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

                                  FORM 10-K405

(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, 1998 

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
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             (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
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               (Address of principal executive offices) (Zip Code)


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


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


     Securities registered pursuant to Section 12(g) of the Act:
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                          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-K405. [ X ]

     State the aggregate market value of the voting stock held by non-affiliates
of the registrant.* The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.

           Aggregate market value at August 31, 1998, was $84,471,062

*Solely for purposes of this calculation affiliates of the registrant have been
deemed to include only Canon Inc., and the directors and executive officers of
the registrant, and members of their immediate families living in their homes.

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

      11,078,172 Shares of Common Stock, $.10 Par Value, at August 31, 1998

     Documents incorporated by reference: Specified portions of the registrant's
Proxy Statement related to the registrant's 1998 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 III of this Report.


<PAGE>


                           FORWARD LOOKING STATEMENTS

     All statements other than statements of historical fact included in this
Annual Report, including without limitation statements under "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business," regarding the Company's financial position,
business strategy, and plans and objectives of management of the Company for
future operations, are forward-looking statements. When used in this Annual
Report, words such as "anticipate," "believe," "estimate," "expect," "intend,"
and similar expressions, as they relate to the Company or its management,
identify forward-looking statements. Forward-looking statements are based on the
beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. 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 the current views of the Company with respect
to future events and are subject to these and other risks, uncertainties and
assumptions relating to the operations, results of operations, and growth
strategy of the Company.


                                       2


<PAGE>


                                     PART I

ITEM 1. BUSINESS

                                   THE COMPANY

     Zygo Corporation ("Zygo" or "the Company") is a world leader in metrology,
process control, and yield enhancement solutions for high precision
manufacturing industries. The Company's products are based on its core
competencies in high precision measurement including interferometry, confocal
scanning optical microscopy ("CSOM"), application specific vision metrology,
systems integration, automated piece parts handling, and precision optical
components. Over the past five years, the Company has refocused its mission and
transformed itself from an off-line measurement and test instrument supplier,
primarily serving the research and development laboratory and quality control
laboratory markets, to an on-line process control company with the mission of
improving the yields of precision products manufactured by its customers by
offering application specific solutions. Zygo has been broadening its ability to
provide productivity enhancing solutions through in-house development of
leading-edge technological innovations and through synergistic add-on
acquisitions.

     The Company has a successful track record in commercializing its product
innovations. Since 1992, the Company has introduced over 10 new products and an
extensive number of customer-specific applications. The Company received R&D
magazine's R&D 100 awards and Photonics Spectra magazine's Photonics Circle of
Excellence awards for its NewView 100, Pegasus 2000, ZMI 2000, and MESA product
introductions in 1994, 1996, 1997, and 1998, respectively, and has expanded its
product applications to end industries which have not historically used
noncontact metrology products such as those which use machined parts
extensively.

     In addition to continued in-house product innovation, the Company has
broadened its yield enhancement capabilities through four synergistic
acquisitions of companies with complementary technologies in the last two years.
In August, 1996, the Company acquired the proprietary products division of
Technical Instrument Company ("TIC"), a Sunnyvale, California-based company that
designed, manufactured, and marketed confocal microscope systems and other
precision optical instrument systems and components. In September 1996, the
Company merged with NexStar Automation ("NexStar") of Longmont, Colorado, which
developed automated manufacturing systems for the data storage and semiconductor
markets. In August 1997, the Company completed its merger with Sight Systems,
Inc. ("SSI"), a Newbury Park, California-based vision metrology company. SSI
served the data storage industry and the semiconductor industry with
application-specific vision systems, which are primarily used in or on the
production line of customers. The Company acquired Syncotec Neue Technologien
und Instrumente GmbH ("Syncotec"), a company located in Asslar, Germany, in
September 1997. Syncotec was a small manufacturer of confocal modules and
systems principally for the European market. Syncotec had a long-term
relationship with TIC and was focused on designing solutions for local customers
for their specific measurement problems utilizing the TIC confocal scanning
optical microscopy components, as well as other locally designed hardware and
software.

     Each of these acquired companies is now fully integrated into Zygo with a
cohesive singular strategy. In January 1998, the Company reorganized its sales,
marketing and customer services organization from a product and operating unit
specific focus to an industry specific focus. In June 1998, the Company further
integrated its operations with a comprehensive reorganization aimed at
centralized functional control of Research, Development and Engineering
activities as well as all operations activities. As this integration has been
completed, each of the Company's operations has been renamed. The Company's core
business unit located in Middlefield, Connecticut, and home of the
interferometric based products 


                                       3
<PAGE>


as well as the optical components business is now known as Zygo Advanced
Metrology Systems. The Company's Sunnyvale, California (TIC), and Asslar,
Germany (Syncotec), operations expanded the Company's confocal expertise and
bring a dominant position in the mask industry as well as an entry point to the
European market. These operations are now known as Zygo Advanced Imaging
Systems. The Newbury Park, California (SSI), operation, which added vision
metrology to the Company's product line that can be coupled with Zygo's
interferometry and/or confocal scanning microscopy ("CSOM") products and other
technologies to form customer-specific applications solutions, is now known as
Zygo Vision Systems. Finally, the Longmont, Colorado (NexStar), operation allows
the combined organization to integrate Zygo's traditional metrology products
into an automated system which can be placed directly into a customer's
production line, and is now known as Zygo Automation Systems.

     The following chart illustrates the combined strengths of the current Zygo
structure and demonstrates the strategic thrust of the Company which is to
improve the yields of its customers manufacturing processes by providing
application specific solutions for customers' precision manufacturing needs.

                          INTEGRATED CORE COMPETENCIES

                                                                   AUTOMATED
                                                                   METROLOGY
   SENSOR                 APPLICATION  SPECIFIC ENGINEERING        SOLUTIONS

===============         ============     ===================     ===============

                                                                     YIELD
      HIGH                                      PARTS            PRODUCTIVITY
    PRECISION     +       ANALYSIS    +        HANDLING      =     ENHANCING
    METROLOGY             SOFTWARE            AUTOMATION           SOLUTIONS

===============         ============     ===================    ================
  |                             |        |                 |
  -------------------------------        -------------------
   INTERFEROMETRY - MIDDLEFIELD          SYSTEMS INTEGRATION =
   CSOM - SUNNYVALE & ASSLAR             LONGMONT
   VISION -  NEWBURY PARK


                                INDUSTRY OVERVIEW

     Manufacturers in high precision industries are radically redesigning
processes in order to compete more effectively in an increasingly competitive
marketplace. These changes are being necessitated by (i) decreasing product
geometries (ii) increasing complexity of manufacturing processes (iii) shortened
product life cycles (iv) declining product prices and (v) intensified global
competition. These pressures on manufacturers to improve productivity and
quality have required integration of high precision metrology and process
control technologies directly into the manufacturing process in order to
increase yields and quality control. High performance, noncontact metrology is
an enabling technology for the semiconductor, data storage, optical
manufacturing, and other high precision manufacturing industries.

     Advancing technologies have required manufacturers in a variety of
industries to produce smaller products with more precise tolerances and
decreased design geometries, not capable of adequately being measured by the
devices and systems historically utilized. For example, contact profilers and
visual qualitative inspection systems are inadequate for quantitative analysis
of critical dimensions such as air bearing surface geometry and pole-tip
recession necessary in high volume production of read/write heads. Additionally,
precision machined part tolerances now required in high performance automotive

                                       4
<PAGE>


engines are approaching dimensions that require manufacturers to implement
sophisticated metrology and inspection tools.

     The trend towards miniaturization and tighter tolerances creates new
challenges for manufacturers as they are forced to handle, measure, and test
ever-smaller components. As piece part dimensions and tolerances become smaller,
"nano technology scale" precision is necessitated. Disk drive manufacturers, for
example, continue to increase drive capacity while reducing the size of drives.
Recording heads are flying closer to the disk and the head itself is being made
smaller and to greater precision.

     Because on-line process control and yield improvement metrology solutions
are enabling factors for manufacturers of precision components, the growth for
yield enhancement solutions has outpaced the growth of the overall capital
equipment market. Shortened product lifecycles, increased competition, and
declining product prices in these industries, have forced these manufacturers to
no longer depend solely on sales growth to fuel financial performance
improvement, but rather to focus greater attention on the need to reduce
production defects and significantly increase production yields. In the data
storage and automotive markets, on-line automated metrology solutions are at an
early stage of penetration, as manufacturers are being required to measure
critical dimensions and surface topography of smaller parts to tighter
tolerances.

                                    STRATEGY

     Zygo's objective is to expand its position as a leading worldwide supplier
of high performance, process control, and yield management improvement
instruments, systems and accessories that improve the performance, quality,
reliability, yield, and cost of automated manufacturing processes. Zygo
dedicates substantial resources to research and product development to enable it
to compete effectively in its market areas. Key elements of Zygo's strategy
include:

o    MAINTAIN ENHANCED LEADERSHIP THROUGH INNOVATIVE TECHNICAL SOLUTIONS

     Zygo's core competencies in high precision measurement, including
     interferometry, confocal scanning optical microscopy, application-specific
     vision metrology, systems integration, automated piece parts handling, and
     precision optic components are directly applied to meet the higher
     measurement precision, accuracy, resolution, data acquisition and data
     analysis requirements in the most demanding manufacturing processes of its
     customers. Throughout its history, Zygo has met its customers' requirements
     through innovation and invention, with 77 United States patents and 12
     foreign patents, and 19 United States patent applications and 69 foreign
     patent applications pending.

o    FOCUS ON NEW MARKET SEGMENTS

     Zygo is focused on expanding its presence in new high precision
     manufacturing market segments where yield improvement process control
     solutions are enabling technologies. For example, the Company's recently
     introduced MESA system has broadened the capabilities of large aperture
     products and now allows manufacturers of precision machined parts to use
     interferometry to measure the surface topography of their parts. Zygo's
     history of innovation is across products and technologies, and the Company
     is integrating nano-metrology products with expertise in application
     specific vision systems and automated discrete parts handling. Examples
     include Zygo's automated mask handling system, which incorporates motion
     control and precision parts handling with optical components and robotics
     and the Company's reticle inspection system which utilizes parts handling
     robotics and optical microscopy. The combination of several of the
     Company's core technologies 


                                       5
<PAGE>


     results in automated precision metrology and process control solutions that
     can be placed directly in the production line.

o    BROADEN CUSTOMER RELATIONSHIPS

     Zygo's strategy is to form close technical and strategic relationships with
     leading companies in its targeted end markets. This is accomplished by
     working closely with its customers to provide high precision metrology and
     process control solutions integrated directly into the manufacturing
     process. Zygo has developed significant brand-name recognition among
     leading users of microfabrication technology, and several of its customers
     are repeat purchasers of multiple product families across technological
     platforms. Zygo intends, by forming closer customer alliances, to better
     understand the evolving needs of its customers and, through the application
     of innovative technology, to provide high performance, high quality, cost
     effective solutions to the production improvement requirements in the
     shortest possible cycle time. Through this solution-sales cycle, which
     further promotes a closer and longer term partnership relationship between
     Zygo and its customers, Zygo strives to attain a preferred position with
     major industry leaders.

o    SUPPLY QUALITY SOLUTIONS RAPIDLY

     Zygo seeks to deliver high quality and high reliability system solutions in
     a minimal cycle time. To this end, Zygo has installed an enterprise-wide
     total quality process where employee-led teams work to improve the
     effectiveness and efficiency of its processes while searching out and
     removing areas of poor quality and waste. Zygo's operations strategy
     focuses on internally providing those manufacturing service that add value
     in a rapidly changing customer needs environment.

o    PROVIDE UNINTERRUPTED WORLDWIDE SERVICE AND SUPPORT

     To support its customers' continuous manufacturing processes, Zygo intends
     to ensure optimal operation and reliable performance of its production
     control equipment through its worldwide customer support service group.
     Through a worldwide network of service representatives, Zygo provides
     24-hour on-demand maintenance services. Its service engineers have a unique
     skill set, including optical and electrical component repair, software,
     application and system integration diagnostic and problem solution
     capabilities.

                            PRODUCTS AND APPLICATIONS

     Zygo manufactures high performance, noncontact metrology instruments and
systems and accessories, and optical components to precise tolerances both for
sale and for use as key elements in its own products. The Company's products are
based on its six core competencies: (i) interferometry, (ii) confocal scanning,
(iii) optical metrology, (iv) application specific vision metrology, (v) systems
integration and automated piece parts handling, and (vi) precision optical
component fabrication.

     Zygo's product strategy is to apply its high precision automated metrology
systems to its customers' production lines in order to improve yields and
increase productivity. The Company's products employ such features as automated
parts handling, auto-focus, and automated parts alignment, thereby removing the
operator from the measurement process and improving throughput and product
yields. The Company's instruments and systems utilize modular designs where
entire product families share several, if not all, of the same components,
modules, and software. Since 1992, Zygo has redesigned all of its instruments
and continues to upgrade its software capabilities.


                                       6
<PAGE>


     Since its inception, Zygo has been broadening its ability to provide
productivity enhancing solutions through in-house development of leading-edge
technological innovations and through synergistic add-on acquisitions. The
Company has integrated all of these acquisitions, and has now augmented its
existing interferometry and optical expertise with a broad array of high
precision metrology capabilities. The Company now offers confocal scanning
microscopy expertise and holds a dominant position in the mask industry. The
addition of vision metrology to its product line provides the Company with
additional growth potential. The addition of systems integration and parts
handling capabilities allows Zygo to integrate its core metrology products into
an automated system, which can be placed directly into a customer's production
line.

     All of Zygo's instrument products utilize powerful processors that
facilitate high-speed data acquisition and data analysis. Zygo's interferometric
surface analysis microscopes and large aperture surface measurement
interferometers utilize Zygo's proprietary MetroPro(R) software, which has a
graphical user interface that makes the product very user friendly. The
MetroPro(R) software, combined with super high-resolution graphics and pull-down
menus, provides the user with engineering solutions with on-line processing. The
software allows the user to record, print, and store measurement data locally as
well as to distribute the data through networks for process management and
further analysis. Zygo's proprietary software provides Zygo with a high speed,
powerful analysis capability based on proprietary algorithms, easily
configurable screens, powerful image analysis modules, and adaptability to new
applications.

                            ZYGO'S PRODUCT OFFERINGS
<TABLE>
<CAPTION>

==========================================================================================================
<S>                        <C>                                                  <C>
CORE COMPETENCIES          MEASUREMENT/APPLICATION                              PRODUCT
-----------------          -----------------------                              --------

Interferometry             Surface Analysis Microscopy                          Maxim(o)GP, NewView, AAB
                           Large-Aperture Surface Analysis                      GPI family, MESA
                           Flying Height Test                                   Pegasus 2000
                           Precision Distance/Angle/Motion Measurement          ZMI family

Confocal Scanning          Surface Analysis Microscopy                          AMS, KMS family
  Optical Metrology        Confocal Modules - OEM                               K-2, K-3, NCM, PCM

Vision Metrology           Application Specific Vision Systems                  GAPii, ROBOii

Automatic Handling         Application Specific Automation Systems              Systems integration,
                                                                                production line automation

Optical Components         Optical Instruments; Zygo's own products             Flats, Spheres, Waveplates,
                                                                                Mirrors
==========================================================================================================
</TABLE>

The following chart shows the relative contributions of instruments and systems
and modules and components to consolidated sales for fiscal 1998:


                                       7
<PAGE>


                     [GRAPHIC REPRESENTATION OF PIE CHART]

                     Modules and Components ..........35%
                     Instruments and Systems .........65%

          =====================================================
          INSTRUMENTS & SYSTEMS:   Maxim(o)GP, NewView, AAB
                                   GPI family, MESA,
                                   Pegasus 2000
                                   AMS, KMS family
                                   GAPii, ROBOii
                                   Systems integration,  
                                   Production line automation

          MODULES & COMPONENTS:    ZMI family
                                   K-2, K-3, NCM, PCM
                                   Optical Components
          =====================================================

INTERFEROMETRY

    Interferometry has certain inherent benefits over other forms of surface and
distance measurement as it provides noncontact, quantitative, full field of
view, ultra-high resolution surface analysis in three dimensions, which results
in higher analysis throughput and lower cost of ownership for the user.
Additionally, interferometric metrology is often an enabling technology as
dimensions and tolerances of many parts in high technology applications have
dimensions below 250 nanometers. In interferometry, a pattern of bright and dark
lines (fringes) results from an optical path difference between a reference and
a measurement beam. Incoming light is split inside an interferometer, one beam
going to an internal reference surface and the other to a sample. After
reflection, the beams recombine inside the interferometer, undergo constructive
and destructive interference, and produce the light and dark fringe pattern. The
number, shape, and position of the lines in the fringe patterns can be analyzed
to provide quantitative surface structure analysis. Zygo's products analyze the
patterns through a series of steps and generate quantitative three-dimensional
surface profiles, which are used to determine conformity to dimensional
specification and, increasingly, to analyze and enhance manufacturing processes.
Zygo's interferometric instruments and systems utilize highly sophisticated
subsystems, including: precision optical components such as beamsplitters,
reference optics, and transmission optics; stable and long-life laser or other
light sources; piece part positioning stages; high-powered workstations or PCs
for processing and analyzing fringe pattern data; and a variety of peripheral
components such as monitors and printers.

Surface Analysis Systems

     The surface characteristics of many products in industries such as
semiconductor, data storage, fiber optics, and medical implants, and with
increased applications in the precision machining, paper, printing plates,
coatings, and pharmaceuticals industries, controls the performance of the
product. As a result, surface structure analysis is fundamental to many facets
of research and industry. The Zygo Maxim(o)GP, the fully automated AAB System,
and NewView microscopes combine advanced techniques of interferometry,
microscopy, and precision analysis algorithms in an automated package, to enable
high precision surface analysis. Unlike visual microscopes, Zygo's instruments
provide measurement information as quantitative three-dimensional images, two-
and three-dimensional surface maps with colors and shades representing relative
heights of surface features, and quantitative results.

     The Maxim(o)GP platform provides general purpose noncontact surface
profiling microscopy, providing low-cost area profiling and quantification of
surface details. It is based on phase shifting interferometry to provide very
precise, fast measurements of specular (mirror-like) or near specular surfaces.

     Applications of the Maxim(o)GP include measurements of pole-tip recession,
air-bearing-surface geometry, and disk surface texture in the data storage
industry as well as measurement of wafer texture



                                       8
<PAGE>


and microroughness, depth characterization of laser ablation markings, and
surface topography of micromachined devices and sensors in the
semiconductor/microelectronic industry.

     Based on the Maxim(o)GP, the read/write head surface inspection systems
developed by the Company include production fixturing, five-axis
computer-controlled stage positioning, and high-speed image processing. These
systems provide automated, noncontact quantitative measurement and analysis of
all critical parameters of ABS geometry on magnetic read/write heads used in
computer hard disk drives. On the production line, these systems verify ABS
design compliance with high-speed quantitative measurement of all critical head
parameters while real-time SPC charts monitor process control.

     The NewView microscopes use scanning white light interferometry to measure
nonspecular surfaces and build ultra-high Z resolution images. Patented
Frequency Domain Analysis and workstation power then combine for next-generation
3D surface structure analysis, eliminating the trade-off between range and
resolution. The NewView 100 was introduced in 1994, while an enhanced and
automated version, the NewView 200, was introduced in 1997. In 1998, the Company
introduced NewView 5000, which substantially increased the measurement
capabilities and the robustness of the system. The product has a wide array of
applications across a diverse group of industries including data storage,
semiconductor, automotive, medical, and materials sciences.

Large Aperture Surface Analysis Systems

     Zygo's interferometers for large surface metrology are the Growth Potential
Interferometer ("GPI") and MESA families of upgradable instruments, which
consist of enlarged versions of the three-dimensional microscope, designed to
perform surface profile analysis on larger surface areas. Each member of the GPI
interferometer family is designed to address a specific level of measurement
needs. While all GPI models have essentially the same purpose--noncontact
measurement of flat or spherical surfaces and transmitted wavefront measurement
of optics--they differ widely in operational features and data analysis
capabilities. The GPI family of products is used extensively in the optics
industry to measure glass or plastic optical components like flats, lenses and
prisms, and more recently in a growing number of other situations to measure
precision components such as hard disks, bearing and sealing surfaces, polished
ceramics, and contact lens molds.

     Introduced in 1997, the MESA is the latest member of the large aperture
systems family, and is a patented, revolutionary, and fundamental advancement in
interferometry technology. The MESA utilizes defraction gradings to artificially
extend the equivalent wavelength of the instrument's light source to measure
surfaces that have roughness and departures 20x greater than those surfaces
presently measurable by existing interferometer technology. It is designed to
provide Zygo's customers with the ability to measure rougher, nonspecular
surfaces, factors which in the past have prevented the Company from measuring a
great number of parts, such as those used in many precision machined parts
applications. The MESA accomplishes these revolutionary capabilities without
sacrificing any of the advantages of previous technology, including the ability
to utilize high speed noncontact interferometry and to produce a full-field wide
aperture view. Additionally, the MESA is production-line robust as it is not
sensitive to vibrations and is capable of a wide range of working distances
allowing the customer flexibility in placement of the MESA system. The Company
commenced shipping the MESA in February 1998. Additionally, the Company
successfully combined the MESA with automation and began shipping an automated
disk flatness system to the data storage industry in June 1998.

Flying Height Testers

     In September 1995, Zygo introduced the Pegasus 2000, a dynamic flying
height tester used to measure the height at which a read/write head flies
("flying height") over the surface of a magnetic disk within 


                                       9
<PAGE>


the disk drive. The Pegasus 2000 offers several unique capabilities to the data
storage industry. As flying heights are reduced, manufacturers require
measurement instruments, which can measure at near-contact. Zygo's flying height
tester actually increases in accuracy the closer the read/write head flies over
the surface of the disk. Additionally, due to significant increases in disk
storage requirements, manufacturers require easy-to-use, high throughput
testers. The Pegasus 2000 has been designed as a production oriented tester
capable of having a head loaded while a second head is being tested. Also, the
tester automatically calibrates the sensor requirements (n&k) of each head
rather than requiring operator inputs.

Precision Distance, Angle, and Motion Measurement Interferometers

     Fast, precise control of machine motion is the primary challenge in many
production processes and for major equipment manufacturers. Industries as
diverse as semiconductor, flat panel display production, and optical component
manufacturing require systems to measure the position of a tool relative to a
part under fabrication. Zygo's ZMI family of Laser Interferometer systems
provides the measurements that control the position of some of the world's most
sophisticated machinery. Through the use of a directed laser beam reflecting
from the moving portion of the machine, the ZMI product line can tell the
machine's computer control systems about movements as small as 1.24 nanometers
(billionths of a meter). This level of accuracy can be compared to the finest
geometries of semiconductors, which are approximately 350 nanometers. Its design
also accommodates fast motions and maintains its precision at speeds in excess
of a meter per second. Applications for these interferometers include accurately
measuring and controlling, while they are in motion, the x, y, and theta stages
in photolithography equipment that is used in making semiconductors and
flat-panel video displays. Zygo sells the ZMI in a number of different
applications. A large number are sold on an OEM basis into the semiconductor
photolithography market. Additionally, the Company provides these sophisticated
motion control systems to manufacturers of memory repair systems, wafer sawing
systems, and mask making systems.

CONFOCAL SCANNING OPTICAL MICROSCOPY

     Confocal Scanning Optical Microscopy ("CSOM") is a key base technology
employed in Zygo's confocal systems. In a microscope utilizing white light CSOM
imaging, a high-intensity white light illuminates a section of a spinning disk
containing pinholes arranged in multiple spiral patterns. Acting as point
illumination sources, the pinholes direct light to points on the sample. The
reflected light from the sample returns through the same section of the disk.
Only light from points on the sample near the focal plane will pass through the
pinholes for imaging. The advantages of white light CSOM technology over other
forms of imaging systems offering submicron definition include high resolution
in real time with no delay for image processing, transverse resolution, and
extremely shallow depth of field. These provide precise imaging of sub-half
micron structures and lower cost of ownership. CSOM imaging is used for both
inspection and metrology measurement in Zygo's systems. These systems utilize
both white light and laser light sources. Scanning white light technology was
patented by Stanford University and TIC. Additionally, Zygo manufactures laser
confocal systems which employ a laser light source which causes a sample to
fluoresce with the resulting light of a shorter wavelength which retraces its
path to a pinhole. The fluorescent light is split into two spectral ranges.
After an x/y scan the two channels are digitized and stored in the computer as
separate images that can be displayed individually or overlaid to create a
single color image. This results in high resolution and the ability to display
many layers of translucent samples as a live overlay of bright, perfectly
registered optical sections.

Surface Analysis Microscopes

     The KMS and AMS product lines constitute the majority of Zygo's confocal
scanning microscopy sales, and they hold dominant market share of the mask
metrology market. The KMS group of products is 


                                       10
<PAGE>


fully automated high-throughput confocal scanning metrology systems, which
provide measurement in three axes and real-time observation in color.
Nondestructive confocal white light imaging permits measurements, which are
impossible with other types of critical dimension measurement instrumentation
such as scanning electron microscopes. Positioning, measurement, and data
collection are easily custom-configured and interface to most networks. The KMS
and AMS products utilize powerful software, which is menu and script-file driven
to allow for ease in program generation. The majority of these products are sold
to mask manufacturers in the semiconductor industry. As the demands for finer
line width geometry's increases, mask manufacturers must utilize sophisticated
metrology and inspection tools as a way to improve their manufacturing yields.

Confocal Modules

     Zygo's confocal module products include the K-2 and K-3 Industrial modules,
the NCM module, and the PCM module. The K-2 and K-3 modules provide confocal
scanning capability to nearly any modern upright white-light microscope. These
products are fitted to the microscope as a replacement for the vertical
illuminator and attach to the microscope stand. The modules provide two confocal
modes and one brightfield imaging mode. Zygo also offers an optional confocal
software package with the K-2 and K-3 modules which makes it possible to
precisely layer several two-dimensional confocal images to create an accurate
three-dimensional image. The K-2 and K-3 modules are primarily sold to OEMs. The
NCM module is a confocal module, similar to the K-2 module, which is
incorporated into a Nikon white light microscope. The PCM module was recently
developed for an OEM application in the biomedical field. The module utilizes
laser scanning confocal technology where fluorescence is used to analyze the
subject. This module is incorporated into an OEM product which is used in
research work for analyzing cell structures and DNA. Zygo's principal OEM
accounts include Nikon, Leica, and Olympus.

VISION METROLOGY

     Zygo's application specific vision metrology systems measure the space
between points in a two-dimensional x/y coordinate. The Company serves the data
storage industry and the semiconductor industry with application-specific vision
systems, which are primarily used in production by its customers. These vision
systems are configured from a vast collection of software and hardware
components into a system, which meets specific customer requirements. Examples
of such applications in the data storage industry where the Company has sold the
majority of its systems to date include: pole geometry measurements and gap
width on various types of read/write heads, straightness, flaw detection, and
measurements of read/write heads mounted on row bars in the manufacturing
process.

AUTOMATION SYSTEMS

     Zygo's automated solutions integrate its own proprietary mechanical
components and applications software with mechanical, software, and robotics
subsystems produced by third parties. Zygo's automated solutions also enhance
production control to ensure consistent high quality. The Company manufactures
advanced automation systems to load and unload process equipment, enhance the
operation of quality inspection equipment, convey component parts throughout the
factory, and assemble complex products. It is usual for such systems to be built
to stringent environmental requirements such as cleanroom standards and for
resistance to corrosive conditions. The Company's sophisticated automation
products and equipment are utilized in many applications, including media
manufacturing, disk drive assembly, semiconductor manufacturing, precision
machining, and packaging and assembly applications. During fiscal 1998, the
automation system unit has redirected its efforts to incorporate Zygo metrology
solutions and to fully automated yield improvement solutions, such as the
automated

                                       11
<PAGE>


disk flatness system and its automated disk thickness/sorting system.
Additionally, the Company is focused on several critical OEM opportunities in
the semiconductor capital equipment market.

OPTICAL COMPONENTS

     Zygo believes it is a world leader in the design and manufacture of highly
accurate "cosmetically excellent" surfaces and angles on plano components
ranging in size from small prisms to large mirrors, scanners, aerospace windows,
and laser amplifier disks. Zygo's precision machining capability is used to make
complex glass and ceramic parts such as stage mirrors and other lightweight
structures. The Company receives ongoing business from maintenance programs and
commercial activities, and, most importantly, it manufactures optics for its own
products. Zygo considers this point a strategic core competence and a
differentiating capability for its instruments. Operations at Zygo's
state-of-the-art optical components manufacturing facility include machining,
shaping, generating, grinding, polishing, and edging. The Company utilizes
technology that it has developed and incorporated into rotary polishing machines
designed and built by Zygo. The Company's thin film coating capability includes
metallic and high-efficiency dielectric coatings for transmissive or reflective
applications in the ultraviolet, visible, and infrared regions of the spectrum.
Zygo also applies polarization, beamsplitter, and antireflection coatings.

     During fiscal 1997, Zygo was selected by Lawrence Livermore National
Laboratory ("LLNL") to be a primary supplier of large plano optical components
for the National Ignition Facility ("NIF"), a $1.2 billion Department of Energy
project at Livermore to produce the world's largest laser for nuclear fusion
research. The contract was another significant step in the NIF program for Zygo
and provided for the Company to design, manufacture, and equip a world-class
optical fabrication facility at its Middlefield, Connecticut, operations for a
fixed price of nearly $10 million over an 18-month time period. This
facilitation contract was nearly completed in fiscal 1998. The Company expects
additional contracts from LLNL for pilot production beginning at the conclusion
of the facilitation contract. An additional aspect of the contract contemplates
the negotiation, during the pilot production phase of the contract, of an
optical component production contract.

     To ensure quality control of its products, Zygo maintains complete control
over every facet of manufacturing, from grinding and polishing to mating and
assembly. At each stage of production, opticians test and verify the components
using sophisticated interferometric measuring instruments designed and
manufactured by Zygo. Zygo believes that the production of its precision optical
components gives Zygo a distinct competitive advantage over most of its
competitors.

PATENTS

     Zygo relies on a combination of patent, copyright, trademark, and trade
secret laws and license agreements to establish and protect its proprietary
rights in its products. Zygo believes, however, that its success depends to a
greater extent upon innovation, technological expertise, and distribution
strength. The Company has been awarded 77 United States patents and 12 foreign
patents since the Company was founded, and has 19 United States patent
applications and 69 foreign patent applications pending. Zygo, the Zygo logo,
and Sight Systems are registered trademarks of Zygo Corporation. The Company
also holds several nonregistered trademarks including AAB System, AMS, GAPii,
GPI, Growth Potential Interferometer, KMS, MaximoGP, MESA, NewView 100, NewView
200, NewView 5000, Pegasus 2000, ROBOii, ZMI 1000, and ZMI 2000.


                                       12
<PAGE>


RESEARCH AND DEVELOPMENT

     Zygo operates in an industry that is subject to rapid technological change
and engineering innovation. The Company distinguishes its instrument products on
the basis of its electro-optical sensor technology, its software capability, and
its skill in systems integration. Zygo dedicates substantial resources to
research and development. At June 30, 1998, the Company employed 82 individuals
within its R&D and engineering operations, including 18 individuals with
advanced degrees, of which nine individuals have earned doctoral degrees.

     As an integral part of Zygo's product development strategy, it has formed
technical relationships with several customers. The Company's strategy is to
form close technical working relationships with the leading suppliers in its
markets and thereby develop products and systems, which have the greatest
relevancy to the marketplace in general. In connection with its R&D operations,
Zygo also maintains a close working relationship with various research groups
and academic institutions in the United States as well as abroad. Zygo believes
that continued enhancement, development, and commercialization of new and
existing products and systems is essential to maintaining and improving its
leadership position.

                              CUSTOMERS AND MARKETS

     The growing need for dimensional control to the subnanometer level has
created a growing need for Zygo's instruments and systems among both OEMs and
end-users of microfabrication technology. As the market demands for greater
tolerance control in the manufacturing process have increased, particularly in
the data storage and semiconductor markets, Zygo has been able to meet these
demands with on-the-production-line yield improvement instruments and systems as
well as with its off-line quality control instruments. The Company's installed
base of high precision metrology systems exceeds 6,000.

                           ZYGO'S REVENUES BY INDUSTRY
                                   FISCAL 1998

                     [GRAPHIC REPRESENTATION OF PIE CHART]

                 INDUSTRIAL/RESEARCH           OPTICS (INCLUDING NIF)
                 SEMICONDUCTOR                 DATA STORAGE

     Sales to the semiconductor industry in fiscal year 1998 constituted
approximately 35% of the Company's revenues. A large portion of sales to this
sector is motion control systems to OEMs for the photolithography process, wafer
repair, sawing systems, and mask making systems. Approximately 20% of the
Company's sales are confocal microscopes to the mask sector. As the
semiconductor industry requires 300 mm wafers, it is expected to also require
larger masks with smaller feature sizes demanding more sophisticated and precise
metrology equipment.

     Sales to the data storage industry in fiscal year 1998 constituted
approximately 26% of the Company's revenues. The demand for increasing disk
drive areal density dictates that flying heights are decreasing and that head
designs and tolerances are becoming more and more critical. As a result, the
majority of 


                                       13
<PAGE>


sales to the data storage industry are interferometric and vision metrology
microscopes and systems which provide complete measurement and analysis of all
critical head parameters. The remainder of data storage sales apply to the
manufacturing of disks and generally constitutes automation products which are
beginning to be coupled with other metrology solutions. All sales to the data
storage industry are to end-users.

     Approximately 25% of the Company's fiscal year 1998 sales are to industrial
companies and research institutions. The Company anticipates growth opportunity
exist in its sales to the industrial market, as products such as the NewView,
ZMI and GPI family, and new product introductions, such as the MESA, expand its
capability to sell to the precision machining and automotive sectors.
Specifically, the Company sees significant penetration of the Tier 1 suppliers
to the automotive industry as performance engines require parts machined to
tighter and tighter tolerances. The Company also maintains close working
relationships with various research groups and academic institutions. Finally,
the Company dominates the sale of confocal modules to photography and imaging
companies such as Canon, Olympus, Nikon, and Leica on an OEM basis.

     The remainder of the Company's sales is to precision optics manufacturers,
including NIF. Virtually all testing of optical components and systems is done
with Zygo's GPI family of interferometers which have a variety of applications
including aircraft windows, stages for high precision equipment, and optics for
Zygo's own equipment. The Company maintains key relationships with major optics
research organizations as evidenced by its relationship and significant contract
with the National Ignition Facility, referred to earlier.

     Several of Zygo's customers purchase multiple product family types and
multiple technology platforms and employ Zygo's solutions at multiple facilities
worldwide. The following is a representative list of end-users of Zygo's
products (* denotes an OEM customer and ** denotes both OEM and end-user.):

                      SELECTED ZYGO CUSTOMERS BY END MARKET

<TABLE>
<CAPTION>
                                                                                  Industrial Surfaces,
      Semiconductor              Data Storage          Optics                   Machine Control, & Other
      -------------              ------------          ------                   ------------------------
<S>                            <C>                  <C>                         <C>
Canon**                        Applied Magnetics    Bausch & Lomb               Anorad
DuPont Photomasks              HMT                  Berliner Glass              Catepillar
ESI*                           Hitachi              Canon                       Cummins Engine
ETEC**                         Iomega               Corning                     Delphi Saginaw Steering
IBM                            Komag                Hughes                        Systems (GMC)
Intel                          Maxtor               Laboratory for              Dover Instruments*
Leica*                         Quantum                Laser Energetics          General Motors
Motorola                       Read-Rite            Lawrence Livermore          Gerber Scientific
NEC                            SAE Magnetics          National Laboratories     Martin Marietta
Phototronics                   Seagate              Melles Griot                National Institute of
Seimens                        Sony                 OCLI                          Standards & Technology
SVG**                          StorMedia            Perkin Elmer                Nikon*
Sematech                       TDK                  Schott Glass                Olympus*
Taiwan Mask Co.                Toshiba              Vistakon                    Saint-Gobain/Norton
Taiwan Semicon. Mask                                Zeiss                       Sikorsky Aircraft
Texas Instruments                                                               Stanadyne
Toshiba                                                                         3M
Ultratech Stepper**                                                             TRW
United Microelectronics Co.
</TABLE>

                                       14
<PAGE>


     In fiscal years 1998, 1997, and 1996, sales to Zygo's top customer, Canon
Inc., accounted for approximately 18%, 20%, and 34%, respectively, of Zygo's net
sales. Sales to the Lawrence Livermore National Laboratories accounted for 13%
of the Company's sales in 1998 including those related to the facilitation
contract. No other single customer accounted for more than 10% of Zygo's sales
in fiscal 1998.

     Canon Inc. is both an important customer and a highly valued strategic
partner. Canon was one of the founding investors in Zygo and continues to own
approximately 11% of the Company. Sales to Canon include products that Canon
uses in its manufacturing facilities, such as Zygo's large aperture surface
measurement interferometers, which are used to quantitatively analyze the
surface of optics Canon produces for its photolithographic steppers, and Zygo's
motion measurement components which are incorporated into Canon's steppers for
controlling the x/y stage in that product. Zygo is Canon's primary source for
motion control systems. Sales to Canon also include optical components and
instruments, systems and accessories sold by Canon's semiconductor sales group
as a distributor for certain of the Company's products in Japan. In this
respect, the Company benefits from Canon's significant Japanese presence and
highly technical sales force.

                                     BACKLOG

     Backlog at June 30, 1998, was $24,410,000 compared to $38,688,000 at June
30, 1997, a decrease of $14,278,000 (36.9%). The backlog of the Company's
instruments and systems at June 30, 1998, decreased by $8,481,000 (39.0%) from
that at June 30, 1997, principally as a result of a weak demand from customers
in the data storage and semiconductor industries. The backlog of the Company's
modules and components decreased by $5,797,000 (35.0%) from the year earlier
primarily as a result of the Company's progress in its NIF facilitation contract
which accounted for $8,887,000 of revenue in 1998.

                                MARKETING & SALES

     The Company's core marketing strategy is to establish and solidify
strategic relationships with leading OEMs and end-users in targeted end-markets.
The selling process for Zygo's products is performed through Zygo's worldwide
sales organization and frequently involves participation by sales, marketing,
applications specialists, and engineering personnel. Zygo's marketing activities
also include participation in international standards organizations, trade
shows, publication of articles in trade journals, participation in industry
forums, and distribution of sales literature. In addition, Zygo's strategic
relationships with customers serve as highly visible references.

     Sales to the Company's OEM customers are usually through direct sales
personnel. Zygo's sales and marketing staff and engineers work closely with the
OEM to design high value-added subsystems to be integrated into the OEM's
product. These subsystems often contain multiple metrology technologies, are
highly customized, and provide a differentiated advantage for the OEM. While
these sales generally take a long time to develop and deliver, the result is a
long-term relationship as a sole-source supplier.

     Sales to end-users are also broadly organized on an industry applications
approach allowing the Company to understand the process problem and offer a
specific, value-added solution. The Company's industry orientation allows it to
understand the problem then bring to bear sales, marketing, applications, and
engineering personnel to solve the problem on a multi-technology and multi-site
basis. End-users build partnering relationships with the Company, often sharing
roadmaps with Zygo of where they are taking their processes.


                                       15
<PAGE>


     Zygo sells its products worldwide through a combination of direct sales
staff and independent distributors and sales representatives, which are
organized along industry lines. It maintains a direct sales force to target the
U.S. and employs sales representatives to cover all international accounts. Zygo
maintains a direct sales staff at its headquarters in Middlefield, Connecticut,
and in California and Colorado, for domestic sales. International sales are made
through more than 10 representatives and distributors, covering sales and
service in over 20 countries including Japan, Singapore, Malaysia, Philippines,
Taiwan, South Korea, Germany, United Kingdom, France, and Italy. In Singapore,
the Company has recently opened a sales and applications office to better
support its distributor and significant installed base in the Pacific Rim.

     The following table sets forth the percentage of Zygo's total sales
(including sales delivered through distributors) by billing location during the
past three years:

                                                 Year Ended June 30,
                                          -------------------------------
                                          1998          1997         1996
                                          ----          ----         ----
United States .........................   56.0%         54.7%        52.6%
Japan .................................   22.8          24.9         34.4
Pacific Rim ...........................   11.6          14.5          8.3
Other (primarily Europe) ..............    9.6           5.9          4.7

     All of Zygo's export sales are negotiated, invoiced, and paid in United
States dollars.

CUSTOMER SUPPORT

     Zygo believes that its strong commitment to service is essential, based on
the growing complexity of the equipment used in the manufacturing process by
Zygo's customers. More importantly, as Zygo's products are on customer
production lines, uptime of Zygo's products is critical considering the effect
on the customers' production efficiency. At June 30, 1998, Zygo's domestic
customer support and service staff consisted of 29 persons. Outside of the U.S.,
Zygo's distributors and sales representatives offer a worldwide network for
customer support, providing 24-hour-on-demand maintenance services. The service
engineers are skilled in optical and electrical component repair, software,
application and system integration, diagnostics, and problem solving
capabilities.

     Zygo offers its customers three main types of service programs including
priority support, extended warranty, and preventive maintenance, and it will
also customize a program to meet specific customer needs. These service programs
include emergency service scheduling, software upgrades, preventative
maintenance visits, and charges for parts, labor, and travel. To minimize
downtime, the Company has available spare parts kits designed to ensure
availability and emergency delivery. Finally, the Company can supply customers
with upgrades for nearly all of its systems.

     Zygo also offers testing services for a fee to customers, which require
extra precision, an alternative metrology resource, a third party
opinion/certification, or extended metrology capabilities. This service provides
an economical way for customers to measure and/or certify their samples with
Zygo's precision, noncontact, surface and optical measuring instruments. When
customers need the accuracy and NIST-traceability of Zygo precision surface and
optical measuring instruments, but do not have the volume to justify a purchase,
Zygo's Testing & Certification Services provides an excellent, cost-effective
solution. The Company's facility has state-of-the-art equipment for testing the
microroughness of precision 


                                       16
<PAGE>


surfaces, flying height of magnetic heads, air bearing surface geometry of
magnetic heads, optical components and systems, surface angles, reflective and
anti-reflective coatings, and specular surfaces of all kinds.

     Zygo also offer absolute calibration of spheres and flats, as well as large
aperture plano surfaces. To assist customers in establishing and maintaining a
routine calibration program, the Company often automatically notifies customers
when the next certification is due.

TRAINING AND SEMINARS

     In addition to its customer support network, Zygo also offers training
programs and maintenance contracts for its customers for a fee. Zygo's Customer
Education and Training seminars offer training in the areas of interferometry,
optical testing, surface metrology, and 3D microscopy, and can be customized to
suit the attendees particular needs. Customer opticians, QC inspectors,
technicians and engineers, and managers generally attend the classes and receive
the training necessary to reduce the variability of measurements, solve chronic
testing problems due to issues such as alignment and environment, increase
throughput of production teams, automate systems setup and data recording, and
prevent bottlenecks in the QC department. Classes can be held at Zygo's
Middlefield, Connecticut, or Sunnyvale, California, locations or the customer's.

     All Zygo training courses integrate lab sessions with the classroom
content. While the classes are not restricted to Zygo customers, attendees use
Zygo interferometers to set up and measure surfaces as well as explore many of
the features and functions of MetroPro(R). In this respect, classes also serve
as a sales tool as attendees experience the user-friendly setup and performance
of Zygo products.

               MANUFACTURING, RAW MATERIALS, AND SOURCES OF SUPPLY

     Zygo's principal manufacturing activities are conducted at its facilities
in Middlefield, Connecticut; Newbury Park and Sunnyvale, California; Longmont,
Colorado; and Asslar, Germany. Zygo maintains a state-of-the-art optical
components manufacturing facility in Middlefield, specializing in the
fabrication, polishing, and coating of plano (flat) optics for sales to third
parties, as well as the manufacturing of a wide variety of optics that are used
in Zygo's instrument and automation products. Zygo's manufacturing activities
for its instruments and system products consist primarily of assembling and
testing components and sub assemblies, some of which are supplied from within
Zygo and others are supplied by third party vendors and then integrated into
Zygo's finished products. Many of the components and subassemblies are standard
products, although certain items are made to Company specifications. Zygo also
maintains Computer Numerical Control (CNC) metal fabrication equipment for
in-house production of strategic metal formed components.

     Certain components and subassemblies incorporated into Zygo's systems are
obtained from a single source or a limited group of suppliers. Management
routinely monitors single or limited source supply parts, and Zygo endeavors to
ensure that adequate inventory is available to maintain manufacturing schedules
should the supply of any part be interrupted. Although Zygo seeks to reduce its
dependence on sole and limited source suppliers, it has not qualified a second
source for these products and the partial or complete loss of certain of these
sources could have an adverse effect on Zygo's results of operations and damage
customer relationships. To date, the Company has not experienced a significant
production delay from a parts shortage or loss of a single-source component.

     At its Middlefield operations, Zygo also maintains a state-of-the-art fully
integrated management information system which includes all business modules
(capacity planning, materials requirements planning, order entry, financials,
etc.) necessary to manage Zygo's growing operations there. Plans to 


                                       17
<PAGE>


expand the system to Zygo's other operations are being developed. All of Zygo's
domestic operations are connected by a wide area network which provides full
network services including shared databases, electronic mail, and the ability to
interchange files containing writing material software code and engineering
drawings. Zygo's Longmont, Colorado, operations are presently installing a fully
integrated state-of-the-art management information system. Additionally, to
facilitate effective communications, Zygo's Middlefield, Longmont, and Sunnyvale
operations have recently installed state-of-the-art video conferencing
equipment.

     The Company has built a significant Total Quality Management ("TQM")
process, which is headed by the Vice President of Corporate Quality. The TQM
program is characterized by a 7-step problem solving process whereby employees
identify areas of waste, establish teams, and apply the process to eliminate the
root cause of the problem. The TQM program, which is completely voluntary for
employees, was instrumental in the Company obtaining ISO 9001 certification at
its Middlefield facility where it was originally launched and enjoys a 75%
employee participation. This program is currently being initiated in the other
Zygo facilities.

                                    EMPLOYEES

     At June 30, 1998, Zygo employed 441 persons. Subsequent to the end of the
year, as a result of certain economic conditions and their impact on the data
storage and semiconductor industries, the Company announced staff reductions
approaching 10% of the workforce. Additional announced actions included salary
and wage freezes and reduction in certain discretionary spending areas.

     Zygo historically has had excellent employee relations and offers
competitive salaries and a comprehensive benefits program including companywide
profit sharing, which has resulted in low employee turnover. None of the
Company's employees are covered by collective bargaining agreements. Zygo has
never experienced a work stoppage and believes that its relations with its
employees are excellent.

ITEM 2. PROPERTIES

     The Company maintains manufacturing facilities in Middlefield, Connecticut;
Sunnyvale, California; and Longmont, Colorado, and maintains its corporate
headquarters on Laurel Brook Road in Middlefield, Connecticut. The Middlefield
facility consists of one 135,500-square-foot building on approximately 13 acres.
In 1998, this facility was expanded by 35,500 square feet to provide additional
optical fabrication capacity and a new office area for sales, service, R&D, and
administrative personnel. The Company also owns 50 acres of undeveloped land
adjacent to its principal facility. Advanced Imaging Systems maintains its
headquarters in a leased 20,000-square-foot building located in a high
technology area in Sunnyvale, California. Automation Systems' manufacturing
activities are carried on from Longmont, Colorado, where it occupies 21,000
square feet within a new leased facility. Automation Systems moved into the
facility in April 1997.


                                       18
<PAGE>


                                           SQUARE FEET
                                      ----------------------           OWNED/
     OPERATION/LOCATION               MANUFACTURING    TOTAL          LEASE/EXP.
     ------------------               -------------   -------         ----------
Corporate Headquarters                   80,000       135,500          Owned
  and Advanced Metrology Systems
Middlefield, Connecticut

Automation Systems                       10,000        21,000          Leased
Longmont, Colorado                                                   31-Mar-00

Zygo - Laser Technology                       0         1,452          Leased
Watsonville, California                                              14-Apr-00

Advanced Imaging Systems                  8,000        20,000          Leased
Sunnyvale, California                                                31-Oct-00

Vision Systems                            8,000        12,240          Leased
Newbury Park, California                                              2-Feb-03

Advanced Imaging Systems                  1,500         4,000          Leased
Asslar, Germany                                                      31-Aug-03

Zygo Singapore                                0         2,350          Leased
                                                                      1-Mar-01
                                        -------       -------
Total                                   107,500       196,542
                                        =======       =======

ITEM 3. LEGAL PROCEEDINGS

     On June 29, 1988, Zygo filed suit in the U.S. District Court in Arizona
against WYKO Corporation for patent infringement based on the belief that the
WYKO 6000 interferometer infringed certain patents owned by Zygo. On March 1,
1993, the United States District Court (District of Arizona) rendered a
Memorandum Opinion and Findings of Fact and Conclusions of Law in the matter of
the patent suit. The conclusions of the court were that Zygo's patent is valid,
the WYKO Model 6000 interferometer infringes the Zygo patent, that WYKO
Corporation is liable to Zygo for any damages suffered as a result of WYKO's
infringement of Zygo's patents by making, selling, and using the WYKO Model 6000
interferometer, and that the amount of the monetary judgment and other relief
shall be determined following a trial on the issue of damages. The damage phase
of the trial was held from November 29, 1993 through December 6, 1993. The Court
rendered its judgment on June 2, 1994, awarding Zygo approximately $2.7 million
plus recovery of certain costs to be awarded by the Court which were incurred by
Zygo in connection with the conduct of the trial and entered a permanent
injunction prohibiting further sales of the WYKO Model 6000 interferometers
found to infringe. An appeal of the District Court's decision was filed by WYKO
on August 9, 1994 with the Court of Appeals for the Federal Circuit located in
Washington, D.C. The oral argument of the appeal was heard by the Court of
Appeals on March 9, 1995. On April 1, 1996, the Court of Appeals rendered an
Opinion Announcing Judgment of the Court. The appellate court affirmed-in-part
and reversed-in-part the District Court's earlier findings and remanded the case
to the District Court for a redetermination of the damage award. In its Opinion,
the appellate court reversed the District Court's opinion that certain WYKO
units infringed the Zygo patent on the basis of the doctrine of equivalents,
upheld the validity of Zygo's patent, and affirmed the District Court's opinion
that the original WYKO model 6000 infringed Zygo's patent. Zygo has not recorded
any gain from the District Court's earlier ruling and will not until a final
determination of the award is made.


                                       19
<PAGE>


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

                      EXECUTIVE OFFICERS OF THE REGISTRANT

GARY K. WILLIS - AGE 53 - PRESIDENT AND CEO

     Mr. Willis has served as President and Chief Executive Officer of the
Company since August 1993. From February 1992 to August 1993, Mr. Willis served
as President and Chief Operating Officer of the Company. Previously, Mr. Willis
spent 15 years with The Foxboro Company, most recently as President, Chairman
and CEO. 

Mr. Willis has served as an executive officer of the Company since February 1992
and is a director of the Company.


AHMAD AKRAMI - AGE 39 - VICE PRESIDENT MARKETING, SALES AND CUSTOMER SERVICE

     Mr. Akrami has served as Vice President Marketing, Sales and Customer
Service of the Company since June 1998. Mr. Akrami served as Vice President and
General Manager Zygo Automation Systems (formerly NexStar Automation) from
August 1997 to June 1998. From January 1993 to August 1997 Mr. Akrami was
President of NexStar Automation, which merged with Zygo in September 1996. 

Mr. Akrami has served as an executive officer of the Company since August
1997.


WILLIAM H. BACON - AGE 48 - VICE PRESIDENT CORPORATE QUALITY

     Mr. Bacon has served as Vice President, Corporate Quality of the Company
since January 1996. From November 1993 to January 1996, Mr. Bacon was Director
of Total Quality of the Company and also served as Manager of Instrument
Manufacturing Engineering of the Company from June 1987 to November 1993. 

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


MARK J. BONNEY - AGE 44 - VICE PRESIDENT OPERATIONS

     Mr. Bonney has served as Vice President of Operations since June 1998.
Previously Mr. Bonney served as Vice President, Finance and Administration and
Chief Financial Officer of the Company from March 1993 and Treasurer of the
Company from November 1993 until June 1998. Additionally, Mr. Bonney served as
General Manager of the Company's Advanced Metrology Systems operation from
January 1998 until June 1998.

Mr. Bonney has served as an executive officer of the Company since March 1993.


DAVID GRANT - AGE 35 - VICE PRESIDENT AND GENERAL MANAGER ZYGO VISION SYSTEMS

     Mr. Grant has served as Vice President of the Company since August 1998 and
General Manager of Zygo Vision Systems (formerly Sight Systems, Inc.) since its
merger with Zygo in August 1997. Mr. Grant previously served as President of
Sight Systems, Inc. since its founding in 1990. 

Mr. Grant has served as an executive officer of the Company since August 1998.


FRANCIS E. LUNDY - AGE 60 - VICE PRESIDENT BUSINESS DEVELOPMENT

     Mr. Lundy has served as Vice President Business Development since June
1998. Previously Mr. Lundy served as Vice President and General Manager of Zygo
Advanced Imaging Systems (formerly Technical Instrument Company) since August
1997 and President of Technical Instrument Company from January 1985 to August
1996.

Mr. Lundy has served as an executive officer of the Company since August 1997.


                                       20
<PAGE>


KEVIN M. MCGUANE - AGE 42 - VICE PRESIDENT FINANCE, CFO AND TREASURER

     Mr. McGuane has served as Vice President, Chief Financial Officer, and
Treasurer since June 1998. Mr. McGuane served as Corporate Controller of the
Company from February 1997 until June 1998. Previously, Mr. McGuane spent six
years with Dexter Corporation as Director of Operations Accounting.

Mr. McGuane has served as an executive officer of the Corporation since June
1998.


DAVID J. PERSON - AGE 50 - VICE PRESIDENT HUMAN RESOURCES

     Mr. Person has served as Vice President Human Resources since September
1998. Previously Mr. Person 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 the Company since September
1998.


ROBERT A. SMYTHE - AGE 47 - VICE PRESIDENT ADVANCED MARKETING AND PRODUCT
DEVELOPMENT

     Mr. Smythe has served as Vice President Advanced Marketing and Product
Development since June 1998. Previously, he served as Vice President, Sales and
Marketing of the Company from January 1996 to June 1998. From June 1993 to
January 1996, Mr. Smythe was Director of Sales and Marketing of the Company and
from April 1992 to June 1993 served as Manager, Industry Marketing of the
Company.

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


CARL A. ZANONI - AGE 57 - VICE PRESIDENT RESEARCH AND DEVELOPMENT

     Dr. Zanoni has served as Vice President Research and Development since June
1998. Previously, he served as Vice President, Research Development and
Engineering of the Company from April 1992 to June 1998.

Dr. Zanoni is one of the original founders of the Company and has served as an
executive officer since its inception in 1970. He is also a director of the
Company.

     Of the above executive officers, Mr. Willis and Mr. Zanoni are directors of
the Company. Under the Bylaws, executive officers serve for a term of one year
and until their successors are chosen and qualified unless earlier removed.

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS

     The Company's common shares are traded over-the-counter and are quoted on
the NASDAQ/National Market under the symbol "ZIGO". Market price data for 1998
and 1997, adjusted for the effect of the 2-for-1 stock split which was effective
on February 27, 1997, was as follows:

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

                Fiscal Year Ended June 30, 1998  Fiscal Year Ended June 30, 1997
                -------------------------------  -------------------------------
                   High            Low                 High            Low
                   ----            ---                 ----            ---
First Quarter     $38-1/2        $28-1/2              $21-1/2          $14
Second Quarter    $33-1/16       $14-3/4              $26              $12-1/4
Third Quarter     $21-1/2        $13-7/8              $29-7/8          $21
Fourth Quarter    $22-1/8        $12-7/16             $31-1/2          $21-1/2

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

     The number of stockholders of record at June 30, 1998, were 539.


                                       21

<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

(Thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                       Fiscal Year Ended June 30,
                                                     --------------------------------------------------------------
                                                     1998(1)        1997(1)        1996        1995        1994
                                                     -------        -------      --------    --------    --------
<S>                                                  <C>            <C>           <C>         <C>         <C>     
Net Sales                                            $ 97,871       $ 87,220      $ 57,374    $ 32,233    $ 24,141
      Instruments and Systems sales                        65%            75%           65%         62%         54%
      Modules and Components sales                         35%            25%           35%         38%         46%
Gross Profit                                         $ 41,142       $ 41,825      $ 25,866    $ 14,231    $ 10,616
      % of sales                                           42%            48%           45%         44%         44%

Earnings before taxes and nonrecurring charges       $ 13,003(2)    $ 21,121(2)   $ 11,558    $  3,956    $  1,328
      % of sales                                           13%            24%           20%         12%          6%
Earnings before nonrecurring charges                 $  9,034(2)    $ 13,960(2)   $  7,799    $  2,749    $    918
      % of sales                                            9%            16%           14%          9%          4%
Earnings per share before nonrecurring charges (4)
      Basic                                          $   0.83(2)    $   1.34(2)   $   0.84    $   0.35    $   0.12
      Diluted                                        $   0.74(2)    $   1.16(2)   $   0.72    $   0.32    $   0.12
      Earnings per share growth rate                      (36%)           62%          121%        181%         87%

Net earnings                                         $  7,114       $  2,877      $  7,799    $  2,749    $    918
Net earnings per common share: (4)
   Basic (3)                                         $   0.65       $   0.28      $   0.84    $   0.35    $   0.12
   Diluted (3)                                       $   0.58       $   0.24      $   0.72    $   0.32    $   0.12
Weighted average number of shares:
   Basic                                               10,890         10,403         9,323       7,801       7,777
   Diluted                                             12,235         11,998        10,878       8,484       7,974

Research and development                             $  9,844       $  7,151      $  5,538    $  3,967    $  2,786
Capital expenditures                                 $  9,016       $  4,723      $  2,864    $  1,631    $  1,912
Depreciation and amortization                        $  3,408       $  2,612      $  1,477    $  1,248    $  1,348

<CAPTION>
                                                                                  June 30,
                                                      -----------------------------------------------------------
                                                      1998(1)        1997(1)        1996       1995        1994
                                                      -------        -------       -------    -------     -------
<S>                                                   <C>            <C>           <C>        <C>         <C>    
Working capital                                       $50,085        $47,633       $47,148    $17,072     $14,889
Current ratio                                             4.2            4.6           5.2        3.6         4.8
Total assets                                          $91,005        $78,799       $65,895    $29,666     $24,499
Long-term debt (excluding current portion)               --             --            --         --           481
Stockholders' equity                                  $72,166        $62,408       $54,087    $22,333     $19,274
Price-earnings ratio (2) (3) (4)                         20.0           26.5          30.4       35.2        18.1
Number of employees at year end                           441            399           287        210         176
Sales per employee - average                          $   225        $   231       $   224    $   173     $   132
Book value per common share                           $  6.55        $  5.91       $  5.34    $  2.84     $  2.48
Market price at year-end                              $14.813        $30.750       $21.875    $11.250     $ 2.167
</TABLE>

(1)  The results of Sight Systems, Inc ("SSI"), which is being accounted for as
     an immaterial pooling-of-interests, 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)  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.

(3)  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, 1,555,000, 683,000, and
     197,000 in the year ended June 30, 1998, 1997, 1996, 1995, and 1994,
     respectively.

(4)  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.


                                       22
<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                              RESULTS OF OPERATIONS

FISCAL 1998 COMPARED TO FISCAL 1997

     Net sales of $97,871,000 for fiscal 1998 increased by $10,651,000 or 12.2%
from fiscal 1997 net sales of $87,220,000. This increase was principally the
result of revenues of $8,887,000 received under a contract with the University
of California's Lawrence Livermore National Laboratory ("LLNL"), whereby the
Company is the primary supplier of large plano optical components for the
National Ignition Facility ("NIF"), and to a lesser extent the Company's
acquisition of Syncotec Neue Technologien und Instrumente GmbH ("Syncotec") and
merger with Sight Systems, Inc. ("SSI"), partially offset by a 2.6% decrease in
net sales of the Company's instruments and systems to $63,416,000, resulting
from lower demand from data storage and semiconductor industries. Net sales of
modules and components increased by 55.9% to $34,451,000, in fiscal 1998,
primarily due to NIF as stated above.

     The Company's sales outside the United States amounted to $43,019,000 in
fiscal 1998, an increase of $3,494,000 or 8.8% from fiscal 1997. Sales in Japan
during fiscal 1998 amounted to $22,284,000, an increase of $554,000 over fiscal
1997 despite flat sales for the Company's motion control components to Canon
Inc. for incorporation into Canon's photolithography "steppers" used in
production of semiconductors. Sales to other geographic markets outside the U.S.
amounted to $20,735,000 in fiscal 1998, an increase of $2,940,000 or 16.5% from
fiscal 1997. Decreases in the Pacific Rim of $1,302,000, principally due to the
macro economic environment there, were offset by increased sales of the
Company's products in Europe due to the Company's acquisition of Syncotec and
improved market conditions. Substantially all of the Company's sales and costs
are negotiated and paid in U.S. dollars. Significant changes in the values of
foreign currencies relative to the value of the U.S. dollar can impact the sales
of the Company's products in its export markets as would changes in the general
economic conditions in those markets. The impact of such changes in foreign
currency values on the Company's sales cannot be measured.

     Gross profit in fiscal 1998 amounted to $41,142,000, a decrease of $683,000
or 1.6% from gross profit of $41,825,000 in fiscal 1997. As a percentage of net
sales, gross profit in fiscal 1998 was 42.0%, as compared to 48.0% in fiscal
1997. Increase in gross profit dollars from the NIF facility project with its
lower margins than the Company's products, were offset by volume decreases in
the automation facility and reductions in higher margin confocal mask metrology
systems. Additionally, under absorption of certain manufacturing costs primarily
in the Company's automation facility and increased inventory reserves negatively
impacted current year results.

     Selling, general and administrative expenses in fiscal 1998 amounted to
$18,354,000 and increased by $4,524,000 or 32.7% from fiscal 1997. The increase
was primarily attributable to the settlement of a commercial dispute, the
addition of Syncotec and SSI, and the investment in Sales, Service and Marketing
infrastructure with a number of initiatives, including the introduction of
several new products, most notably, the MESA interferometer, the addition of
sales and service personnel, and the restructuring of the sales organization
into a single worldwide organization selling all Zygo products. The Company also
incurred incremental expenses for the office opened in Singapore. As a
percentage of net sales, selling, general and administrative expenses increased
in fiscal 1998 to 18.8%, as compared to 15.9% in fiscal 1997. In the fourth
quarter ended June 30, 1998, the Company took several actions due 


                                       23

<PAGE>


to the declining order rates and resulting under absorption including curtailing
all discretionary spending, freezing all salaries, reducing the workforce, and
realigning management.

     Research, development and engineering expenses ("R&D") in fiscal 1998
totaled $9,844,000 and increased by $2,693,000 or 37.7% from fiscal 1997. The
increase in R&D expenses includes principally expenses from the Company's
acquisitions of SSI and Syncotec, expenses relating to the consolidation of the
Company's Flying Height Test Division and Vision Systems operations into one
facility, and to a lesser extent, expenses associated with additional
expenditures for manpower and materials to support new product development.
Research and Development cost as a percentage of net sales amounted to 10.1%
which compares with 8.2% of net sales in 1997.

     The Company recorded nonrecurring charges in the amount of $1,920,000 in
fiscal 1998 as compared with nonrecurring acquisition-related charges in the
amount of $11,083,000 in fiscal 1997. The fiscal 1998 nonrecurring charges, all
which were incurred in the three months ended September 30, 1997, related to
$707,000 of expenses incurred to complete the Company's merger with SSI,
recorded as a pooling-of-interest, the write-off of $878,000 of in-process
research and development costs in conjunction with the Company's acquisition of
Syncotec, and failed merger costs of $335,000 relating to the Company's failed
efforts to merge with Digital Instruments, Inc. The fiscal 1997 nonrecurring
charges, all which were incurred in the three months ended September 30, 1996,
related to $999,000 of expenses incurred to complete the Company's merger with
NexStar and the write off of $10,084,000 of in-process research and development
costs in conjunction with the Company's acquisition of TIC.

     Excluding the nonrecurring charges, the Company's operating profit in
fiscal 1998 was $12,151,000, a decrease of $8,135,000 or 40.1% from operating
profit in fiscal 1997. Operating profit in fiscal 1998, including the
nonrecurring acquisition-related charges amounted to $10,231,000 as compared to
$9,203,000 in fiscal 1997.

     Income tax expense in fiscal 1998 totaled $3,969,000 on earnings before
income taxes of $11,083,000 as compared to $7,161,000 of income taxes in fiscal
1997 on earnings before income taxes of $10,038,000. The lower tax expense as a
percentage of earnings before taxes in fiscal 1998 compared to fiscal 1997 was
principally a result of the incurrence of less non-tax deductible acquisition
charges to earnings in fiscal 1998 than were incurred in the prior fiscal year.

     Backlog at June 30, 1998, was $24,410,000 compared to $38,688,000 at June
30, 1997, a decrease of $14,278,000 or 36.9%. The backlog of the Company's
instruments and systems at June 30, 1998 decreased by $8,481,000 or 39.0% from
that at June 30, 1997, principally as a result of a weak demand from customers
in the data storage and semiconductor industries. The backlog of the Company's
modules and components decreased by $5,797,000 or 35.0% from the year earlier
primarily as a result of the Company's progress in its NIF facilitation contract
which accounted for $8,887,000 of revenue in 1998.

     Net earnings and diluted earnings per share for fiscal 1998 amounted to
$7,114,000 and $.58 as compared to $2,877,000 and $.24, respectively, for fiscal
1997. Excluding nonrecurring charges, net income for fiscal 1998 totaled
$9,034,000, a decrease of $4,926,000 or 35.3% from fiscal 1997. Earnings per
share excluding the nonrecurring charges, were $.74 in fiscal 1998, down 36.2%
from $1.16 in fiscal 1997.


                                       24

<PAGE>

FISCAL 1997 COMPARED TO FISCAL 1996

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

     The Company's sales outside the United States amounted to $39,525,000 in
fiscal 1997, an increase of $12,330,000 or 45.3% from fiscal 1996. Sales in
Japan during fiscal 1997 amounted to $21,730,000, an increase of $1,967,000 over
fiscal 1996 despite a reduction of sales for the Company's motion control
components to Canon Inc. for incorporation into Canon's photolithography
"steppers" used in production of semiconductors. Sales to other geographic
markets outside the U.S. amounted to $17,795,000 in fiscal 1997, an increase of
$10,363,000 or 139.4% from fiscal 1996. This increase was principally the result
of increased demand for the Company's instruments and systems by the data
storage and semiconductor manufacturing industries in the Pacific Rim, the
addition of TIC which has a strong market presence in the Pacific Rim, primarily
among the various producers of semiconductor masks, and increased sales of the
Company's products in Europe due to improved market conditions. Substantially
all of the Company's sales and costs are negotiated and paid in U.S. dollars.
Significant changes in the values of foreign currencies relative to the value of
the U.S. dollar can impact the sales of the Company's products in its export
markets as would changes in the general economic conditions in those markets.
The impact of such changes in foreign currency values on the Company's sales
cannot be measured.

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

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

     Research, development and engineering expenses ("R&D") in fiscal 1997
totaled $7,151,000 and increased by $1,613,000 or 29.1% from fiscal 1996. The
increase in R&D expenses was principally due to the impact of including TIC from
August 8, 1996 and increased engineering headcount at the Company's Middlefield,
Connecticut, facilities, partially offset by lower material expenditures. R&D
expenses as a percentage of net sales decreased to 8.2% in fiscal 1997 as
compared to 9.7% in fiscal 1996.

     The Company recorded nonrecurring acquisition-related charges in the amount
of $11,083,000 in the three months ended September 30, 1996. The nonrecurring
charges related to $999,000 of expenses 



                                       25

<PAGE>

incurred to complete the Company's merger with NexStar and the write-off of
$10,084,000 of in-process research and development costs in conjunction with the
Company's acquisition of TIC.

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

     At June 30, 1998 working capital was $50,085,000, an increase of $2,452,000
from the amount at June 30, 1997, and the Company had cash and cash equivalents
of $22,023,000 and marketable securities amounting to $8,264,000 for a total of
$30,287,000. The $6,540,000 increase in cash and cash equivalents and marketable
securities from the amount at June 30, 1997 was largely due to receivable
reductions. Trade accounts receivable decreased by $4,175,000, principally as a
result of lower fourth quarter net sales combined with focused collection
activities. As a result of the addition of SSI and Syncotec and lower fourth
quarter shipments, inventory increased by $2,774,000 at June 30, 1998 compared
to the year earlier. Accounts payable and accrued expenses increased by
$2,630,000 in fiscal 1998 to $15,535,000 due to normal business activities. The
Company's expenditures for property, plant and equipment totaled $9,016,000 in
fiscal 1998, which was $4,293,000 more than the prior fiscal year. Fiscal 1998
expenditures included $5.1 million spent on the completion of certain building
additions, principally the expansion of the Middlefield, Connecticut, facilities
by 35,500 square feet to accommodate the space required for the NIF facility and
to provide additional office facilities. These expenditures were funded by
operating cash flows. Management expects 1999 capital expenditures to


                                       26

<PAGE>

approximate $4.0 million. As of June 30, 1998, there were no borrowings
outstanding under the Company's $3,000,000 bank line of credit. Unused amounts
under the line of credit are available for short-term working capital needs.
Stockholders' equity at June 30, 1998 increased by $9,758,000 from the year
earlier to $72,166,000 as a result of net income of $7,114,000, and increases in
the Company's common stock and paid-in capital accounts resulting from the
Company's acquisition of SSI and the exercise of employee stock options.

     Effective June 30, 1997, TIC, a wholly owned subsidiary of the Company, and
Syncotec, a German-based company, completed all necessary legal requirements
allowing for the appropriate transfer and registration of 50 percent of Syncotec
shares to TIC. Effective September 1, 1997, the Company, through TIC, purchased
the remaining 50 percent of Syncotec for approximately $2.0 million in a
combination of cash and the Company's common stock. Syncotec designs, develops,
manufactures, and markets certain products, which incorporate TIC's confocal
technology for European customers. Syncotec's sales in the year ended December
31, 1996 amounted to $2.9 million (DM4.9 million).

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

RISK FACTORS THAT MAY IMPACT FUTURE RESULTS

     Customer Concentration; Relationship with Canon. Sales to Zygo's two
largest customers in fiscal 1998 and fiscal 1997 accounted for an aggregate of
approximately 31% and 20% of net sales, respectively. During these fiscal years,
sales to Canon Inc. and Canon Sales Co., Inc. (collectively, "Canon"), Zygo's
largest customer in those periods, accounted for approximately 18% and 20%,
respectively, of Zygo's net sales. Zygo expects that sales to Canon, an original
investor in Zygo which owns approximately 11% of Zygo's outstanding shares of
Common Stock and is a distributor of certain Zygo products in the Japanese
market, will continue to represent a significant percentage of Zygo's net sales
for the foreseeable future. During fiscal 1998, sales to Zygo's second largest
customer, LLNL, accounted for approximately 13% of Zygo's net sales. Zygo's
customers generally do not enter into long-term agreements obligating them to
purchase Zygo's products. A reduction or delay in orders from either of these
two customers, including reductions or delays due to market, economic, or
competitive conditions in the semiconductor or computer disk drive industries,
could have a material adverse effect upon Zygo's results of operations.

     Risks Associated with Acquisitions. Zygo's growth strategy involves growth
through acquisitions and internal development and, as a result, Zygo is subject
to various risks associated with this growth strategy. The successful
integration of acquired businesses is important to Zygo's future financial
performance. In addition, while there are currently no commitments with respect
to any future acquisitions, Zygo's business strategy includes the expansion of
its products and services, which may be effected through further acquisitions.
Zygo regularly reviews various acquisition prospects of businesses, technologies
or products complementary to Zygo's business and periodically engages in
discussions regarding such possible acquisitions. Acquisitions involve numerous
risks, including difficulties in the assimilation of the operations and products
of the acquired companies, the ability to manage effectively geographically
remote units, the diversion of management's attention from the day-to-day
business operations of the Company and its other business concerns, risks of
entering markets in which Zygo has limited or no direct experience, integrating
personnel with disparate business backgrounds, combining different corporate
cultures, and the potential loss of key employees of the acquired companies.
There can be no assurance that there will not be substantial costs associated
with such activities or that there will not be other material adverse effects 
of those integrating efforts. 


                                       27

<PAGE>

Further, there can be no assurance that management's efforts to integrate the
operations of Zygo and newly acquired companies will be successful or that the
anticipated benefits of the recent acquisitions will be fully realized.

     In addition, acquisitions may result in dilutive issuances of equity
securities, the incurrence of debt, reduction of existing cash balances,
amortization expenses related to goodwill and other intangible assets, and other
charges to operations that may materially adversely affect Zygo's business,
financial condition or results of operations. Although management expects to
carefully analyze any such opportunity before committing Zygo's resources, there
can be no assurance that any acquisition will result in long-term benefits to
Zygo or that Zygo's management will be able to manage effectively the resulting
businesses.
     
     Industry Concentration and Cyclicality. Zygo's business is significantly
dependent on capital expenditures by manufacturers of components for the
computer disk drive industry and of semiconductors. These industries are
cyclical and have historically experienced periods of oversupply, resulting in
significantly reduced demand for capital equipment, including the products
manufactured and marketed by Zygo. For the foreseeable future, Zygo's operations
will continue to be dependent on the capital expenditures in these industries
which, in turn, is largely dependent on the market demand for hard disk drives
and products containing integrated circuits. Zygo's net sales and results of
operations may be materially adversely affected if downturns or slowdowns in the
computer disk drive or semiconductor markets significantly extend into the
future.

     Technological Change and New Product Development. The market for Zygo's
products is characterized by rapidly changing technology. Zygo's future success
will continue to depend upon its ability to enhance its 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. Zygo continually redesigns and
enhances its instruments, systems and components and upgrades its proprietary
software technology incorporated in its products. Any failure by Zygo 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 Zygo's business, results of close
relationships with its customers and their willingness to share proprietary
information about their requirements and participate in collaborative efforts
with Zygo. There can be no assurance that Zygo's customers will continue to
provide the Company with timely access to such information or that Zygo will be
successful in developing and marketing new products and services or product and
service enhancements on a timely basis and respond effectively to technological
changes or new product announcements by others. In addition, there can be no
assurance the new products and services and services or product enhancements, if
any, developed by Zygo will achieve market acceptance.

     Dependence on Key Personnel. Zygo's success depends in large part upon the
continued services of many of its high skilled personnel involved in management,
research, development and engineering, and sales and marketing and upon its
ability to attract and retain additional highly qualified employees. Zygo's
employees may voluntarily terminate their employment with Zygo at any time.
Competition for such personnel is intense, and there can be no assurance that
Zygo will be successful in retaining its existing personnel or attracting and
retaining additional personnel.

     Quarterly Fluctuations. Zygo has experienced quarterly fluctuations in
results of operations and anticipates that these fluctuations may continue.
These fluctuations have been caused by various factors, including the capital
procurement practices of its customers and the industries into which its
products are sold generally, the timing and acceptance of new product
introductions and enhancements, and the timing of product shipments and
marketing. Future results of operations may fluctuate as a result of 


                                       28

<PAGE>

these and other factors, including Zygo's ability to continue to develop
innovative products, the announcement or introduction of new products by Zygo's
competitors, Zygo's product and customer mix, the level of competition and
overall trends in the United States and various economies.

     Possible Volatility of Stock Price. Zygo believes that factors such as the
announcement of new products or technologies by Zygo or its competitors, market
conditions in the precision measurement, data storage, and semiconductor
industries generally and quarterly fluctuations in financial results are
expected to cause the market price of the Common Stock to vary substantially.
Further, Zygo's 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, perhaps
substantially. In addition, in recent years 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 the shares of Zygo's Common Stock.

     Competition. Zygo faces competition from a number of companies in all its
markets, some of which have greater manufacturing and marketing capabilities,
and greater financial, technological, and personnel resources. In addition, Zygo
competes with the internal development efforts of its current and prospective
customers, certain of which may attempt to become vertically integrated. Zygo's
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 Zygo believes that it has
certain technical and other advantages over certain of its competitors,
maintaining such advantages will require a continued high level of investment by
Zygo in research and development and sales, marketing and service. There can be
no assurance that Zygo will have sufficient resources to continue to make such
investment or that Zygo 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 Zygo competes
will not shift.

     Dependence on Proprietary Technology. Zygo's success is heavily dependent
upon its proprietary technology. There can be no assurance that the steps taken
by Zygo to protect its proprietary technology will be adequate to prevent
misappropriation of its technology by third parties or will be adequate under
the laws of some foreign countries, which may not protect Zygo's proprietary
rights to the same extent as do laws of the United States. In addition, there
remains the possibility that others will "reverse engineer" Zygo's 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 Zygo's results of
operations. Further, some of the markets in which Zygo competes 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 its products increase, the markets
in which its products are sold expands, and the functionality of those products
grows and overlaps with products offered by competitors, Zygo believes that it
may become increasingly subject to infringement claims. Although Zygo does not
believe any of its products or proprietary rights infringe the rights of third
parties, there can be no assurance that infringement claims will not be asserted
against Zygo in the future or that any such claim will not result in costly
litigation or require Zygo to enter into royalty arrangements, which may not be
available to the Company on commercially acceptable terms if at all.

     Dependence on Third-Party Suppliers. Certain of the components and
subassemblies included in Zygo's systems are obtained from a single source or a
limited group of suppliers. Although Zygo seeks to reduce dependence on sole and
limited source suppliers in some cases, the partial or complete loss of 


                                       29

<PAGE>

certain of these sources could have an adverse effect on Zygo's results of
operations and damage customer relationships.

     Revenues Derived From International Sales and Foreign Operations. Zygo's
products are sold internationally by Zygo primarily to customers in Japan and
throughout the Pacific Rim. Net sales to customers outside the United States
accounted for 44% and 45% of Zygo's net sales in the fiscal years ended June 30,
1998 and 1997, respectively, and are expected to continue to account for a
substantial percentage of Zygo's 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 and in
staffing and managing foreign operations, exposure to currency exchange
fluctuations, transportation delays, and potentially adverse tax consequences.
Substantially all Zygo's sales and costs are negotiated and paid in U.S.
dollars. However, changes in the values of foreign currencies relative to the
value of the U.S. dollar can render Zygo's products comparatively more expensive
to the extent locally produced alternative products are available. Such
conditions could negatively impact international sales of Zygo's products and
Zygo's foreign operations, as would changes in the general economic conditions
in those markets. There can be no assurance that risks inherent in international
sales and foreign operations will not have a material adverse effect on Zygo in
the future.

     Reliance on Middlefield Manufacturing Facility. The Company manufactures
all of its optical components at its facility in Middlefield, Connecticut. Any
extended interruption of optical component production at the Middlefield
manufacturing facility could have a material adverse effect on the business of
the Company.

     Control of Company. The Company's executive officers and directors, through
their affiliation with certain stockholders and their stock option holdings, may
be deemed to beneficially own approximately 31% of the outstanding shares of
Common Stock. As a result, these individuals may have the ability to control the
Company and direct its affairs and business, including the election of all the
directors.

     Dividend Policy. The Company has never declared or paid cash dividends on
its capital stock. The Company currently intends to retain all its earnings to
finance the expansion and development of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future.

     Year 2000. As is the case with most other companies using computers in
their operations, the Company is currently working to minimize the potential
impact of the year 2000 on the processing of date-sensitive information by the
Company's computerized information systems, as well as any supplier and customer
date-sensitive information transferred to or by the Company. The Company's
products only use the date function of the underlying computer system to
date-stamp data files collected during the measurement process.

     The year 2000 ("Y2K") issue is primarily the result of computer programs
being written using two digits, rather than four, to define the applicable year.
Any of the Company's systems that have date-sensitive software may recognize the
year "00" as 1900 rather than the year 2000, which could result in
miscalculations, classification errors, or system failures. Additional errors in
handling leap years in the twenty-first century are also considered to be part
of this issue.

     Based on an assessment of the systems, the cost of addressing potential
problems is not currently expected to have a material adverse impact on the
Company's financial position, results of operations or cash flows in future
periods. However, if the Company, its customers and suppliers are unable to
resolve such processing issues on a timely basis, the Company's financial
condition and results of


                                       30

<PAGE>

operations could be adversely affected. Accordingly, the Company has been
executing a plan in order to attempt to resolve the significant year 2000 issues
in a timely manner.

     The Company is in the process of investigating the effect of the year 2000
in the following areas at each of our sites:

     o Products we have sold in the last 10 years
     o Product Design and Development Tools
     o Manufacturing Tools
     o Facility Infrastructure
     o Management Information Systems
     o Material and Service Suppliers

Products:

     Y2K issues with products are expected to be minimal because dates are not
used to perform any software calculations. The computer system's date is used to
date-stamp data files when the information is written. Workarounds are available
for compliance issues with the computer or operating system software. Some of
the oldest products may require computer upgrades to be able to provide fully
compliant date handling at the computer level. Product specific details are
available through the Company's web site. Support is available through the Zygo
Customer Service Group.

Design and Development Tools:

     These have been inventoried and tested and management believes it may
present only minor compliance issues, usually related to minor Microsoft
software Y2K issues that are not expected to impact their operation. None of
these tools are expected to be able to cause disruption to the business should
an undetected issue arise. Minor costs may be involved in upgrading some of the
oldest computers to properly provide the date and time.

Manufacturing Process and Control Tools:

     These have been inventoried and management believes it may present only
minor compliance issues, usually related to minor Microsoft software Y2K issues
that are not expected to impact their operation. None of these tools are
expected to be able to cause disruption to the business should an undetected
issue arise. Minor costs may be involved in upgrading some of the oldest
computers to properly provide the date and time.

Facility Infrastructures:

     All sites have been inventoried and checked for date functions that may
have Y2K issues. Phones, faxes, copiers, heating and cooling, lighting,
elevators, backup power systems, security and fire systems present no Y2K
issues. Voice mail systems require planned upgrades at minimal costs at two
sites.

Management Information Systems:

     All sites either have MIS systems which are fully compliant or are
substantially compliant. Those that are substantially compliant management
believes will have fully compliant versions of the current systems installed and
operational before June 1999. As a contingency, testing of the essential
functions on the current system software has been done in an attempt to assure
that even if no upgrades were installed the business would still be able to
function. The functions required for taking orders, planning material purchases
and shop floor control, accounts payable, order shipment, order invoicing and
accounts receivable have been tested with Y2K dates and have been found to
handle them appropriately. The planned software upgrades are included in the
support contract in effect with our supplier, so no unplanned costs are
anticipated.


                                       31

<PAGE>

     Desktop systems are running Microsoft products which management believes
are compliant with minor issues. Applications that support or analyze data on
the main MIS system use four digit year logic to remove ambiguity. No
significant issues have been detected on these systems.

Material and Service Suppliers:

     All sites have sent surveys regarding the Y2K issue to substantially all
suppliers of material or services. The results are being recorded and an
analysis is planned to review and classify the risks identified. Appropriate
corrective actions are expected to be taken to minimize the risk of late
deliveries of materials or services, which may affect our customers. Corrective
actions will be taken as part of our ongoing supplier improvement and corrective
action process, minimizing the cost to the Company.

     Financial service providers, including our banks, payroll processor, and
benefit providers have been inventoried and have reported that while not totally
Y2K compliant at the present time, they intend to before January 1, 2000.

     The utilities suppliers (power, phone, sewer, and water) are not all
completely Y2K compliant, but are working to be compliant. Should these service
suppliers not resolve all of their critical issues before January 1, 2000, the
uninterrupted operation of the business may be jeopardized.

     According to reports in the press, Regulatory and Government interfaces may
not be completely Y2K compliant before January 1, 2000, but are not expected to
prevent the Company from operating. Some additional clerical costs may be
incurred if paper or electronic data needs to be refiled should the originals be
improperly handled by these agencies.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     None.

                                    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 report, information required by this item is included under
the captions "Election of Board of Directors" and "Other Agreements and Other
Matters" in the Proxy Statement to be filed pursuant to Regulation 14A for use
in connection with the Registrant's 1998 Annual Meeting of Stockholders ("the
Proxy Statement") and is herein incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

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


                                       32
<PAGE>


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information required by this item is included in the Proxy Statement under
the captions "Election of Board of Directors" and "Principal Stockholders" and
is herein incorporated by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                     PART IV

ITEM 14. 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")*

    4.1       Shareholders Agreement dated October 17, 1983, between Canon Inc.,
              Wesleyan University, Paul F. Forman, Carl A. Zanoni, and Sol F.
              Laufer (Exhibit (4)(a) to Registration 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      Zygo Corporation Profit Sharing Plan, as amended effective June
              30, 1985 (Exhibit 10.35 to the Company's Annual Report on Form
              10-K for its year ended June 30, 1985)*

    10.5      First Amendment to the Zygo Corporation Profit Sharing Plan
              (Exhibit 10.28 to the Company's Annual Report on Form 10-K for its
              year ended June 30, 1989)*


                                       33
<PAGE>


    10.6      Second Amendment to the Zygo Corporation Profit Sharing Plan
              (Exhibit 10.29 to the Company's Annual Report on Form 10-K for its
              year ended June 30, 1989)*

    10.7      Third Amendment to the Zygo Corporation Profit Sharing Plan
              (Exhibit 10.30 to the Company's Annual Report on Form 10-K for
              its year ended June 30, 1989)*

    10.8      Fourth Amendment to the Zygo Corporation Profit Sharing Plan
              (Exhibit 10.31 to the Company's Annual Report on Form 10-K for
              its year ended June 30, 1989)*

    10.9      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)*

    10.10     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)*

    10.11     Employment Agreement dated February 13, 1992, relating to the
              employment of Gary K. Willis by the Company (Exhibit 10.38 to
              the Company's Annual Report on Form 10-K for its year ended
              June 30, 1992)*

    10.12     Amendment, dated August 26, 1993, to the Employment Agreement
              dated February 13, 1992, between Gary K. Willis and the Company
              (Exhibit 10.22 to the Company's Annual Report on Form 10-K for
              its year ended June 30, 1993)*

    10.13     Second Amendment, dated March 10, 1995, to the Employment
              Agreement dated February 13, 1992, between Gary K. Willis and
              the Company (Exhibit 10.19 to the Company's Annual Report on
              Form 10-K405 for its year ended June 30, 1996)*

    10.14     Stock Purchase Agreement dated March 4, 1992, relating to the
              purchase of Company Common Stock by Gary K. Willis from
              Wesleyan University (Exhibit 10.39 to the Company's Annual
              Report on Form 10-K for its year ended June 30, 1992)*

    10.15     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)*

    10.16     Amendment Agreement dated as of December 31, 1996, between the
              Company and Paul F. Forman*

    10.17     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)*

    10.18     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)*

    10.19     Employment Agreement dated March 1, 1993, between Mark J. Bonney
              and the Company (Exhibit 10.31 to the Company's Annual Report on
              Form 10-K for its year ended June 30, 1993)*


                                       34
<PAGE>


    10.20     Amendment, dated March 12, 1996, to the Employment Agreement dated
              March 1, 1993, between Mark J. Bonney and the Company (Exhibit
              10.21 to the Company's Annual Report on Form 10-K 405 for its year
              ended June 30, 1996)*

    10.21     Termination Agreement dated November 30, 1993, covering the
              termination of the Shareholders' Agreement between Canon Inc.,
              Wesleyan University, Paul F. Forman, Carl A. Zanoni, and Sol F.
              Laufer dated October 17, 1983 (Exhibit 10.33 to the Company's
              Annual Report on Form 10-K for its year ended June 30, 1994)*

    10.22     Registration Rights Agreement dated November 30, 1993, between
              Canon Inc., Wesleyan University, Paul F. Forman, Carl A.
              Zanoni, Sol F. Laufer, and the Company (Exhibit 10.34 to the
              Company's Annual Report on Form 10-K for its year ended June
              30, 1994)*

    10.23     Renewal of Line of Credit dated June 3, 1997, between the Company
              and Fleet Bank Connecticut, N.A.*

    10.24     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)*

    10.25     Agreement and Plan of Merger, dated as of August 7, 1996, by and
              among the Company, Technical Instrument Company, Zygo Acquisition
              Corporation, Francis E. Lundy, the Lundy 1996 Charitable Trust,
              The Sherman Family Living Trust, Frank J. Scheufele Trust, David
              Lytle, and Inspectron Development Partners L.P., a California
              Limited Partnership (Exhibit 2 to the Company's Current Report on
              Form 8-K dated August 19, 1996)*

    10.26     Employment Agreement, dated August 7, 1996, between Technical
              Instrument Company and Francis E. Lundy (Exhibit 10.27 to the
              Company's Annual Report on Form 10-K 405 for its year ended June
              30, 1996)*

    10.27     Acquisition Agreement, dated August 12, 1996, among the Company,
              NX Acquisition Corporation, and NexStar Automation, Incorporated
              (Exhibit 2 to the Company's Current Report on Form 8-K dated
              September 27, 1996)*

    10.28     Employment Agreement, dated September 12, 1996, between NexStar
              Corporation and Ahmad Akrami (Exhibit 10.29 to the Company's
              Annual Report on Form 10-K 405 for its year ended June 30, 1996)*

    10.29     Acquisition Agreement dated August 19, 1997, by and among Zygo
              Corporation, Sight Systems, Inc., and the Shareholders of Sight
              Systems, Inc.*

    10.30     Stock Purchase Agreement dated September 1, 1997, between
              Technical Instrument Company and Syncotec Neue Technologien und
              Instrumente GmbH*

    10.31     Subcontract B335188 between The Regents of The University of
              California Lawrence Livermore National Laboratory and Zygo
              Corporation dated May 9, 1997*

    10.32     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*


                                       35
<PAGE>


     10.33    Employment Agreement dated August 19, 1997, between Sight Systems,
              Inc. and David Grant*

     13       Annual Report

     21.      Subsidiaries of Registrant

     23.      Accountants' Consent

     24.      Power of Attorney

     27.      Financial Data Schedule

(b) Reports on Form 8-K

     No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.








*Incorporated herein by reference.


                                       36
<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.
<TABLE>
<S>                                                                                  <C>
          ZYGO CORPORATION
----------------------------------------
              Registrant


By     /s/ KEVIN M. MCGUANE                                                          Date September 18, 1998
----------------------------------------
         Kevin M. McGuane
       Vice President Finance
</TABLE>


     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>
<CAPTION>

              Signature                                    Title
              ---------                                    -----
<S>                                     <C>                                          <C>
/s/ GARY K. WILLIS                      President, Chief Executive Officer           Date September 18, 1998
------------------------------------    and Director
        Gary K. Willis                  


/s/ KEVIN M. McGUANE                    Vice President Finance, Chief                Date September 18, 1998
------------------------------------    Financial Officer and Treasurer
        Kevin M. McGuane                


/s/ CARL A. ZANONI                      Vice President Research and                  Date September 18, 1998
------------------------------------    Development and Director
        Carl A. Zanoni


Paul F. Forman*                         Chairman of the Board
------------------------------------
        (Paul F. Forman)


Michael R. Corboy*                      Director
------------------------------------
        (Michael R. Corboy)


Seymour E. Liebman*                     Director
------------------------------------
        (Seymour E. Liebman)


Robert G. McKelvey*                     Director
------------------------------------
        (Robert G. McKelvey)


Paul W. Murrill*                        Director
------------------------------------
        (Paul W. Murrill)


John R. Rockwell*                       Director
------------------------------------
        (John R. Rockwell)


Robert B. Taylor*                       Director
------------------------------------
        (Robert B. Taylor)

*By    /s/ MARK J. BONNEY                                                            Date September 18, 1998
------------------------------------
       Mark J. Bonney
       Attorney-in-Fact
</TABLE>

                                       37
<PAGE>


                  ZYGO CORPORATION AND CONSOLIDATED SUBSIDIARY

                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

Page

F-2         Report of Management

F-3         Independent Auditors' Report

F-4         Consolidated balance sheets at June 30, 1998 and 1997

F-5         Consolidated statements of earnings for the years ended June 30,
            1998, 1997, and 1996

F-6         Consolidated statements of stockholders' equity for the years ended
            June 30, 1998, 1997, and 1996

F-7         Consolidated statements of cash flows for the years ended June 30,
            1998, 1997, and 1996

F-8 to F-21 Notes to consolidated financial statements

F-22        Selected consolidated quarterly financial data for the years ended
            June 30, 1998 and 1997


Consolidated Schedules

S-1         Independent Auditors' Report on Schedule

S-2         VIII -   Valuation and qualifying accounts

         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 MANAGEMENT

     Management is responsible for preparing the Company's financial statements
and related information that appears in this report on Form 10-K405. Management
believes that the financial statements fairly reflect the form and substance of
transactions and reasonably present the Company's financial condition and
results of operations in conformity with generally accepted accounting
principles. Management has included in the Company's financial statements
amounts that are based on estimates and judgments which it believes are
reasonable under the circumstances.

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

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

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

Kevin M. McGuane
Vice President of Finance,
Treasurer, and Chief Financial Officer


                                      F-2
<PAGE>


REPORT OF INDEPENDENT AUDITORS

THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ZYGO CORPORATION:

     We have audited the accompanying consolidated balance sheets of Zygo
Corporation and subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Zygo
Corporation and subsidiaries as of June 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998, in conformity with generally accepted accounting
principles.

KPMG PEAT MARWICK LLP

Hartford, Connecticut
August 7, 1998


                                      F-3
<PAGE>


CONSOLIDATED BALANCE SHEETS
(Thousands, except share and per share amounts)

                                                           JUNE 30,  June 30,
                                                             1998      1997
                                                           -------   -------
ASSETS
   CURRENT ASSETS:
      Cash and cash equivalents                            $22,023   $10,981
      Marketable securities (note 3)                         8,264    12,766
      Receivables (note 4)                                  16,555    20,730
      Inventories (note 5)                                  14,430    11,656
      Costs in excess of billings (note 6)                   1,182     2,082
      Prepaid expenses and taxes                               829       590
      Deferred income taxes (note 17)                        2,680     2,205
                                                           -------   -------
         Total current assets                               65,963    61,010
                                                           -------   -------
Property, plant and equipment, net (notes 7, and 11)        15,689     9,174
Goodwill and other intangibles, net (note 8)                 8,524     7,818
Other assets                                                   829       797
                                                           -------   -------
TOTAL ASSETS                                               $91,005   $78,799
                                                           =======   =======

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Accounts payable                                        $ 5,993   $ 4,659
   Customer progress payments                                  417       251
   Accrued salaries and wages                                4,214     3,581
   Other accrued expenses                                    4,911     4,414
   Income taxes payable                                        343       472
                                                           -------   -------
      Total current liabilities                             15,878    13,377
                                                           -------   -------

Deferred income taxes (note 17)                              2,961     3,014
STOCKHOLDERS' EQUITY (notes 13, 14, 15, and 16):
   Common stock, $ .10 par value per share:
      15,000,000 shares authorized; 11,217,942
      shares issued (10,765,940 in 1997)                     1,122     1,077
   Additional paid-in capital                               42,267    40,210
   Retained earnings                                        29,063    21,405
   Currency translation effects                                  1      --
   Net unrealized gain on marketable securities (note 3)        14        17
                                                           -------   -------
                                                            72,467    62,709
   Less treasury stock, at cost; 207,600 common shares         301       301
                                                           -------   -------
      Total stockholders' equity                            72,166    62,408
                                                           -------   -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                 $91,005   $78,799
                                                           =======   =======


See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>


CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                  Fiscal Year Ended June 30,
                                                             --------------------------------
                                                               1998        1997        1996
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Net sales (notes 18 and 19)                                  $ 97,871    $ 87,220    $ 57,374
Cost of goods sold                                             56,729      45,395      31,508
      Gross profit                                             41,142      41,825      25,866

Selling, general and administrative expenses                   18,354      13,830       9,500
Research and development                                        9,844       7,151       5,538
Failed merger costs                                               335        --          --
Nonrecurring acquisition-related charges                        1,585      11,083        --
Amortization of goodwill and other intangibles                    793         558        --
                                                             --------    --------    --------
      Operating profit                                         10,231       9,203      10,828
                                                             --------    --------    --------

Other income (expense):
      Interest income                                           1,100         883         946
      Interest expense (note 10)                                 --          --          --
      Miscellaneous expense, net                                 (248)        (48)       (216)
                                                             --------    --------    --------
         Total other income                                       852         835         730
                                                             --------    --------    --------
         Earnings before income taxes                          11,083      10,038      11,558

Income tax expense (note 17)                                    3,969       7,161       3,759
                                                             --------    --------    --------
Net earnings                                                 $  7,114    $  2,877    $  7,799
                                                             ========    ========    ========

Earnings per common and common equivalent share (note 14):
      Basic                                                  $   0.65    $   0.28    $   0.84
                                                             ========    ========    ========
      Diluted                                                $   0.58    $   0.24    $   0.72
                                                             ========    ========    ========
Weighted average common shares and common
 dilutive equivalents outstanding (note 14):
      Basic                                                    10,890      10,403       9,323
                                                             ========    ========    ========
      Diluted                                                  12,235      11,998      10,878
                                                             ========    ========    ========
</TABLE>


See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Thousands of dollars)
<TABLE>
<CAPTION>
                                                                                       Unrealized
                                                         Additional                  Gain (Loss) on                       Total
                                                Common     Paid-In      Retained       Marketable        Treasury     Stockholders'
                                                Stock      Capital      Earnings     Securities (1)       Stock          Equity
                                              --------- ------------ ------------- ------------------ ------------- ----------------
<S>                                           <C>        <C>            <C>            <C>               <C>            <C>      
Balance at June 30, 1995                      $    403   $ 10,726       $ 11,508       $     (3)         $   (301)      $ 22,333 
   Net earnings                                   --         --            7,799           --                --            7,799
   Shares issued for NexStar (note 2)               25      1,017           (247)          --                --              795
   Net unrealized loss on marketable                                                                                    
      securities, net of related tax effect       --         --             --              (32)             --              (32)
   Issuance of common stock (note 14)               85     22,607           --             --                --           22,692
   Exercise of employee stock options                                                                                   
      and related tax effect                         4        496           --             --                --              500
                                              --------   --------       --------       --------          --------       --------
Balance at June 30, 1996                           517     34,846         19,060            (35)             (301)        54,087
   Net earnings                                   --         --            2,877           --                --            2,877
   Shares issued for TIC (note 2)                   10      2,990           --             --                --            3,000
   Net unrealized gain on marketable                                                                                    
      securities, net of related tax effect       --         --             --               52              --               52
   Exercise of employee stock options                                                                                   
      and related tax effect                        18      2,374           --             --                --            2,392
   Stock split (note 14)                           532       --             (532)          --                --             --
                                              --------   --------       --------       --------          --------       --------
Balance at June 30, 1997                         1,077     40,210         21,405             17              (301)        62,408
   NET EARNINGS                                   --         --            7,114           --                --            7,114
   SHARES ISSUED FOR SYNCOTEC (NOTE 2)               2        621           --             --                --              623
   SHARES ISSUED FOR SIGHT SYSTEMS (NOTE 2)         29        (18)           544           --                --              555
   NET UNREALIZED LOSS ON MARKETABLE                                                                                    
      SECURITIES, NET OF RELATED TAX EFFECT       --         --             --               (3)             --               (3)
   CURRENCY TRANSLATION EFFECTS                                                               1                                1  
   EXERCISE OF EMPLOYEE STOCK OPTIONS                                                                                   
      AND RELATED TAX EFFECT (NOTE 16)              14      1,454           --             --                --            1,468
                                              --------   --------       --------       --------          --------       --------
BALANCE AT JUNE 30, 1998                      $  1,122   $ 42,267       $ 29,063       $     15          $   (301)      $ 72,166
                                              ========   ========       ========       ========          ========       ========
</TABLE>

(1)  Includes Currency translation effects.

See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>


CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
<TABLE>
<CAPTION>

                                                                   Fiscal Year Ended June 30,
                                                                --------------------------------
                                                                  1998        1997        1996
                                                                --------    --------    --------
<S>                                                             <C>         <C>         <C>     
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
   Net earnings                                                 $  7,114    $  2,877    $  7,799
   Adjustments to reconcile net earnings to cash provided by
      operating activities:
      Depreciation and amortization                                3,408       2,612       1,477
      Deferred income taxes                                       (1,103)       (255)        (67)
      Loss (gain) on disposal of assets                              (63)        298         266
      Nonrecurring acquisition-related IPR&D charges (note 2)        878      10,084        --
      Gain on sale of marketable securities                          (70)        (49)        (16)
      Changes in operating accounts:
         Receivables                                               5,002      (7,682)     (3,579)
         Costs in excess of billings                                 900      (1,830)       (252)
         Inventories                                              (2,295)       (764)     (1,519)
         Prepaid expenses and taxes                                 (234)         20         350
         Accounts payable and accrued expenses                       972      (1,244)      4,136
                                                                --------    --------    --------
      Net cash provided by operating activities                   14,509       4,067       8,595
                                                                --------    --------    --------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
   Additions to property, plant and equipment                     (9,016)     (4,723)     (2,864)
   Investment in marketable securities                            (4,479)     (3,772)    (16,986)
   Investments in other assets                                      (626)       (154)       (229)
   Acquisition of business                                        (1,268)    (11,699)       --
   Cash acquired from business                                     2,059        --          --
   Proceeds from the sale of marketable securities                 4,605       6,098         999
   Proceeds from maturity of marketable securities                 4,368       4,860       3,660
   Proceeds from sale of assets                                      230          18           4
                                                                --------    --------    --------
      Net cash used for investing activities                      (4,127)     (9,372)    (15,416)
                                                                --------    --------    --------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
   Repayments of long-term debt                                     --        (2,662)       --
   Net proceeds from issuance of common stock                       --          --        22,692
   Exercise of employee stock options                                660         499         150
                                                                --------    --------    --------
      Net cash provided by (used for) financing activities           660      (2,163)     22,842
                                                                --------    --------    --------
 Net increase (decrease) in cash and cash equivalents             11,042      (7,468)     16,021
Cash and cash equivalents, beginning of year                      10,981      18,449       2,428
                                                                --------    --------    --------
Cash and cash equivalents, end of year                          $ 22,023    $ 10,981    $ 18,449
                                                                ========    ========    ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-7


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997, and 1996

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

     The accompanying consolidated financial statements include the accounts of
Zygo Corporation and its subsidiaries (the "Zygo" or "Company"). All material
transactions and accounts with the subsidiaries have been eliminated from the
consolidated financial statements. As discussed in Note 2, all the outstanding
shares of Sight Systems, Inc. ("SSI") were acquired by the Company on August 19,
1997, in a transaction accounted for as a pooling-of-interests. The operating
results for SSI were not material to the combined results of the companies for
all prior periods. The Company, via its wholly owned subsidiary, Technical
Instrument Company, completed the acquisition of Syncotec Neue Technologien und
Instrumente GmbH ("Syncotec"), a German-based company, effective September 1,
1997. Zygo, prior to this acquisition, completed all necessary legal
requirements allowing for appropriate transfer and registration of its original
50 percent ownership on June 30, 1997.

CASH AND CASH EQUIVALENTS

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

MARKETABLE SECURITIES

     The Company considers investments in securities with maturities at the date
of purchase in excess of three months as marketable securities. Marketable
securities primarily consist of tax-exempt municipal debt securities. All
securities held by the Company at June 30, 1998 and 1997, were classified as
available-for-sale and recorded at fair value or held to maturity and recorded
at cost. Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
separate component of stockholders' equity until realized.

INVENTORIES

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

REVENUE RECOGNITION

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

DEPRECIATION

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

EARNINGS PER SHARE

     In 1997 the Financial Accounting Standards Board ("FASB") issued Statement
No. 128 "Earnings Per Share." Statement No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share exclude any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share are very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement No. 128
requirements.


                                       F-8

<PAGE>

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

--------------------------------------------------------------------------------
                                 June 30,           June 30,            June 30,
                                   1998               1997                1996
--------------------------------------------------------------------------------
Weighted average shares
outstanding                    10,890,000         10,403,000          9,323,000
Dilutive effect of stock
options                         1,345,000          1,595,000          1,555,000
                               ----------         ----------         ----------
Diluted weighted average
shares outstanding             12,235,000         11,998,000         10,878,000
--------------------------------------------------------------------------------


GAIN CONTINGENCY

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

STOCK SPLIT

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

CAPITAL STOCK

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

STOCK BASED COMPENSATION

     Stock-based compensation awards to employees under the Company's stock
plans are accounted for using the intrinsic value method prescribed in
Accounting Principals Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees" and related interpretations. The Company has adopted the
disclosure requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation.


                                       F-9

<PAGE>

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

USE OF ESTIMATES

     Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues and expenses and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

     Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("Statement 130"), was issued in 1997 and is effective for
financial statements for both interim and annual periods beginning after
December 15, 1997. Statement 130 was issued to establish standards for reporting
and display of comprehensive income and components in a full set of
general-purpose financial statements. The Company will not be required to
disclose comprehensive income until their first quarter 1999 ending September
30, 1998.

     Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information ("Statement 131"), was issued
in 1997 and is effective for financial statements for both interim and annual
periods beginning after December 15, 1997. Statement 131 was issued to establish
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The requirements for this statement will be first applicable to the
Company in the financial statements for the year ended June 30, 1999.

     Statement of Financial Accounting Standard No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits ("Statement 132"), was issued
in 1997, and is effective for fiscal years beginning after December 15, 1997.
This statement revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. The requirements for this statement will be first applicable to
the Company in the financial statements for the year ended June 30, 1999.

     Statement of Financial Accounting Standard No. 133, Accounting for
Derivative Instruments and Hedging Activities ("Statement 133"), was issued in
1998 and is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. This statement is not expected to
have an impact as the Company does not currently utilize derivatives or hedges.


                                      F-10

<PAGE>

NOTE 2: MERGERS AND ACQUISITIONS

     On August 19, 1997, the Company issued 287,400 shares of common stock in
exchange for all the outstanding shares of Sight Systems, Inc. ("SSI"). The
acquisition has been accounted for as a pooling-of-interests. The operating
results for SSI were not material; therefore, results for the prior periods were
not restated. In connection with the acquisition, $707,000 of
acquisition-related costs were incurred and have been charged to nonrecurring
acquisition expense in the first quarter of fiscal 1998. These costs consist of
legal, investment banking, and accounting fees.

     On September 1, 1997, the Company, through its Technical Instruments
subsidiary completed the purchase of the remaining 50% of Syncotec Neue
Technologien und Instrumente GmbH ("Syncotec") it did not already own. The
Company paid $2,262,000 and issued 19,432 shares of common stock, $.10 par
value, valued at $623,000. The transaction was accounted for as a purchase. The
net purchase price was allocated to the fair value net assets acquired. This
allocation resulted in a charge of $878,000 of in-process research and
development costs.

     In October 1997, the Company terminated merger talks with Digital
Instruments, Inc. resulting in a charge for failed merger costs of $335,000.

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

(Thousands of dollars)

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


     Results of operations after the acquisition date are included in the 1997
Consolidated Statements of Earnings. Fiscal 1997 sales would have been increased
$1,727,000 for the July 1, 1996 to August 8, 1996 time frame with no material
impact on earnings. The following unaudited pro forma information for 1996 has
been prepared assuming that this acquisition had taken place at the beginning of
the period. The pro forma information includes adjustments to record the
amortization of intangibles arising from the transaction, to reduce interest
income for cash used for the transaction, and to adjust income taxes for the
reduction in interest income. The unaudited pro forma financial information is
not necessarily indicative of the results of operations as they would have been
had the transactions been effected on the assumed dates.

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


                                      F-11

<PAGE>

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

NOTE 3: MARKETABLE SECURITIES

     Marketable securities at June 30, 1998, consist primarily of tax-exempt
bonds issued by various state and municipal agencies which are reported either
at fair value or at cost depending on their classification. The unrealized gain
on marketable securities of $23,413 (gross) is shown net of its related tax
effect of $9,505 as a separate component of stockholders' equity.

     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 cost, gross unrealized holding gains, gross unrealized holding losses,
and fair value for available-for-sale securities at June 30, 1998 and 1997 were
as follows:

<TABLE>
<CAPTION>
                                                     Gross             Gross
                                                   Unrealized        Unrealized
                                                    Holding           Holding            Fair
(Thousands of dollars)              Cost             Gains             Losses            Value
                                   ------          ----------        ----------          -----

<S>                                <C>                <C>               <C>             <C>
AT JUNE 30, 1998
   STATE AND LOCAL
      MUNICIPAL BONDS              $3,645             $23               $ --            $3,668
                                   ------             ---               -----           ------
At June 30, 1997
   State and local
      municipal bonds              $5,536             $29               $ --            $5,565
                                   ------             ---               -----           ------
</TABLE>


     The Company recorded gross realized gains on the maturity of investment
securities of $69,847 and $49,228 in 1998 and 1997, respectively. There were no
gross realized losses recorded in 1998 or 1997.

     Maturities of investment securities classified as available-for-sale were
as follows at June 30, 1998:

                                                                    Fair
(Thousands of dollars)                             Cost             Value
                                                 --------          -------
Due within one year                              $    --           $    --
Due after one year through five years               3,645             3,668
                                                 ========          ========
                                                 $  3,645          $  3,668
                                                 ========          ========

     Maturities of investment securities classified as held-to-maturity were as
follows at June 30, 1998:

                                                                     Fair
(Thousands of dollars)                             Cost              Value
                                                 --------          --------
Due within one year                              $  4,596          $  4,596
Due after one year through five years                 --                --
                                                 ========          ========
                                                 $  4,596          $  4,596
                                                 ========          ========


                                      F-12

<PAGE>

NOTE 4: ACCOUNTS RECEIVABLE

     At June 30, 1998 and 1997, accounts receivable, net of allowances, were as
follows:

                                         JUNE 30,           June 30,
(Thousands of dollars)                     1998               1997
                                       ------------      --------------
Trade (note 19)                             $16,890             $21,047
Other                                           419                 411
                                       ------------      --------------
                                             17,309              21,458
Allowance                                     (754)               (728)
                                       ------------      --------------
                                            $16,555             $20,730
                                       ============      ==============

NOTE 5: INVENTORIES

     Inventories at June 30, 1998 and 1997 were as follows:

                                                 JUNE 30,         June 30,
(Thousands of dollars)                             1998             1997
                                               -----------      ------------
Raw materials and manufactured parts              $  9,763          $  7,435
Work in process                                      3,723             3,248
Finished goods                                         944               973
                                               -----------      ------------
                                                   $14,430           $11,656
                                               ===========      ============

NOTE 6: COSTS IN EXCESS OF BILLINGS

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

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

                                                  JUNE 30,         June 30,
(Thousands of dollars)                              1998             1997
                                                -----------      ------------
Revenue recognized to date                         $ 20,110          $ 14,674
Billings to date                                     18,928            12,592
                                                -----------      ------------
                                                   $  1,182          $  2,082
                                                ===========      ============

NOTE 7: PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment are stated at cost. Costs of replacements and
improvements are capitalized and depreciated. Maintenance and repairs are
charged to expense as incurred. At June 30, 1998 and 1997, property, plant and
equipment, at cost, were as follows:

                                                  JUNE 30,         June 30,
(Thousands of dollars)                              1998             1997
                                                -----------      ------------
Land                                              $     814          $    650
Building                                              9,215             4,170
Machinery, equipment and office furniture            18,472            15,372
Leasehold improvements                                  326               277
Construction in progress                              1,863             1,396
                                                -----------      ------------
                                                     30,690            21,865
Less accumulated depreciation                        15,001            12,691
                                                -----------      ------------
                                                  $  15,689          $  9,174
                                                ===========      ============


                                      F-13

<PAGE>

     Building includes a $5,059,000, 35,500 square foot building addition at the
Company's Middlefield, Connecticut, location in the year ended 1998.

NOTE 8: GOODWILL AND OTHER INTANGIBLES

     The cost of intangible assets is amortized on a straight-line basis, which
ranges from 4 to 20 years. During fiscal 1998 goodwill and other intangibles
increased primarily due to additional investments in patents and the Company's
acquisition of Syncotec. These investments were partially offset by $793,000 of
amortization expense. Management evaluates, on an ongoing basis, the carrying
value of its intangible assets and makes adjustments, when impairments are
identified. Goodwill and other intangibles, net, at June 30, 1998 and 1997 were
as follows:

                                                  JUNE 30,         June 30,
(Thousands of dollars)                              1998             1997
                                                -----------      ------------
Goodwill and other intangibles                     $ 10,094            $8,594
Accumulated amortization                              1,570               776
                                                -----------      ------------
                                                   $  8,524            $7,818
                                                ===========      ============

NOTE 9: BANK LINE OF CREDIT

     The Company has a $3,000,000 unsecured bank line of credit with interest at
LIBOR plus 60 basis points (approximately 5.7% at June 30, 1998). The line of
credit is available through November 25, 1998. At June 30, 1998 and 1997, no
amounts were outstanding under the bank line of credit.

NOTE 10: LONG-TERM DEBT

     As of June 30, 1998, the Company has no long-term debt obligations.

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

     Interest payments were $0 in fiscal 1998, 1997, and 1996.

NOTE 11: LEASES

     The Company leases certain manufacturing equipment and facilities under
operating leases, some of which include cost escalation clauses, expiring on
various dates through 2002. Total rental expense charged to operations was
$569,000 in 1998, $509,000 in 1997, and $336,000 in 1996. At June 30, 1998 the
minimum future rental commitments under noncancellable leases payable over the
remaining lives of the leases were:

                                                           Minimum
                                                        Future Rental
(Thousands of dollars)                                   Commitments
                                                      ----------------
1999                                                         $ 608
2000                                                           591
2001                                                           290
2002                                                           149
                                                      ----------------
                                                            $1,638
                                                      ================


                                      F-14

<PAGE>

NOTE 12: PROFIT-SHARING PLAN

     The Company maintains a deferred profit-sharing plan under which
substantially all full-time employees of the Company are eligible to
participate. Profit-sharing expense for the years ended June 30, 1998, 1997, and
1996 amounted to $1,370,700, $2,007,600 and $1,295,600, respectively.
Profit-sharing contributions are determined annually at the discretion of the
Board of Directors.

     Effective June 30, 1985, the existing profit-sharing plan was revised and
amended to incorporate a 401(k) tax deferred payroll deduction program and an
Employee Stock Ownership Program. Under the 401(k) program, employees may
contribute a tax-deferred amount of up to 15% of their compensation, as defined.
The Company may contribute to the 401(k) program, an amount determined annually
at the discretion of the Board of Directors. The 401(k)-contribution expense for
the years ended June 30, 1998, 1997, and 1996 amounted to $603,600, $468,700,
and $333,900, respectively.

     Under the Employee Stock Ownership Program, the Company may, at the
discretion of the Board of Directors, contribute its own stock or cash to
purchase its own stock. The purchased stock's fair market value can not exceed
the maximum amount of employee stock ownership credit as determined under
Section 416 of the Internal Revenue Code. There were no purchases and no
contributions made under this program for the years ended June 30, 1998, 1997,
and 1996.

NOTE 13: STOCKHOLDERS' AGREEMENTS

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

NOTE 14: STOCKHOLDERS' EQUITY

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

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

NOTE 15: STOCK COMPENSATION PLANS

     As of June 30, 1998, Zygo Corporation has two stock based compensation
plans, which are described below. (See note 16). The Company applies APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for its plans. Since all options are granted with an exercise price
equal to the fair-market value on the date of the grant, no compensation cost
has been


                                      F-15

<PAGE>

recognized for its fixed option plans. Pro forma information regarding net
income and earnings per share is required by SFAS No. 123 "Accounting for
Stock-Based Compensation", which requires that the information be determined as
if the Company has accounted for its stock options granted in fiscal years
beginning after December 15, 1994 under the fair value method of the statement.
The fair value of options at date of grant was estimated using the Black-Scholes
model. The Company's pro forma information follows:

                                                     JUNE 30,         June 30,
(In thousands, except per share amounts)               1998             1997
                                                   -----------      -----------
Pro forma net income                                 $   5,623         $    423
Pro forma earnings per share - diluted               $     .46         $    .04


     The fair value of these options at the date of grant was estimated with the
following weighted average assumptions of 1998 and 1997:

                                                  JUNE 30,         June 30,
                                                    1998             1997
                                                -----------      -----------
Risk free rate of interest                              5.8%             6.8%
Dividend yield                                          0.0%             0.0%
Volatility Factor                                        68%              69%
Expected life of option                            6.2 YEARS        6.6 years

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

NOTE 16: STOCK OPTION PLANS

1987 STOCK OPTION PLAN AND DATA

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

<TABLE>
<CAPTION>
                                                                       JUNE 30, 1998
                                                      ----------------------------------------------
                                                                                      WEIGHTED
                                                                                       AVERAGE
                                                           SHARES                  EXERCISE PRICE
                                                      ----------------          --------------------
<S>                                                          <C>                      <C>     
Outstanding at beginning of year                             1,393,324                $ 5.6865
Granted                                                        280,500                $32.9166
Exercised                                                     (145,170)               $ 4.5445
Expired or canceled                                           (111,875)               $11.5510
                                                      ----------------
Outstanding at end of year                                   1,416,779                $ 7.2866
                                                      ================

<CAPTION>
                                                                       June 30, 1997
                                                      ----------------------------------------------
                                                                                      Weighted
                                                                                       Average
                                                           Shares                  Exercise Price
                                                      -----------------         --------------------
<S>                                                           <C>                     <C>     
Outstanding at beginning of year                              1,304,674               $ 2.1982
Granted                                                         322,500               $17.9720
Exercised                                                      (232,950)              $ 2.1436
Expired or canceled                                                (900)              $ 1.6650
                                                      -----------------
Outstanding at end of year                                    1,393,324               $ 5.6865
                                                      =================
</TABLE>


                                      F-16

<PAGE>

<TABLE>
<CAPTION>
                                                                       June 30, 1996
                                                      ----------------------------------------------
                                                                                      Weighted
                                                                                       Average
                                                           Shares                  Exercise Price
                                                      ----------------          --------------------
<S>                                                          <C>                      <C>     
Outstanding at beginning of year                             1,375,574                $ 2.0347
Granted                                                         15,500                $14.2426
Exercised                                                      (86,400)               $ 1.7554
Expired or canceled                                                 --                $    --
                                                      ----------------
Outstanding at end of year                                   1,304,674                $ 2.1982
                                                      ================
</TABLE>


1994 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN AND DATA

     The Zygo Corporation 1994 Non-Employee Director Stock Option Plan permits
the granting of non-qualified options to purchase a total of 620,000 shares
(adjusted for splits) of common stock at prices not less than the fair-market
value on the date of grant. Options become exercisable at the rate of 20% of the
shares each year commencing one year after the date of grant. The Plan, as
amended, will expire on August 25, 2004.

<TABLE>
<CAPTION>
                                                                       JUNE 30, 1998
                                                      ----------------------------------------------
                                                                                      WEIGHTED
                                                                                       AVERAGE
                                                           SHARES                  EXERCISE PRICE
                                                      ----------------          --------------------
<S>                                                          <C>                      <C>     
Outstanding at beginning of year                             450,000                  $6.2292
Granted                                                          --                   $   --
Exercised                                                        --                   $   --
Expired or canceled                                              --                   $   --
                                                      ----------------
Outstanding at end of year                                   450,000                  $6.2292
                                                      ================

<CAPTION>
                                                                       June 30, 1997
                                                      ----------------------------------------------
                                                                                      Weighted
                                                                                       Average
                                                           Shares                  Exercise Price
                                                      -----------------         --------------------
<S>                                                           <C>                     <C>     
Outstanding at beginning of year                             450,000                  $6.2292
Granted                                                          --                   $   --
Exercised                                                        --                   $   --
Expired or canceled                                              --                   $   --
                                                      ----------------
Outstanding at end of year                                   450,000                  $6.2292
                                                      ================

<CAPTION>
                                                                       June 30, 1996
                                                      ----------------------------------------------
                                                                                      Weighted
                                                                                       Average
                                                           Shares                  Exercise Price
                                                      ----------------          --------------------
<S>                                                          <C>                      <C>     
Outstanding at beginning of year                             375,000                  $ 2.0000
Granted                                                       75,000                  $24.2594
Exercised                                                         --                  $    --
Expired or canceled                                               --                  $    --
                                                      ----------------       
Outstanding at end of year                                   450,000                  $ 6.2292
                                                      ================        
</TABLE>

     The following table summarizes information about all fixed stock options
outstanding at June 30, 1998:


                                      F-17

<PAGE>

<TABLE>
<CAPTION>
                               Options Outstanding
----------------------------------------------------------------------------------------------
                                   Number            Weighted Average
          Range of               Outstanding             Remaining                Weighted
          Exercise                  as of               Contractual                Average
           Prices               June 30, 1998              Life                Exercise Price
----------------------------------------------------------------------------------------------

      <S>                         <C>                      <C>                    <C>
      $ 1.25 - $ 1.92               264,950                2.69                   $ 1.6479
      $ 2.00 - $ 2.00               856,499                5.80                   $ 2.0000
      $ 2.29 - $18.82               323,830                6.64                   $10.4179
      $20.00 - $27.38               180,000                8.08                   $23.3764
      $34.50 - $34.50                 2,000                9.10                   $34.5000
      $35.13 - $35.13               239,500                9.12                   $35.1300
      ---------------             ---------                ----                   --------
      $ 1.25 - $35.13             1,866,779                6.15                   $ 9.7567
---------------------------
</TABLE>

                               Options Exercisable
------------------------------------------------------------------------
          Range of                  Number               Weighted
          Exercise            Exercisable as of           Average
           Prices               June 30, 1998         Exercise Price
------------------------------------------------------------------------

      $ 1.25 - $ 1.92                 264,950             $ 1.6479
      $ 2.00 - $ 2.00                 610,124             $ 2.0000
      $ 2.29 - $18.82                 164,580             $ 5.9954
      $20.00 - $27.38                  54,625             $24.2991
      $34.50 - $34.50                     --              $    --
      $35.13 - $35.13                     --              $    --
      ---------------               ---------             --------
      $ 1.25 - $35.13               1,094,279             $ 3.6288


NOTE 17: INCOME TAXES

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

                                               Fiscal Year Ended June 30,
                                            ------------------------------
(Thousands of dollars)                        1998       1997         1996
Currently payable:                          ------------------------------
   Federal                                  $3,949      $5,614      $3,264
   State                                       907       1,494         910
                                            ------------------------------
                                            $4,856      $7,108      $4,174
                                            ==============================
Deferred:
   Federal                                  $(741)      $   38      $(319)
   State                                     (146)          15        (96)
                                            ------------------------------
                                             (887)      $   53      $(415)
                                            ==============================
Total income tax expense                    $3,969      $7,161      $3,759
                                            ==============================

     Income taxes paid amounted to $4,660,200 (including cash payments of
$3,426,000 and $1,234,200 of prior year overpayments applied to fiscal 1998),
$6,068,000 (including cash payments of $5,432,500 and $635,500 of prior year
overpayments applied to fiscal 1997) and $3,403,300, in fiscal 1998, 1997, and
1996, respectively.

     The total income tax expense differs from the amount computed by applying
the applicable U.S. federal income tax rate of 35% in 1998, 35% in 1997, and 34%
in 1996 to earnings before income taxes for the following reasons:


                                      F-18

<PAGE>

                                             Fiscal Year Ended June 30,
                                          ------------------------------
(Thousands of dollars)                      1998       1997         1996
                                          ------------------------------
Computed "expected" tax expense           $3,879      $3,516      $3,994
Increases (reductions) in taxes
  resulting from:
    Nondeductible acquisition-
      related charges                        458       3,634         --
    State taxes, net of federal
      income tax benefit                     495         989         537
    Tax exempt interest income              (179)       (170)      (245)
    FSC benefit                             (637)       (724)      (543)
    Other, net                               (47)        (84)         16
                                          ------------------------------
                                          $3,969      $7,161      $3,759
                                          ==============================


     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,
1998 and 1997, are presented below:

<TABLE>
<CAPTION>
                                                                JUNE 30,        June 30,
(Thousands of dollars)                                            1998            1997
                                                            ----------------------------
<S>                                                         <C>                <C>
Deferred tax assets:
   Accounts receivable, principally due to
      the allowance for doubtful accounts                   $      302         $     295
   Warranty costs                                                  413               347
   Vacation costs                                                  106               104
   Medical insurance costs                                         103               123
   Inventory valuation                                           2,003             1,386
   Unrealized loss on marketable securities                         --                --
   Other                                                            80                28
                                                            ----------------------------
                                                                 3,007             2,283
   Less valuation allowance                                         --                --
                                                            ----------------------------
   Deferred tax asset                                            3,007             2,283
Deferred tax liabilities:
   Prepaid expenses                                              (118)              (67)
   Plant and equipment, principally due
      to differences in depreciation expense                     (669)             (555)
   Intangibles                                                 (2,491)           (2,429)
   Unrealized gain on marketable securities                       (10)              (11)
   Other                                                            --              (30)
                                                            ----------------------------
   Deferred tax liability                                      (3,288)           (3,092)
                                                            ----------------------------
Net deferred tax asset (liability)                          $    (281)         $   (809)
                                                            ============================
</TABLE>


     The net current deferred tax assets and net non-current deferred tax
liabilities as recorded on the balance sheet as of June 30, 1998 and 1997 are as
follows:

                                                     JUNE 30,         June 30,
(Thousands of dollars)                                 1998             1997
                                                   -----------      ------------
Net current deferred tax asset                      $  2,680         $   2,205
Net noncurrent deferred tax liability                 (2,961)           (3,014)
                                                   -----------      ------------
Net deferred tax asset (liability)                  $   (281)        $    (809)


                                      F-19

<PAGE>

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

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

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

     Sales to Canon Inc. and to Canon Sales Co., Inc., accounted for more than
18% of total Company sales for each of the years ended June 30, 1998, 1997 and
1996. (See note 19.) During 1998, the Company recorded $8.9 million or 9% of
current year revenues with the University of California's Lawrence Livermore
National Laboratories relating to the facilitation contract. (See note 20.) For
the year ended June 30, 1996, sales to a major manufacturer of computer disk
drives and related hardware and software accounted for 16% of total Company
sales. No other individual customer accounted for more than 10% of total Company
sales for any year presented in the accompanying consolidated financial
statements.

     Export sales by geographic area were as follows:

                                              Fiscal Year Ended June 30,
(Thousands of dollars)                       1998       1997        1996
                                           ------------------------------
Far east:
Japan                                      $22,284    $21,730     $19,763
Pacific Rim                                 11,348     12,650       4,765
                                           ------------------------------
Total Far East                             $33,632    $34,380     $24,528
Europe and other                             9,387      5,145       2,667
                                           ------------------------------
Total                                      $43,019    $39,525     $27,195
                                           ==============================


NOTE 19: RELATED PARTY TRANSACTIONS

     Sales to Canon Inc., a stockholder, and to Canon Sales Co., Inc., a
distributor for certain of the Company's products in Japan and a subsidiary of
Canon Inc., amounted to approximately $17,626,000 (18% of net sales),
$17,564,000 (20% of net sales), and $19,761,000 (34% of net sales), for the
years ended June 30, 1998, 1997, and 1996, respectively.

     Selling prices of products sold to Canon Inc. and Canon Sales Co., Inc. are
based, generally, on the normal terms given to distributors. At June 30, 1998,
1997, and 1996, there was approximately, in the aggregate, $1,288,200,
$2,345,500, and $3,198,100, respectively, of trade accounts receivable from
Canon Inc. and Canon Sales Co., Inc.

     Purchases from Technical Instruments - San Francisco, a company controlled
by Francis Lundy, an officer of the Company, amounted to approximately $789,800.
Prices for products purchased are based on normal terms and conditions.


                                      F-20

<PAGE>

NOTE 20: MATERIAL CONTRACTS

     On May 9, 1997, the Company announced it had entered into a contract with
the University of California's Lawrence Livermore National Laboratory ("LLNL"),
whereby the Company will be a primary supplier of large plano optical components
for the National Ignition Facility ("NIF"), a $1.2 billion Department of Energy
project at LLNL to produce the world's largest laser for nuclear fusion
research. The contract provides for the Company to design, manufacture, and
equip a world-class optical fabrication facility at its Middlefield,
Connecticut, operations for a fixed price of nearly $10 million over an 18-month
time period. Revenues recognized on this contract in fiscal 1998 amounted to
$8,887,000. To accommodate the space required for the NIF facility and provide
additional office facilities, the Company has built a 35,500-square-foot
building addition at its Middlefield, Connecticut, site.


                                      F-21

<PAGE>


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

<TABLE>
<CAPTION>

                                                                       FOR THE FISCAL YEAR ENDED JUNE 30, 1998 (1)
                                                        ------------------------------------------------------------------------
                                                          SEPTEMBER 30(5)      DECEMBER 31        MARCH 31          JUNE 30
                                                          ---------------      -----------        --------          -------
<S>                                                           <C>                <C>               <C>             <C>     
Net sales                                                     $24,316            $27,277           $26,901         $ 19,377
Earnings (loss) before taxes and nonrecurring charges         $ 5,214            $ 5,400           $ 5,115         $ (2,726)
Income taxes                                                    1,596              1,711             1,579             (917)
                                                              -------            -------           -------         ---------
Earnings before nonrecurring charges                          $ 3,618            $ 3,689           $ 3,536         $ (1,809)
                                                              =======            =======           =======         =========
Earnings per share before nonrecurring charges: (4)

      Basic (2)                                               $  0.34            $  0.34           $  0.32         $  (0.16)(3)
                                                              =======            =======           =======         =========
      Diluted (2)                                             $  0.30            $  0.30           $  0.29         $  (0.16)(3)
                                                              =======            =======           =======         =========

Net earnings                                                  $ 1,698            $ 3,689           $ 3,536         $ (1,809)
                                                              =======            =======           =======         =========
Net earnings per share: (4)
   Basic (2)                                                  $  0.16            $  0.34           $  0.32         $  (0.16)(3)
                                                              =======            =======           =======         =========
   Diluted (2)                                                $  0.14            $  0.30           $  0.29         $  (0.16)(3)
                                                              =======            =======           =======         =========


<CAPTION>
                                                                       For the Fiscal Year Ended June 30, 1997 (1)
                                                        ------------------------------------------------------------------------
                                                          September 30(5)     December 31        March 31          June 30
                                                          ---------------     -----------        --------          -------
Net sales                                                     $18,443            $20,810          $22,476          $25,491
Earnings before taxes and nonrecurring charges                $ 4,345            $ 4,873          $ 5,771          $ 6,132
Income taxes                                                    1,206              1,774            2,078            2,103
                                                              -------            -------          -------         ---------
Earnings before nonrecurring charges                          $ 3,139            $ 3,099          $ 3,693          $ 4,029
                                                              =======            =======          =======         =========
Earnings per share before nonrecurring charges: (4)

      Basic                                                   $  0.31            $  0.30          $  0.35          $  0.38
                                                              =======            =======          =======         =========
      Diluted                                                 $  0.26            $  0.26          $  0.31          $  0.33
                                                              =======            =======          =======         =========

Net earnings                                                  $(7,944)           $ 3,099          $ 3,693          $ 4,029
                                                              =======            =======          =======         =========
Net earnings share: (4)
   Basic                                                      $ (0.77)(3)        $  0.30          $  0.35          $  0.38
                                                              =======            =======          =======         =========
   Diluted                                                    $ (0.77)(3)        $  0.26          $  0.31          $  0.33
                                                              =======            =======          =======         =========
</TABLE>

----------

(1)  The results of Sight Systems, Inc. ("SSI"), which is being accounted for as
     an immaterial pooling-of-interests, 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 1,503,200, 1,416,300, 1,253,200 and 1,584,000
     for the fiscal 1998 quarters ended September 30, December 31, March 31, and
     June 30, respectively.

(3)  Generally accepted accounting principles requires the computation of the
     net loss per share to be based on the weighted average basic shares
     outstanding.

(4)  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.

(5)  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.


                                      F-22

<PAGE>

INDEPENDENT AUDITORS' REPORT ON SCHEDULE

The Board of Directors
Zygo Corporation

     Under date of August 7, 1998, we reported on the consolidated balance
sheets of Zygo Corporation and subsidiaries as of June 30, 1998 and 1997, and
the related consolidated statements of earnings, stockholders' equity and cash
flows for each of the years in the three-year period ended June 30, 1998 as
contained in the 1998 annual report to stockholders. In the connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule listed in the accompanying
index. 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 PEAT MARWICK LLP
Hartford, Connecticut
September 23, 1998


                                       S-1

<PAGE>


<TABLE>
<CAPTION>
                            ZYGO CORPORATION AND CONSOLIDATED SUBSIDIARY

                          SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS

                              YEARS ENDED JUNE 30, 1998, 1997, AND 1996


                                          Balance                                                        Balance
                                        at Beginning                                                      at End
Description                              of Period             Provision           Write-Offs           of Period
-----------                             ------------           ---------           ----------           ---------

<S>                                      <C>                  <C>                  <C>                  <C>
YEAR ENDED JUNE 30, 1998*:
  ALLOWANCE FOR DOUBTFUL
    ACCOUNTS                             $  814,700           $  131,300           $  192,400           $  753,600

  INVENTORY RESERVE                      $1,477,450           $1,421,700           $  475,650           $2,423,500

Year Ended June  30, 1997**:
  Allowance for Doubtful
    Accounts                             $  733,000           $   15,146           $   20,146           $  728,000

  Inventory Reserve                      $1,321,850           $  395,500           $  239,900           $1,477,450

Year Ended June 30, 1996***:
  Allowance for Doubtful
    Accounts                             $  137,655           $  153,402           $   24,057           $  267,000

  Inventory Reserve                      $  419,147           $  581,253           $   85,350           $  915,050
</TABLE>

----------

*    Includes opening balances of SSI

                  Allowance for Doubtful Accounts               $ 86,700

**   Includes opening balances of TIC purchased August 8, 1996

                  Allowance for Doubtful Accounts               $466,000
                  Inventory Reserves                            $406,800

***  1996 restated to include NexStar activity 1996


                                      S-2


<PAGE>


EXHIBIT INDEX

       EXHIBIT                                                      FORM 10K-405
       NUMBER         DESCRIPION                                    PAGE NUMBER
       ------         ----------                                    -----------

       13.       Annual Report

       21.       Subsidiaries of Registrant

       23.       Accountants' Consent

       24.       Power of Attorney

       27.       Financial Data Schedule