ZYGO
                                                              ----------------

                                                              Zygo Corporation
                                                              1998 Annual Report




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   |TO OUR SHAREHOLDERS
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   [PHOTO HERE]


SEMICONDUCTOR MARKET

Not all semiconductor mask defects will actually print on the wafer. Zygo's TINT
Virtual Stepper quickly and accurately assesses the reality and impact of mask
defects under varying lithography conditions, and transforms the mask image into
a printed wafer pattern.


   [PHOTO HERE]


DATA STORAGE MARKET

Hard disk drive component manufacturers using Zygo's NewView 5000 to measure
critical magnetic head pole tip recession and air bearing surface parameters are
confident of the quality of their components. The image on the front-cover is a
measurement of a landing-zone texture bump on the surface of a hard disk
platter.

Although your company was able to record its sixth year in a row of
year-over-year revenue increases, the Asian currency crises, combined with a
softening demand for data storage and semiconductor components resulting in
significantly lower capital expenditures for our goods and services, made fiscal
year 1998 a most challenging year. Although the momentum we had built in our
business allowed us to post record performance through the first half of the
fiscal year, the slackening orders, initially felt in our second quarter and
continuing through the rest of the fiscal year, impacted our revenues and
financial performance as we closed our fourth quarter. Fiscal 1998 concluded
with net sales of $97.9 million, 12% over those recorded the previous year, and
net income, excluding one-time acquisition-related charges recorded during our
first quarter, of $.74 per share, was 36% lower than recorded in fiscal 1997. In
spite of the difficulties encountered during fiscal 1998, your company's
financial condition continues to be strong. We concluded the year debt free,
with cash and cash equivalents equaling $30.3 million, an increase of almost $7
million over that existing at the close of fiscal 1997 and working capital at
$50.1 million.

In spite of the difficult business environment we faced during fiscal 1998,
progress was made in a number of areas strengthening and broadening our ability
to serve our customers and positioning our company to most effectively take
advantage of whatever business opportunities present themselves. During the
first quarter of this past fiscal year, we completed the acquisitions of Sight
Systems, Inc. and of Syncotec Neue Technologien und Instrumente GmbH. Both of
these organizations are now well integrated into the Zygo family as their
product offerings and application capabilities further broaden our precision
measurement applications. Further, in the second quarter of this year, we
introduced our MESA large aperture interferometric measuring system. This
patented fundamental advancement in interferometric measurement technology,
allows us to measure piece parts with surface roughness and departures 20 times
greater than those which could be previously measured with prior
interferonmetric techniques. The MESA product has already captured several
orders in our traditional data storage market, but more importantly, has
captured orders and attracted great attention from customers in the precision
machine parts market segment. We believe there is a large untapped opportunity
for us in applications from the automotive and other industrial areas, which not
only provide an incremental growth opportunity for us, but one which is not tied
to the cyclical nature of the high technology, data storage and semiconductor
sectors.

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   [PHOTO HERE]


OEM MARKET

Zygo products are used as critical components of OEM products where high quality
and reliability are required. The new ZMI 510 distance measuring interferometer
system has potential in markets where traditional electro-mechanical position
measuring devices are used.


   [PHOTO HERE]



INDUSTRIAL MARKET

High-volume manufacturers of precision machined components are excited about the
Zygo MESA flatness measuring system. MESA enables them to quickly measure
critical surfaces of every part produced, right on the production line, enabling
them to enhance their production yields.

In addition to the positive response we have seen from both new and existing
markets, we were once again honored to receive two most prestigious awards for
our MESA product: our fifth Circle of Excellence Award and our ninth R&D 100
Award. These awards are given annually in recognition of the commercialization
of the most innovative technologies by the Photonics Spectra and R&D Magazines,
respectively.

Towards the end of our fiscal year, we completed the integration and
consolidation of the four acquisitions we've made during the past two fiscal
years and realigned our organization structure into a streamlined,
corporatewide, functional organization. We now have a single integrated
marketing, sales, and customer services organization, promoting and delivering
all Zygo solutions on an industry focused basis, allowing us to most effectively
position our offerings with our customers, while enhancing our ability to focus
on their emerging needs as we evolve and develop our future product offerings.

While it is difficult to precisely predict the degree to which the current
challenging business climate will affect us and for how long it will continue,
we believe our company is well positioned within our present served markets. The
inherent value of our precision measurement capabilities, coupled with our
automation and parts handling solutions, has not diminished during these
difficult times. In fact, piece parts, line widths, critical dimensions and
tolerances continue to get smaller, resulting in parts which are much more
difficult to handle, measure, and control during the manufacturing process.
Today, improving production yields in high precision manufacturing processes
depends on our capabilities more than ever. We are well positioned to take
advantage of this trend through the investments we've made in our core business,
technology development, and in our acquisitions.

                    We thank you for your continued interest in, and support of,
                    your company and, of course, you can count on our very best
                    efforts as we move forward.

                    Sincerely,

                    GARY K. WILLIS
                    
                    Gary K. Willis
                    President and Chief Executive Officer
                    September 18, 1998

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   | CONSOLIDATED FINANCIAL HIGHLIGHTS
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   | (Thousands, except per share amounts
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<TABLE>
<CAPTION>

                                        Fiscal Year Ending June 30,          Percentage Change
                                       -----------------------------    --------------------------
                                       1998(1)    1997(1)     1996      1997 to 1998  1996 to 1997
                                       --------   -------   --------    ------------  ------------
<S>                                     <C>       <C>       <C>             <C>           <C>
Net sales ...........................   $97,871   $87,220   $57,374          12%           52%
New earnings before                                                                    
  nonrecurring charges (4) ..........   $ 9,034   $13,960   $ 7,799          (35)          79
New earnings per share before                                                          
  nonrecurring charges (3)(4)                                                          
    Basic (2) .......................   $  0.83   $  1.34   $  0.84          (38)          60
    Diluted (2) .....................   $  0.74   $  1.16   $  0.72          (36)          61
                                                                                       
Net earnings ........................   $ 7,114   $ 2,877   $ 7,799          147          (63)
Net earnings per common share (3)                                                       
    Basic (2) .......................   $  0.65   $  0.28   $  0.84          132          (67)
    Diluted (2) .....................   $  0.58   $  0.24   $  0.72          142          (67)
Weighted average number of                                                             
  shares                                                                               
    Basic ...........................    10,890    10,403     9,323            5           12
    Diluted .........................    12,235    11,998    10,878            2           10
                                                                                       

<CAPTION>
                                        Fiscal Year Ending June 30,          Percentage Change    
                                       -----------------------------    --------------------------
                                         1998       1997      1996      1997 to 1998  1996 to 1997
                                       --------   -------   --------    ------------  ------------
<S>                                     <C>       <C>       <C>             <C>          <C>      
Working capital .....................   $50,085   $47,633   $47,148          5%           1%
Stockholders' equity ................   $72,166   $62,408   $54,087         16           15
</TABLE>

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(1)  The results of Sight Systems, Inc. ("SSI"), which is being accounted for as
     an immaterial pooling-of-interest, are included from July 1, 1997; the
     results of Syncotec Neue Technologien und Instrumente GmbH ("Syncotec") are
     included from September 1, 1997 when the acquisition of the remaining 50%
     of Syncotec was completed; and the results of Technical Instrument Company
     ("TIC") are included in the consolidated results of the Company from August
     8, 1996 when that acquisition was effective. Both of Syncotec and TIC were
     accounted for as purchases.

(2)  The difference between basic shares outstanding and diluted shares
     outstanding is the assumed conversion of common stock equivalents (stock
     options) in the amounts of 1,345,000, 1,595,000 and 1,555,000 in the year
     ended June 30, 1998, 1997, and 1996, respectively.

(3)  The net earnings per share have been restated as a result of the adoption
     of Statement of Financial Accounting Standards No. 128, Earnings per share.

(4)  Nonrecurring charges include acquisition-related charges of $1,585,000 and
     $11,083,000 in the first quarter ended September 30, 1997 and 1996,
     respectively; and failed merger costs of $335,000 in the first quarter
     ended September 30, 1997.



        NET SALES               EARNINGS PER SHARE     NUMBER OF EMPLOYEES
       (in thousands)                                     (Year End)




       (GRAPHICAL                  (GRAPHICAL             (GRAPHICAL     
      REPRESENTATION              REPRESENTATION         REPRESENTATION  
        GOES HERE)                  GOES HERE)              GOES HERE)     
                                                           
                                                       

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

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

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


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<TABLE>
<CAPTION>
<S>                             <C>                               <C>                              <C>
                                                                                                   STOCKHOLDER 
DIRECTORS                       OFFICERS                          OPERATING UNITS                  INFORMATION 
                                
MICHAEL R. CORBOY               GARY K. WILLIS                    ADVANCED IMAGING SYSTEMS         ANNUAL MEETING
Chairman and President          President and Chief Executive     650 North Mary Avenue            November 17, 1998, at 10 a.m.
Corboy Investment Company       Officer                           Sunnyvale, California 94086      Zygo Corporation
                                                                  Web Site: www.zygo.com           Laurel Brook Road
PAUL F. FORMAN                  AHMAD AKRAMI                      E-mail: inquire@zygo.com         Middlefield, Connecticut 06455
Chairman of the Board           Vice President, Marketing,
Zygo Corporation                Sales and Customer Service        SYNCOTEC NEUE TECHNOLOGIEN       CORPORATE HEADQUARTERS
                                                                  UND INSTRUMENTE GmbH             Laurel Brook Road
SEYMOUR E. LIEBMAN              WILLIAM H. BACON                  Loherstrasse 4                   Middlefield, Connecticut 06455
Executive Vice President        Vice President, Corporate         D-35614 Asslar                   Web Site: www.zygo.com
and General Counsel             Quality                           Germany                          E-mail: inquire@zygo.com
Canon U.S.A., Inc.              
                                MARK J. BONNEY                    ADVANCED METROLOGY SYSTEMS       AUDITORS
ROBERT G. MCKELVEY              Vice President, Operations        Laurel Brook Road                KPMG Peat Marwick LLP
Chairman and President                                            Middlefield, Connecticut 06455   City Place II
George McKelvey Co., Inc.       DAVID GRANT                       Web Site: www.zygo.com           Hartford, Connecticut 06103
                                Vice President,                   E-mail: inquire@zygo.com             
PAUL W. MURRILL                 General Manager                                                    LEGAL COUNSEL
Professional Engineer           Zygo Vision Systems               AUTOMATION SYSTEMS               Fulbright & Jaworski L.L.P.
                                                                  2505-A Trade Centre Avenue       666 Fifth Avenue
JOHN R. ROCKWELL                FRANCIS E. LUNDY                  Longmont, Colorado 80501         New York, New York 10103
Retired Senior Executive        Vice President                    Web Site: www.zygo.com       
                                Business Development              E-Mail: inquire@zygo.com         TRANSFER AGENT AND REGISTRAR
ROBERT B. TAYLOR                                                                                   Continental Stock Transfer
Vice President and Treasurer    KEVIN M. MCGUANE                  VISION SYSTEMS                   and Trust Company
Wesleyan University             Vice President, Finance,          2193-B Anchor Court              2 Broadway
                                Chief Financial Officer           Newbury Park, California 91320   New York, New York 10004
GARY K. WILLIS                  and Treasurer                     Web Site: www.zygo.com           
Zygo Corporation                                                  E-mail: inquire@zygo.com         DIVIDENDS
                                DAVID J. PERSON                                                    The Company has not declared
CARL ZANONI                     Vice President,                                                    or paid cash dividends since
Zygo Corporation                Human Resources                                                    becoming a public company.
                                                          
                                ROBERT A. SMYTHE          
                                Vice President, Advanced  
                                Marketing and Product     
                                Development               
                                                          
                                CARL A. ZANONI            
                                Vice President, Research  
                                and Development           
                                                          
                                PAUL JACOBS               
                                Secretary                 


                                                                                           Zygo and the Zygo logo are
                                                                                                   registered trademarks of  
                                                                                                   Zygo Corporation          
</TABLE>
                                                                                
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   ZYGO
   ---------------------
   Zygo Corporation
   Laurel Brook Road
   Middlefield, CT 06455
   Voice: 860 347-8506
   Fax: 860 347-8372
   
   http://www.zygo.com