<PAGE>

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

                                    FORM 10-K

(Mark One)

[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934

     For the fiscal year ended June 30, 2004

Or

[_]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

     For the transition period from _______________ to _______________

                         Commission file number 0-12944

                                ZYGO CORPORATION
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

            Delaware                                     06-0864500
-------------------------------             ------------------------------------
(State or other jurisdiction of             (IRS Employer Identification Number)
 incorporation or organization)

             Laurel Brook Road, Middlefield, Connecticut 06455-1291
             ------------------------------------------------------
               (Address of principal executive offices) (Zip Code)

                                 (860) 347-8506
              -----------------------------------------------------
              (Registrant's telephone number, including area code:)

           Securities registered pursuant to Section 12(b) of the Act:
           -----------------------------------------------------------
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
           -----------------------------------------------------------
                          Common Stock, $.10 Par Value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [_]

The aggregate market value of the registrant's Common Stock held by
non-affiliates, based upon the closing price of the Common Stock on December 26,
2003, as reported by the Nasdaq National Market, was approximately $181,480,000.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding Common Stock, based on filings
with the Securities and Exchange Commission, have been excluded since such
persons may be deemed affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

Indicate the number of shares outstanding of each of the registrant's classes of
Common Stock, as of the latest practicable date.

      17,890,928 Shares of Common Stock, $.10 Par Value, at August 31, 2004

Documents incorporated by reference: Specified portions of the registrant's
Proxy Statement related to the registrant's 2004 Annual Meeting of Stockholders,
to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934
with the Securities and Exchange Commission, are incorporated by reference into
Part II (Item 5) and Part III (Items 10-14) of this Annual Report on Form 10-K
to the extent stated herein.





<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                          <C>
           Forward-Looking Statements                                         1

PART I
Item 1.    Business                                                           2
           Executive Officers of the Registrant                               8
Item 2.    Properties                                                        10
Item 3.    Legal Proceedings                                                 11
Item 4.    Submission of Matters to a Vote of Security Holders               11

PART II
Item 5.    Market for the Registrant's Common Equity and Related
              Stockholder Matters                                            11
Item 6.    Selected Consolidated Financial Data                              12
Item 7.    Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                      13
Item 7A.   Quantitative and Qualitative Disclosures about Market Risks       22
Item 8.    Financial Statements and Supplementary Data                       23
Item 9.    Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure                                       23
Item 9A.   Controls and Procedures                                           23
Item 9B.   Other Information                                                 23

PART III
Item 10.   Directors and Executive Officers of the Registrant                24
Item 11.   Executive Compensation                                            24
Item 12.   Security Ownership of Certain Beneficial Owners and Management    24
Item 13.   Certain Relationships and Related Transactions                    24
Item 14.   Principal Accounting Fees and Services                            24

PART IV
Item 15.   Exhibits, Financial Statement Schedules, and Reports on
              Form 8-K                                                       25

           Signatures                                                        28
           Power of Attorney                                                 28
</TABLE>

----------
As used in this Annual Report on Form 10-K, unless the context otherwise
requires, the terms "we," "us," "our," "Company", and "ZYGO" refer to Zygo
Corporation, a Delaware corporation.





<PAGE>

                           FORWARD-LOOKING STATEMENTS

All statements other than statements of historical fact included in this Annual
Report regarding our financial position, business strategy, plans, anticipated
growth rates, and objectives of management for future operations are
forward-looking statements. These forward looking statements include without
limitation statements under "Business," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Risk Factors."
Forward-looking statements are intended to provide management's current
expectations or plans for the future operating and financial performance based
upon information currently available and assumptions currently believed to be
valid. Forward-looking statements can be identified by the use of words such as
"anticipate," "believe," "estimate," "expect," "intend," "plans," "strategy,"
"project," and other words of similar meaning in connection with a discussion of
future operating or financial performance. Actual results could differ
materially from those contemplated by the forward-looking statements as a result
of certain factors such as those disclosed under "Risk Factors." Such statements
reflect our current views with respect to future events and are subject to these
and other risks, uncertainties, and assumptions relating to the operations,
results of operations, and our growth strategy.

Any forward looking statements included in this Annual Report speak only as of
the date of this document. ZYGO undertakes no obligation to publicly update or
revise forward-looking statements to reflect events or circumstances occurring
after the date of this 10-K.


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<PAGE>

                                     PART I

Item 1. Business

                                    OVERVIEW

Zygo Corporation ("ZYGO," "we," "us," "our," or "Company") is a leading
designer, developer, and manufacturer of optical components and instruments for
optics-intensive industries. Our products fall into two categories, metrology
and custom optics, each serving the semiconductor and industrial markets. We
have achieved our leadership position over more than 30 years through the use of
our deep knowledge of optical science and technology, and expertise in the field
of on-line manufacturing process control to provide innovative and valuable
solutions to our customers. We conduct the majority of our manufacturing and
research and development activities in our 135,500 square foot facility in
Middlefield, Connecticut.

Our metrology products are sophisticated optical measurement instruments
generally based on the techniques of optical interferometry. We are one of the
largest and most experienced manufacturers of optical interferometers for
optical surface and figure measurements and of optical surface profilers for
nano-technology applications. ZYGO is also a leader in displacement
interferometry, and our integrated measurement products, based on this
technology, are used extensively in ultra-precise wafer positioning systems
(especially for ultraviolet and deep ultraviolet optical lithography steppers)
required in the semiconductor industry. These products help enable semiconductor
chip and flat panel display manufacturers to achieve high yields and throughput
in their manufacturing process.

Our custom optic products consist of high precision optical components, optical
coatings, and optical assemblies. We are a leader in the manufacture of
plano-optics that are used in applications such as laser fusion research,
semiconductor manufacturing equipment, and aerospace optical systems. We also
design and manufacture optical systems and assemblies under contracts to
customers predominantly in the defense, aerospace, and semiconductor industries
at our facilities in Arizona and Southern California. This service-oriented part
of our business leverages our excellent reputation and strong brand, along with
our extensive knowledge of optical metrology and manufacturing techniques.

In May 2000, we acquired Firefly Technologies, Inc., renamed Zygo TeraOptix,
which developed optical components and modules for the telecommunications
market. We exited this telecommunications segment of our business in September
2002.

We were incorporated in 1970 under the laws of the State of Delaware. The
address of our principal executive offices is Laurel Brook Road, Middlefield,
Connecticut, 06455-1291. Our telephone number at that address is (860) 347-8506.
Our website address is www.zygo.com. The information on our website is not part
of this Form 10-K.

Industry Background and Solutions

Precision Manufacturing Industry

Manufacturers in the semiconductor and industrial markets continue to redesign
their processes in order to compete more effectively in an increasingly
competitive marketplace. These changes are necessitated, among other things, by:

     o    decreasing product dimensions;

     o    increasing complexity of manufacturing processes;

     o    shortening product life cycles;

     o    declining product prices; and

     o    intensifying global competition.

Precision metrology is an enabling technology for the semiconductor and
industrial markets. The pressures on manufacturers to improve productivity and
quality have fueled demand for precision noncontact optical metrology, and
required integration of high precision metrology into the manufacturing process
in order to increase yields and quality control. Increasing demands on
performance have required manufacturers in a variety of industries to produce
smaller products with more precise tolerances and increased complexity of design
geometries. Our products address the component and measurement challenges these
manufacturers face. We believe that our on-line process control and yield
improvement metrology solutions are an enabling factor for manufacturers of
precision components, to increase yield and precision to greater tolerances.

History of Innovation and Commercialization

Throughout our history, we have met our customers' requirements through
innovation. Since we introduced the first optical interferometer in 1972, we
have been issued approximately 160 United States patents, of which approximately
130 are currently active, and approximately 80 foreign patents, of which
approximately 75 are active. In addition we have


                                       2





<PAGE>

approximately 100 United States and approximately 90 foreign patent applications
pending. Our intellectual property has been the foundation and driver of our
yield enhancement solutions over the last 30 years.

We have received numerous achievement awards, including:

     o    R&D Magazine 100 Award in 2003, for the VeriFire'TM' MST, Multi
          Surface Metrology;

     o    R&D Magazine 100 Award in 2002 for the Simetra'TM', 3D Relational
          Metrology System and R&D 100 Awards in 1978, 1982, 1988 (three
          awards), 1994, 1996, 1997 and 1998;

     o    Laser Focus World Commercial Technology Award in 2001;

     o    Photonics Spectra Circle of Excellence Awards in 1988, 1994, 1996,
          1997, 1998 and 2001;

     o    American Machinist Excellence in Manufacturing Technology Achievement
          Award for Technology & Reliability in 2000;

     o    1998 R&D Magazine 100 and Photonics Spectra Circle of Excellence Award
          for MESA'TM' Interferometric System; and

     o    1997 R&D Magazine 100 and Photonics Spectra Circle of Excellence Award
          for ZMI 2001'TM' Displacement Measuring Interferometer.

Integrated Core Competencies

Metrology and Automation: Yield Enhancement Solutions

Our expertise in the area of optical instrumentation, our commitment to basic
research, and our unique ability to rapidly develop and deploy sophisticated
automation systems around our instruments enables us to meet the emerging needs
of our customers, and to quickly enter new markets as they develop. For example,
this combination of strengths has recently enabled us to establish new
instrument product lines in the automation-intensive flat panel display market
and advanced chip packaging industries. We also regularly sell a wide range of
standard and semi-custom interferometer products to our customers in other
optical metrology-intensive industries.

Optical Components and Assemblies

We combine our expertise in optical component manufacturing, optical system
design and manufacturing, and optical metrology to produce to our customers'
specifications, products of high quality and workmanship at a reasonable cost,
for an excellent overall value. We also manufacture optics for use in our own
systems.

PRODUCTS AND APPLICATIONS

We manufacture, design, and market yield enhancement solutions that utilize
optical metrology and automation for high performance manufacturers. We also
manufacture macro-optical components, such as optical flats, spheres,
waveplates, mirrors, and optical assemblies for the semiconductor and industrial
markets.

     Our products are based on our two core competencies:

     o    Metrology--including OEM, process control, and on-line automated
          metrology for yield enhancement; and

     o    Optics--sold as components and assemblies.

Metrology

We offer a broad range of interferometry-based and imaging products. An
interferometer analyzes the pattern of bright and dark fringes that result from
the optical interference between a reference and a measurement beam. Our
interferometers incorporate sophisticated subsystems including precision optical
components, stable and long-life laser or other light sources, piece part
positioning stages, and PC workstations. Our metrology products include the
following:


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<PAGE>

OEM

Displacement Measuring Interferometers. Our displacement measuring
interferometer family of laser interferometer systems provides measurements that
control some of the world's most sophisticated machinery in the semiconductor,
flat panel display production, and optical component manufacturing industries.
These products are used to measure the position of a tool relative to a part
under fabrication through the use of a directed laser beam reflected from the
moving portion of a machine. Most of these systems are sold on an OEM basis into
the semiconductor photolithography market.

Process Control

Interferometric Microscopes. Our interferometric microscopes combine advanced
techniques of interferometry, microscopy, and precision analysis algorithms in
an automated package. These instruments make high precision surface analysis
possible and are important because they provide surface structure analysis.
These microscopes use scanning white light interferometry to measure
non-specular surfaces and build ultra-high z-axis resolution images. Our
patented Frequency Domain Analysis system and powerful workstations and personal
computers then combine for next-generation three-dimensional surface structure
analysis.

Small Aperture Wavefront Interferometer. Our small aperture wavefront
interferometer is a compact interferometer that is designed for ease of use,
especially for applications that involve repetitive testing of similar
components. It has the ability to quickly and automatically characterize
microlenses as small as 20 microns to three millimeters in diameter. Its
integrated motion control and down facing orientation make it ideal for testing
lens arrays and picking and testing discrete lenses, molded aspherics, miniature
mirrors, and filters.

Large Aperture Wavefront Interferometer. Our large aperture wavefront
interferometer is used for large surface metrology. Our interferometers are used
extensively in the optics industry to measure glass or plastic optical
components such as flats, lenses, and prisms. In addition, they are used to
measure other precision components such as bearings, sealing surfaces, polished
ceramics, and contact lens molds.

Geometrically Desensitized Interferometer. Our geometrically desensitized
interferometer product is a patented interferometer that utilizes diffraction
gratings to measure surfaces that have roughness and departures approximately 20
times greater than those surfaces presently measurable with existing
interferometer technology. It is able to measure rougher, non-specular surfaces,
such as those used in precision-machined parts applications, without sacrificing
advantages of other interferometers, such as the ability to utilize high-speed
non-contact interferometry and to produce a full-field wide aperture view.

Digital Video Disk Interferometer. The digital video disk interferometer
measures spherical and aspherical lenses for next-generation DVD players.

Automated Metrology

Our automation products include the following:

APEX'TM' Series. The APEX system measures patterned features and films on the
surfaces of diced and undiced chips in advanced chip packaging fabrication
facilities. It incorporates a specialized optical profiler and wafer positioning
system with pattern recognition software, and can be configured for cleanroom or
laboratory use.

FPD Series. This fully automated inspection system incorporates our NewView'TM'
microscope with a robotic material handling system. The system accepts an
individual flat panel display from a carrier, loads it to the microscope's
inspection stage, performs an automated inspection routine, and returns the flat
panel display to the original input location. A single graphical user interface
provides the operator with input to both the handling and inspection systems.

Macro-Optics and Assemblies

We manufacture and supply high precision optical components and modules to
customers, as well as for use in our own instruments. Our macro-optics products
include:

Optical Coatings. Reflective films are designed to minimize loss of optical
energy upon reflection from the coated surface. Anti-reflective films minimize
the loss of energy upon transmission through the coated surface. These coatings
are produced by vacuum deposition of thin dielectric films in sophisticated
coating chambers. Reflective and anti-reflective coatings are essential for
achieving low insertion losses through components and assemblies. Polarization
coatings are applied to prisms and other plano optical components to separate or
combine laser beams of orthogonal polarization.


                                       4





<PAGE>

Lenses and Lens Systems. Lenses are transmissive optical components with
spherical or aspherical surfaces. They are used individually or in combination
as lens systems to form and transfer images. We produce lenses and assemblies
for use in a wide variety of applications, ranging from spectrum analyzers for
optical telecom systems to semiconductor lithography. Such lenses are produced
using advanced computer numeric control manufacturing and metrology equipment.
We assemble lens systems in clean-room conditions using laser-based alignment
and centering equipment.

Reference Flat Mirrors. Our super-smooth flat mirrors serve as reference
surfaces when used in conjunction with displacement measurement interferometers.
These reference mirrors must be made of special materials to be insensitive to
temperature variation and non-uniformity. We produce a large quantity and
variety of reference flat mirrors used in semiconductor manufacturing and
metrology equipment. The flatness and smoothness of these mirrors are essential
for precise location of semiconductor wafers and exposure masks during
production and testing of integrated circuits.

Stage Mirrors. Our stage mirrors are lightweight structures, which serve as both
a mechanical support for a wafer or reticle and two orthogonal reference flat
mirror surfaces. Stage mirrors are used in high performance lithography and
metrology systems employing laser, electron-beam, or x-ray exposure sources.
They are made of low-expansion materials to reduce sensitivity to thermal
variations, and are machined to produce a lightweight, but stiff mechanical
structure with excellent dimensional stability. Two adjacent sides of the stage
are finished using proprietary technology to serve as reference flat mirrors.
The combined optical and structural properties of such stage mirrors are
critical for achieving higher wafer throughput in advanced lithography and
metrology tools. We supply stage mirrors to a number of manufacturers of
semiconductor lithography and metrology equipment.

Laser Optics. Laser optics are mirrors, polarizers, and solid-state laser
amplifiers used in high energy laser systems. Such components are used in laser
fusion research and nuclear weapons simulation. Such optical components must be
finished to the highest quality in terms of surface flatness, smoothness, and
surface cosmetics. Even the smallest defects can lead to catastrophic failure in
use. We are a leader in producing large plano laser optics, having supplied such
components to major laser fusion laboratories for nearly two decades. We are
under contract with the University of California Lawrence Livermore National
Laboratory to produce mirrors, polarizers, and amplifier slabs for the National
Ignition Facility, also known as NIF. The NIF, scheduled for completion in 2007,
is expected to be the largest laser system ever built.

Prisms, Rhomboids, and Beamsplitters. Our high-precision plano optical
components are manufactured and supplied to our external customers for use in a
variety of modules and assemblies. In addition, they are also used internally as
part of our metrology and automation solutions. They are used individually or in
combination with one another to direct, steer, combine, divide, and separate
laser beams. These products are often coated with special optical films to meet
the highly demanding requirements for low insertion loss and cross-channel
isolation.

CUSTOMERS AND MARKETS

The growing requirements for dimensional control to the sub-nanometer level have
created an escalating need for our yield enhancement instruments and systems
among both OEMs and end-users of microfabrication technology. We have been able
to meet these demands with on-line yield improvement instruments and systems, as
well as with our off-line quality control instruments. Today, our installed base
of high precision metrology systems exceeds 12,500 systems.

Several of our customers purchase multiple product family types and multiple
technology platforms and employ our solutions at their facilities worldwide. The
following is a sampling of our customers in fiscal 2004:

                        Selected Customers by End Market

<TABLE>
<CAPTION>
Semiconductor        Industrial
-------------        ----------
<S>                  <C>
AU Optronics         AWE
Canon                Bosch
Electro Scientific   Chengdu
KLA-Tencor           Lawrence Livermore National Laboratory
Nikon                Lockheed Martin
Samsung              Northrop Grumman
Zeiss                Raytheon
</TABLE>


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<PAGE>

During fiscal 2004, 2003, and 2002, aggregate sales to Canon Inc. and its
affiliate Canon Sales Co., Inc. amounted to 49%, 51%, and 22%, respectively, of
our net sales. No other single customer accounted for more than 10% of our sales
in any of the fiscal years 2004, 2003, and 2002.

Patents and Other Intellectual Property

Our success and ability to compete depend substantially upon our technology. We
have been developing a portfolio of intellectual property for over 30 years. We
rely on a combination of patent, copyright, trademark, and trade secret laws,
and license agreements to establish and protect our proprietary rights in our
products.

Since we introduced the first optical interferometer in 1972, we have had
approximately 160 United States patents issued, of which approximately 130 are
currently active, and approximately 80 foreign patents issued, of which
approximately 75 are active, and we have approximately 100 United States and
approximately 90 foreign patent applications pending. In addition, we have a
number of registered and unregistered trademarks.

While we rely on patent, copyright, trademark, and trade secret laws to protect
our technology, we also believe that factors such as the technological and
creative skills of our personnel, new product developments, frequent product
enhancements, and reliable product maintenance are essential to establishing and
maintaining a technology leadership position.

Research and Development and Engineering Operations

We operate in industries that are subject to rapid technological change and
engineering innovation. We dedicate substantial resources to research and
development. At June 30, 2004, we employed 118 individuals or approximately 24%
of our workforce within our research and development and engineering operations.
Our strategy is to form close technical working relationships with customers and
OEM suppliers in our markets to ensure that our products have relevancy when
commercialized. In connection with our research and development operations, we
also maintain a close working relationship with various research groups and
academic institutions in the United States as well as abroad. We believe that
continued enhancement, development, and commercialization of new and existing
products and systems are essential to maintaining and improving our leadership
position.

Competition

The industries in which we participate are intensely competitive and are
characterized by price pressure and rapid technological change. Furthermore,
these markets are dominated by a few market leaders.

We are one of a limited number of companies that develop and market yield
enhancement solutions. Our primary yield enhancement competitors in the
semiconductor and industrial markets include Agilent's Laser Interferometer
Positioning Systems Division, ADE's Phase Shift Technology, Leica's Mask
Metrology Division, and Veeco's Metrology Division.

The principal factors upon which we compete are:

     o    performance and flexibility of solutions;

     o    value;

     o    on-time delivery;

     o    responsive customer service and support; and

     o    breadth of product line.

BACKLOG

Backlog at June 30, 2004 was $54.8 million, an increase of $17.6 million, or
47%, as compared with $37.2 million at June 30, 2003. The year-end fiscal 2004
backlog consisted of $33.1 million, or 60%, in the semiconductor segment and
$21.7 million, or 40%, in the industrial segment. Orders for the fiscal year
ended June 30, 2004 totaled $134.2 million and consisted of $79.6 million, or
59%, in the semiconductor segment and $54.6 million, or 41%, in the industrial
segment.


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<PAGE>

MARKETING AND SALES

Our sales and marketing strategy is to establish and/or solidify strategic
relationships with leading OEMs and end-users in targeted sectors within our
markets. The selling process for our products is performed through our worldwide
sales organization operating out of seven regional sales offices in California,
Connecticut, Germany, Japan, Singapore, Taiwan, and China. Supporting this core
sales team are business development, marketing, service, and engineering
specialists representing our various optics and metrology units in Connecticut,
Arizona, California, and Florida. Product promotion is done through trade shows,
printed and e-business advertising, and industry technical organizations.

The following table sets forth the percentage of our total sales by region
(including sales delivered through distributors) during the past three years:

<TABLE>
<CAPTION>
                                      Fiscal Year Ended June 30,
                                      --------------------------
                                          2004   2003   2002
                                          ----   ----   ----
<S>                                        <C>    <C>    <C>
Americas (primarily United States)          29%    30%    47%
Far East:
   Japan                                    53%    53%    27%
   Pacific Rim                              11%     7%    10%
                                           ---    ---    ---
Total Far East                              64%    60%    37%
Europe and other (primarily Europe)          7%    10%    16%
                                           ---    ---    ---
Total                                      100%   100%   100%
                                           ===    ===    ===
</TABLE>

Customer service is an essential part of our business since product up time is
critical given its effect on our customers' production efficiency. As of
June 30, 2004, our global sales customer support and service organization
consisted of over 70 people skilled in sales, marketing, optical and electro
component repair, software, application and system integration, diagnostics, and
problem-solving capabilities.

MANUFACTURING, RAW MATERIALS, AND SOURCES OF SUPPLY

Our principal manufacturing activities are conducted at our facilities in
Middlefield, Connecticut and Tucson, Arizona.

We maintain an advanced optical components manufacturing facility in
Middlefield, Connecticut, specializing in the fabrication, polishing, and
coating of plano, or flat, optics for sales to third parties, as well as the
manufacturing of a wide variety of optics that are used in our metrology
products. Our manufacturing activities for our metrology products consist
primarily of assembling and testing components and sub-assemblies supplied by us
and third-party vendors, and then integrating these components and
sub-assemblies into our finished products.

Our optical assembly manufacturing activities are conducted in our Tucson,
Arizona, facility. We integrate ZYGO optics, optics from third party vendors,
and mechanical sub-systems utilizing ZYGO metrology in this facility.

Certain components and sub-assemblies incorporated into our systems are obtained
from a single source or a limited group of suppliers. We routinely monitor
single or limited source supply parts, and we endeavor to ensure that adequate
inventory is available to maintain manufacturing schedules should the supply of
any part be interrupted. Although we seek to reduce our dependence on sole or
limited source suppliers, we have not qualified a second source for some of
these products and the partial or complete loss of certain of these sources
could have a negative impact on our results of operations and damage customer
relationships.


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<PAGE>

AVAILABLE INFORMATION

We make available free of charge through our website, www.zygo.com, our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, proxy statements, and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with the Securities and
Exchange Commission ("SEC"). These reports may also be obtained without charge
by contacting Investor Relations, Zygo Corporation, Corporate Headquarters,
Laurel Brook Road, Middlefield, Connecticut 06455-1291, phone: 1-860-347-8506.
Our Internet website and the information contained therein or incorporated
therein are not intended to be incorporated into this Annual Report on Form
10-K. In addition, the public may read and copy any materials we file with the
SEC's Public Reference Room at 450 Fifth Street, NW., Washington, DC 20549 or
may obtain information by calling the SEC at 1-800-SEC-0330. Moreover, the SEC
maintains an Internet site that contains reports, proxy, and information
statements, or other information regarding reports that we file electronically
with them at http://www.sec.gov.

EMPLOYEES

At June 30, 2004, we employed 476 people of whom 227 were in manufacturing, 118
were in research and development, 71 were in sales and marketing, and 60 were in
management and administration. Our employees are not represented by a labor
union or a collective bargaining agreement. We regard our employee relations as
good.

EXECUTIVE OFFICERS OF THE REGISTRANT

J. Bruce Robinson - age 62 - Chairman, President, and Chief Executive Officer

Mr. Robinson has served as our Chairman, President, and Chief Executive Officer
since November 2000, as President and Chief Executive Officer from November 1999
to November 2000, and as President from February 1999 to November 1999.
Previously, he spent 25 years with The Foxboro Company, where his most recent
positions were President Worldwide Operations from 1996 to 1998 and President of
European Operations from 1990 to 1996.

Mr. Robinson has served as an executive officer of ZYGO since February 1999 and
is also a director of ZYGO.

Walter A. Shephard - age 50 - Vice President, Finance, Chief Financial Officer,
and Treasurer

Mr. Shephard has served as Vice President Finance, Chief Financial Officer, and
Treasurer since February 2004. Previously, he was a Principal with the Loftus
Group, LLC, a management consulting firm, from November 2002 to January 2004.
From 1983 to 2001, Mr. Shephard served in various capacities with GenRad, Inc.,
including Vice President Finance and Chief Financial Officer, Vice President of
Investor Relations and Treasurer.

Mr. Shephard has served as an executive officer of ZYGO since February 2004.

William H. Bacon - age 54 - Vice President, Corporate Quality and Support
Services

Mr. Bacon has served as Vice President, Corporate Quality and Support Services
since March 2003. Previously, he served as our Vice President, Manufacturing
from April 2002 to March 2003, Vice President, Metrology Manufacturing from
April 2000 to April 2002, and Vice President, Corporate Quality from January
1996 to April 2000. From November 1993 to January 1996, Mr. Bacon was Director
of Total Quality and also served as Manager of Instrument Manufacturing from
June 1987 to November 1993.

Mr. Bacon has served as an executive officer of ZYGO since January 1996.

Douglas J. Eccleston - age 55 - Vice President, Motion Measurement

Mr. Eccelston has served as Vice President, Motion Measurement since March
2003. Previously, from 1977 to 2002, he held various management positions with
Corning Incorporated, including most recently as a Business General Manager for
the Photonic Technologies division.

Mr. Eccelston has served as an executive officer of ZYGO since July 2004.

Brian J. Monti - age 48 - Vice President, Worldwide Sales and Marketing

Mr. Monti has served as Vice President, Worldwide Sales and Marketing since July
1999. Previously, he served as Vice President, Sales, Service and Marketing for
Radiometric Corporation from 1998 to 1999. From 1984 to 1998, Mr. Monti held
various positions for Honeywell Measurex including Vice President, Sales,
Service and Marketing.

Mr. Monti has served as an executive officer of ZYGO since July 1999.


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<PAGE>

David J. Person - age 56 - Vice President, Human Resources

Mr. Person has served as Vice President, Human Resources since September 1998.
Previously, he served in a number of senior human resource management positions
with Digital Equipment Corporation from 1972 to September 1998.

Mr. Person has served as an executive officer of ZYGO since September 1998.

Robert A. Smythe - age 52 - Vice President, Marketing

Mr. Smythe has served as Vice President, Marketing since April 2002. Previously,
he served as our Vice President, Engineering from June 1998 to April 2002; Vice
President, Sales and Marketing, from January 1996 to June 1998; Director of
Sales and Marketing from June 1993 to January 1996; and Manager, Industry from
April 1992 to June 1993.

Mr. Smythe has served as an executive officer of ZYGO since January 1996.

Robert J. Stoner - age 41 -Vice President, Metrology and Optical Systems

Dr. Stoner joined ZYGO as Vice President of Business Development in 2002, and
has served as Vice President of Metrology and Optical Systems since 2003. From
2000 to 2002, Dr. Stoner was President of Vinestone Corporation, a software
company, and from 1995 to 2000 he was President of Cooper Mountain Corporation,
a technology consulting firm.

Dr. Stoner has served as an executive officer of ZYGO since July 2004.

Carl A. Zanoni - age 63 - Senior Vice President, Technology

Dr. Zanoni has served as Senior Vice President, Technology since November 2001.
Previously, he served as our Vice President, Technology from June 1998 to
November 2001, and Vice President, Research, Development and Engineering from
April 1992 to June 1998.

Dr. Zanoni is a co-founder of our company and has served as an executive officer
of ZYGO since its inception in 1970. He is also a director of ZYGO.

Under the By-laws, executive officers serve for a term of one year and until
their successors are chosen and qualified unless earlier removed.


                                       9





<PAGE>

Item 2. Properties

Our principal manufacturing facility and corporate headquarters is located on
Laurel Brook Road in Middlefield, Connecticut. The Middlefield facility consists
of one 135,500-square-foot building on approximately 13 acres. We are presently
constructing an additional 18,000 square foot addition to this facility. In
August 2004, we entered into an agreement to sell our Westborough,
Massachusetts, facility. The sale is expected to be completed in the fall 2004.

<TABLE>
<CAPTION>
                                                    Square Footage
                                               -----------------------     Owned / Leased
             Operation/Location                Manufacturing    Total     Expiration Date
--------------------------------------------   -------------   -------   -----------------
<S>                                                <C>         <C>       <C>
Corporate Headquarters, Eastern Regional
   Sales Office, and Instrument and Optics
   Manufacturing
Middlefield, Connecticut                           80,000      135,500         Owned

R&D Center
Delray Beach, Florida                                   0        9,900   Leased - 06/30/05

Zygo - Laser Technology (R&D)
Watsonville, California                                 0        1,452   Leased - 02/25/05

Zygo - Opto-Mechanical Assembly
Tucson, Arizona                                    14,560       22,560   Leased - 08/31/06

Zygo Applied Optics
Costa Mesa, California                                  0       13,714   Leased - 06/30/05

Western Regional Sales Office and R&D Center
Sunnyvale, California                                   0        7,400   Leased - 10/31/08

R&D Center
Simi Valley, California                                 0        6,290   Leased - 12/14/05

Zygo PTE Ltd - Sales Office
Singapore                                               0        1,550   Leased - 12/27/04

Zygo Taiwan - Sales Office
Taiwan                                                  0        3,500   Leased - 07/31/04

ZygoLOT
Germany                                                 0        1,296   Leased - 10/01/04

Zygo KK
Japan                                                   0        1,775   Leased - 10/31/04

Zygo China
China                                                   0        1,610   Leased - 08/15/05

Properties Unoccupied or Leased to Others
Westborough, Massachusetts                              0      120,500         Owned
Plymouth, Massachusetts                                 0        6,600   Leased - 05/31/06
Longmont, Colorado                                      0       50,110   Leased - 05/31/06
                                                   ------      -------
Total                                              94,560      383,757
                                                   ======      =======
</TABLE>


                                       10





<PAGE>

Item 3. Legal Proceedings

From time to time, we are subject to certain legal proceedings and claims that
arise in the normal course of our business. In the opinion of management, we are
not party to any litigation that we believe could have a material effect on our
business.

Item 4. Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

Our shares of common stock are traded over-the-counter and are quoted on the
NASDAQ/National Market under the symbol "ZIGO." Market price data for fiscal
2004 and 2003 is as follows:

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

<TABLE>
<CAPTION>
                Fiscal Year Ended June 30, 2004  Fiscal Year Ended June 30, 2003
                -------------------------------  -------------------------------
                         High      Low                     High    Low
                        ------   ------                   -----   -----
<S>                     <C>      <C>                      <C>     <C>
First quarter           $15.10   $ 7.74                   $8.09   $4.13
Second quarter          $21.53   $13.36                   $9.35   $3.55
Third quarter           $21.23   $13.22                   $8.20   $4.79
Fourth quarter          $16.70   $ 9.30                   $8.40   $5.65
</TABLE>

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

These over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.

The number of record holders of our common stock at June 30, 2004 was 480. Our
closing stock price as of August 31, 2004 was $9.97.

We have never declared or paid a cash dividend on our capital stock. We
currently intend to retain all our earnings to finance the expansion and
development of our business and, therefore, do not anticipate paying any cash
dividends in the foreseeable future.

Information required with respect to "Securities Authorized for Issuance Under
Equity Compensation Plans" will be included under the caption "Equity
Compensation Plan Information" in the proxy statement to be filed pursuant to
Regulation 14A for use in connection with our company's 2004 Annual Meeting of
Stockholders (the "Proxy Statement") and is incorporated herein by reference.


                                       11





<PAGE>

Item 6. Selected Consolidated Financial Data

The financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and with our Consolidated Financial Statements and notes thereto
included elsewhere in this Form 10-K.

(Thousands, except for per share and ratio amounts)

<TABLE>
<CAPTION>
                                                             Fiscal Year Ended June 30,
                                             --------------------------------------------------------
                                               2004        2003      2002 (1)    2001 (1)    2000 (1)
                                             --------   ---------   ---------    --------   ---------
<S>                                          <C>        <C>         <C>          <C>        <C>
Net sales                                    $116,642   $ 102,577   $  80,268    $129,508   $  83,099
Gross profit                                 $ 43,065   $  35,445   $  27,463    $ 61,361   $  30,670
      % of sales                                   37%         35%         34%         47%         37%

Earnings (loss) from continuing operations   $  4,248   $   1,575     ($4,279)   $ 13,901     ($4,294)
      % of sales                                    4%          2%         (5%)        11%         (5%)
Earnings (loss) per share from continuing
   operations
      Basic                                  $   0.24   $    0.09      ($0.24)   $   0.90      ($0.34)
      Diluted                                $   0.23   $    0.09      ($0.24)   $   0.86      ($0.34)

Net (loss) earnings                           ($3,407)   ($10,570)   ($11,733)   $ 10,659    ($16,047)
Net (loss) earnings per share:
   Basic                                       ($0.19)     ($0.60)     ($0.67)   $   0.69      ($1.28)
   Diluted                                     ($0.19)     ($0.60)     ($0.67)   $   0.66      ($1.28)

Weighted average number of shares:
   Basic                                       17,802      17,539      17,414      15,398      12,511
   Diluted                                     18,221      17,696      17,414      16,063      12,511

Research and development                     $ 13,011   $  12,659   $  17,696    $ 13,518   $  10,723
Capital expenditures                         $  7,585   $   5,037   $  11,381    $ 13,902   $   5,828
Depreciation and amortization                $  5,717   $   5,623   $   6,098    $  3,760   $  11,233
</TABLE>

<TABLE>
<CAPTION>
                                                                   June 30,
                                             ----------------------------------------------------
                                               2004       2003     2002 (1)   2001 (1)   2000 (1)
                                             --------   --------   --------   --------   --------
<S>                                          <C>        <C>        <C>        <C>         <C>
Working capital                              $ 58,481   $ 66,881   $ 65,917   $ 88,741    $49,464
Current ratio                                     3.5        3.3        5.2        4.6        4.1
Total assets                                 $155,452   $161,068   $169,201   $186,832    $95,162
Long-term debt (including current portion)   $      0   $ 11,374   $ 12,211   $ 12,560    $    84
Stockholders' equity                         $130,644   $129,860   $140,005   $149,139    $78,229
Price-earnings ratio                              N/A        N/A        N/A       33.7        N/A
Number of employees at year end                   476        477        537        648        486
Sales per employee - average                 $    245   $    215   $    149   $    200    $   171
Book value per share                         $   7.85   $   7.92   $   7.99   $   8.48    $  5.50
Market price per share at year-end           $  11.19   $   8.00   $   8.05   $  22.25    $ 90.81
</TABLE>

(1)  The selected consolidated financial data for the periods ended June 30,
     2002, 2001, and 2000 have been reclassified to conform with the fiscal 2004
     and 2003 presentation of the discontinued operations and loss on disposal
     of our former TeraOptix unit.


                                       12





<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operation

       CRITICAL ACCOUNTING POLICIES, SIGNIFICANT JUDGMENTS, AND ESTIMATES

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

Revenue Recognition and Allowance for Doubtful Accounts

We recognize revenue based on guidance provided in SEC Staff Accounting Bulletin
("SAB") No. 104, "Revenue Recognition." We recognize revenue when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, our price is fixed or determinable, and collectibility is reasonably
assured.

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

Inventory Valuation

Inventories are valued at the lower of cost or market, cost being determined on
a first-in, first-out basis. Management evaluates the need to record adjustments
for impairment of inventory on a monthly basis. Our policy is to assess the
valuation of all inventories, including raw materials, work-in-process, and
finished goods. Obsolete inventory or inventory in excess of management's
estimated future usage is written down to its estimated market value, if less
than its cost. Contracts with fixed prices are evaluated to determine if
estimated total costs will exceed revenues. A loss provision is recorded when
the judgment is made that actual costs incurred plus estimated costs remaining
to be incurred will exceed total revenues from the contract. Inherent in the
estimates of market value are management's estimates related to current economic
trends, future demand for our products, and technological obsolescence.
Significant management judgments must be made when providing for obsolete and
excess inventory and losses on contracts. If actual market conditions are
different than those projected by management, additional inventory write-downs
and loss accruals may be required.

Warranty Costs

We provide for the estimated cost of product warranties at the time revenue is
recognized. We consider historical warranty costs actually incurred and
specifically identified circumstances to establish the warranty liability. The
warranty liability is reviewed on a quarterly basis. Should actual costs differ
from management's estimates, revisions to the estimated warranty liability would
be required. A one percent change in actual costs would have an impact of
approximately $20,000 on our financial condition and results of operations.

Accounting for Income Taxes

Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases, and operating loss and tax credit carryforwards. Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
requires the establishment of a valuation allowance to reflect the likelihood of
the realization of deferred tax assets. We record a valuation allowance to
reduce our deferred tax assets to an estimated realizable amount based on
historical and forecasted results. While management has considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event management were to
determine that it would be able to realize its deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the valuation allowance
would decrease income tax expense in the period such determination was made.
Likewise, should management determine that it would not be able to realize all
or part of its net


                                       13





<PAGE>

deferred tax asset in the future, an adjustment to the valuation allowance would
be charged to income tax expense in the period such determination was made. Our
effective tax rate may vary from period to period based on changes in estimated
taxable income or loss, changes to the valuation allowance, changes to federal,
state or foreign tax laws, and deductibility of certain costs and expenses by
jurisdiction.

Valuation of Long-Lived Assets

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

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

Health Insurance

Beginning in January 2004, we became self insured for the majority of our group
health insurance. We rely on claims experience in determining an adequate
liability for claims incurred, but not reported. To the extent actual claims
exceed estimates; we may be required to record additional expense. A one percent
change in actual claims would have an impact of approximately $25,000 on our
financial condition and results of operations.

                              RESULTS OF OPERATIONS

Zygo Corporation is a worldwide supplier of optical metrology instruments,
precision optics, and electro-optical design and manufacturing services, serving
customers in the semiconductor capital equipment and industrial markets. Optical
instruments products encompass non-contact optical measurement instruments.
Optics products consist of high performance macro-optics components, optical
coatings, and optical system assemblies. We conduct the majority of our
manufacturing in our 135,500 square foot facility in Middlefield, Connecticut.
We are currently constructing an 18,000 square foot addition to our Middlefield,
Connecticut, facility to increase our overall manufacturing space.

We also perform several development services, which have produced a significant
amount of our revenue over the past two years. In September 2002, we entered
into a development services agreement with Canon Inc. In March 2004, we signed a
preliminary agreement to begin further add-on work, with a definitive agreement
anticipated to be signed in the fall of this year. We have generated a total of
approximately $36.3 million in revenues from these agreements, including $16.1
million in fiscal 2004. Delivery under this first development services agreement
is expected to occur in our second fiscal quarter of fiscal 2005. We recognized
$3.1 million in revenue through June 30, 2004 under the preliminary agreement to
provide add-on work. Significant revenues are expected from any such
follow-on contract. Our period over period comparable sales would be
significantly adversely affected if we do not continue to provide these
development services.

Our backlog at June 30, 2004 was $54.8 million, an increase of $5.8 million from
March 26, 2004 and our highest level since fiscal 2001. Orders were $42.1
million in the fourth quarter as we experienced an increase across most of our
product lines and regions. Bookings in the first quarter of our fiscal year tend
to be lower than the fourth quarter of the previous year and we expect the first
quarter of fiscal 2005 to continue that trend. In addition, revenues under the
preliminary agreement noted above are ramping up slower than expected and will
not generate as much revenue in the first quarter as initially expected.

An area of revenue growth expected in fiscal 2005 is in our optics business. Two
years ago we opened a facility in Tucson, Arizona, that provides contract
optical-mechanical manufacturing, utilizing lean manufacturing technology. Last
year we launched our Costa Mesa, California operation, that supplies
electro-optical system design and prototyping. Together, these operations enable
us to deliver integrated optical solutions, from design to delivery, primarily
to the defense and aerospace markets.

We also plan to enhance the technologies and capabilities we have developed
through government-funded projects and re-apply them in commercial applications.
For three decades, we have been a major supplier of optics and
optical-mechanical assemblies to NIF. While there is no certainty that we will
be successful in generating orders from these developed capabilities, we believe
there is a market that we have not yet fully explored. Over the next year, we
also expect to develop improved manufacturing technologies and pilot plant
equipment required for fabricating thin-fused silica optics for NIF.

In late fiscal 2004, we introduced a new product family of small aperture
wavefront interferometers (PTI 250) that is being marketed to manufacturers of
small optical components. While revenues from the PTI 250 are not expected to
have a material impact on our results from operations in fiscal 2005, this new
product family will help to broaden our market coverage and, if successful,
strengthen our market position.

In July 2004, we also opened a representative office in mainland China, where
investment in semiconductor and optical fabrication facilities continues to
grow. Through this office, we will offer our products to the optical industry
and to manufacturers of flat panel displays. This is a long-term strategy that
will have a minimal impact on our results of operations in the immediate future.

We discontinued our telecommunications TeraOptix business unit during fiscal
2003. Accordingly, the results of TeraOptix have been presented as a separate
line item on the Consolidated Statements of Operations as discontinued TeraOptix
operations, net of tax, for all periods presented. In addition, the charges on
the disposal of TeraOptix, net of


                                       14





<PAGE>

tax, have been recorded as a separate line item for all periods presented. All
continuing operations line items presented exclude TeraOptix results. During
fiscal 2003 and 2004, we marketed for sale our former telecommunications
facility located in Westborough, Massachusetts. In fiscal 2004, we recorded
impairment charges on the facility of $6.4 million, net of tax, to reflect
changes in the fair value of the property. At June 30, 2004, the value of the
facility, net of estimated selling expenses, is $2.0 million. In August 2004, we
reached an agreement to sell the facility. The sales transaction is expected to
be completed in the fall of 2004 and to generate approximately $2.0 million
of cash, net of selling expenses.

Fiscal 2004 Compared with Fiscal 2003

Net sales of $116.6 million for fiscal 2004 increased by $14.0 million, or 14%,
from the comparable prior year period sales of $102.6 million. Net sales for
fiscal 2004 included $16.1 million from development services agreements, as
compared with $18.8 million in the prior fiscal year. The first developmental
services agreement is expected to be substantially completed in the second
quarter of fiscal 2005 with minimal finishing work through the third quarter.
Therefore, we expect to have diminishing revenues under this agreement in the
first three quarters of fiscal 2005. We have signed an additional agreement
letter that has allowed us to begin a new development project with the
expectation that a follow-on contract will be signed by the fall of this year.
For fiscal 2004, net sales in the semiconductor segment were $67.1 million, or
58% of total net sales, as compared with $59.3 million, or 58%, in the prior
year period and net sales in the industrial segment were $49.5 million, or 42%
of total net sales, as compared with $43.3 million, or 42%, in the prior year
period. The increase in net sales in the semiconductor segment was primarily due
to general increases in the number of products sold across most product
categories. The sales of flat panel systems also contributed to the increase.
The industrial sector showed strong sales, particularly large aperture metrology
shipments to the defense and aerospace sectors.

Sales to the Americas, primarily the United States, amounted to $33.9 million in
fiscal 2004, an increase of $2.8 million, or 9%, from fiscal 2003 levels of
$31.1 million. Sales to Japan during fiscal 2004 amounted to $61.1 million, an
increase of $6.4 million, or 12%, from fiscal 2003 sales levels, primarily due
to an increase in orders from Canon, Inc. Sales to Europe/Other, primarily
Europe, amounted to $8.4 million, a decrease of $1.9 million, or 18%, from
fiscal 2003. Sales to the Pacific Rim, excluding Japan, amounted to $13.2
million, an increase of $6.7 million, or 103%, from 2003 sales levels, primarily
due to an increase in flat panel and large aperture sales.

Approximately 89% of all fiscal 2004 sales were 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 our products in export markets, as would changes
in the general economic conditions in those markets. The impact of changes in
foreign currency values on our sales cannot be measured. Management believes the
percentage of sales in foreign currencies may increase in the coming year due to
an increase in sales denominated in yen to Japanese customers.

Gross profit for fiscal 2004 totaled $43.1 million, an increase of $7.7 million,
or 22%, from $35.4 million in the prior fiscal year. Gross profit as a
percentage of sales for fiscal 2004 and 2003 was 37% and 35%, respectively.
Gross profit for fiscal 2004 included $3.5 million from the development services
agreements, as compared with $3.8 million for fiscal 2003. The increased margin
was primarily due to product mix with increases in sales on higher margin
products and a decrease in the development services revenue, which carry a lower
margin as a percentage of total revenues.

Selling, general, and administrative expenses ("SG&A") in fiscal 2004 amounted
to $24.3 million, an increase of $3.9 million, or 19%, from fiscal 2003. SG&A as
a percentage of net sales in fiscal 2004 was 21%, as compared with 20% in fiscal
2003. The increase in SG&A for fiscal 2004 is primarily related to increases in
various personnel costs including incentive programs, and external commissions.

Research and development expenses ("R&D") in fiscal 2004 amounted to $13.0
million, an increase of $0.3 million, or 2%, from $12.7 million in the
comparable prior year period. R&D as a percentage of net sales in fiscal 2004
was 11%, as compared with 12% in fiscal 2003. R&D costs in 2004 included a full
year of our applied optics group, partially offset by decreases associated with
production starts in flat panel and optics.

Our operating profit in fiscal 2004 was $5.5 million, as compared with an
operating profit of $2.0 million in fiscal 2003. Operating profit as a
percentage of sales in fiscal 2004 was 5%, as compared with the operating profit
as a percentage of sales of 2% in fiscal 2003.

The income tax expense from continuing operations in fiscal 2004 totaled $1.9
million, or 29% of pretax profits, which compares with an income tax expense of
$0.6 million, or 24% of pretax profits in fiscal 2003. The effective tax rates
for fiscal 2004 and 2003 relate primarily to large R&D credits being applied to
low pretax profits from continuing


                                       15





<PAGE>

operations. The overall effective tax rate, including the tax effect of the
discontinued operations, for fiscal years 2004 and 2003 was an income tax
benefit of 42% and 38%, respectively.

We recorded a net loss of $3.4 million for fiscal 2004 as compared with a net
loss of $10.6 million for fiscal 2003. On a diluted per share basis, the net
loss was $0.19 per share for fiscal 2004 as compared with a net loss of $0.60
per share for fiscal 2003. The net loss for fiscal 2004 includes losses of $1.3
million, net of tax, related to the operations of our discontinued TeraOptix
unit and charges of $6.4 million, net of tax, related to the disposal of our
discontinued TeraOptix unit. The charge related to the disposal of our
discontinued TeraOptix unit was primarily due to the downward adjustments in our
second and fourth fiscal quarters of 2004 in the fair market value of our vacant
facility in Westborough, Massachusetts. The fourth quarter charge represents our
decision to market the property as general manufacturing space in contrast to
marketing the property with clean room laboratory space. The net loss for fiscal
2003 includes losses of $2.5 million related to the operations of our
discontinued TeraOptix unit and charges of $9.7 million related to the disposal
of our discontinued TeraOptix unit. The earnings from continuing operations for
fiscal 2004 was $4.2 million, or $0.23 per diluted share, as compared with
earnings from continuing operations of $1.6 million, or $0.09 per diluted share,
for fiscal 2003.

Backlog at June 30, 2004 totaled $54.8 million, an increase of $17.6 million, or
47%, from $37.2 million at June 30, 2003. The year-end fiscal 2004 backlog
consisted of $33.1 million, or 60%, in the semiconductor segment and $21.7
million, or 40%, in the industrial segment. Orders for fiscal 2004 totaled
$134.2 million. Orders by segment for fiscal 2004 consisted of $79.6 million, or
59%, in the semiconductor segment and $54.6 million, or 41%, in the industrial
segment. The increase in the backlog is primarily related to an increase in both
domestic and Japan region orders. Domestic orders were driven by large custom
optics and optical assembly orders, as well as an increase in orders received by
our applied optics group. Orders in Japan increased as we diversified our
customer base in the region, coupled with an increase in product orders from
Canon. We currently have $7.7 million of flat panel system orders in backlog at
June 30, 2004 as compared with $2.7 million at June 30, 2003.

Fiscal 2003 Compared with Fiscal 2002

Net sales of $102.6 million for fiscal 2003 increased by $22.3 million, or 28%,
from the comparable prior year period sales of $80.3 million. Net sales for
fiscal 2003 included $18.8 million from a development services agreement, as
compared to $1.4 million in the prior fiscal year. For fiscal 2003, net sales
in the semiconductor segment were $59.3 million, or 58% of total net sales, as
compared to $37.5 million, or 47%, in the prior year period and net sales in the
industrial segment were $43.3 million, or 42% of total net sales, as compared to
$42.8 million, or 53%, in the prior year period. The increase in net sales in
the semiconductor segment was primarily due to the sales from the development
services agreement.

Sales to the Americas, primarily the United States, amounted to $31.1 million in
fiscal 2003, a decrease of $6.8 million, or 18%, from fiscal 2002 levels of
$37.9 million. Sales outside the Americas amounted to $71.5 million in fiscal
2003, an increase of $29.1 million, or 69%, from fiscal 2002 levels of $42.4
million. Sales to Japan during fiscal 2003 amounted to $54.7 million, an
increase of $33.5 million, or 158%, from fiscal 2002 sales levels, primarily due
to the development services agreement. Sales to Europe/Other, primarily Europe,
amounted to $10.3 million, a decrease of $2.8 million, or 21%, from fiscal 2002.
Sales to the Pacific Rim, excluding Japan, amounted to $6.5 million, a decrease
of $1.6 million, or 20%, from 2002 sales levels.

Approximately 85% of all fiscal 2003 sales were 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 our products in export markets, as would changes
in the general economic conditions in those markets. The impact of changes in
foreign currency values on our sales cannot be measured.

Gross profit for fiscal 2003 totaled $35.4 million, an increase of $7.9 million,
or 29%, from $27.5 million in the prior fiscal year. Gross profit as a
percentage of sales for fiscal 2003 and 2002 was 35% and 34%, respectively.
Gross profit for fiscal 2003 included $3.8 million from the development services
agreement, as compared to $0.3 million for fiscal 2002.

Selling, general, and administrative expenses ("SG&A") in fiscal 2003 amounted
to $20.3 million, a decrease of $1.6 million, or 7%, from fiscal 2002. SG&A as a
percentage of net sales in fiscal 2003 was 20%, as compared to 27% in fiscal
2002. The decrease in SG&A for fiscal 2003 is primarily related to SG&A costs
eliminated after the sale of the Automation Systems Group in December 2001 and a
reduction in selling expenses, including commissions to outside sales
representatives and personnel costs.


                                       16





<PAGE>

Research and development expenses ("R&D") in fiscal 2003 totaled $12.7 million,
a decrease of $5.0 million, or 28%, from $17.7 million in the comparable prior
year period. R&D as a percentage of net sales in fiscal 2003 was 12%, as
compared to 22% in fiscal 2002. The decrease was primarily related to the
completion of several large research and development projects in the
semiconductor segment in fiscal 2002 and the transfer of engineering resources
to revenue producing projects in fiscal 2003.

Our operating profit in fiscal 2003 was $2.0 million, as compared to an
operating loss of $14.8 million in fiscal 2002. Operating profit as a percentage
of sales in fiscal 2003 was 2%, as compared to the operating loss as a
percentage of sales of 18% in fiscal 2002.

The income tax expense from continuing operations in fiscal 2003 totaled $0.6
million, or 24% of pretax profits, which compares with an income tax benefit of
$3.7 million, or 49% of pretax losses in fiscal 2002. The effective tax rate for
fiscal 2003 relates primarily to large R&D credits being applied to a low
taxable income from continuing operations. The overall tax rate, including the
tax effect on the discontinued operations, for fiscal years 2003 and 2002 was
38%.

We recorded a net loss of $10.6 million for fiscal 2003 as compared to a net
loss of $11.7 million for fiscal 2002. On a diluted per share basis, the net
loss was $0.60 per share for fiscal 2003 as compared to a net loss of $0.67 for
fiscal 2002. The net loss for fiscal 2003 includes losses of $2.5 million
related to the operations of our discontinued TeraOptix unit and charges of $9.7
million related to the disposal of our discontinued TeraOptix unit. The net loss
for fiscal 2002 includes losses related to the operations of our discontinued
TeraOptix unit of $7.4 million. The net loss for fiscal 2002 also includes a
gain on the sale of our Automation Systems Group of $6.1 million before related
exit costs of $1.9 million, inventory write-downs of $0.8 million, and tax
expense of $1.3 million. The income from continuing operations for fiscal 2003
was $1.6 million, or $0.09 per share, as compared to a net loss of $4.3 million,
or $0.24 per share, for fiscal 2002.

Backlog at June 30, 2003 totaled $37.2 million, a decrease of $3.3 million, or
8%, from $40.5 million at June 30, 2002. The year-end fiscal 2003 backlog
consisted of $20.6 million, or 55%, in the semiconductor segment and $16.6
million, or 45%, in the industrial segment. Orders for fiscal 2003 totaled $99.2
million. Orders related to the development services agreement totaled $18.8
million in fiscal 2003. Orders by segment for fiscal 2003 consisted of $57.9
million, or 58%, in the semiconductor segment and $41.3 million, or 42%, in the
industrial segment.

                           RELATED PARTY TRANSACTIONS

Sales to Canon Inc., a stockholder, and Canon Sales Co., Inc., a distributor of
certain of our products in Japan and a subsidiary of Canon Inc., amounted to
$57.3 million (49% of net sales), $52.8 million (51% of net sales), and $17.6
million (22% of net sales), for the years ended June 30, 2004, 2003, and 2002,
respectively. Selling prices of products sold to Canon Inc. and Canon Sales Co.,
Inc. are based, generally, on the normal terms customarily given to
distributors. Revenues generated from a development contract with Canon are
recorded on a cost-plus basis. At June 30, 2004 and 2003, there was
approximately, in the aggregate, $10.9 million and $4.0 million, respectively,
of trade accounts receivable from Canon.

In September 2002, we entered into a contract with Canon related to the
development of certain interferometers. In March 2004 we signed a preliminary
agreement to begin further add-on work, with a definitive agreement anticipated
to be signed later in the fall. Since the inception of these developmental
services, we have recognized revenue of $36.3 million on both the original
contract and subsequent add-on work, with $16.1 million and $18.8 million of
revenue being recorded in fiscal 2004 and fiscal 2003, respectively.

                         LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2004, working capital was $58.5 million, a decrease of $8.4 million
from the $66.9 million at June 30, 2003. We maintained cash, cash equivalents,
and marketable securities at June 30, 2004 totaling $34.4 million. This
represents a decrease of $18.5 million from June 30, 2003. The decrease was
primarily due to the payoff of the Westborough facility mortgage ($11.0
million), payment on the related interest rate swap ($1.1 million), and an
increase in receivables ($13.4 million) and inventory ($2.8 million) due to
increased sales volume. The decrease was partially offset by an increase in
accounts payable and accrued expenses ($7.3 million).

We have recently announced that we entered into an agreement to sell our vacant
Westborough, Massachusetts, facility. The sale transaction, anticipated to be
completed in the fall of 2004, is expected to generate approximately $2.0
million in cash, net of selling expenses.

There were no borrowings outstanding under our $3.0 million bank line of credit
at June 30, 2004.


                                       17





<PAGE>

Acquisitions of property, plant, and equipment were $7.6 million for fiscal 2004
as compared with $5.0 million for fiscal 2003, primarily reflecting new
purchases of equipment for the Middlefield factory. We are currently
constructing an 18,000 square foot addition to our Middlefield facility which is
expected to cost approximately $2.8 million.

Although cash requirements will fluctuate based on the timing and extent of
various factors, management believes that cash generated from operations,
together with the liquidity provided by existing cash balances and borrowing
capability, will be sufficient to satisfy our liquidity requirements for the
next 12 months.

                             CONTRACTUAL OBLIGATIONS

The following table summarizes our significant contractual obligations at June
30, 2004, and the effect such obligations are expected to have on our liquidity
and cash flows in future periods.

<TABLE>
<CAPTION>
                                       Payments Due By Period
                                       (Dollars in millions)
                       -----------------------------------------------------
                               Less than                           More than
                       Total     1 year    1-3 years   3-5 years    5 years
                       -----   ---------   ---------   ---------   ---------
<S>                    <C>       <C>          <C>         <C>         <C>
Operating leases       $ 2.6     $1.6         $1.0        $--         $--
Purchase obligations    10.5      3.0          7.5         --          --
                       -----     ----         ----        ---         ---
   Total               $13.1     $4.6         $8.5        $--         $--
                       -----     ----         ----        ---         ---
</TABLE>

                   RISK FACTORS THAT MAY IMPACT FUTURE RESULTS

Industry Concentration and Cyclicality

Our business is significantly dependent on capital expenditures and component
requirements for manufacturers in the semiconductor industry. This industry is
cyclical and has historically experienced periods of oversupply, resulting in
significantly reduced demand for capital equipment, including the products
manufactured and marketed by us. For the foreseeable future, our operations will
continue to be dependent on the capital expenditures in this industry which, in
turn, is largely dependent on the market demand in the semiconductor markets.

Costs of Discontinued Operations

We have exited the telecommunications segment of our business and closed the
TeraOptix facility in Westborough, Massachusetts. The mortgage note and related
swap were paid off in December 2003 for $11.0 million and $1.1 million,
respectively. The value of the facility is estimated at $2.0 million, net of
estimated selling expenses, based upon the purchase and sale agreement entered
into in August 2004. Until the closing of the sale transaction, scheduled for
the fall of 2004, we will continue to pay various carrying costs associated with
the facility.

Customer Concentration; Relationship with Canon

During fiscal 2004, 2003, and 2002, sales to Canon Inc. and Canon Sales Co.,
Inc. (collectively, "Canon"), our largest customer in those periods, accounted
for 49%, 51%, and 22% of our net sales, respectively. We expect that sales to
Canon will continue to represent a significant percentage of our net sales for
the foreseeable future. Canon is an original investor in our company, the owner
at June 30, 2004 of approximately 7% of our outstanding shares of common stock,
and is a distributor of certain of our products in the Japanese market. A
reduction or delay in orders from this customer, including reductions or delays
due to market, economic, or competitive conditions in the industries in which we
serve, could have a material adverse effect upon our results of operations. Our
customers, including Canon, generally do not enter into long-term agreements
obligating them to purchase our products.

Revenues Derived From International Sales and Foreign Operations

We sell our products internationally, primarily to customers in Japan and
throughout the Pacific Rim. Net sales to customers outside the Americas
(primarily the United States) accounted for 71%, 70%, and 53% of our net sales
in each of the fiscal years ended June 30, 2004, 2003, and 2002, respectively,
and are expected to continue to account for a substantial percentage of our net
sales.

International sales and foreign operations are subject to inherent risks,
including the economic conditions in these various foreign countries and their
trading partners, political instability, longer payment cycles, greater
difficulty in accounts receivable collection, compliance with foreign laws,
changes in regulatory requirements, tariffs or other barriers, difficulties in
obtaining export licenses, staffing and managing foreign operations, exposure to
currency exchange fluctuations, transportation delays, and potentially adverse
tax consequences.


                                       18





<PAGE>

Our sales and costs are negotiated and paid primarily in U.S. dollars. However,
changes in the values of foreign currencies relative to the value of the U.S.
dollar can render our products comparatively more expensive to the extent
locally produced alternative products are available. Such conditions could
negatively impact international sales of our products and foreign operations, as
would changes in the general economic conditions in those markets. For our sales
which are based in local currency, we are exposed to foreign exchange
fluctuations from the time customers are invoiced in local currency until
collection occurs. For fiscal 2004, approximately 11% of our sales were in
foreign currency. Management believes the percentage of sales in foreign
currencies may increase in the coming year due to an increase in sales to
Japanese customers denominated in yen. There can be no assurance that risks
inherent in international sales and foreign operations will not have a material
adverse effect on our results of operations in the future.

Risks Associated with Acquisitions

Our growth strategy includes expanding our products and services, and we may
seek acquisitions to expand our business. We regularly review potential
acquisitions of businesses, technologies, or products complementary to our
business and periodically engage in discussions regarding such possible
acquisitions. Acquisitions involve numerous risks, including some or all of the
following: substantial cash expenditures and capital investments; potentially
dilutive issuance of equity securities; incurrence of debt and contingent
liabilities; amortization of certain intangible assets; difficulties in
assimilating the operations and products of the acquired companies; diverting
our management's attention away from other business concerns; risks of entering
markets in which we have limited or no direct experience; the inability to
manage the growth expected for various acquisitions; potential loss of key
employees of the acquired companies in the process of integrating personnel with
disparate business backgrounds; and combining different corporate cultures.

We cannot assure you that any acquisition will result in long-term benefits to
us or that our management will be able to effectively manage the acquired
businesses. We may also incorrectly judge the value or worth of an acquired
company or business. We have recently disposed or divested ourselves of several
companies or lines of business that were acquired by us in the past few years,
at a significant net loss to us.

Quarterly Fluctuations

Our quarterly and annual operating results have varied in the past and may vary
significantly in the future depending on factors such as: the effect of our
acquisitions and consequent integration; budgeting cycles of our customers; the
size, timing, and recognition of revenue from significant orders; increased
competition; our ability to develop innovative products; the timing of new
product releases by us or our competitors; market acceptance of our products;
changes in our and our competitors' pricing policies; changes in operating
expenses and personnel changes; changes in our business strategy; and general
economic factors.

Due to these and other factors, we believe that quarter-to-quarter comparisons
of our operating results may not be meaningful. You should not rely on our
results for one quarter as any indication of our future performance. In future
periods our operating results may be below the expectations of public market
analysts or investors. If this occurs, the price of our common stock would
likely decrease.

Current conditions in the domestic and global economies are extremely uncertain.
As a result, it is difficult to estimate the level of growth for the economy as
a whole or of capital expenditures in the semiconductor and industrial markets.
Because all of the components of our budgeting and forecasting are dependent on
estimates of spending within these markets, the prevailing economic uncertainty
renders estimates of future revenue and expenses even more difficult than usual
to make.

Possible Volatility of Stock Price

We believe that factors such as the announcement of new products or technologies
by us or our competitors, market conditions in the semiconductor and industrial
markets, and quarterly fluctuations in financial results are expected to cause
the market price of our common stock to vary substantially. Further, our net
sales or results of operations in future quarters may be below the expectations
of public market securities analysts and investors. In such event, the price of
the common stock would likely decline. In addition, historically the stock
market has experienced price and volume fluctuations that have particularly
affected the market prices for many high technology companies and which often
have been unrelated to the operating performance of such companies. The market
volatility may adversely affect the market price of shares of our common stock.

Competition

We face competition from a number of companies in all our markets, some of which
have greater manufacturing and marketing capabilities, and greater financial,
technological, and personnel resources. In addition, we compete with the
internal development efforts of our current and prospective customers, some of
which may attempt to become vertically


                                       19





<PAGE>

integrated. Our competitors can be expected to continue to improve the design
and performance of their products and to introduce new products with competitive
price/performance characteristics. Competitive pressures may necessitate price
reductions, which can adversely affect results of operations. Although we
believe that we have certain technical and other advantages over some of our
competitors, maintaining such advantages will require a continued high level of
investment by our company in research and development and sales, marketing, and
service. There can be no assurance that we will have sufficient resources to
continue to make such investments or that we will be able to make the
technological advances necessary to maintain such competitive advantages. In
addition, there can be no assurance that the bases of competition in the
industries in which we compete will not shift.

Technological Change and New Product Development

The market for our products is characterized by rapidly changing technology. Our
future success will continue to depend upon our ability to enhance our current
products and to develop and introduce new products that keep pace with
technological developments and evolving industry standards, respond to changes
in customer requirements, and achieve market acceptance. The development of new
technologically advanced products is a complex and uncertain process requiring
high levels of innovation, as well as the accurate anticipation of technological
and market trends.

We commit significant financial and personnel resources on a continuous basis to
redesign and enhance our instruments, systems, and components and upgrade our
proprietary software technology incorporated in our products. Any failure by us
to anticipate or respond adequately to technological developments and customer
requirements, or any significant delays in product development or introduction,
could have a material adverse effect on our business and impact our close
relationships with customers. This could have an impact on customers'
willingness to share proprietary information about their requirements and
participate in collaborative efforts with us. There can be no assurance that our
customers will continue to provide us with timely access to such information,
that we will be successful in developing and marketing new products and services
or product and service enhancements on a timely basis, or respond effectively to
technological changes or new product announcements by others. In addition, there
can be no assurance the new products and services or product enhancements, if
any, which we developed will achieve market acceptance.

Dependence on Proprietary Technology

Our success is heavily dependent upon our proprietary technology. There can be
no assurance that the steps taken by us to protect our proprietary technology
will be adequate to prevent misappropriation of our technology by third parties
or will be adequate under the laws of some foreign countries, which may not
protect our proprietary rights to the same extent as do laws of the United
States. In addition, there remains the possibility that others will "reverse
engineer" our products in order to determine their method of operation and
introduce competing products or that others will develop competing technology
independently. Any such adverse circumstances could have a material adverse
effect on our results of operations.

Some of the markets in which we compete are characterized by the existence of a
large number of patents and frequent litigation for financial gain that is based
on patents with broad, and often questionable, application. As the number of our
products increase, the markets in which our products are sold expands, and the
functionality of those products grows and overlaps with products offered by
competitors, we believe that we may become increasingly subject to infringement
claims. Although we do not believe any of our products or proprietary rights
infringe the rights of third parties, there can be no assurance that
infringement claims will not be asserted against us in the future or that any
such claim will not result in costly litigation or require us to enter into
royalty arrangements, which may not be available to us on commercially
acceptable terms if at all.

Dependence on Key Personnel

Our success depends in large part upon the continued services of many of our
highly skilled personnel involved in management, research, development and
engineering, sales and marketing, manufacturing, and support and upon our
ability to attract and retain additional highly qualified employees. Our
employees may voluntarily terminate their employment with us at any time.
Competition for these individuals from a variety of employers, including our
competitors and companies in computer or technology-related industries, at times
is intense. We cannot assure you that we will be able to retain our existing
personnel or attract and retain additional personnel.

Dependence on Third-Party Suppliers

We are dependent on suppliers for raw materials and various electrical,
mechanical, and optical supplies, including fiber and electronic components and
modules. Although we enter, either directly or through our contract
manufacturers, into purchase orders with our suppliers based on our forecasts,
we do not have any guaranteed supply arrangements with these suppliers.
Moreover, as our demand for supplies increases, we may not be able to obtain
these supplies in a timely manner. If any relationship with a key supplier is
terminated or if a supplier fails or is unable to provide reliable services or
equipment and we are unable to reach suitable alternative solutions quickly, we
may experience significant delays and additional costs in the manufacturing of
our products. If our key suppliers cease manufacturing the supplies we require,


                                       20





<PAGE>

if their manufacturing operations are interrupted for any significant amount of
time, or if they are unable or unwilling to supply us for any other reason,
including capacity restraints, then we may be at least temporarily unable to
obtain these supplies, thus exposing us to significant delays and additional
costs. Currently there are only a limited number of companies that are capable
of supplying optical materials in the quantity and of the quality we require.

Backlog

We schedule the production of our systems based in part upon order backlog. Due
to possible customer changes in delivery schedules and cancellations of orders,
our backlog at any particular date is not necessarily indicative of actual sales
for any succeeding period. There can be no assurance that amounts included in
backlog will ultimately result in future sales. A reduction in backlog during
any particular period, or the failure of our backlog to result in future sales
could adversely affect our results of operations.

Sales Cycle

Our lengthy and variable qualification and sales cycle makes it difficult to
predict the timing of a sale or whether a sale will be made, which may cause us
to have excess manufacturing capacity or inventory and negatively impact our
operating results. As is typical in the industry, our customers generally expend
significant efforts in evaluating and qualifying our products and manufacturing
process. This evaluation and qualification process frequently results in a
lengthy sales cycle, typically ranging from three to six months and sometimes
longer. While our customers are evaluating our products and before they place an
order with us, we may incur substantial sales, marketing, and research and
development expenses, expend significant management efforts, increase
manufacturing capacity and order long-lead-time supplies prior to receiving an
order. Even after this evaluation process, it is possible that a potential
customer will not purchase our products. In addition, product purchases are
frequently subject to unplanned processing and other delays, particularly with
respect to larger customers for which our products represent a very small
percentage of their overall purchase activity.

If we increase capacity and order supplies in anticipation of an order that does
not materialize, our gross margins may be negatively impacted and we may have to
carry or write off excess inventory. Even if we receive an order, the additional
manufacturing capacity that we add to service the customer's requirements may be
underutilized in a subsequent quarter. Either situation could cause our results
of operations to be adversely affected. Our long sales cycles also may cause our
revenues and operating results to vary significantly and unexpectedly from
quarter to quarter.

Prediction of Manufacturing Requirements

If we fail to predict our manufacturing requirements accurately, we could incur
additional costs or experience manufacturing delays, which could cause us to
lose orders or customers and result in lower net sales. We currently use a
rolling 12-month forecast based primarily on our anticipated product orders and
our product order history to help determine our requirements for components and
materials. It is very important that we accurately predict both the demand for
our products and the lead-time required to obtain the necessary components and
raw materials. Lead times for materials and components that we order vary
significantly and depend on factors such as the specific supplier, the size of
the order, contract terms, and demand for each component at a given time. If we
underestimate our requirements, we may have inadequate manufacturing capacity or
inventory, which could interrupt manufacturing of our products and result in
delays in shipments and net sales. If we overestimate our requirements, we could
have excess inventory of parts. In addition, delays in the manufacturing of our
products could cause us to lose orders or customers.

Undetected Product Defects

Our products are deployed in large and complex systems and may contain defects
that are not detected until after our products have been installed, which could
damage our reputation and cause us to lose customers. We design some of our
products for deployment in large and complex optical networks. Because of the
nature of these products, they can only be fully tested for reliability when
deployed in networks for long periods of time. Our customers may discover
defects in our products only after they have been fully deployed and operated
under peak stress conditions. In addition, our products are combined with
products from other vendors. As a result, should problems occur, it might be
difficult to identify the source of the problem. These conditions increase the
risk that we could experience, among other things: loss of customers; damage to
our brand reputation; failure to attract new customers or achieve market
acceptance; diversion of development and engineering resources; and legal
actions by our customers. The occurrence of any one or more of the foregoing
factors could cause us to experience losses, incur liabilities, and cause our
net sales to decline.

Environmental Regulations

Environmental regulations applicable to our manufacturing operations could limit
our ability to expand or subject us to substantial costs. We are subject to a
variety of environmental regulations relating to the use, storage, discharge,
and disposal of hazardous chemicals used during our manufacturing processes. Any
failure by us to comply with present and future regulations could subject us to
future liabilities or the suspension of production. In addition, such
regulations


                                       21





<PAGE>

could restrict our ability to expand our facilities or could require us to
acquire costly equipment or to incur other significant expenses to comply with
environmental regulations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risks

The following discussion about our market risk involves forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements. We are exposed to market risk related to changes in
interest rates and foreign currency exchange rates. We do not use derivative
financial instruments for speculative or trading purposes.

Interest Rate Sensitivity

We maintain a portfolio of cash equivalents and marketable securities including
institutional money market funds (which may include commercial paper,
certificates of deposit, and U.S. treasury securities), government agency
securities, and corporate bonds. Our interest income is sensitive to changes in
the general level of U.S. interest rates, particularly on our short-term
instruments. The table below presents principal amounts and related weighted
average interest rates by year of maturity for our investment portfolio.

Fair value of investments as of June 30, 2004 maturing in:
($ in millions)

<TABLE>
<CAPTION>
                                    2005   2006   2007   2008   2009
                                    ----   ----   ----   ----   ----
<S>                                 <C>    <C>    <C>    <C>     <C>
Cash equivalents
   Fixed rate                       $9.6   $ --   $ --   $ --    $--
   Weighted average interest rate    1.8%    --     --     --     --

Marketable securities
   Fixed rate                       $8.4   $2.4   $4.2   $1.8    $--
   Weighted average interest rate    2.1%   1.9%   2.6%   2.8%    --
</TABLE>

Exchange Rate Sensitivity

Approximately 89% of our fiscal 2004 sales were in U.S. dollars. At June 30,
2004, our backlog included orders in U.S. dollars of $51.6 million, or 94% of
the total backlog. Substantially all of our 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 sales of our products in export
markets as would changes in the general economic conditions in those markets.
For our sales which are based in local currency, we are exposed to foreign
exchange fluctuations from the time customers are invoiced in local currency
until collection occurs. Management believes the percentage of sales in foreign
currencies may increase in the coming year due to an increase in sales
denominated in yen to Japanese customers.

The majority of our foreign currency transactions and foreign operations are in
the euro and Japanese yen. In the absence of a substantial increase in sales
orders in currency other than U.S. dollars, we believe a 10% appreciation or
depreciation of the U.S. dollar against the euro and yen would have an
immaterial impact on our consolidated financial position and results of
operations.

Item 8. Financial Statements and Supplementary Data

Financial statements and supplementary data required pursuant to this Item begin
on Page F-1 of this Annual Report on Form 10K.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.


                                       22





<PAGE>

Item 9A. Controls and Procedures

ZYGO maintains "disclosure controls and procedures," as such term is defined
under Securities Exchange Act Rule 13a-15 or 15d-15, that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized, and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures. In designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives and our management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. We have carried out an evaluation, as of the end of the period
covered by this report, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon their evaluation and subject to the foregoing, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective in ensuring that material information
relating to ZYGO is made known to the Chief Executive Officer and Chief
Financial Officer by others within our company during the period in which this
report was being prepared.

There were no changes in our internal controls over financial reporting that
occurred during our most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.

Item 9B. Other Information

None.


                                       23





<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

Except for the information concerning executive officers which is set forth in
Part I of this Annual Report, information required by this item will be included
under the captions "Election of Board of Directors", "Committees of the Board of
Directors", and "Other Agreements and Other Matters" in our Proxy Statement to
be filed pursuant to Regulation 14A for use in connection with our company's
2004 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 11. Executive Compensation

Information required by this item will be included in our Proxy Statement under
the caption "Executive Compensation" and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information required by this item will be included in our Proxy Statement under
the captions "Election of Board of Directors," "Equity Compensation Plan
Information," and "Principal Stockholders" and is incorporated herein by
reference.

Item 13. Certain Relationships and Related Transactions

Information required by this item will be included in our Proxy Statement under
the caption "Certain Relationships and Related Transactions" and is incorporated
herein by reference.

Item 14. Principal Accounting Fees and Services

Information required by this item will be included in our Proxy Statement under
the caption "Relationship with Independent Public Accountants" and is
incorporated herein by reference.


                                       24





<PAGE>

                                     PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)  The following documents are filed as part of this report:

     1. and 2. Financial Statements and Financial Statement Schedules:

               An index to the financial statements and financial statement
               schedules filed is located on page F-1.

     3.        EXHIBITS

     3.(i)     Restated Certificate of Incorporation of the Company and
               amendments thereto (Exhibit 3.(i) to the Company's Annual Report
               on Form 10-K for its year ended June 30, 1993)*

     3.(ii)    Certificate of Amendment of Certificate of Incorporation, filed
               June 3, 1996 (Exhibit 3.(ii) to the Company's Annual Report on
               Form 10-K 405 for its year ended June 30, 1996)*

     3.(iii)   By-laws of the Company (Exhibit (3)(b) to Registration
               No. 2-87253 on Form S-1 hereinafter "Registration No. 2-87253")*

     10.1      Confidentiality and Non-Competition Agreement dated October 25,
               1983, between the Company and Carl A. Zanoni (Exhibit (10)(b) to
               Registration No. 2-87253)*

     10.2      Agreement dated May 27, 1975, between the Company and Canon
               U.S.A., Inc., regarding information sharing and marketing
               (Exhibit (10)(x) to Registration No. 2-87253)*

     10.3      Agreement dated November 20, 1980, between the Company and Canon
               Inc. regarding exchange of information (Exhibit (10)(y) to
               Registration No. 2-87253)*

     10.4      Amended and Restated Zygo Corporation Profit Sharing Plan
               (Exhibit 10.15 to the Company's Annual Report on Form 10-K405 for
               its year ended June 30, 1995)*

     10.5      Canon/ZYGO Confidentiality Agreement dated March 7, 1990, between
               the Company and Canon Inc. regarding confidential technical
               information received from each other (Exhibit 10.42 to the
               Company's Annual Report on Form 10-K for its year ended June 30,
               1991)*

     10.6      Services Agreement dated August 26, 1993, between the Company and
               Paul F. Forman (Exhibit 10.26 to the Company's Annual Report on
               Form 10-K for its year ended June 30, 1993)*

     10.7      Amendment Agreement dated as of December 31, 1996, between the
               Company and Paul F. Forman (Exhibit 10.16 to the Company's Annual
               Report on Form 10-K for its year ended June 30, 1997)*

     10.8      Non-Competition Agreement dated August 26, 1993, between the
               Company and Paul F. Forman (Exhibit 10.27 to the Company's Annual
               Report on Form 10-K for its year ended June 30, 1993)*

     10.9      Zygo Corporation Amended and Restated Non-Qualified Stock Option
               Plan ratified and approved by the Company's Stockholders on
               November 19, 1992 (Exhibit 10.30 to the Company's Annual Report
               on Form 10-K for its year ended June 30, 1993)*

     10.10     Renewal of Line of Credit dated June 4, 1997, between the Company
               and Fleet Bank Connecticut, N.A. (Exhibit 10.23 to the Company's
               Annual Report on Form 10-K for its year ended June 30, 1997)*

     10.11     Zygo Corporation Non-Employee Director Stock Option Plan ratified
               and approved by the Company's stockholders on November 17, 1994
               (Exhibit 10.30 to the Company's Annual Report on Form 10-K405 for
               its year ended June 30, 1996)*

     10.12     Subcontract B335188 between The Regents of The University of
               California Lawrence Livermore National Laboratory and Zygo
               Corporation dated May 9, 1997 (Exhibit 10.31 to the Company's
               Annual Report on Form 10-K for its year ended June 30, 1997)*


                                       25





<PAGE>

     10.13     Agreement between Zygo Corporation and Dacon Corporation covering
               an addition to the Company's Middlefield, Connecticut, facilities
               (Project 1774) and the N.I.F. Manufacturing Renovation (Project
               1842) dated April 7, 1997 (Exhibit 10.32 to the Company's Annual
               Report on Form 10-K for its year ended June 30, 1997)*

     10.14     Employment agreement dated January 15, 1999, between Zygo
               Corporation and J. Bruce Robinson (Exhibit 10.34 to the Company's
               Annual Report on Form 10-K 405 for its year ended June 30, 1999)*

     10.15     Zygo Corporation Amended and Restated Non-Employee Director Stock
               Option Plan ratified and approved by the Company's stockholders
               on November 17, 1999 (Exhibit to the Company's Definitive Proxy
               Statement for its year ended June 30, 1999)*

     10.16     Employment agreement dated July 1, 1999, between Zygo Corporation
               and Brian J. Monti (Exhibit 10.22 to the Company's Annual Report
               on Form 10-K405 for its year ended June 30, 2000)*

     10.17     Acquisition Agreement dated May 5, 2000, by and among Zygo
               Corporation, Firefly Technologies Inc., and the Shareholders of
               Firefly Technologies Inc. (Company's Current Reports on Form 8-K
               dated May 8, 2000 and on Form 8-KA dated June 30, 2000)*

     10.18     Employment agreement dated May 5, 2000, between Zygo Corporation
               and John Berg (Exhibit 10.01(e)(1) to the Company's Current
               Reports on Form 8-K dated May 8, 2000 and on Form 8-KA dated
               June 30, 2000)*

     10.19     Employment agreement dated May 5, 2000, between Zygo Corporation
               and Patrick Tan (Exhibit 10.01(e)(2) to the Company's Current
               Reports on Form 8-K dated May 8, 2000 and on Form 8-KA dated
               June 30, 2000)*

     10.20     Promissory Note to the amended and restated credit agreement
               dated May 14, 2001, between Zygo Corporation and Fleet National
               Bank (Exhibit 10.26 to the Company's Annual Report on Form 10K
               405 for its year ended June 30, 2001)*

     10.21     Amended and restated credit agreement dated May 14, 2001, between
               Zygo Corporation and Fleet National Bank (Exhibit 10.21 to the
               Company's Annual Report on Form 10K for its year ended
               June 30, 2002)*

     10.22     Amended and restated credit agreement dated November 22, 2001
               between Zygo Corporation and Fleet National Bank (Exhibit 10.22
               to the Company's Annual Report on Form 10K for its year ended
               June 30, 2002)*

     10.23     Amended and restated credit agreement dated June 26, 2002 between
               Zygo Corporation and Fleet National Bank (Exhibit 10.23 to the
               Company's Annual Report on Form 10K for its year ended
               June 30, 2002)*

     10.24     Subcontract B514527 between The Regents of The University of
               California Lawrence Livermore National Laboratory and Zygo
               Corporation dated April 14, 2001 (Exhibit 10.24 to the Company's
               Annual Report on Form 10K for its year ended June 30, 2002)*

     10.25     Subcontract B519044 between The Regents of The University of
               California Lawrence Livermore National Laboratory and Zygo
               Corporation dated January 14, 2002 (Exhibit 10.25 to the
               Company's Annual Report on Form 10K for its year ended
               June 30, 2002)*

     10.26     Development Agreement dated September 11, 2002, between Zygo
               Corporation and Canon, Inc. (Exhibit 99.2 to the Company's
               Current Reports on Form 8-K dated September 17, 2002)*

     10.27     Development and Manufacturing Support Services Agreement
               effective December 1, 2001, between Zygo Corporation and
               Philips Electronics North America Corporation. (Exhibit 99.1 to
               the Company's Current Reports on Form 8-K dated
               October 22, 2002)*


                                       26





<PAGE>

     10.28     Master Reaffirmation and Amendment No. 3 to Loan Documents dated
               November 21, 2002, between Fleet National Bank and Zygo
               Corporation. (Exhibit 10.1 to the Company's Quarterly Report on
               Form 10-Q for its quarterly period ended December 27, 2002)*

     10.29     Master Reaffirmation and Amendment No. 4 to Loan Documents dated
               December 18, 2003, between Fleet National Bank and Zygo
               Corporation. (Exhibit 10.1 to the Company's Quarterly Report on
               Form 10-Q for its quarterly period ended December 26, 2003)*

     10.30     Offer Letter dated February 10, 2004 between Zygo Corporation
               and Walter Shephard.

     14.1      Zygo Corporation Code of Ethics (Exhibit 14.1 to the Company's
               Quarterly Report on Form 10-Q for its quarterly period ended
               March 26, 2004)*

     21.       Subsidiaries of Registrant

     23.       Consent of Independent Registered Public Accounting Firm

     24.       Power of Attorney (included in the signature page)

     31.1      Certification of Chief Executive Officer under Rule 13a-14(a)

     31.2      Certification of Chief Financial Officer under Rule 13a-14(a)

     32.1      Certification of Chief Executive Officer and Chief Financial
               Officer

     Exhibit numbers 10.9, 10.11, 10.14, 10.15, 10.16, 10.18, 10.19, and 10.30,
     are management contracts, compensatory plans or arrangements.

* Incorporated herein by reference.


                                       27





<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

         ZYGO CORPORATION
   --------------------------------
            Registrant


By /s/ Walter A. Shephard                                Date September 13, 2004
   --------------------------------                           ------------------
   Walter A. Shephard
   Vice President, Finance, Chief
   Financial Officer, and Treasurer

                                POWER OF ATTORNEY

Know all persons by these presents, that each person whose signature appears
below constitutes and appoints J. Bruce Robinson and Walter A. Shephard, jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
each of them in any and all capacities, to sign any amendments to this Report on
Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorney's-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

<TABLE>
<S>                              <C>                                 <C>


/s/ J. Bruce Robinson            Chairman, President, and Chief      Date September 13, 2004
------------------------------   Executive Officer
J. Bruce Robinson


/s/ Walter A. Shephard           Vice President, Finance, Chief      Date September 13, 2004
------------------------------   Financial Officer, and Treasurer
Walter A. Shephard


/s/ Carl A. Zanoni               Senior Vice President, Technology   Date September 13, 2004
------------------------------   and Director
Carl A. Zanoni


/s/ Eugene G. Banucci            Director                                 September 13, 2004
------------------------------
(Eugene G. Banucci)


/s/ Youssef A. El-Mansy          Director                                 September 13, 2004
------------------------------
(Youssef A. El-Mansy)


/s/ Paul F. Forman               Director                                 September 13, 2004
------------------------------
(Paul F. Forman)


/s/ Samuel H. Fuller             Director                                 September 13, 2004
------------------------------
(Samuel H. Fuller)


/s/ Seymour E. Liebman           Director                                 September 13, 2004
------------------------------
(Seymour E. Liebman)


/s/ Robert G. McKelvey           Director                                 September 13, 2004
------------------------------
(Robert G. McKelvey)


/s/ Robert B. Taylor             Director                                 September 13, 2004
------------------------------
(Robert B. Taylor)


/s/ Bruce W. Worster             Director                                 September 13, 2004
------------------------------
(Bruce W. Worster)
</TABLE>


                                       28





<PAGE>

                 ZYGO CORPORATION AND CONSOLIDATED SUBSIDIARIES

                   Index to Financial Statements and Schedule

<TABLE>
<CAPTION>
    Page
-----------
<S>           <C>
F-2           Report of Independent Registered Public Accounting Firm

F-3           Consolidated balance sheets at June 30, 2004 and 2003

F-4           Consolidated statements of operations for the years ended June 30, 2004, 2003, and 2002

F-5           Consolidated statements of stockholders' equity for the years ended June 30, 2004, 2003, and 2002

F-6           Consolidated statements of cash flows for the years ended June 30, 2004, 2003, and 2002

F-7 to F-20   Notes to consolidated financial statements

F-21          Selected consolidated quarterly financial data for the years ended June 30, 2004 and 2003

              Consolidated Schedules

S-1           Report of Independent Registered Public Accounting Firm on Schedule II

S-2           Schedule II -Valuation and qualifying accounts
</TABLE>

     All other schedules have been omitted since the required information is not
     present or not present in amounts sufficient to require submission of the
     schedules or the information required is included in the consolidated
     financial statements or notes thereto.


                                       F-1





<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2004 and 2003, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended June 30, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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, 2004 and 2003, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 2004, in conformity with U.S. generally accepted accounting principles.

As discussed in Notes 1 and 2 to the consolidated financial statements, the
Company changed its method of accounting for impairment and disposal of
long-lived assets effective July 1, 2002 in accordance with Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."

KPMG LLP
Hartford, Connecticut
August 25, 2004


                                       F-2





<PAGE>

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

<TABLE>
<CAPTION>
                                                                     June 30, 2004   June 30, 2003
                                                                     -------------   -------------
<S>                                                                     <C>             <C>
Assets
   Current assets:
      Cash and cash equivalents                                         $ 17,462        $ 31,209
      Marketable securities (note 3)                                       8,428          14,929
      Receivables (notes 4 and 18)                                        26,338          12,868
      Inventories (note 5)                                                21,547          18,444
      Prepaid expenses                                                     1,915           1,791
      Deferred income taxes (note 16)                                      3,999           5,179
      Assets from discontinued unit held for sale (notes 2 and 10)         2,012          11,899
                                                                        --------        --------
         Total current assets                                             81,701          96,319
                                                                        --------        --------
Marketable securities (note 3)                                             8,503           6,712
Property, plant, and equipment, net (note 6)                              27,433          26,648
Deferred income taxes (note 16)                                           31,738          26,364
Intangible assets, net (notes 7)                                           4,999           4,464
Other assets                                                               1,078             561
                                                                        --------        --------
Total assets                                                            $155,452        $161,068
                                                                        ========        ========

Liabilities and Stockholders' Equity
   Current liabilities:
      Current portion of long-term debt (note 10)                       $     --        $ 11,374
      Accounts payable                                                    10,384           5,254
      Accrued progress payments (note 18)                                    615           2,319
      Accrued salaries and wages                                           5,794           3,612
      Interest rate swap liability (note 10)                                  --           1,435
      Other accrued expenses (note 9)                                      4,389           3,694
      Income taxes payable                                                 2,038           1,750
                                                                        --------        --------
         Total current liabilities                                        23,220          29,438
                                                                        --------        --------
Long-term debt (note 10)                                                      --              --
Other long-term liabilities (note 2)                                         350             609
Minority interest                                                          1,238           1,161
                                                                        --------        --------
Total liabilities                                                         24,808          31,208
                                                                        --------        --------
Commitments (notes 9 and 11)

Stockholders' equity (notes 13, 14, and 15):
   Common stock, $ .10 par value per share:
      40,000,000 shares authorized (40,000,000 in 2003);
      18,332,933 shares issued (18,042,917 in 2003);
      17,885,728 shares outstanding (17,595,712 in 2003)                   1,833           1,804
   Additional paid-in capital                                            141,151         138,333
   Retained earnings (deficit)                                            (5,996)         (2,589)
   Accumulated other comprehensive income (loss):
      Currency translation effects                                        (1,119)         (1,623)
      Net unrealized loss on swap agreement (note 10)                         --            (914)
      Net unrealized gain on marketable securities (note 3)                   62             136
                                                                        --------        --------
                                                                         135,931         135,147
   Less treasury stock, at cost; 447,205 common shares
      (447,205 shares in 2003)                                             5,287           5,287
                                                                        --------        --------
      Total stockholders' equity                                         130,644         129,860
                                                                        --------        --------
Total liabilities and stockholders' equity                              $155,452        $161,068
                                                                        ========        ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       F-3





<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands except per share amounts)

<TABLE>
<CAPTION>
                                                           Fiscal Year Ended June 30,
                                                         ------------------------------
                                                           2004       2003       2002
                                                         --------   --------   --------
<S>                                                      <C>        <C>        <C>
Net sales (notes 18 and 19)
      Products                                           $100,585   $ 83,798   $ 78,877
      Development services                                 16,057     18,779      1,391
                                                         --------   --------   --------
                                                          116,642    102,577     80,268
                                                         --------   --------   --------
Cost of goods sold
      Products                                             61,044     52,202     51,666
      Development services                                 12,533     14,930      1,139
                                                         --------   --------   --------
                                                           73,577     67,132     52,805
                                                         --------   --------   --------
      Gross profit                                         43,065     35,445     27,463

Selling, general, and administrative expenses              24,280     20,424     22,685
Research and development                                   13,011     12,659     17,696
Automation Systems Group exit costs (note 2)                  315        352      1,856
                                                         --------   --------   --------
      Operating profit (loss)                               5,459      2,010    (14,774)
                                                         --------   --------   --------
Gain on sale of Automation Systems Group (note 2)              --         --      6,142
                                                         --------   --------   --------

Other income (expense):
      Interest income                                         795        943      1,605
      Miscellaneous income (expense), net                     169       (293)      (428)
                                                         --------   --------   --------
         Total other income                                   964        650      1,177
                                                         --------   --------   --------
         Earnings (loss) before income taxes and
            minority interest                               6,423      2,660     (7,455)

Income tax benefit (expense) (note 16)                     (1,863)      (626)     3,652
Minority interest                                            (312)      (459)      (476)
                                                         --------   --------   --------
Earnings (loss) from continuing operations                  4,248      1,575     (4,279)
                                                         --------   --------   --------

Discontinued TeraOptix operations, net of tax (note 2)     (1,263)    (2,493)    (7,454)
Charges related to the disposal of TeraOptix,
   net of tax (note 2)                                     (6,392)    (9,652)         -
                                                         --------   --------   --------
      Loss from discontinued operations                    (7,655)   (12,145)    (7,454)
                                                         --------   --------   --------
Net earnings (loss)                                      $ (3,407)  $(10,570)  $(11,733)
                                                         ========   ========   ========
Basic - Earnings (loss) per share:
      Continuing operations                              $   0.24   $   0.09   $  (0.24)
                                                         ========   ========   ========
      Discontinued operations                            $  (0.43)  $  (0.69)  $  (0.43)
                                                         ========   ========   ========
      Net earnings (loss)                                $  (0.19)  $  (0.60)  $  (0.67)
                                                         ========   ========   ========

Diluted - Earnings (loss) per share:
      Continuing operations                              $   0.23   $   0.09   $  (0.24)
                                                         ========   ========   ========
      Discontinued operations                            $  (0.42)  $  (0.69)  $  (0.43)
                                                         ========   ========   ========
      Net earnings (loss)                                $  (0.19)  $  (0.60)  $  (0.67)
                                                         ========   ========   ========

Weighted average number of shares:
      Basic                                                17,802     17,539     17,414
                                                         ========   ========   ========
      Diluted                                              18,221     17,696     17,414
                                                         ========   ========   ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       F-4





<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Thousands of dollars)

<TABLE>
<CAPTION>
                                                                                      Accum.
                                                                                      Other
                                                                Comp.     Retained    Comp.
                                                                Income    Earnings    Income   Common   Treasury    Paid-In
                                                      Total     (Loss)   (Deficit)    (Loss)    Stock     Stock     Capital
                                                    --------   -------   ---------   -------   ------   --------   --------
<S>                                                 <C>        <C>        <C>        <C>       <C>       <C>       <C>
Balance at June 30, 2001                            $149,139              $ 19,714   $(1,718)  $1,780    $(5,017)  $134,380
Comprehensive income (loss)
   Net loss                                          (11,733)  (11,733)    (11,733)
                                                               -------
   Other comprehensive income (loss),
      net of tax
         Unrealized loss on marketable securities        (21)      (21)
         Unrealized loss on swap agreement              (546)     (546)
         Foreign currency translation effect             417       417
                                                               -------
   Other comprehensive loss                                       (150)                 (150)
                                                               -------
Comprehensive loss                                             (11,883)
                                                               =======
Repurchased common stock adjustment                     (270)                                               (270)
Non-cash compensation charges
   related to stock options                               83                                                             83
Employee stock purchase                                1,098                                        8                 1,090
Exercise of employee stock options
   and related tax effect                              1,838                                        1                 1,837
                                                    --------              --------   -------   ------    -------   --------
Balance at June 30, 2002                            $140,005              $  7,981   $(1,868)  $1,789    $(5,287)  $137,390
Comprehensive income (loss)
   Net loss                                          (10,570)  (10,570)    (10,570)
                                                               -------
   Other comprehensive income (loss),
      net of tax
         Unrealized gain on marketable securities        120       120
         Unrealized loss on swap agreement              (399)     (399)
         Foreign currency translation effect            (254)     (254)
                                                               -------
   Other comprehensive loss                                       (533)                 (533)
                                                               -------
Comprehensive loss                                             (11,103)
                                                               =======
Non-cash compensation charges
   related to stock options                               70                                                             70
Employee stock purchase                                  731                                       12                   719
Exercise of employee stock options
   and related tax effect                                157                                        3                   154
                                                    --------              --------   -------   ------    -------   --------
Balance at June 30, 2003                            $129,860              $ (2,589)  $(2,401)  $1,804    $(5,287)  $138,333
Comprehensive income (loss)
   Net loss                                           (3,407)   (3,407)     (3,407)
                                                               -------
   Other comprehensive income (loss),
      net of tax
         Unrealized loss on marketable securities        (74)      (74)
         Reclassification adjustment for loss
            on swap agreement included in
            net loss                                     914       914
         Foreign currency translation effect             504       504
                                                               -------
   Other comprehensive income                                    1,344                 1,344
                                                               -------
Comprehensive loss                                              (2,063)
                                                               =======
Non-cash compensation charges
   related to stock options                              269                                                            269
Tax benefit for deductible expenses charged
   to equity                                             474                                                            474
Employee stock purchase                                  578                                        9                   569
Exercise of employee stock options
   and related tax effect                              1,526                                       20                 1,506
                                                    --------              --------   -------   ------    -------   --------
Balance at June 30, 2004                            $130,644              $ (5,996)  $(1,057)  $1,833    $(5,287)  $141,151
                                                    ========              ========   =======   ======    =======   ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       F-5





<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)

<TABLE>
<CAPTION>
                                                                           Fiscal Year Ended June 30,
                                                                         ------------------------------
                                                                           2004       2003       2002
                                                                         --------   --------   --------
<S>                                                                      <C>        <C>        <C>
Cash provided by (used for) operating activities:
   Net loss                                                              $ (3,407)  $(10,570)  $(11,733)
   Adjustments to reconcile net loss to cash
      provided by (used for) operating activities:
      Loss from discontinued operations                                     7,655     12,145      7,454
      Depreciation and amortization                                         5,717      5,623      6,098
      Gain on sale of Automation Systems Group                                 --         --     (6,142)
      Loss on disposal and impairment of assets                               525        489      2,320
      Deferred income taxes                                                  (233)      (236)    (1,336)
      Other non-cash items                                                    192         70         83
      Changes in operating accounts:
         Receivables                                                      (13,401)     7,528      2,681
         Costs in excess of billings                                           --         --       (690)
         Inventories                                                       (2,796)     4,353       (568)
         Prepaid expenses                                                    (122)      (367)      (131)
         Accounts payable, accrued expenses and taxes payable               7,310      2,721     (7,801)
         Minority interest                                                    312        459        476
                                                                         --------   --------   --------
      Net cash provided by (used for) continuing operations                 1,752     22,215     (9,289)
      Net cash used for discontinued operations                            (1,944)    (4,607)    (8,470)
                                                                         --------   --------   --------
      Net cash provided by (used for) operating activities                   (192)    17,608    (17,759)
                                                                         --------   --------   --------
Cash used for investing activities:
   Additions to property, plant, and equipment                             (7,585)    (5,037)   (11,381)
   Purchase of marketable securities                                       (8,533)   (15,842)    (8,001)
   Additions to intangibles and other assets                               (1,138)      (957)      (493)
   Proceeds from the sale of assets                                            --         --        673
   Proceeds from sale of Automation Systems Group,
      net of cash sold ($88)                                                   --         --     12,077
   Restricted cash with interest from sale of Automation Systems Group         --      1,225     (1,225)
   Proceeds from the sale of marketable securities                          1,001         --      4,248
   Proceeds from maturity of marketable securities                         12,125      3,075      2,155
                                                                         --------   --------   --------
      Net cash used for continuing operations                              (4,130)   (17,536)    (1,947)
      Net cash provided by (used for) discontinued operations                  80      2,841     (6,259)
                                                                         --------   --------   --------
      Net cash used for investing activities                               (4,050)   (14,695)    (8,206)
                                                                         --------   --------   --------
Cash provided by (used for) financing activities:
   Dividend payments to minority interest                                    (235)      (268)      (469)
   Employee stock purchase                                                    578        731      1,098
   Exercise of employee stock options                                       1,526        157      1,838
   Repurchase of common stock                                                  --         --       (270)
                                                                         --------   --------   --------
      Net cash provided by continuing operations                            1,869        620      2,197
      Net cash used for discontinued operations                           (11,374)      (837)      (349)
                                                                         --------   --------   --------
      Net cash provided by (used for) financing activities                 (9,505)      (217)     1,848
                                                                         --------   --------   --------
Net increase (decrease) in cash and cash equivalents                      (13,747)     2,696    (24,117)
Cash and cash equivalents, beginning of year                               31,209     28,513     52,630
                                                                         --------   --------   --------
Cash and cash equivalents, end of year                                   $ 17,462   $ 31,209   $ 28,513
                                                                         ========   ========   ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       F-6





<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004, 2003, and 2002
(Dollars in thousands, except for per share amounts)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Operations and Principles of Consolidation

Zygo Corporation is a worldwide developer and supplier of high performance
metrology instruments, high precision optics, optical assemblies, and automation
for the semiconductor and industrial markets. The accompanying consolidated
financial statements include the accounts of Zygo Corporation and its
subsidiaries ("ZYGO," "we," "us," "our" or "Company"). All material transactions
and accounts with the subsidiaries have been eliminated from the consolidated
financial statements.

Cash and Cash Equivalents

We consider cash and investments in securities with maturities at the date of
purchase of three months or less to be cash and cash equivalents.

Marketable Securities

We consider investments in securities with maturities at the date of purchase in
excess of three months as marketable securities. Marketable securities primarily
consist of corporate bonds, government agency securities, and tax-exempt bonds.
All securities held by us at June 30, 2004 and 2003, were classified as 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.

Property, Plant, and Equipment

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

Intangible Assets

Intangible assets include patents, trademarks, and license agreements. The cost
of intangible assets is amortized on a straight-line basis, which ranges from
4-20 years.

Valuation of Long-Lived Assets

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

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

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted rates expected to apply to taxable income in the years in
which those


                                       F-7





<PAGE>

temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.

Revenue Recognition

We recognize revenue based on guidance provided in Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition". We recognize revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, our price is fixed
or determinable, and collectibility is reasonably assured.

Research and Development

Research and development costs are expensed as incurred.

Earnings Per Share

Basic and diluted earnings per share are calculated in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings Per Share."

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

<TABLE>
<CAPTION>
                                              June 30, 2004   June 30, 2003   June 30, 2002
                                              -------------   -------------   -------------
<S>                                             <C>             <C>             <C>
Weighted average shares outstanding             17,802,000      17,539,000      17,414,000
Dilutive effect of stock options                   419,000         157,000              --
                                                ----------      ----------      ----------
Diluted weighted average shares outstanding     18,221,000      17,696,000      17,414,000
                                                ----------      ----------      ----------
</TABLE>

For the fiscal year ended June 30, 2002, the Company recorded a net loss from
continuing operations. Due to the net loss from continuing operations, stock
options of 319,000 for the fiscal year ended 2002 were excluded from the
computation because of the anti-dilutive effect on earnings per share.

Stock Based Compensation

We have three stock-based compensation plans, which are described in note 14. We
apply Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for our plans.
Since all options were granted with an exercise price equal to the fair market
value on the date of grant, no compensation cost has been recognized for our
fixed option plans. Pro forma information regarding net earnings (loss) and
earnings (loss) per share is required by SFAS No. 123, "Accounting for
Stock-Based Compensation," which requires that the information be determined as
if we have accounted for our 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. Our pro forma information is as follows:

<TABLE>
<CAPTION>
                                              June 30,   June 30,   June 30,
                                                2004       2003       2002
                                              --------   --------   --------
<S>                                           <C>        <C>        <C>
Net earnings (loss), as reported              $(3,407)   $(10,570)  $(11,733)
Deduct: Total stock-based employee
   compensation expense determined under
   fair value based method for all awards,
   net of related tax effects                  (5,786)     (5,209)    (8,896)
                                              -------    --------   --------
Pro forma net earnings (loss)                 $(9,193)   $(15,779)  $(20,629)
                                              =======    ========   ========

Net earnings (loss) per share
   Basic - as reported                        $ (0.19)   $  (0.60)  $  (0.67)
                                              =======    ========   ========
   Basic - pro forma                          $ (0.52)   $  (0.90)  $  (1.18)
                                              =======    ========   ========

   Diluted - as reported                      $ (0.19)   $  (0.60)  $  (0.67)
                                              =======    ========   ========
   Diluted - pro forma                        $ (0.50)   $  (0.90)  $  (1.18)
                                              =======    ========   ========
</TABLE>

The above pro forma information is based on historical activity and may not
represent future trends.


                                       F-8





<PAGE>

Fair Value of Financial Instruments

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
that reporting entities provide, to the extent practicable, the fair value of
financial instruments, both assets and liabilities. The carrying amounts of
cash, accounts receivable, accounts payable, and accrued expenses approximate
fair value because they are short-term in nature.

Use of Estimates

Management has made a number of estimates and assumptions relating to the
reporting of assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America. On an ongoing basis, management evaluates its
estimates and judgments, including those related to bad debts, inventories,
long-lived assets, income taxes, and warranty obligations. Actual results could
differ from those estimates.

Reclassifications

Certain amounts included in the consolidated financial statements for the prior
years have been reclassified to conform with the current year presentation.

Recently Issued Accounting Pronouncements

In January and December 2003, the FASB Issued Financial Interpretation No
("FIN") 46, "Consolidation of Variable Interest Entities, an Interpretation of
ARB No. 51." FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the equity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities created or acquired
after January 31, 2003. FIN 46 is effective for all variable interest entities
created or acquired prior to February 1, 2003 for the first reporting period
ended after March 15, 2004. The adoption of FIN 46 did not have an impact on our
consolidated results of operations or financial position.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments. SFAS No. 149
became effective for us in July 2003. The adoption of SFAS No. 149 did not have
an affect on our consolidated results of operations or financial position.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
Generally, the statement is effective for financial instruments entered into or
modified after November 5, 2003 and is otherwise effective for the beginning of
the first interim period beginning after June 15, 2003. The adoption of SFAS No.
150 did not have an affect on our consolidated results of operations or
financial position.

The FASB's Emerging Issues Task Force ("EITF") reached a consensus on Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21
provides guidance on how to account for arrangements that involve the delivery
or performance of multiple products, services, and/or rights to use assets. The
provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No.
00-21 did not have a material effect on our consolidated results of operations
or financial position.

In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which expands
financial statement disclosures for defined benefit plans. The change replaces
existing FASB disclosure requirements for pensions. The adoption of SFAS No. 132
(revised) did not have an affect on our results of operations or financial
position.

NOTE 2: DIVESTITURES AND DISCONTINUED OPERATIONS

On December 12, 2001, we sold our Automation Systems Group in Longmont,
Colorado, to Brooks Automation, Inc. of Chelmsford, Massachusetts, in a cash
transaction, for $12,165. Substantially all of the assets were sold to Brooks
and substantially all of the liabilities were assumed by Brooks. The gain on the
sale was $6,142 before related exit costs of $1,856 to be paid from the
proceeds, inventory write-downs of $808, and tax expense of $1,322. In fiscal
2004 and 2003, we recorded an additional $315 and $352, respectively, of charges
related to the remaining term on the lease of space formerly occupied by the
Automation Systems Group.


                                       F-9





<PAGE>

In September 2002, we committed to a planned disposition of our TeraOptix
business unit ("TeraOptix"). During fiscal 2003, we recorded an after-tax loss
of $9,652, net of a tax benefit of $5,101 for charges related to the disposal of
TeraOptix. During fiscal 2004, we recorded additional charges related to the
disposal of TeraOptix of $6,392, net of tax of $3,425, primarily related to
impairment charges on the vacant facility previously used by the TeraOptix unit.
In December 2003, we paid off the remaining mortgage debt of $10,955 on the
facility. The mortgage debt had carried interest at 7.5% per annum at the time
of repayment, and required monthly principal payments of $70, plus interest,
until April 2007 and a balloon payment of $8,200 in May 2007. In connection with
the debt repayment, the Company also paid the balance of a related interest rate
swap agreement of $1,109. This payment resulted in an additional charge to
discontinued TeraOptix operations, recorded net of tax. Prior to the payment, in
accordance with SFAS No. 133, as amended, the swap liability was recorded with a
corresponding debit, net of tax, to stockholders' equity. The aggregate payment
of $12,064 on the mortgage debt ($10,955) and swap agreement ($1,109) was funded
from the Company's available cash and marketable securities.

Subsequent to the balance sheet date, we announced in August 2004 that we have
entered into an agreement to sell our vacant Westborough, Massachusetts,
facility. The sales transaction, anticipated to be completed in the fall of
2004, is expected to generate approximately $2,000 in cash, net of selling
expenses.

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

<TABLE>
<CAPTION>
                                                                                    June 30,   June 30,   June 30,
                                                                                      2004       2003       2002
                                                                                    --------   --------   --------
<S>                                                                                 <C>        <C>        <C>
Cash flow from operating activities from discontinued operations:
Loss from discontinued operations                                                   $ (7,655)  $(12,145)  $(7,454)
Depreciation and amortization                                                             --         --     1,153
Loss on sale and impairment of assets                                                  9,817     13,070        --
Deferred income taxes                                                                 (4,104)    (6,506)   (3,685)
Receivables                                                                               --        845     1,294
Inventories                                                                               --        815      (159)
Prepaid expenses                                                                          (2)        20        59
Accounts payable and accrued expenses                                                     --       (706)      322
                                                                                    --------   --------   -------
Net cash used for operating activities from discontinued operations                 $ (1,944)  $ (4,607)  $(8,470)
                                                                                    --------   --------   -------

Cash flow from investing activities from discontinued operations:
Additions to property, plant, and equipment                                         $     --   $     --   $(6,259)
Proceeds from sale of assets                                                              80      2,841        --
                                                                                    --------   --------   -------
Net cash provided by (used for) investing activities from discontinued operations   $     80   $  2,841   $(6,259)
                                                                                    --------   --------   -------

Cash flow from financing activities from discontinued operations:
Payments of long-term debt                                                          $(11,374)  $   (837)  $  (349)
                                                                                    --------   --------   -------
Net cash used for financing activities from discontinued operations                 $(11,374)  $   (837)  $  (349)
                                                                                    --------   --------   -------
</TABLE>

NOTE 3: MARKETABLE SECURITIES

Marketable securities consisted primarily of corporate bonds, government agency
securities and tax-exempt bonds issued by various federal, state and municipal
agencies for both 2004 and 2003. Marketable securities at June 30, 2004 and 2003
are reported at cost. The gross unrealized gains on marketable securities of $90
and $213 at June 30, 2004 and 2003, respectively, are shown net of their related
tax effects, resulting in balances of $62 and $136, respectively, as a separate
component of stockholders' equity. As of June 30, 2003, we transferred our
marketable securities from available-for-sale to held-to-maturity. Accordingly,
the gross unrealized gains, net of tax, of $62 in stockholders' equity remaining
as of June 30, 2004 will continue to be amortized over the remaining life of the
securities. Amortization expense related to marketable securities was $43 and
$49 in fiscal 2004 and 2003, respectively. During fiscal 2004, we sold four
securities totaling $1,001 that were classified as held to maturity. We sold
these securities in order to comply with changes in our investment policy. The
gain realized on the sale of these securities was $13.

Dividend and interest income is 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 amortized cost, gross unrealized holding gains (losses), and fair value of
held-to-maturity securities at June 30, 2004 and 2003 were as follows:


                                      F-10





<PAGE>

<TABLE>
<CAPTION>
                                           Gross        Gross
                                        Unrealized   Unrealized
                            Amortized     Holding      Holding      Fair
                               Cost       Gains        Losses      Value
                            ---------   ----------   ----------   -------
<S>                          <C>            <C>         <C>       <C>
At June 30, 2004
Corporate, federal, state
and local municipal bonds    $16,931        $ 3         $172      $16,762
                             =======        ===         ====      =======

At June 30, 2003
Corporate, federal, state
and local municipal bonds    $21,641        $--         $ --      $21,641
                             =======        ===         ====      =======
</TABLE>

Maturities of investment securities classified as held-to-maturity were as
follows at June 30, 2004 and 2003:

<TABLE>
<CAPTION>
                                           June 30, 2004         June 30, 2003
                                        -------------------   -------------------
                                        Amortized    Fair     Amortized    Fair
                                           Cost      Value      Cost       Value
                                        ---------   -------   ---------   -------
<S>                                      <C>        <C>        <C>        <C>
Due within one year                      $ 8,428    $ 8,419    $14,929    $14,929
Due after one year through five years      8,503      8,343      6,712      6,712
                                         -------    -------    -------    -------
                                         $16,931    $16,762    $21,641    $21,641
                                         =======    =======    =======    =======
</TABLE>

NOTE 4: ACCOUNTS RECEIVABLE

At June 30, 2004 and 2003, accounts receivable were as follows:

<TABLE>
<CAPTION>
                                       June 30, 2004   June 30, 2003
                                       -------------   -------------
<S>                                       <C>            <C>
Trade (note 18)                           $26,383        $12,284
Other                                         662            921
                                          -------        -------
                                           27,045         13,205
Allowance for doubtful accounts              (707)          (337)
                                          -------        -------
                                          $26,338        $12,868
                                          =======        =======
</TABLE>

NOTE 5: INVENTORIES

At June 30, 2004 and 2003, inventories were as follows:

<TABLE>
<CAPTION>
                                       June 30, 2004   June 30, 2003
                                       -------------   -------------
<S>                                       <C>             <C>
Raw materials and manufactured parts      $11,155         $10,103
Work in process                             9,794           7,816
Finished goods                                598             525
                                          -------         -------
                                          $21,547         $18,444
                                          =======         =======
</TABLE>

NOTE 6: PROPERTY, PLANT, AND EQUIPMENT

At June 30, 2004 and 2003, property, plant, and equipment, at cost, were as
follows:


                                      F-11





<PAGE>

<TABLE>
<CAPTION>
                                                                              Estimated
                                                                             Useful Life
                                             June 30, 2004   June 30, 2003     (Years)
                                             -------------   -------------   -----------
<S>                                            <C>             <C>              <C>
Land                                           $    615        $    615           --
Building and Improvements                        11,941          11,355         15-40
Machinery, Equipment, and office furniture       40,602          39,545          3-8
Leasehold improvements                              657             166          1-5
Construction in progress                          3,917           2,222           --
                                               --------        --------
                                                 57,732          53,903
Less accumulated depreciation                   (30,299)        (27,255)
                                               --------        --------
                                               $ 27,433        $ 26,648
                                               ========        ========
</TABLE>

Depreciation expense for the fiscal years ended June 30, 2004, 2003, and 2002
was $5,225, $5,325, and $5,335, respectively.

NOTE 7: INTANGIBLE ASSETS

Intangible assets, at cost, at June 30, 2004 and 2003 were as follows:

<TABLE>
<CAPTION>
                           June 30, 2004   June 30, 2003
                           -------------   -------------
<S>                           <C>             <C>
Intangible assets             $ 6,759         $ 5,775
Accumulated amortization       (1,760)         (1,311)
                              -------         -------
                              $ 4,999         $ 4,464
                              =======         =======
</TABLE>

Intangible amortization expense was $449 for the fiscal year ended June 30, 2004
and is estimated to be approximately $450 in fiscal years 2005-2009. Intangible
amortization expense for the fiscal years ended June 30, 2003 and 2002 was $249
and $763, respectively, which included goodwill amortization of $263 in fiscal
2002. As of June 30, 2002, the Company's goodwill was fully amortized.
Amortization expense related to certain intangible assets is included in cost of
goods sold in the consolidated statements of operations.

NOTE 8: BANK LINE OF CREDIT

We have a $3,000 unsecured bank line of credit bearing interest at our choice of
either the prime rate (4.00% at June 30, 2004) or the one month LIBOR rate plus
a variable interest rate of 1.0% to 2.5%, based on a pricing grid related to a
certain debt ratio, adjusted quarterly. The line of credit is available through
November 18, 2004. At June 30, 2004 and 2003, no amounts were outstanding under
the bank line of credit.

NOTE 9: WARRANTY

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

The following is a reconciliation of the beginning and ending balances of our
accrued warranty liability, which is included in the "Other accrued expenses"
line item in the consolidated balance sheets:


                                      F-12





<PAGE>

<TABLE>
<CAPTION>
                                                        June 30, 2004   June 30, 2003
                                                        -------------   --------------
<S>                                                        <C>             <C>
Beginning balance                                          $ 1,215         $   830
Reductions for payments made                                (2,305)         (1,153)
Changes in accruals related to warranties issued in
   the current period                                        1,949           1,346
Changes in accrual related to pre-existing warranties          627             192
                                                           -------         -------
Ending balance                                             $ 1,486         $ 1,215
                                                           =======         =======
</TABLE>

NOTE 10: LONG-TERM DEBT

In December 2003, we paid off the remaining mortgage debt of $10,955 on the
facility and the interest rate swap agreement of $1,109. The mortgage debt had
carried interest at 7.5% per annum at the time of repayment and required monthly
principal payments of $70, plus interest, until April 2007 with a balloon
payment of $8,200 in May 2007.

Interest payments on debt were $480, $1,021, and $1,158 in fiscal 2004, 2003,
and 2002, respectively.

NOTE 11: LEASES

We lease certain manufacturing equipment and facilities under operating leases,
some of which include cost escalation clauses, expiring on various dates through
2008. Total lease expense, net, charged to operations was $1,720 in 2004, $1,453
in 2003, and $1,603 in 2002. At June 30, 2004, the minimum future lease
commitments, including vacant facilities, under noncancellable leases payable
over the remaining lives of the leases, net of sublease rentals, are as follows:

<TABLE>
<CAPTION>
                                     Minimum
                                  Future Lease
Year ending June 30,               Commitments
-------------------------------   ------------
<S>                                  <C>
2005                                 $1,627
2006                                    840
2007                                     66
2008                                     18
                                     ------
   Total minimum lease payments      $2,551
                                     ======
</TABLE>

NOTE 12: PROFIT-SHARING PLAN

We maintain a deferred profit-sharing plan under which substantially all
full-time employees are eligible to participate. The profit-sharing plan
consists of a cash distribution and a contribution to our 401(k) program.
Profit-sharing contributions are determined annually at the discretion of the
Board of Directors. We also maintain 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. We may contribute to the 401(k) program an amount
determined annually at the discretion of the Board of Directors. Under the
Employee Stock Ownership Program, we may, at the discretion of the Board of
Directors, contribute our own stock or contribute cash to purchase our own
stock. The purchased stock's fair market value can not exceed the maximum amount
of employee stock ownership credit as determined under Section 416 of the
Internal Revenue Code. Our contribution expenses related to the plans for the
years ended June 30, 2004, 2003, and 2002, amounted to $1,186, $359, and $476,
respectively.

NOTE 13: STOCK COMPENSATION PLANS

As of June 30, 2004, we have three stock-based compensation plans, which are
described below (see note 14). In accordance with SFAS No. 123, a table
illustrating the effect on net earnings (loss) per share as if the Black-Scholes
fair value method had been applied to all stock options is presented in note 1.

The fair value of these options at the date of grant was estimated with the
following weighted-average assumptions for 2004, 2003 and 2002:


                                      F-13





<PAGE>

<TABLE>
<CAPTION>
                              June 30,    June 30,    June 30,
                                2004        2003        2002
                             ---------   ---------   ---------
<S>                          <C>         <C>         <C>
Risk free rate of interest      3.9%        2.9%        4.3%
Dividend yield                    0%          0%          0%
Volatility factor                80%         74%         76%
Expected life of option      4.5 years   4.5 years   4.5 years
</TABLE>

Weighted average fair values at date of grant for options granted during fiscal
2004, 2003, and 2002 were $6.55, $3.86, and $7.91, respectively.

On June 26, 2001, the Board of Directors granted a warrant to purchase 25,000
shares of our common stock to the Zetetic Institute, a non-profit organization
that provides assistance to us in connection with certain research and
development activities. The warrant has an exercise price of $18.64 per share,
the closing price of the common stock on the date of the grant, and will vest,
in equal annual increments, over the four-year period following the date of
grant.

NOTE 14: STOCK OPTION PLANS

Employee Stock Option Plan

The Zygo Corporation Amended and Restated Non-Qualified Stock Option Plan
permitted the granting of non-qualified options to purchase a total of 4,850,000
shares (adjusted for splits) of common stock at prices not less than the fair
market value on the date of grant. There are no shares available for future
grant under this plan, as the Plan expired on September 3, 2002. Options
generally become exercisable at the rate of 25% of the shares each year
commencing one year after the date of grant.

<TABLE>
<CAPTION>
                                          June 30, 2004
                                   ---------------------------
                                                   Weighted
                                                    Average
                                     Shares     Exercise Price
                                   ----------   --------------
<S>                                 <C>             <C>
Outstanding at beginning of year    1,486,426       $36.338
Granted                                    --       $    --
Exercised                             (89,101)      $ 7.607
Expired or canceled                   (46,653)      $56.853
                                    ---------       -------
Outstanding at end of year          1,350,672       $37.525
                                    =========       =======
</TABLE>

<TABLE>
<CAPTION>
                                          June 30, 2003
                                   ---------------------------
                                                   Weighted
                                                    Average
                                     Shares     Exercise Price
                                   ----------   --------------
<S>                                <C>              <C>
Outstanding at beginning of year   1,950,719        $44.527
Granted                              247,875        $ 6.538
Exercised                            (34,124)       $ 1.993
Expired or canceled                 (678,044)       $50.730
                                   ---------        -------
Outstanding at end of year         1,486,426        $36.338
                                   =========        =======
</TABLE>

<TABLE>
<CAPTION>
                                          June 30, 2002
                                   ---------------------------
                                                   Weighted
                                                    Average
                                     Shares     Exercise Price
                                   ----------   --------------
<S>                                <C>              <C>
Outstanding at beginning of year   1,778,308        $50.223
Granted                              325,075        $12.870
Exercised                             (2,125)       $10.425
Expired or canceled                 (150,539)       $44.774
                                   ---------        -------
Outstanding at end of year         1,950,719        $44.527
                                   =========        =======
</TABLE>


                                      F-14





<PAGE>

Non-Employee Director Stock Option Plan

The Zygo Corporation Amended and Restated Non-Employee Director Stock Option
Plan permits the granting of non-qualified options to purchase a total of
620,000 shares (adjusted for splits) of common stock at prices not less than the
fair market value on the date of grant. Under the terms of the Plan, as amended
on September 24, 1999, each new non-employee director (other than a person who
was previously an employee of the Company or any of its subsidiaries) was
granted options to purchase 8,000 shares of common stock, generally, on his or
her first day of service as a non-employee director; and each other non-employee
director was granted options to purchase 3,000 shares of common stock on an
annual basis. All options are fully exercisable on the date of grant and have a
10-year term. The Plan, as amended, will expire on November 17, 2009. There are
99,000 shares available for future grant under the plan as of June 30, 2004. The
Company does not intend to grant further options under the Non-Employee Director
Stock Option Plan. The Company granted stock options in fiscal 2004 to
non-employee directors from the 2002 Equity Incentive Plan.

<TABLE>
<CAPTION>
                                          June 30, 2004
                                   ---------------------------
                                                   Weighted
                                                    Average
                                     Shares     Exercise Price
                                   ----------   --------------
<S>                                 <C>             <C>
Outstanding at beginning of year     226,000        $13.744
Granted                                   --             --
Exercised                           (107,000)       $ 2.000
Expired or canceled                  (44,000)       $37.332
                                    --------        -------
Outstanding at end of year            75,000        $16.662
                                    ========        =======
</TABLE>

<TABLE>
<CAPTION>
                                          June 30, 2003
                                   ---------------------------
                                                   Weighted
                                                    Average
                                     Shares     Exercise Price
                                   ----------   --------------
<S>                                  <C>            <C>
Outstanding at beginning of year     195,000        $14.880
Granted                               34,000        $ 6.559
Exercised                             (3,000)       $ 6.150
Expired or canceled                       --        $    --
                                     -------        -------
Outstanding at end of year           226,000        $13.744
                                     =======        =======
</TABLE>

<TABLE>
<CAPTION>
                                          June 30, 2002
                                   ---------------------------
                                                   Weighted
                                                    Average
                                     Shares     Exercise Price
                                   ----------   --------------
<S>                                  <C>            <C>
Outstanding at beginning of year     182,000        $13.996
Granted                               23,000        $16.276
Exercised                            (10,000)       $ 2.000
Expired or canceled                       --        $    --
                                     -------        -------
Outstanding at end of year           195,000        $14.880
                                     =======        =======
</TABLE>


                                      F-15





<PAGE>

2002 Equity Incentive Plan

The Zygo Corporation 2002 Equity Incentive Plan permits the granting of
incentive stock options, non-qualified stock options, or restricted stock to
purchase a total of 1,500,000 shares of common stock. The exercise price per
share of common stock covered by an option may not be less than the par value
per share on the date of grant, and in case of an incentive stock option, the
exercise price may not be less than the fair market value per share on the date
of grant. The Plan will expire on August 27, 2012. The Board of Directors may
also amend the Plan to authorize the grant of other types of equity based
awards, without further action by our stockholders. Non-employee directors are
now granted options to purchase 6,000 shares of common stock on an annual basis
and each new non-employee director is granted options to purchase 12,000 shares
of common stock, generally, on their first day of service. These options
generally vest over a four year period in quarterly increments.

<TABLE>
<CAPTION>
                                         June 30, 2004
                                   -------------------------
                                                 Weighted
                                                  Average
                                    Shares    Exercise Price
                                   --------   --------------
<S>                                <C>            <C>
Outstanding at beginning of year    72,063        $ 6.044
Granted                            435,350        $10.992
Exercised                           (3,975)       $ 6.518
Expired or canceled                (26,125)       $ 9.516
                                   -------        -------
Outstanding at end of year         477,313        $10.363
                                   =======        =======
</TABLE>

<TABLE>
<CAPTION>
                                        June 30, 2003
                                   -----------------------
                                               Weighted
                                                Average
                                   Shares   Exercise Price
                                   ------   --------------
<S>                                <C>          <C>
Outstanding at beginning of year       --       $   --
Granted                            72,163       $6.044
Exercised                              --       $   --
Expired or canceled                  (100)      $6.051
                                   ------       ------
Outstanding at end of year         72,063       $6.044
                                   ======       ======
</TABLE>

The following table summarizes information about all fixed stock options
outstanding at June 30, 2004:

<TABLE>
<CAPTION>
                               Options Outstanding                       Options Exercisable
                  --------------------------------------------   ----------------------------------
                                    Weighted
                      Number        Average
    Range of       Outstanding     Remaining       Weighted           Number            Weighted
    Exercise          as of       Contractual       Average      Exercisable as of       Average
     Prices       June 30, 2004       Life      Exercise Price     June 30, 2004     Exercise Price
---------------   -------------   -----------   --------------   -----------------   --------------
<S>                 <C>               <C>           <C>              <C>                 <C>
$ 2.00 - $ 2.00         4,000         0.2           $ 2.00               4,000           $ 2.00
$ 5.20 - $ 7.67       326,395         7.8           $ 6.50             119,063           $ 6.63
$ 7.90 - $11.75       521,125         7.4           $10.20             190,075           $10.55
$12.23 - $18.00       318,425         7.3           $14.02             190,283           $14.15
$18.37 - $27.00       226,547         6.2           $19.02             176,080           $19.10
$28.22 - $40.38         8,125         4.6           $33.28               6,975           $32.83
$42.44 - $63.44        55,300         4.2           $45.63              54,000           $45.61
$64.63 - $90.81       443,068         6.0           $85.42             337,491           $85.43
---------------     ---------         ---           ------           ---------           ------
$ 2.00 - $90.81     1,902,985         6.9           $29.88           1,077,967           $37.46
===============     =========         ===           ======           =========           ======
</TABLE>


                                      F-16





<PAGE>

The following table summarizes information about all fixed stock options
outstanding at June 30, 2003:

<TABLE>
<CAPTION>
                               Options Outstanding                       Options Exercisable
                  --------------------------------------------   ----------------------------------
                                    Weighted
                      Number        Average
    Range of       Outstanding     Remaining       Weighted            Number           Weighted
    Exercise          as of       Contractual       Average      Exercisable as of       Average
     Prices       June 30, 2003       Life      Exercise Price     June 30, 2003     Exercise Price
---------------   -------------   -----------   --------------   -----------------   --------------
<S>                 <C>               <C>           <C>               <C>                <C>
$ 2.00 - $ 2.00       141,000         1.2           $ 2.00            141,000            $ 2.00
$ 5.20 - $ 7.67       361,038         9.1           $ 6.48             46,000            $ 6.87
$ 7.90 - $11.75       214,000         5.5           $10.51            189,513            $10.56
$12.23 - $18.00       255,418         7.7           $13.63            103,706            $14.68
$18.64 - $27.38       267,883         6.8           $19.97            166,040            $20.62
$28.22 - $40.38         8,475         7.4           $32.10              4,625            $32.09
$42.44 - $63.44        54,750         6.6           $45.50             39,950            $45.29
$64.63 - $90.81       481,925         7.0           $85.23            252,968            $85.17
---------------     ---------         ---           ------            -------            ------
$ 2.00 - $90.81     1,784,489         6.8           $32.24            943,802            $32.90
===============     =========         ===           ======            =======            ======
</TABLE>

NOTE 15: EMPLOYEE STOCK PURCHASE PLAN

In November 2000, we adopted a non-compensatory Employee Stock Purchase Plan
("ESPP"). Under the ESPP, employees who elect to participate have the ability to
purchase common stock at a 15% discount from the market value of such stock. The
ESPP permits an enrolled employee to make contributions to purchase shares of
common stock by having withheld from his or her salary an amount between 1% and
10% of compensation. The total number of shares of common stock that may be
issued under the ESPP is 500,000. At June 30, 2004 and 2003, we had withheld
$467 and $382, respectively, for the purchases of shares under this plan; and in
July 2004 and 2003, issued shares of common stock of approximately 35,000 and
43,000, respectively.

NOTE 16: INCOME TAXES

Total income tax expense (benefit) for each year is as follows:

<TABLE>
<CAPTION>
                                              Fiscal Year Ended June 30,
                                             ---------------------------
                                               2004      2003     2002
                                             -------   -------   -------
<S>                                          <C>       <C>       <C>
Earnings (loss) from continuing operations   $ 1,863   $   626   $(3,652)
Discontinued TeraOptix operations               (679)   (1,614)   (3,248)
Disposal of TeraOptix                         (3,425)   (5,101)       --
Amounts charged to stockholders' equity         (578)     (282)     (389)
                                             -------   -------   -------
                                             $(2,819)  $(6,371)  $(7,289)
                                             =======   =======   =======
</TABLE>

Income tax expense (benefit) attributable to earnings (loss) from continuing
operations consists of:

<TABLE>
<CAPTION>
                            Fiscal Year Ended June 30,
                            --------------------------
                               2004    2003     2002
                             ------   -----   -------
<S>                          <C>      <C>     <C>
Currently payable:
   Federal                   $  797   $  --   $(3,118)
   State                        160     138         4
   Foreign                      539     724       798
                             ------   -----   -------
                              1,496     862    (2,316)
                             ------   -----   -------
Deferred:
   Federal                    1,135    (238)   (1,336)
   State                       (603)      2        --
   Foreign                     (165)     --        --
                             ------   -----   -------
                                367    (236)   (1,336)
                             ------   -----   -------
Income tax (benefit) from
   continuing operations     $1,863   $ 626   $(3,652)
                             ======   =====   =======
</TABLE>


                                      F-17





<PAGE>

Income tax refunds, net of payments, amounted to $377, $2,449, and $149 in
fiscal 2004, 2003, and 2002, respectively.

The total income tax expense (benefit) differs from the amount computed by
applying the applicable U.S. federal income tax rate of 35% in each of the
fiscal years 2004, 2003, and 2002 to earnings before income taxes for the
following reasons:

<TABLE>
<CAPTION>
                                                  Fiscal Year Ended June 30,
                                                  --------------------------
                                                    2004     2003     2002
                                                   ------   -----   -------
<S>                                                <C>      <C>     <C>
Computed "expected" tax expense
   (benefit)                                       $2,248   $ 931   $(2,609)
Increases (reductions) in taxes resulting from:
   State taxes, net of federal
     income tax benefit                              (288)    384        --
   Tax exempt interest income                          (4)     (5)      (29)
   Export tax incentives                             (111)    (81)       --
   Research credit                                   (307)   (822)   (1,126)
   Change in estimate of prior year taxes             229      --        --
   Other, net                                          96     219       112
                                                   ------   -----   -------
                                                   $1,863   $ 626   $(3,652)
                                                   ======   =====   =======
</TABLE>

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, 2004 and
2003 are presented below:

<TABLE>
<CAPTION>
                                                 June 30, 2004   June 30, 2003
                                                 -------------   -------------
<S>                                                 <C>             <C>
Deferred tax assets:
   Accounts receivable                              $   240         $   122
   Accrued liabilities                                1,868           1,999
   Inventory valuation                                2,232           2,046
   Plant and equipment                                4,703             942
   Intangibles                                          132             242
   Federal, foreign and state NOLs and credits       30,405          28,325
   Contributions                                         56              52
                                                    -------         -------
                                                     39,636          33,728
   Less valuation allowance                           3,606           1,820
                                                    -------         -------
   Deferred tax asset                                36,030          31,908
                                                    -------         -------
Deferred tax liabilities:
   Prepaid expenses                                    (265)           (288)
   Unrealized gain on marketable securities             (28)            (77)
                                                    -------         -------
   Deferred tax liability                              (293)           (365)
                                                    -------         -------
Net deferred tax asset                              $35,737         $31,543
                                                    =======         =======
</TABLE>

The net current deferred tax assets and net non-current deferred tax assets as
recorded on the balance sheet as of June 30, 2004 and 2003 are as follows:

<TABLE>
<CAPTION>
                                    June 30, 2004   June 30, 2003
                                    -------------   -------------
<S>                                    <C>             <C>
Net current deferrred tax asset        $ 3,999         $ 5,179
Net noncurrent deferred tax asset       31,738          26,364
                                       -------         -------
Net deferred tax asset                 $35,737         $31,543
                                       =======         =======
</TABLE>


                                      F-18





<PAGE>

The deferred tax provisions for 2004 and 2003 do not reflect the tax benefit of
$578 and $282, respectively, resulting from amounts charged to other
comprehensive income and paid in capital, which includes $600 from the exercise
of employee stock options in 2004.

During 2003, we wrote off certain fully reserved state NOLs and credits. The
write off of these deferred tax assets, along with the change in valuation
allowance have been included in state income tax expense.

Management believes it is more likely than not that the remaining net deferred
tax assets of $35,737 will be realized as the results of future operations are
expected to generate sufficient taxable income to do so.

At June 30, 2004, our share of the cumulative undistributed earnings of foreign
subsidiaries was $1,913. No provision has been made for U.S. or additional
foreign taxes on the undistributed earnings of foreign subsidiaries because we
intend to continue to reinvest these earnings. Determination of the amount of
unrecognized deferred tax liability associated with these earnings is not
practicable.

At June 30, 2004, we have federal, foreign, and state net operating loss
carryforwards of approximately $55,641, $1,759, and $51,105, respectively, and
various state credit carryforwards of $3,761, which are available to reduce
income taxes in various jurisdictions through 2024. We also have a federal
general business credit carryforward of approximately $5,498, which is available
to reduce federal income taxes, if any, through 2024. In addition, the Company
also has alternative minimum tax credit carryforwards of approximately $95,
which are available to reduce future federal regular income taxes, if any, over
an indefinite period.

Note 17: SEGMENT REPORTING

We operate in two principal business segments globally: Semiconductor and
Industrial. The segment data is presented below in a manner consistent with
management's internal measurement of the business. Segment data for fiscal 2002
was restated to reflect our exit from the telecommunications segment.

<TABLE>
<CAPTION>
                                  June 30,   June 30,   June 30,
                                    2004       2003       2002
                                  --------   --------   --------
<S>                               <C>        <C>        <C>
Semiconductor
   Sales                          $ 67,117   $ 59,247   $37,483
   Gross profit                     23,805     19,601     9,909
   Gross profit as a % of sales         35%        33%       26%

Industrial
   Sales                          $ 49,525   $ 43,330   $42,785
   Gross profit                     19,260     15,844    17,554
   Gross profit as a % of sales         39%        37%       41%

Total
   Sales                          $116,642   $102,577   $80,268
   Gross profit                     43,065     35,445    27,463
   Gross profit as a % of sales         37%        35%       34%
</TABLE>

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


                                      F-19





<PAGE>

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

<TABLE>
<CAPTION>
                                        Fiscal Year Ended June 30,
                                      -----------------------------
                                        2004       2003       2002
                                      --------   --------   -------
<S>                                   <C>        <C>        <C>
Americas (primarily United States)    $ 33,937   $ 31,093   $37,932
                                      --------   --------   -------
Far East:
   Japan                                61,067     54,690    21,200
   Pacific Rim                          13,172      6,490     8,054
                                      --------   --------   -------
Total Far East                          74,239     61,180    29,254
Europe and Other (primarily Europe)      8,466     10,304    13,082
                                      --------   --------   -------
Total                                 $116,642   $102,577   $80,268
                                      ========   ========   =======
</TABLE>

Note 18: RELATED PARTY TRANSACTIONS

Sales to Canon, Inc., a stockholder representing approximately 7% ownership at
June 30, 2004, and Canon Sales Co., Inc., a distributor of certain of our
products in Japan and a subsidiary of Canon Inc., amounted to $57,306 (49% of
net sales), $52,773 (51% of net sales), and $17,636 (22% of net sales), for the
years ended June 30, 2004, 2003, and 2002, respectively. Selling prices of
products sold to Canon, Inc. and Canon Sales Co., Inc. are based, generally, on
the normal terms given to distributors. Revenues generated from a development
contract are recorded on a cost-plus basis. At June 30, 2004 and 2003, there was
approximately, in the aggregate, $10,913 and $3,972, respectively, of trade
accounts receivable from Canon, Inc. and Canon Sales Co., Inc.

In September 2002, we entered into a contract with Canon Inc. related to the
development of certain interferometers. In March 2004 we signed a preliminary
agreement to begin further add-on work, with a definitive agreement to be signed
later in the fall. During fiscal 2004 and 2003, we recognized revenue in the
semiconductor segment of $16,057 and $18,779, respectively, for the original
contract and subsequent add-on work.

Note 19: MATERIAL CONTRACTS

In May 1997, we entered into a contract with the University of California's
Lawrence Livermore National Laboratory ("LLNL"), whereby we are a primary
supplier of large plano optical components for the National Ignition Facility
("NIF"). In April 2001 and January 2002, we entered into related contracts with
LLNL to supply additional optical components to NIF. Revenues under the NIF
contract, which is presently a fixed price contract, are recorded as deliveries
are made. Revenues recognized in fiscal 2004, 2003, and 2002 amounted to $6,447,
$4,711, and $3,834, respectively.


                                      F-20





<PAGE>

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

<TABLE>
<CAPTION>
                                                   For the Fiscal Year Ended June 30, 2004
                                             ---------------------------------------------------
                                             September 26,   December 26,   March 26,   June 30,
                                             -------------   ------------   ---------   --------
<S>                                             <C>            <C>           <C>        <C>
Net sales                                       $24,247        $27,654       $28,433    $ 36,308
                                                =======        =======       =======    ========
Gross profit                                    $ 7,777        $10,387       $ 9,402    $ 15,499
                                                =======        =======       =======    ========

Earnings (loss) from continuing operations      $  (663)         $ 928       $   968    $  3,015
Loss from discontinued operations                  (162)        (1,912)         (667)     (4,914)
                                                -------        -------       -------    --------
Net earnings (loss)                             $  (825)       $  (984)      $   301    $ (1,899)
                                                =======        =======       =======    ========

Basic - earnings (loss) per share:

   Continuing operations                        $ (0.04)       $  0.05       $  0.05    $   0.17
                                                =======        =======       =======    ========
   Discontinued operations                      $ (0.01)       $ (0.10)      $ (0.03)   $  (0.28)
                                                =======        =======       =======    ========
   Net earnings (loss)                          $ (0.05)       $ (0.05)      $  0.02    $  (0.11)
                                                =======        =======       =======    ========

Diluted - earnings (loss) per share:
   Continuing operations                        $ (0.04)       $  0.05       $  0.05    $   0.17
                                                =======        =======       =======    ========
   Discontinued operations                      $ (0.01)       $ (0.10)      $ (0.03)   $  (0.27)
                                                =======        =======       =======    ========
   Net earnings (loss)                          $ (0.05)       $ (0.05)      $  0.02    $  (0.10)
                                                =======        =======       =======    ========
</TABLE>

<TABLE>
<CAPTION>
                                                   For the Fiscal Year Ended June 30, 2003
                                             ---------------------------------------------------
                                             September 27,   December 27,   March 28,   June 30,
                                             -------------   ------------   ---------   --------
<S>                                            <C>             <C>           <C>        <C>
Net sales                                      $ 20,409        $26,310       $29,010    $26,848
                                               ========        =======       =======    =======
Gross profit                                   $  7,366        $ 8,995       $ 9,502    $ 9,582
                                               ========        =======       =======    =======

Earnings (loss) from continuing operations     $   (848)       $   390       $   780    $ 1,253
Loss from discontinued operations               (11,034)          (228)         (299)      (584)
                                               --------        -------       -------    -------
Net earnings (loss)                            $(11,882)       $   162       $   481    $   669
                                               ========        =======       =======    =======

Basic - earnings (loss) per share:

   Continuing operations                       $  (0.05)       $  0.02       $  0.04    $  0.07
                                               ========        =======       =======    =======
   Discontinued operations                     $  (0.63)       $ (0.01)      $ (0.01)   $ (0.03)
                                               ========        =======       =======    =======
   Net earnings (loss)                         $  (0.68)       $  0.01       $  0.03    $  0.04
                                               ========        =======       =======    =======

Diluted - earnings (loss) per share:

   Continuing operations                       $  (0.05)       $  0.02       $  0.04    $  0.07
                                               ========        =======       =======    =======
   Discontinued operations                     $  (0.63)       $ (0.01)      $ (0.01)   $ (0.03)
                                               ========        =======       =======    =======
   Net earnings (loss)                         $  (0.68)       $  0.01       $  0.03    $  0.04
                                               ========        =======       =======    =======
</TABLE>


                                      F-21





<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE II

The Board of Directors and Stockholders of
Zygo Corporation

Under date of August 25, 2004, we reported on the consolidated balance sheets of
Zygo Corporation and subsidiaries as of June 30, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 2004 as contained in
the 2004 Annual Report to stockholders on Form 10-K. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule listed in the accompanying
index on page F-1. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.

In our opinion, this financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

KPMG LLP

Hartford, Connecticut
August 25, 2004


                                       S-1





<PAGE>

                  ZYGO CORPORATION AND CONSOLIDATED SUBSIDIARY

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                    Years ended June 30, 2004, 2003, and 2002

(Thousands of dollars)

<TABLE>
<CAPTION>
                                        Balance                               Balance
                                     at Beginning                              at End
Description                            of Period    Provision   Write-Offs   of Period
-----------                          ------------   ---------   ----------   ---------
<S>                                     <C>           <C>         <C>          <C>
Year Ended June 30, 2004:
   Allowance for doubtful accounts      $  337        $  374      $    4       $  707

Valuation allowance on net
   deferred tax assets                  $1,820        $1,786      $   --       $3,606

Year Ended June 30, 2003:
   Allowance for doubtful accounts      $  949        $  270      $  882       $  337

Valuation allowance on net
   deferred tax assets                  $3,803        $   --      $1,983       $1,820

Year Ended June 30, 2002:
   Allowance for doubtful accounts      $  381        $  599      $   31       $  949

Valuation allowance on net
   deferred tax assets                  $1,653        $2,150      $   --       $3,803
</TABLE>


                                       S-2





<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
 TABLE
 NUMBER
-------
<S>       <C>
 10.30    Offer Letter dated February 10, 2004 between Zygo Corporation
          and Walter Shephard

 21.      Subsidiaries of Registrant

 23.      Consent of Independent Registered Public Accounting Firm

 31.1     Certification of Chief Executive Officer under Rule 13a-14(a)

 31.2     Certification of Chief Financial Officer under Rule 13a-14(a)

 32.1     Certification of Chief Executive Officer and Chief Financial Officer
</TABLE>



                         STATEMENT OF DIFFERENCES

The trademark symbol shall be expressed as.............................. 'TM'