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

FORM 10-K

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|(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, 2007                                                 
|Or         |                                                                                          |  |   
|[    ]     | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|           | For the transition period from                                                           |  | to
|          

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|---------------------------------------------------------------------------
|Commission
              file number 0-12944                               
|                                                                           
|ZYGO
              CORPORATION                                             
|(Exact
            name of registrant as specified in its charter)         
|                                                                           
|Delaware                                                                   
|(State
            or other jurisdiction of                                
|incorporation
            or organization)                                 
|                                                                           
|Laurel
              Brook Road, Middlefield, Connecticut 06455-1291       
|(Address
            of principal executive offices) (Zip Code)            
|                                                                           
|                                                                           
|(Registrant's
            telephone number, including area code:)          
|                                                                           
|Securities
                registered pursuant to Section 12(b) of the Act:
|None                                                                       
|                                                                           
|Securities
              registered pursuant to Section 12(g) of the Act:  
|Common
            Stock, $.10 Par Value                                   

Indicate by check mark if the
      registrant is a well-known seasoned issuer, as defined in Rule 405 of the
      Securities Act.
 YES
        [   ]      NO [ X ]

Indicate by check mark
      if the registrant is not required to file reports pursuant to Section 13
      or Section 15(d) of the Act.YES
      [
  ]      NO [ X ]

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(229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [
X ]

Indicate by check mark
      whether the registrant is a large accelerated filer, an accelerated filer,
      or a non-accelerated filer. See definition of accelerated filer and
      large accelerated filer in rule 12b-2 of the Exchange act. (Check
      one):Large
      accelerated filer [   ]                                    Accelerated
      filer [ X ]                                    Non-accelerated
      filer [   ]

Indicate by check mark
      whether the registrant is a shell company (as defined in Rule 12b-2 of
      the Act).   YES
      [   ]      NO [X ]

The aggregate market value of the registrants Common Stock held by non-affiliates, based upon the closing price of the Common Stock on December 31, 2006, as reported by the NASDAQ National Market, was $208,255,816. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock, based on filings with the Securities and Exchange Commission, have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

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

18,529,696 Shares of Common Stock, $.10 Par Value, at September 4, 2007

Documents incorporated by reference: Specified portions of the registrants Proxy Statement related to the registrants 2007 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 with the Securities and Exchange Commission, are incorporated by reference into Part II (Item 5) and Part III (Items 10-14) of this Annual Report on Form 10-K to the extent stated herein.

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TABLE OF CONTENTS

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|         |                                                                                                                      | Page
|-----    | Forward-Looking Statements                                                                                           | 1   
|        
|PART I   |                                                                                                                      |     
|         |                                                                                                                      |     
|Item 1.  | Business                                                                                                             | 2   
|         |                                                                                                                      |     
|-----    | Executive Officers of the Registrant                                                                                 | 9   
|         |                                                                                                                      |     
|Item 1A. | Risk Factors                                                                                                         | 11  
|         |                                                                                                                      |     
|Item 1B. | Unresolved Staff Comments                                                                                            | 14  
|         |                                                                                                                      |     
|Item 2.  | Properties                                                                                                           | 15  
|         |                                                                                                                      |     
|Item 3.  | Legal Proceedings                                                                                                    | 16  
|         |                                                                                                                      |     
|Item 4.  | Submission of Matters to a Vote of Security Holders                                                                  | 16  
|        
|PART II  |                                                                                                                      |     
|         |                                                                                                                      |     
|Item 5.  | Market for the Registrants Common Equity, Related Stockholder Matters and IssuerPurchases
     of Equity Securities | 17  
|         |                                                                                                                      |     
|Item 6.  | Selected Financial Data                                                                                              | 19  
|         |                                                                                                                      |     
|Item 7.  | Managements Discussion and Analysis of Financial Condition and Results of Operation                                 | 20  
|         |                                                                                                                      |     
|Item 7A. | Quantitative and Qualitative Disclosures about Market Risk                                                           | 28  
|         |                                                                                                                      |     
|Item 8.  | Financial Statements and Supplementary Data                                                                          | 29  
|         |                                                                                                                      |     
|Item 9.  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                                 | 29  
|         |                                                                                                                      |     
|Item 9A. | Controls and Procedures                                                                                              | 29  
|         |                                                                                                                      |     
|Item 9B. | Other Information                                                                                                    | 30  
|        
|PART III |                                                                                                                      |     
|         |                                                                                                                      |     
|Item 10. | Directors, Executive Officers and Corporate Governance                                                               | 31  
|         |                                                                                                                      |     
|Item 11. | Executive Compensation                                                                                               | 31  
|         |                                                                                                                      |     
|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters                        | 31  
|         |                                                                                                                      |     
|Item 13. | Certain Relationships and Related Transactions, and Director Independence                                            | 31  
|         |                                                                                                                      |     
|Item 14. | Principal Accountant Fees and Services                                                                               | 31  
|        
|PART IV  |                                                                                                                      |     
|         |                                                                                                                      |     
|Item 15. | Exhibits, Financial Statement Schedules                                                                              | 32  
|        
|-----    | Signatures                                                                                                           | 35  

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

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FORWARD-LOOKING STATEMENTS

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

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

1

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PART I

Item 1. Business

OVERVIEW

Zygo Corporation (ZYGO, we, us, our, or Company) designs, develops, and manufactures ultra-high precision measurement solutions to improve our customers manufacturing yields, and top-tier optical sub-systems and components for original equipment manufacturers (OEM) and end-user applications. We operate with two divisions. Our Metrology Solutions Division (also referred to herein as the Metrology segment) manufactures products to improve quality, increase productivity, and decrease the overall cost of product development and manufacturing for high-technology companies, particularly in their semiconductor manufacturing processes. Our Optical Systems Division (also referred to herein as the Optics segment) provides leading-edge product development and manufacturing services that leverage a variety of core technologies across

 medical, defense, semiconductor, laser fusion research, biomedical, and other industrial markets.

Our Metrology Solutions
      Division serves the semiconductor and industrial markets by providing process
      control for surface shape and roughness, which are critical to all of the
      our markets, through product offerings that measure surface and material
      characteristics such as roughness, figure, and transmitted wavefront of
      flat, spherical, and aspheric components. Our semiconductor product offerings
      include semiconductor metrology tools, OEM solutions, in-line automated
      yield improvement systems for both flat panel displays and advanced semiconductor
      packaging manufacturing and technology development projects for the semiconductor
      capital equipment industry. Our displacement measurement systems are used
      extensively in ultra-precise wafer positioning systems for the semiconductor
      capital equipment industry. One of our continuing strategic initiatives
      is to expand our product offerings by applying our patented technology
      to integrated in-line technology. During our fiscal year ended June 30,
      2007, we made continued progress on this initiative by expanding our semiconductor
      applications to a fully integrated wafer based metrology solution, the
      Z3D-7200, and increasing our market penetration of our integrated
      front-end tool, the Z3D-7000. Additionally, during the same period,
      we introduced the UniFire-7900 optical metrology tool which delivers
      high precision three-dimensional information that can be used for surface
      topography, critical dimension, overlay/registration, and film thickness
      metrology in one small footprint. This progress continues our transition
      from our traditional lab environment to the production floor.

Our industrial market products serve the defense/aerospace, automotive, consumer electronics, commercial optics, and all markets other than semiconductor. Industrial market products include measurement-based process control systems for defense and aerospace customers, and measurement-based process control and yield-enhancement systems for automotive, consumer electronics, and commercial optical customers. During the last two years, we introduced and marketed the VeriFire Asphere, GPI PE, GPI FlashPhase and NewView 600, systems. The VeriFire Asphere moves us into the growing asphere measurement market supporting consumer electronics and defense/aerospace markets. The GPI FlashPhase and GPI PE systems operate on the production floor where standard interferometers cannot measure or do not meet the demanding requirements of the defense/aerospace market and commercial optical markets.

Our solutions are primarily based on optical interferometric technology. We continue to be a world leader in optical interferometry with a patent portfolio of approximately 245 active and 225 pending patents, most of which are related to the broad field of interferometry and its practical application.

Our Metrology Solutions Division is headquartered in Middlefield, Connecticut with operations in various domestic and international locations.

Our Optical Systems Division specializes in producing high precision integrated optical systems and unique system-critical optical components for a variety of applications that include medical laser delivery systems, U.S Department of Defense (Defense Department) applications, 3D medical imaging, and semiconductor lithography. The division creates long-term customer value through proprietary manufacturing technology, design for manufacturing and assembly services and specialized market know-how required to produce and support Food and Drug Administration (FDA) regulated medical devices.

Our integrated system
      assembly operation for our Optical Systems Division located in Tucson,
      Arizona is a tier-one optical system assembly facility for high-precision,
      volume production. We assemble and integrate devices ranging from medical
      laser delivery systems to vacuum relay telescopes to opto-electronic surveillance
      devices. Our integrated system design and prototyping operation, located
      in Costa Mesa, California, designs and manufactures prototypes utilizing
      multi-axis alignment, optical contact assembly, custom tooling, single
      point diamond turning, and our proprietary metrology equipment. We also
      operate a large format optical fabrication and coating center located in
      our Middlefield, Connecticut facility. Our vertically integrated approach
      encompasses CNC glass machining and lightweighting, rotational and double-sided
      polishing and magneto rheological finishing polishing, and thin film coating,
      supported by our proprietary metrology equipment. Weproduce
      laser fusion amplifiers and meter-class plano optics, including low aspect
      ratio and advanced materials such as sapphire.

2

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

MARKETS, PRODUCTS, AND CUSTOMERS

During the second quarter of fiscal 2007, we reorganized the business into two operating divisions  Metrology Solutions (Metrology segment) and Optical Systems (Optics segment). Consistent with our new business structure, beginning with the second quarter in fiscal 2007, we reported our segments as Metrology and Optics. The Metrology segment consists of OEM and in-line products primarily for the semiconductor and industrial markets. The Optics segment consists of components and opto-mechanical assemblies primarily for the medical, defense, and aerospace industries, which are part of the industrial market. Prior to the second quarter of fiscal 2007, our segments were reported as Semiconductor and Industrial. Prior year segment information has been restated in a manner consistent with our new reporting segments. For more information related to our segments, please refer to Note 16 Segment reporting, to our Consolidated Financial Statements include

d in this Annual Report.

Manufacturers in the semiconductor and industrial markets strive to improve their manufacturing processes and product performance. These improvements allow them to compete more effectively in a marketplace characterized by decreasing product dimensions, increasingly complex manufacturing processes, and decreasing product life cycles, declining product prices, and intensifying global competition, among other factors. As such, our precision metrology and optical components and systems are designed to help these manufacturers continually achieve process and design improvements.

Metrology Solutions Division

Semiconductor Market

We serve several areas of the semiconductor market, notably semiconductor manufacturers, capital equipment suppliers, as well as the flat panel display and advanced semiconductor packaging. We have a broad and growing range of products that serve these market areas.

Semiconductor manufacturing processes require demanding metrology and inspection technologies. From bare silicon wafers through packaged die, metrology and inspection is critical to meeting technology development and process control demands. Recent products introduced by us are enabling high volume semiconductor manufacturing customers to address the challenges of today as well as advanced processing down to the 45 nanometer (nm) node.

All of our automated semiconductor systems are built on a common, high-throughput platform with a common, configurable sensor head. This approach allows us to leverage engineering and manufacturing investments to produce reliable and cost effective solutions for our customers. Additionally, the flexible sensor head enables our "OneShot" algorithms to provide simultaneous measurement of multiple process parameters thereby dramatically increasing process module level throughput and productivity by driving down time to decision.

Semiconductor Products

The Z3D-7000 is a non-destructive, high throughput, optical metrology system that measure 3-Dimensional features critical for transistor formation in the front end of the line (FEOL). This system is targeted to measure production wafers at the 45 nm node with state-of-the-art precision and repeatability thereby enabling development and its associated transfer to high volume manufacturing.

The Z3D-7200 addresses the bare wafer metrology and inspection market by enabling control of critical parameters such as surface roughness, wafer form, and general topography. With its multifunction capability, this system consolidates a number of different metrology measurements into one system, thereby eliminating the need to purchase multiple tools from different suppliers; the end result being a lower overall cost of ownership (COO) for the customer.

Building on lower COO, the UniFire 7900
    enables multiple back end of the line (BEOL) litho and etch measurements
    to be made under the umbrella of a single system. These measurements include
    3-Dimensional information about surface topography, critical dimension, overlay/registration,
    and film thickness. The UniFire 7900 exploits our "OneShot" technology by
    simultaneously measuring multiple parameters without any loss in measurement
    precision. This multi-function tool enables semiconductor manufacturers
to consolidate multiple metrology tools in their litho and etch modules, thus
    saving valuable cleanroom real estate and reducing overall metrology costs.

3

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Photolithography scanners
form the core of the semiconductor manufacturing process. These scanners image
the patterns of stacked layers of circuitry that make up transistors. The
photolithographic scanners image the circuitry onto both silicon wafers for
microprocessors and memory chips and also flat panel displays for computers,
televisions, and other displays. Several of our products enable these scanners
to image these circuit patterns reliably and with nanometer
precision.

Precision Positioning
Systems

The layers of circuit
patterns must overlay on top of each other to nanometer precision. To achieve
nanometer precision overlay, the silicon wafer must be repeatably positioned to
one-tenth the overlay tolerance. Photolithography scanners, mask and reticle
writers, and yield improvement metrology tools rely on displacement measuring
interferometers (DMI) to provide precise feedback to control the position of
the silicon wafer. Our Metrology Solutions Divisions ZMITM 2000 and ZMITM 4000
precision positioning feedback systems are designed primarily for
photolithography scanners. They are also used in a broad range of semiconductor
metrology and backend process tools.

Technology Development
Projects

Lithography scanners image
the electronic circuit pattern through a precision projection lens. The optical
performance of the lenses required for next-generation lithography scanners
often exceeds the capabilities of commercially available measurement systems.
Our expertise in optical interferometer technology, and the practical skills
needed to apply this technology, make us well suited to deliver custom solutions
to leading photolithography equipment suppliers.

Display
Solutions

Flat panel displays (FPD)
first were used in cell phones and laptop computers, and have grown in
popularity for most personal electronics. Many large screen televisions are
based on flat panel display technology. Our systems, with ultra high precision
measurement solutions, enable our customers to improve flat panel display
manufacturing yields. Our OneShot and SureShotTM systems are in-line process
control, yield enhancement tools. The FPD OneShot tool measures the topography
and critical dimensions (CD) of key color filter features prior to being
combined with the thin-film-transistor panel in the one drop fill assembly
process. This fully automated system incorporates the latest ZYGO Intellisensor,
optical profiler technology, integrated conveyors or robotics with motion
stages, mini-clean room environmental enclosures, and factory floor command and
control software. The system measures the height and width of key optical
components, and predicts the fill volume to increase upstream manufacturing
yields.

The SureShotTM FPD product
provides overlay and CD metrology of the individual mask layers post lithography
and helps identify process control problems such as those found in the half tone
process. These defects, left unchecked, can lead to product performance issues
including variances in illuminescence (called MURA) in the finished
display.

The SureShot tool can be
used as an off-line process analysis device, or in-line in conjunction with
closed loop lithography process control.

Advanced Chip
Packaging and Assembly

During the manufacture of a
semiconductor chip, after the chip making process is complete, the silicon wafer
on which the chips are fabricated must be diced into individual chips and
packaged for customer use. In advanced chip packaging fabrication facilities,
the new CP 6300iTM system measures patterned features and films on the surfaces
of diced and un-diced chips, for process control and yield improvement. The
system incorporates a specialized ZYGO NewViewTM optical profiler and wafer
positioning system with pattern recognition software. It can be configured for
clean room or laboratory use.

|                                                     |                           
|---------------------------------------------------- | --------------------------
|Major
    Metrology Semiconductor Customers include: |                           
|Applied
        Materials                            | Intel                     
|AU
        Optronics                                 | KLA-Tencor
    Corporation
|Canon                                                | Nikon                     
|Chi
        Mei                                      |                           



4

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Industrial
Market

Our industrial market covers
all areas other than semiconductor. Products for defense and aerospace companies
include optical components, optical systems, and measurement-based process
control systems. Products for automotive, consumer electronics and other
customers are measurement-based process control and yield enhancement
systems.

Consumer
Electronics

Consumer electronics,
including cell phones, digital cameras, DVD and CD players, and optical computer
drives, all have significant optical content. Consumer electronic optics, which
provides imaging and data storage, are manufactured in quantities in the
hundreds of thousands to millions of components per year. These complex
miniature optical systems require precise optical testingfrom development to
in-line process controlwhich our measurement-based process control and yield
enhancement systems are designed to perform.

VeriFire Asphere
System

The VeriFire Asphere
provides high resolution 3-Dimensional surface metrology for aspheric shaped
surfaces using patented non contact interferometric techniques for production
and process control. Aspheres are important in consumer electronics products,
cameras, military/defense optics and commercial optics and represent a fast
growing segment in optics today.

GPI and VeriFire
Systems

The development of new
optical systems for any application requires very flexible and easy to use test
equipment. The ZYGO GPI and VeriFire systems are our latest products in our
established product family that has improved optical testing and continues to
evolve to meet changing requirements. Consumer electronics production
applications for larger optics, greater than 25 mm diameter, and research and
development for any size application rely on these products for critical
developmental data and process control feedback in production. These products
are widely used due to their configuration flexibility in both hardware set ups
and ZYGOs MetroProTM data analysis software.

PTI 250TM

Consumer electronics
typically contain small optics, less than 30 mm diameter. The PTI 250 is a small
bench top optical test system in the tradition of our industry standard GPI. The
system meets the consumer market demand by combining high-quality optics with
ZYGOs MetroPro data analysis software.

DVD 400TM, BluRayTM, and HD
DVDTM

The next generation of DVD
players and computer memories are expected to use blue light at 405 nm
wavelength to increase the amount of data on a DVD disk. ZYGOs DVD 400
interferometer is used by the developers of these next generation systems.
ZYGOs DVD 400P is our system for the production floor.

Automotive
Industry

The automotive industry is
striving to improve fuel economy and decrease environmental pollution to meet
customer demand and adhere to government regulation. Improving both requires
more efficient engines, including the fuel injection system. Since high-pressure
valves and sealing surfaces found in the fuel injection system must be
manufactured to high precision, our measurement-based process control and
yield-enhancement systems are used in the development and manufacture of these
components.

NewViewTM 6200/6300 and
DeltaTM Systems

Our high precision metrology
equipment is well suited for fuel injector components, which are ground or
lapped to tolerances of one-hundred billionths of a meter. Our patented FDA
data acquisition system for the NewView optical profiler meets this
high-precision measurement requirement. We recently introduced the NewView 6200
and NewView 6300 for these applications, offering increased speed and better
performance at a lower price point. The NewView Delta is a production floor
packaged system, also targeted to this growing market.

Defense/Aerospace

GPI and VeriFire
Systems: Developing
state-of-the-art optical designs and manufacturing technology for the
defense/aerospace market also requires leading metrology systems for
manufacturing process control and development. Our industry standard GPI and
VeriFire optical interferometers test both the optical components and systems
for design compliance. During the last two years, we introduced and marketed the
VeriFire Asphere, GPI PE and GPI FlashPhase

5

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systems. The VeriFire
Asphere rapidly measures asphere shaped optics in a production environment. The
GPI PE continues our move to the production floor providing lab level results in
a production environment. Using patented algorithms the GPI PE removes the
degrading effects of vibration from the measurement without the need for new
expensive hardware. This system is primarily used in the production of military
and commercial optics.

The GPI FlashPhase system
operates on the production floor where standard interferometers cannot measure
or do not meet the demanding requirements of the defense/aerospace market. With
our proprietary data acquisition, GPI FlashPhase can measure in the turbulent
and vibrating environments that are often found in defense/aerospace
applications. We are also active in designing and manufacturing custom systems
for defense/aerospace applications, especially interferometers that operate at
infrared wavelengths, which are unique to this market.

|                                                    |                
|--------------------------------------------------- | ---------------
|Major Metrology Industrial Customers
      include: |                
|Bosch                                               | Goodrich       
|Canon                                               | Lockheed Martin
|Corning                                             | Raytheon       

Optical Systems Division

Industrial Market

Supporting both the projection lens and
stage positioning systems, we supply OEM optical components to leading
photolithographic suppliers. The core of the wafer stage positioning system is
the stage mirror. ZYGO manufactures stage mirror assemblies that are part of the
stage positioning system, and various OEM optical components for projection
optical systems.

Defense/Aerospace

Defense and aerospace companies use
optical technology in a broad range of applications. One application is the
enhancement of human sight through imaging systems, such as telescopes, that are
used in satellite and airborne reconnaissance, fire-control systems, and
hand-held viewers. Defense Department areas of focus include fire control,
remote sensing, flight simulation, avionics, tracking, stealth systems and high
energy weapon systems. Our Optical Systems Division participates in a variety of
defense applications ranging from high performance sapphire electro magnetic
interference (EMI) windows used in stealth aircraft and ships to satellite
optical sensing packages and state of the art flight simulation helmet mount
displays. In addition to mainstream Defense Department and foreign government
applications, we are a leading manufacturer of several critical path components
to the largest nuclear research laser system ever deployed by the National
Ignition Facility (NIF), which is used for both weapons maintenance programs
and the development of nuclear fusion energy sources. In addition, our Optical
Systems Division has expanded into long range surveillance systems valuable to
home land security applications such as nuclear power plant perimeter control,
border surveillance, and seaport monitoring.

Nuclear research for both weapons
maintenance programs and the development of nuclear fusion energy sources also
use large optical lasers at a number of worldwide facilities, including the NIF.
In addition, projection systems in computer-based flight and battlefield
simulation use sophisticated optical systems. Several of our products support
these and other defense/aerospace programs.

Medical/Biomedical

The medical and biomedical markets are
growing rapidly. The increased demand for high precision medical devices
continues to be driven by an aging population and consumers desire to improve
the quality of life. Our Optical Systems Division addresses this demand with
specialized design for manufacturing and assembly services tailored to producing
high-end diagnostic, processing and surgical devices. In addition the group
offers a variety of process control advantages including medical device quality
management systems, such as ISO 13485:2003. Key application areas are diagnostic
and surgical ophthalmic devices, inter-oral 3D imaging, and biomedical cell
sorting. Supporting these applications are our facilities in Tucson, Arizona
(manufacturing) and Costa Mesa, California (development and prototype
manufacturing). Strategically located, these facilities are capable of providing
highly focused engineering support to fast growing medical and biomedical
regions for both manufacturing and research.

|                                               |                            
|---------------------------------------------- | ---------------------------
|Major
    Optics Industrial Customers include: |                            
|AWE                                            | University
    of Rochester
|Intralase                                      | Zeiss                      
|Lawrence
        Livermore National Laboratory |                            



6

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Competition

The semiconductor and industrial markets
in which we participate are intensely competitive and are characterized by price
pressure and rapid technological change. Furthermore, these markets are
dominated by a few market leaders. We are one of a limited number of companies
that develop and market yield-enhancement solutions. Our primary yield
enhancement competitors include Agilents Laser Interferometer Positioning
Systems Division, Veecos Metrology Division, SNU Precision, KLA-Tencor, and
Rank Taylor Hobson. The principal factors upon which we compete are performance,
flexibility, value, on-time delivery, responsive customer service and support,
and breadth of product line.

Research, Development and Engineering
Operations

We operate in industries that are subject
to rapid technological change and engineering innovation. As such, we dedicate
substantial resources to research and development. At June 30, 2007, we employed
130 individuals or approximately 22% of our workforce within our research and
development and engineering operations. Our strategy is to form close technical
working relationships with customers and OEM suppliers in our markets to ensure
that our products are commercially relevant. We also maintain a close working
relationship with various research groups and academic institutions in the
United States and abroad. We have been recognized as an innovator in
commercializing technology, as evidenced by our numerous achievement awards,
including R&D 100 Awards, Photonics Spectra Circle of Excellence Awards, and
others. We believe that continued enhancement, development, and
commercialization of new and existing products and systems are essential to
maintaining and improving our leadership position.

Patents and Other Intellectual Property

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

Since we introduced the first optical
interferometer in 1972, we have had approximately 235 United States patents
issued, of which approximately 180 are currently active, and approximately
100foreign
patents issued, of which approximately 65 are active. We have approximately
75United
States and approximately 150foreign patent applications pending. In addition, we have a
number of registered and unregistered trademarks.

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

BACKLOG AND ORDERS

Backlog at June 30, 2007 was $72.2
million, a decrease of $8.6million, or 11%, as compared with $80.8 million at June 30,
2006. The fiscal 2007 year-end backlog consisted of $29.5 million, or 41%, in
the Metrology segment and $42.7 million, or 59%, in the Optics segment. Orders
for the fiscal year ended June 30, 2007 totaled $172.5 million and consisted of
$116.4million, or 67%, in the Metrology segment and $56.1 million, or 33%, in
the Optics segment.

MARKETING AND SALES

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

7

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

|                     |                                |   |      |     |      |  |     |  
|-------------------- | ------------------------------ | - | ---- | --- | ---- |  | --- | -
|                     | Fiscal Year Ended June
    30,
|                     | 2007                           |   | 2006 |     | 2005
|Domestic             | 39                             | % |      | 35  | %    |  | 34  | %
|Far
      East:      |                                |   |      |     |      |  |     |  
|Japan                | 37                             | % |      | 45  | %    |  | 43  | %
|Pacific
      Rim    | 13                             | % |      | 11  | %    |  | 12  | %
|Total Far
      East | 50                             | % |      | 56  | %    |  | 55  | %
|Europe               | 11                             | % |      | 9   | %    |  | 11  | %
|Total                | 100                            | % |      | 100 | %    |  | 100 | %

Customer service is an
essential part of our business since product up time is critical given its
effect on our customers production efficiency. As of June 30, 2007, our global
sales customer support and service organization consisted of 95 people skilled
in sales, marketing, optical and electro component repair, software, application
and system integration, diagnostics, and problem-solving capabilities.

MANUFACTURING, RAW
MATERIALS, AND SOURCES OF SUPPLY

Our principal manufacturing
activities are conducted at our facilities in Middlefield, Connecticut and
Tucson, Arizona. We also perform manufacturing activities in our Delray Beach,
Florida facility and utilize a third-party assembly operation in Taiwan for our
Flat Panel Display systems.

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

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

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

8

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AVAILABLE INFORMATION

We make available free of charge through our website, www.zygo.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC). These reports may also be obtained without charge by contacting Investor Relations, Zygo Corporation, Corporate Headquarters, Laurel Brook Road, Middlefield, Connecticut 06455-1291, phone: (860) 347-8506. Our Internet website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K. In addition, the public may read and copy any materials we file with the SECs Public Reference Room at 100 F Street,

 NE, Room 1580, Washington, DC 20549 or may obtain information by calling the SEC at 800-SEC-0330. Moreover, the SEC maintains an Internet website that contains reports, proxy, and information statements, or other information regarding reports that we file electronically with them at http://www.sec.gov.

EMPLOYEES

At June 30, 2007, we employed 575 people and 22 temporary agency and independent contractors worldwide. We employed 284 in manufacturing, 130 in research and development, 95 in sales and marketing, and 88 in management and administration. Our employees are not represented by a labor union or a collective bargaining agreement. We regard our employee relations as satisfactory.

EXECUTIVE OFFICERS OF THE REGISTRANT

J.
        Bruce Robinson  age 65  Chairman and Chief Executive Officer

Mr.
          Robinson has served as our Chairman and Chief Executive Officer since
          December 2006, as Chairman, President, and Chief Executive Officer from
          November 2000 to November 2006, as President and Chief Executive Officer
          from November 1999 to November 2000, and as President from February 1999
          to November 1999. Previously, he spent 25 years with The Foxboro Company,
          where his most recent positions were President Worldwide Operations from
          1996 to 1998 and President of European Operations from 1990 to 1996.
          Mr. Robinson is also a director of our company .

Walter A. Shephard  age 53  Vice President, Finance, Chief Financial Officer, and Treasurer

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

James R. Northup  age
      46 - President Metrology Solutions Division

Mr.
        Northup joined our company in October 2006 and has served as President,
        Metrology Solutions Division since December 2006. Previously, he served
        as Executive Vice President of Sales and Marketing and then Chief Operating
        Officer for Toppan Photomasks, Inc. (formerly DuPont Photomasks), a worldwide
        manufacturer of photomasks used in the manufacture of integrated circuits,
        from January 2002 to July 2006. From July 2000 to January 2002, he served
        as a consultant and as CEO of Gray Scale Technologies, a start-up company
        specializing in thin film technology serving the semiconductor industry.
        From April 1990 to July 2000, he held various management positions at Photronics,
        most recently as President.

John M. Stack  age
        42 - President Optical Solutions Division

Mr. Stack joined our company in November 2006 and has served as President of the Optical Systems Division since December 2006. Previously he spent 18 years with Edmund Optics Inc., a supplier of optics and optical components, where his most recent position was President and Chief Operating Officer from 2001 to 2006. Prior to that Mr. Stack held several management positions at Edmund Optics Inc. including Executive Vice President, Director of Engineering and Application Engineering Manager.

Douglas J. Eccleston  age 58  Senior
        Vice President, Precision Positioning Systems

Mr. Eccelston has served as Senior Vice President, Precision Positioning Systems since February 2007 and as Vice President, Precision Positioning Systems since from March 2003 to January 2007. Previously, from 1977 to 2002, he held various management positions with Corning Incorporated, including most recently as a Business General Manager for the Photonic Technologies division.

Brian J. Monti  age
        51  Senior
        Vice President, Display Solutions

Mr.
          Monti has served as Senior Vice President, Display Solutions since February
          2007. Previously, he served as Vice President, Worldwide Sales and Marketing
          from July 1999 to January 2007, Vice President, Sales, Service and Marketing
          for Radiometric Corporation from 1998 to 1999. From 1984 to 1998, Mr.
          Monti held various positions for Honeywell Measurex including Vice President,
          Sales, Service and Marketing.

9

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Carl A. Zanoni - age 66 -
Senior Vice President, Technology

Dr. Zanoni
  has served as  Senior Vice President, Technology since November 2001. Previously,
  he served as  our Vice President, Technology from June 1998 to November 2001,
  and Vice  President, Research, Development and Engineering from April 1992 to
  June 1998.  Dr. Zanoni is a co-founder of our company and is also a director.

William H. Bacon  age 57
 Vice President, Corporate Quality and Support Services

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

David J. Person - age 59
- Vice President, Human Resources

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

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

10

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Item 1A. Risk Factors

We are subject to numerous
known and unknown risks, many of which are described below and elsewhere in this
Annual Report. Any of the events described below could have a material adverse
effect on our business, financial condition and results of operations.
Additional risks and uncertainties that we are not aware of, or that we
currently deem to be immaterial, could also impact our business and results of
operations.

We are dependent on the
       semiconductor industry, which, as a whole, is volatile.

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

We have been dependent
      on  sales to one large customer; the loss of this customer or expected
      near-term  reduction in orders from this customer would materially affect
      our sales.

During fiscal
        2007, 2006,  and 2005, sales to Canon, our largest customer in those periods,
        accounted for  27%, 36%, and 37% of our net sales, respectively. We expect
        that sales to Canon  will continue to represent a significant, yet declining,
        percentage of our net  sales for the near future. Canon is an original
        investor in our company, the  owner at June 30, 2007 of approximately 7%
        of our outstanding shares of common  stock, and is a distributor of certain
        of our products in the Japanese market. A  reduction or delay in orders
        from this customer, including reductions or delays  due to market, economic,
        or competitive conditions in the industries in which we  or our customer
        serves, could have a material adverse effect upon our results of  operations.
        Our customers, including Canon, generally do not enter into  long-term
        agreements obligating them to purchase our products.

We have generated
significant revenues from development agreements which have been completed this
       year and we may not be able to replace those revenues.

During
         fiscal 2007, 2006,  and 2005, we recorded revenues from development services
         of $4.1 million, $20.0  million, and $15.6 million, respectively. The
         existing development service  agreements were completed in fiscal 2007.
         Presently, we have no plans and know  of no plans from our customers that
         would continue our development services  revenue in fiscal 2008. To the
         extent that we are unable to replace these  revenues with revenues from
         another source, our earnings could be adversely  affected.

Our substantial
international sales are subject to risk.

We
  sell our products  internationally, primarily to customers in Japan and throughout
  the Pacific Rim.  Net sales to customers outside the United States accounted
  for approximately  61%, 65%,
  and 66% of our net sales in each of the fiscal years  ended June 30, 2007, 2006,
  and 2005, respectively, and are expected to continue  to account for a substantial
  percentage of our net sales.

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

Our sales and costs are
negotiated and paid primarily in U.S. dollars. However, changes in the values of
foreign currencies relative to the value of the U.S. dollar can render our
products comparatively more expensive to the extent locally produced alternative
products are available. Such conditions could negatively affect international
sales of our products and foreign operations, as would changes in the general
economic conditions in those markets. For our sales that are based in local
currency, we are exposed to foreign exchange fluctuations from the time
customers are invoiced in local currency until collection occurs. For fiscal
2007, approximately 21% of our sales were denominated in foreign currencies. In
the third quarter of fiscal 2005, we began hedging certain intercompany
transactions by entering into forward contracts to reduce the impact of adverse
fluctuations on earnings associated with foreign currency exchange rate changes.
We do not enter into any derivative transactions for speculative purposes. These
contracts are entered into for periods consistent with the currency transaction
exposures, generally three to six months. Generally, any gains and losses on the
fair value of these contracts are expected to be largely offset by gains and
losses on the underlying transactions. There can be no assurance that risks
inherent in international sales and foreign operations will not have a material
adverse effect on our results of operations in the future.

11

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Future acquisitions may
entail certain operational and financial risks.

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

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

Our quarterly operating
results fluctuate and may continue to fluctuate in the future.

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

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

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

Our scheduled backlog may
not result in future sales.

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

Our lengthy sales cycle
could affect our manufacturing schedule and cause us to incur expenses without
       realizing sales.

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

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

12

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We face risks associated
with manufacturing forecasts.

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

Our stock price may
fluctuate significantly due to a variety of risks.

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

We operate in a highly
competitive industry.

We face competition
  from a  number of companies in all our markets, many of which have greater manufacturing
   and marketing capabilities, and greater financial, technological, and personnel
   resources. In addition, we compete with the internal development efforts of
  our  current and prospective customers, some of which may attempt to become
  vertically integrated. Our competitors can be expected to continue to improve
   the design and performance of their products and to introduce new products with
   competitive price/performance characteristics. Competitive pressures may
  necessitate price reductions, which can adversely affect results of operations.
   Although we believe that we have certain technical and other advantages over
   some of our competitors, maintaining such advantages will require a continued
   high level of investment by our company in research and development and sales,
   marketing, and service. There can be no assurance that we will have sufficient
   resources to continue to make such investments or that we will be able to make
   the technological advances necessary to maintain such competitive advantages.
  In  addition, due to historical relationships and possible prior investments
  by  potential customers in competitive product lines, it may be more difficult
  for  us to realize upon certain of our growth strategies and initiatives. There
  can  be no assurance that the basis of competition in the industries in which
  we  compete will not shift.

Our inability to
anticipate and keep pace with rapidly changing technological developments in
      the  markets in which we operate could have a material adverse effect on
      our  business.

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

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

We may be unable to
enforce or defend our ownership and use of proprietary technology.

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

13

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Our business depends on
management and technical personnel who are in great demand.

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

We are exposed to
significant delays and additional costs if we do not receive adequate or timely
supplies of raw materials and other supplies upon which we depend.

We
         are dependent on  suppliers for raw materials and various electrical,
         mechanical, and optical  supplies. Although we enter, either directly
         or through our contract  manufacturers, into purchase orders with our
         suppliers based on our forecasts,  we do not have any guaranteed supply
         arrangements with these suppliers.  Moreover, as our demand for supplies
         increases, we may not be able to obtain  these supplies in a timely manner.
         If any relationship with a key supplier is  terminated or if a supplier
         fails or is unable to provide reliable services or  equipment and we are
         unable to reach suitable alternative solutions quickly, we  may experience
         significant delays and additional costs in the manufacturing of  our products.
         If our key suppliers cease manufacturing the supplies we require,  if
         their manufacturing operations are interrupted for any significant amount
         of  time, or if they are unable or unwilling to supply us for any other
         reason,  including capacity constraints, then we may be at least temporarily
         unable to  obtain these supplies, thus exposing us to significant delays
         and additional  costs. Currently there are only a limited number of companies
         that are capable  of supplying optical materials in the quantity and of
         the quality we require.

We recently began to
assemble our FPD systems in Taiwan through a third party. We are dependent on
the third party to assemble the systems accurately and on a timely basis. To the
extent the quality of work, including any individual unit, causes delays or
cancellations in shipments to our customers, our results could be adversely
affected.

Our products may contain
defects that are undetected until after our products are installed which may
       lead to a loss of reputation and customers.

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

We may be unprepared for
changes to environmental laws and regulations and may have liabilities arising
from environmental matters.

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

Our investments in
marketable securities may lose their value if economic conditions were to
deteriorate.

Our marketable securities
  represent approximately 25% of our total assets. To the extent credit markets
   tighten, interest rates increase, or other economic conditions influence the
   liquidity of our marketable securities, the value and liquidity of our
  marketable securities may be adversely affected. In addition, we may have to
   record an impairment charge for marketable securities if we determine that a
   permanent decline in the fair value of a marketable security has taken
  place.

Item 1B. Unresolved Staff
Comments

We have received no written comments
  regarding our periodic or current reports from the staff of the SEC that were
  issued 180 days or more preceding the end of our fiscal year 2007 that remain
  unresolved.

14

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Item 2.
Properties

We own our principal
manufacturing facility and corporate headquarters, which is located on Laurel
Brook Road in Middlefield, Connecticut. This facility consists of one
153,500-square-foot building on approximately 13 acres. The following table sets
forth information with respect to our facilities which are used by both of our
operating segments, except as identified otherwise below:

|                                              |                      |  |                      |  |                        
|--------------------------------------------- | -------------------- |  | -------------------- |  | -----------------------
|                                              | Square
      Footage |  | Owned /
      Leased
|Operation/Location                            | Manufacturing        |  | Total                |  | Expiration Date        
|Corporate
      Headquarters,                 |                      |  |                      |  |                        
|Eastern
      Regional Sales Office, and      |                      |  |                      |  |                        
|Metrology
      and Optics                    |                      |  |                      |  |                        
|Manufacturing                                 |                      |  |                      |  |                        
|Middlefield,
      Connecticut                | 89,000               |  | 153,500              |  | Owned                  
|                                              |                      |  |                      |  |                        
|Zygo -
      Optical Systems                  |                      |  |                      |  |                        
|Tucson,
      Arizona                         | 14,560               |  | 22,560               |  | Leased -
      08/31/11
|                                              |                      |  |                      |  |                        
|Flat Panel
      Display Metrology            |                      |  |                      |  |                        
|Engineering
      & Manufacturing             |                      |  |                      |  |                        
|Delray Beach,
      Florida                   | 4,286                |  | 10,323               |  | Leased -
      06/30/09
|                                              |                      |  |                      |  |                        
|Zygo -
      Optical Systems                  |                      |  |                      |  |                        
|Costa Mesa,
      California                  | 0                    |  | 13,714               |  | Leased -
      10/18/07
|                                              |                      |  |                      |  |                        
|Western
      Regional Sales Office           |                      |  |                      |  |                        
|and R&D
      Center                          |                      |  |                      |  |                        
|Sunnyvale,
      California                   | 0                    |  | 7,390                |  | Leased -
      10/31/08
|                                              |                      |  |                      |  |                        
|Semiconductor Process Metrology Office        |                      |  |                      |  |                        
|Beaverton,
      Oregon                       | 0                    |  | 2,496                |  | Leased -
      10/01/07
|                                              |                      |  |                      |  |                        
|Zygo -
      Laser Technology Metrology (R&D) |                      |  |                      |  |                        
|Watsonville,
      California                 | 0                    |  | 1,452                |  | Leased -
      04/14/08
|                                              |                      |  |                      |  |                        
|Office                                        |                      |  |                      |  |                        
|Franklin,
      Massachusetts                 | 0                    |  | 400                  |  | Leased -
      06/30/08
|                                              |                      |  |                      |  |                        
|Zygo PTE
      Ltd                            |                      |  |                      |  |                        
|Singapore                                     | 0                    |  | 803                  |  | Leased -
      01/14/10
|                                              |                      |  |                      |  |                        
|Zygo
      Taiwan                             |                      |  |                      |  |                        
|Sales
      Office                            | 0                    |  | 3,961                |  | Leased -
      12/31/08
|Service
      Office                          | 0                    |  | 2,772                |  | Leased -
      04/30/08
|                                              |                      |  |                      |  |                        
|ZygoLOT                                       |                      |  |                      |  |                        
|Germany                                       | 0                    |  | 3,702                |  | Leased -
      10/01/07
|                                              |                      |  |                      |  |                        
|Zygo
      KK                                 |                      |  |                      |  |                        
|Japan                                         | 0                    |  | 1,053                |  | Leased -
      01/31/09
|                                              |                      |  |                      |  |                        
|Zygo
      China                              |                      |  |                      |  |                        
|China                                         | 0                    |  | 1,610                |  | Leased -
      08/15/07
|                                              |                      |  |                      |  |                        
|Zygo
      Korea                              |                      |  |                      |  |                        
|Korea                                         | 0                    |  | 1,507                |  | Leased -
      04/12/09
|                                             
|Total                                         | 107,846              |  | 227,243              |  |                        

15

---



Item 3. Legal Proceedings

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

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

None.

16

---



PART II

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our shares of common stock are traded over-the-counter
and are quoted on the NASDAQ/National Market under the symbol ZIGO. The
following table provides information about the high and low sales prices of the
 Companys common stock by quarter for fiscal 2007 and 2006.

|               |  |                                 |  |                                 |  |        |  |       
|-------------- |  | ------------------------------- |  | ------------------------------- |  | ------ |  | ------
|              
|              
|               |  | Fiscal Year Ended June 30, 2007 |  | Fiscal Year Ended June 30, 2006
|               |  | High                            |  | Low                             |  | High   |  | Low   
|First quarter  |  | $17.21                          |  | $12.34                          |  | $15.72 |  | $9.65 
|Second quarter |  | $17.35                          |  | $12.16                          |  | $16.44 |  | $12.95
|Third quarter  |  | $17.00                          |  | $14.83                          |  | $18.83 |  | $13.93
|Fourth quarter |  | $16.55                          |  | $14.20                          |  | $19.75 |  | $14.05
|              

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

The number of record holders of our common stock at September 4, 2007 was 603. Our closing stock price as of June 30, 2007 was $14.29.

We have never declared or paid a cash dividend on our capital stock and do not anticipate paying any cash dividends in the foreseeable future.

We at times grant restricted stock awards. These awards generally allow recipients to sell a portion of the stock award back to us, in order to cover tax liabilities resulting from the award. In fiscal 2007, at the election
of various employees, we made the following repurchases of restricted stock.

|                                    |  |                  |  |               
|----------------------------------- |  | ---------------- |  | --------------
|                                    |  | Total number of  |  | Average price 
|Period                              |  | shares purchased |  | paid per share
|                                   
|July 1, 2006 - September 30, 2006   |  | -                |  | $0.00         
|October 1, 2006 - December 31, 2006 |  | -                |  | $0.00         
|January 1, 2007 - March 31, 2007    |  | 2,654            |  | $15.19        
|April 1, 2007 - June 30, 2007       |  | 427              |  | $15.12        

Restricted stock repurchases in the fourth quarter of fiscal year 2007 were as follows:

|                               |  |                  |  |                |  |                     |  |                       
|------------------------------ |  | ---------------- |  | -------------- |  | ------------------- |  | ----------------------
|                               |  |                  |  |                |  | Total number of     |  | Approximate dollar    
|                               |  |                  |  |                |  | shares purchased as |  | value of shares that  
|                               |  |                  |  |                |  | part of publicly    |  | may yet be purchased  
|                               |  | Total number of  |  | Average price  |  | announced           |  | under the plans or    
|Period                         |  | shares purchased |  | paid per share |  | plans or programs   |  | programs (in millions)
|                              
|April 1, 2007 - April 30, 2007 |  | -                |  | $0.00          |  | -                   |  | -                     
|May 1, 2007 - May 31, 2007     |  | -                |  | $0.00          |  | -                   |  | -                     
|June 1, 2007 - June 30, 2007   |  | 427              |  | $15.12         |  | -                   |  | -                     

As previously announced, in August 2007, our Board of Directors authorized the repurchase of up to $25.0 million of our outstanding common stock. The repurchases will occur from time to time as market conditions warrant
through transactions in the open market. The initial share repurchases are expected to be effected pursuant to a plan in conformity with Rule 10b5-1 under the Securities Exchange Act of 1934. This rule allows public companies to adopt written,
pre-arranged stock trading plans when they do not have material, non-public information in their possession. The adoption of this stock trading plan allows us to repurchase our shares during periods when we otherwise might be prevented from doing so
under insider trading laws or because of self-imposed trading blackout periods.

17

---



PERFORMANCE GRAPH

The Stock Price Performance graph below and related information shall not be deemed solicitating material or to befiled with the Securities and Exchange Commision, nor shall such information be incorporated
by reference into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent ZYGO specifically incorporates this information by reference.

The graph below compares cumulative total return of our common stock with the cumulative total return of (i) the Nasdaq National MarketU.S. Index, and (ii) a group of peer companies weighted to reflect differing
market capitalizations. Companies in the peer group are Nanometrics, Inc., Rudolph Technologies, Inc., Veeco Instruments, Inc, II-VI, Incorporated, Mattson Technology, Inc., Semitool, Inc., Photon Dynamics, Inc., Electro Scientific Industries, Inc.,
GSI Group Inc., and Ultratech, Inc. The peer group consists of issuers selected primarily based on market capitalization and the markets they serve.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Zygo Corporation, The NASDAQ Composite Index And A Peer Group



| | * $100 invested on 6/30/02 in stock
        or index-including reinvestment of dividends.
      Fiscal year ending June
  30.
| | -----------------------------------------------------------------------------------------------------------------------------



|                 |  |          |  |          |  |          |  |          |  |          |  |         
|---------------- |  | -------- |  | -------- |  | -------- |  | -------- |  | -------- |  | --------
|                 |  | 06/30/02 |  | 06/30/03 |  | 06/30/04 |  | 06/30/05 |  | 06/30/06 |  | 06/30/07
|ZYGO CORPORATION |  | 100.00   |  | 99.38    |  | 139.01   |  | 121.74   |  | 203.60   |  | 177.52  
|NASDAQ COMPOSITE |  | 100.00   |  | 109.91   |  | 139.04   |  | 141.74   |  | 155.82   |  | 191.32  
|PEER GROUP       |  | 100.00   |  | 79.34    |  | 130.92   |  | 94.01    |  | 95.56    |  | 90.27   

18

---



Item 6. Selected Financial Data

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

(Thousands, except for per share and ratio amounts)

|                                           |  |                            |          |      |  |      |          |      |  |      |          |   |  |                  |          |   |  |          |          |  
|------------------------------------------ |  | -------------------------- | -------- | ---- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | ---------------- | -------- | - |  | -------- | -------- | -
|                                           |  | Fiscal Year Ended June 30,
|                                           |  | 2007                       |          | 2006 |  | 2005 |          | 2004 |  | 2003
|Net sales                                  |  |                            | $180,988 |      |  |      | $168,137 |      |  |      | $141,349 |   |  |                  | $116,276 |   |  |          | $102,221 |  
|Gross profit                               |  |                            | $77,183  |      |  |      | $65,771  |      |  |      | $53,290  |   |  |                  | $42,680  |   |  |          | $35,069  |  
|% of sales                                 |  |                            | 43       | %    |  |      | 39       | %    |  |      | 38       | % |  |                  | 37       | % |  |          | 34       | %
|                                          
|Earnings from continuing operations        |  |                            | $15,142  |      |  |      | $14,485  |      |  |      | $9,350   |   |  |                  | $4,226   |   |  |          | $1,363   |  
|% of sales                                 |  |                            | 8        | %    |  |      | 9        | %    |  |      | 7        | % |  |                  | 4        | % |  |          | 1        | %
|Earnings per share from continuing         |  |                            |          |      |  |      |          |      |  |      |          |   |  |                  |          |   |  |          |          |  
|operations:                                |  |                            |          |      |  |      |          |      |  |      |          |   |  |                  |          |   |  |          |          |  
|Basic                                      |  |                            | $0.83    |      |  |      | $0.80    |      |  |      | $0.52    |   |  |                  | $0.24    |   |  |          | $0.08    |  
|Diluted                                    |  |                            | $0.81    |      |  |      | $0.79    |      |  |      | $0.52    |   |  |                  | $0.23    |   |  |          | $0.08    |  
|                                          
|Net earnings (loss)                        |  |                            | $15,142  |      |  |      | $14,485  |      |  |      | $8,984   |   |  | ($
        3,429 | )        |   |  | ($10,782 | )       
|Net earnings (loss) per share:             |  |                            |          |      |  |      |          |      |  |      |          |   |  |                  |          |   |  |          |          |  
|Basic                                      |  |                            | $0.83    |      |  |      | $0.80    |      |  |      | $0.50    |   |  |                  | ($0.19   | ) |  |          | ($0.61   | )
|Diluted                                    |  |                            | $0.81    |      |  |      | $0.79    |      |  |      | $0.50    |   |  |                  | ($0.19   | ) |  |          | ($0.61   | )
|                                          
|Weighted average number of shares:         |  |                            |          |      |  |      |          |      |  |      |          |   |  |                  |          |   |  |          |          |  
|Basic                                      |  |                            | 18,156   |      |  |      | 18,054   |      |  |      | 17,950   |   |  |                  | 17,802   |   |  |          | 17,539   |  
|Diluted                                    |  |                            | 18,601   |      |  |      | 18,367   |      |  |      | 18,140   |   |  |                  | 18,221   |   |  |          | 17,696   |  
|                                          
|Research, development, and engineering     |  |                            | $22,038  |      |  |      | $15,901  |      |  |      | $13,377  |   |  |                  | $13,011  |   |  |          | $12,659  |  
|Capital expenditures                       |  |                            | $10,149  |      |  |      | $7,441   |      |  |      | $9,987   |   |  |                  | $7,585   |   |  |          | $5,037   |  
|Depreciation and amortization              |  |                            | $6,519   |      |  |      | $6,214   |      |  |      | $5,880   |   |  |                  | $5,717   |   |  |          | $5,623   |  
|                                          
|                                           |  | June 30,                  
|                                           |  | 2007                       |          | 2006 |  | 2005 |          | 2004 |  | 2003
|Working capital                            |  | $                          | 107,834  |      |  | $    | 81,914   |      |  | $    | 63,379   |   |  | $                | 58,504   |   |  | $        | 66,920   |  
|Current ratio                              |  |                            | 4.3      |      |  |      | 2.8      |      |  |      | 2.3      |   |  |                  | 3.5      |   |  |          | 3.3      |  
|Total assets                               |  | $                          | 211,594  |      |  | $    | 206,183  |      |  | $    | 190,182  |   |  | $                | 156,133  |   |  | $        | 161,546  |  
|Long-term debt (including current portion) |  | $                          | -        |      |  | $    | -        |      |  | $    | -        |   |  | $                | -        |   |  | $        | 11,374   |  
|Stockholders' equity                       |  | $                          | 177,777  |      |  | $    | 158,938  |      |  | $    | 141,153  |   |  | $                | 131,352  |   |  | $        | 130,403  |  
|Price-earnings ratio                       |  |                            | 18       |      |  |      | 21       |      |  |      | 20       |   |  |                  | N/A      |   |  | N/A      |         
|Number of employees at year-end            |  |                            | 575      |      |  |      | 570      |      |  |      | 526      |   |  |                  | 476      |   |  |          | 477      |  
|Sales per employee  average               |  |                            | $315     |      |  |      | $295     |      |  |      | $269     |   |  |                  | $244     |   |  |          | $214     |  
|Book value per share                       |  |                            | $9.75    |      |  |      | $8.78    |      |  |      | $7.85    |   |  |                  | $7.34    |   |  |          | $7.41    |  
|Market price per share at year-end         |  |                            | $14.29   |      |  |      | $16.39   |      |  |      | $9.80    |   |  |                  | $11.19   |   |  |          | $8.00    |  

19

---



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

CRITICAL ACCOUNTING POLICIES, SIGNIFICANT JUDGMENTS, AND ESTIMATES

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

Revenue Recognition and Allowance for Doubtful Accounts

We
  recognize revenue based on guidance provided in SEC Staff Accounting Bulletin
  (SAB) No. 104, Revenue Recognition and in accordance
  with the Emerging Issues Task Force (EITF) Issue No.
  00-21, Revenue Arrangements with Multiple Deliverables. We recognize
  revenue when persuasive evidence of an arrangement exists, delivery has occurred
  or services have been rendered, our price is fixed or determinable, and collectibility
   is reasonably assured. We recognize revenue on our standard products when title
  passes to the customer upon shipment. While our standard products generally require
  installation, the installation is considered a perfunctory performance obligation.
   Standard products do not have customer acceptance criteria. Generally, software
  is a component of our standard product and, as such, is not separately recognized
  as revenue. We have standard rights of return that we account for as a warranty
   provision under Statement of Financial Accounting Standards (SFAS)
   No. 5, Accounting for Contingencies. We do not have any price protection
   agreements or other post shipment obligations. For custom equipment where customer
    acceptance is part of the sales agreement, revenue is recognized when the customer
   has accepted the product. In cases where custom equipment does not have customer
   acceptance as part of the sales agreement, we recognize revenue upon shipment
   as long  as the system meets the specifications as agreed upon with the customer.
   Certain transactions have multiple deliverables, with the deliverables clearly
   defined. To the extent that the secondary deliverables are other than perfunctory,
   we recognize  the revenue on each deliverable, if separable, or on the completion
   of all deliverables, if not separable, all in a manner consistent with SAB No.
   104 and EITF 00-21. Standalone software products are recognized as revenue when
   they are shipped.  Revenue generated from development contracts are recorded
   on a cost-plus basis in the period services are rendered.

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

Inventory Valuation

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

20

---



Other Than Temporary Impairment of Marketable Securities

Marketable
  securities have been classified as held-to-maturity, which requires them to be
  carried at amortized cost. Management evaluates the need to record adjustments
  for impairment of marketable securities on a quarterly  basis. Marketable securities
  with unrealized depreciation in fair value for twelve or more consecutive months
  and other securities with unrealized losses are reviewed to determine whether
  the decline in fair value is other than temporary. Investment  ratings, company-specific
  events, general economic conditions, and other reasons are evaluated in determining
  if the decline in fair value is other than temporary. If it is judged that a
  decline in fair value is other than temporary, the marketable  security is valued
  at the current fair value and an impairment charge is reflected in earnings.

Share-Based Compensation

We calculate share-based compensation expense in accordance with SFAS 123(R), Share-Based Payment (as amended) using the Black-Scholes option-pricing model to calculate the fair value of share-based awards. The
key assumptions for this valuation method include the expected term of an option grant, stock price volatility, risk-free interest rate, dividend yield, and forfeiture rate. The determination of these assumptions is based on past history and future
expectations, and is subject to a high level of judgment. To the extent any of the assumptions were to change from year to year, the fair value of new option grants may vary significantly.

Warranty Costs

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

Accounting for Income Taxes

Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
income tax bases, and operating loss and tax credit carryforwards. SFAS No. 109, "Accounting for Income Taxes," requires the establishment of a valuation allowance to reflect the likelihood of the realization of deferred tax assets. We record a
valuation allowance to reduce our deferred tax assets to an estimated realizable amount based on historical and forecasted results. While management has considered future taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event management were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the valuation allowance would
increase income in the period such determination was made. Likewise, should management determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the valuation allowance would be charged
to income in the period such determination was made. Our effective tax rate may vary from period to period based on changes to the valuation allowance, changes in pre-tax income between jurisdictions that have higher or lower tax rates, changes to
federal, state, or foreign tax laws, and deductibility of certain costs and expenses by jurisdiction.

Valuation of Long-Lived Assets

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

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

21

---



Health Insurance

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

OVERVIEW

Zygo Corporation is a worldwide supplier of optical metrology instruments, precision optics, and electro-optical design and manufacturing services, serving customers in the semiconductor capital equipment and industrial
markets. Optical instruments products encompass non-contact optical measurement instruments. Optics products consist of high performance macro-optics components, optical coatings, and optical system assemblies. We conduct the majority of our
manufacturing in our 153,500 square foot facility in Middlefield, Connecticut and a 22,560 square foot leased facility in Tucson, Arizona.

During the second quarter of fiscal 2007, we reorganized the business into two operating divisions  Metrology Solutions (Metrology segment) and Optical Systems (Optics segment). Consistent with our new business
structure, beginning with our second quarter in fiscal 2007 we reported our segments as Metrology and Optics. Prior to the second quarter of fiscal 2007, our segments were reported as Semiconductor and Industrial. The Metrology segment consists of
OEM and in-line products primarily for the semiconductor and industrial markets. The Optics segment consists of components and opto-mechanical assemblies primarily for the medical, defense, and aerospace industries, which are included in the
industrial market.

We believe that within the Metrology segment, the semiconductor
market contains our best sales growth opportunities in the future. As such, we
are focusing our research and development efforts on specific semiconductor
initiatives, most notably in the display and packaging markets. During the past
year, we continued to expand our office in Oregon which houses our semiconductor
process metrology group to take advantage of opportunities in the semiconductor
markets.  In addition, during fiscal 2007, we built on the success of our front-end
semiconductor metrology tool, the Z3D 7000TM
by introducing the Z3D 7200TM and
the UniFire 7900TM to
our in-fab semiconductor product portfolio.

Within our Optics segment, areas of growth continue to be in laser fusion optics and medical based products. In June 2007, our Tucson, Arizona, operation received ISO 13485:2003 certification for medical product
manufacturing. This certification reinforces our ongoing commitment to pursue manufacturing opportunities in the medical components market. The facility's quality system is also certified to ISO 9001:2000.

Over the past four years, development services for Canon Inc. have produced a significant amount of our revenue. However, our development services contract with Canon Inc. were completed during the third quarter of fiscal
2007. For fiscal 2007, increases in overall sales and new product sales growth, both overall and within our Metrology segment, offset the year over year decrease in the development services revenue.

Overall, sales to Canon Inc. and Canon Sales Co., Inc. (collectively, Canon), our single largest customer, represented 27% of our total net sales in fiscal 2007 as compared with 36% in fiscal 2006. This
represented a decrease of $13.3 million in sales in fiscal 2007 as compared with fiscal 2006, with the $15.9 million decrease in development services revenue being partially offset by increases in OEM purchases.

Our backlog at June 30, 2007 was $72.2 million, a decrease of $8.6 million from June 30, 2006. Orders were $36.1 million in the fourth quarter of fiscal 2007. Orders from the Companys Metrology segment
accounted for 57% of the orders received, with the Optics segment accounting for the remaining 43%. For fiscal 2007, orders were $172.5 million, a decrease of 5% over fiscal 2006. As we have previously disclosed, orders for our lithography OEM
products have experienced a sharp decline and we anticipate that this will continue through the remainder of calendar 2007. We have also seen push-outs and cancellations in the semiconductor capital equipment sector. We further anticipate fiscal
2008 sales and earnings to be skewed toward the second half of the year when we believe we will see an increase in orders and shipments of semiconductor and display systems.

In August 2007, we announced that our Board of Directors authorized the repurchase of up to $25.0 million of our outstanding common stock. The repurchases will occur from time to time as market conditions warrant
through transactions in the open market. The initial share repurchases are expected to be effected pursuant to a plan in conformity with Rule 10b5-1 under the Securities Exchange Act of 1934. This rule allows public companies to adopt written,
pre-arranged stock trading plans when they do not have material, non-public information in their possession. The adoption of this stock trading plan allows us to repurchase our shares during periods when we otherwise might be prevented from doing so
under insider trading laws or because of self-imposed trading blackout periods.

22

---



RESULTS OF OPERATIONS

Fiscal 2007 Compared with Fiscal 2006

Net Sales

Twelve Months Ended(Dollars in millions)
      
      June 30,
      
      Net Sales
      
      June 30,
      
      Net Sales2007
      
      %
      
      2006
      
      %SegmentMetrology
      
      $
      132.3
      
      73
      %
      
      $
      125.9
      
      75
      %Optics
      
      
      48.7
      
      27
      %
      
      
      42.2
      
      25
      %Total
      
      $
      181.0
      
      100
      %
      
      $
      168.1
      
      100
      %


Net sales in the Metrology segment increased 5% in fiscal 2007 as compared with the prior year. The increase in net sales of $6.4 million within the Metrology segment was primarily due to an increase in display sales of
$10.0 million, net sales to our lithography customers of $9.6 million, and semiconductor sales of $2.7, partially offset by a decrease in development services revenue of $15.9 million.

Net sales in the Optics segment increased 15% in fiscal 2007 as compared with the prior year. The increase in net sales of $6.5 million within the Optics segment was primarily due to an increased volume of optical
system assemblies of $3.4 million and contract manufacturing of $3.0, which includes medical component sales.

Approximately 79% of all fiscal 2007 net sales were denominated in U.S. dollars. Significant changes in the values of foreign currencies relative to the value of the U.S. dollar can influence the sales of our products in
export markets, as would changes in the general economic conditions in those markets.

Gross Profit

Twelve Months Ended(Dollars in millions)
      
      June 30,
      
      Net Sales
      
      June 30,
      
      Net Sales2007
      
      %
      
      2006
      
      %SegmentMetrology
      
      $
      62.2
      
      47
      %
      
      $
      56.8
      
      45
      %Optics
      
      
      15.0
      
      31
      %
      
      
      9.0
      
      21
      %Total
      
      $
      77.2
      
      43
      %
      
      $
      65.8
      
      39
      %


Gross profit in the Metrology segment as a percentage of net sales increased by two percentage points in fiscal 2007 as compared with the prior year. The increased gross profit as a percentage of net sales was primarily due
to the decrease in development services revenues, which comprised 16% of Metrology revenue in fiscal 2006 and only 3% in fiscal 2007 and which has historically carried margins of 25%-30%. Gross profit in the Optics segment as a percentage of sales
increased by ten percentage points for fiscal 2007 as compared with the prior year. This increase was primarily attributable to having a steady order flow within our contract manufacturing operation which increased our efficiency and
productivity.

Selling, General, and Administrative Expenses ("SG&A")

Twelve Months Ended(Dollars in millions)
      
      June 30,
      
      Net Sales
      
      June 30,
      
      Net Sales2007
      
      %
      
      2006
      
      %$
      32.9
      
      18
      %
      
      $
      31.2
      
      19
      %


SG&A in fiscal 2007 as compared with fiscal 2006 included increases in sales and marketing of $1.9 million primarily due to increases in marketing activities of $0.6 million for our semiconductor products and
$0.5 million for our optical systems solutions. We also incurred additional costs of $0.6 million as we increased our presence throughout our foreign operations. Administration expenses decreased slightly by $0.2 million.

23

---



Research, Development, and Engineering Expenses (RD&E)

Twelve Months Ended(Dollars in millions)
      
      June 30,
      
      Net Sales
      
      June 30,
      
      Net Sales2007
      
      %
      
      2006
      
      %$
      22.0
      
      12
      %
      
      $
      15.9
      
      9
      %


The increase in RD&E costs in fiscal 2007 was primarily related to increased spending on our semiconductor initiatives of $3.1 million, display solutions of $1.2 million, instrument projects of $1.4 million,
and contract manufacturing projects of $0.6 million. Semiconductor RD&E contributed to the release, in fiscal 2007, of two new products, the Z3D 7200TM and the
UniFire 7900TM. Display solution initiatives include developments of new technologies to further enhance our existing product line.

Income Tax Expense

Twelve
      Months Ended(Dollars in millions)
      
      June 30,
      
      Tax Rate
      
      June 30,
      
      Tax Rate2007
      
      %
      
      2006
      
      %$
      9.1
      
      36
      %
      
      $
      5.8
      
      28
      %




Income tax expense in fiscal 2007 increased by 57% as compared with the prior year. The overall tax rate increased by eight percentage points when compared with the prior year. In fiscal 2006, income tax expense included an
aggregate tax benefit of $1.2 million due primarily to the redetermination of our fiscal 2005 and 2004 extraterritorial income exclusion (EIE).

Net Earnings

Twelve
            Months Ended(Dollars in millions)
      
      June 30,
      
      Sales
      
      June 30,
      
      Sales2007
      
      %
      
      2006
      
      %$
      15.1
      
      8
      %
      
      $
      14.5
      
      9
      %




Net earnings in fiscal 2007 increased by 4% as compared with the prior year. Net earnings per diluted share were $0.81 for fiscal 2007, as compared with $0.79 per diluted share for fiscal 2006. Fiscal 2006 net
earnings included a $0.07 benefit for the effect of the EIE credit related to fiscal 2005 and 2004 of $1.2 million. The increased earnings were primarily the result of increased net sales and increased gross profits as a percentage of sales
which was partially offset by a $6.1 million increase in RD&E to support our new initiatives.

Backlog

Backlog at June 30, 2007 totaled $72.2 million, a decrease of $8.6 million, or 11%, from $80.8 million at June 30, 2006. The year-end fiscal 2007 backlog consisted of $29.5 million, or 41%, in the Metrology
segment and $42.7 million, or 59%, in the Optics segment. Orders for fiscal 2007 totaled $172.5 million. Orders by segment for fiscal 2007 consisted of $116.4 million, or 67%, in the Metrology segment and $56.1 million, or 33%, in
the Optics segment. The decrease in backlog primarily reflects a sharp decline in our lithography OEM products and we anticipate that this trend will continue through the remainder of calendar 2007. We have also experienced push-outs and
cancellations related to fiscal 2007 activity in the semiconductor capital equipment sector. We further anticipate fiscal 2008 sales and earnings to be skewed toward the second half of the year when we believe we will see a strengthening in orders
and shipments of semiconductor and display systems.

24

---



Fiscal 2006 Compared with Fiscal 2005Net Sales*

Twelve Months Ended(Dollars in millions)
      
      June 30,
      
      Net Sales
      
      June 30,
      
      Net Sales2006
      
      %
      
      2005
      
      %SegmentMetrology
      
      $
      125.9
      
      75
      %
      
      $
      104.4
      
      74
      %Optics
      
      
      42.2
      
      25
      %
      
      
      36.9
      
      26
      %Total
      
      $
      168.1
      
      100
      %
      
      $
      141.3
      
      100
      %


Net sales in the Metrology segment increased 21% in fiscal 2006 as compared with the prior year. The increase in net sales of $21.5 million within the Metrology segment was primarily due to an increase of product sales
for the instruments and inline semiconductor tools of $10.3 million, net sales to our lithography customers of $6.5 million, and development services of $4.4 million. We opened offices in China and Korea in fiscal 2006 and 2005 and have
seen a steady increase in sales activity from those markets.

Net sales in the Optics segment increased 14% in fiscal 2006 as compared with the prior year. The increase in net sales of $5.3 million within the Optics segment was primarily due to an increased volume of contract
manufacturing of $7.6 million, offset in part by a decrease in laser fusion optics of $2.9 million in fiscal 2006 as compared with the prior period.

Approximately 82% of all fiscal 2006 net sales were denominated in U.S. dollars. Significant changes in the values of foreign currencies relative to the value of the U.S. dollar can influence the sales of our products in
export markets, as would changes in the general economic conditions in those markets.

Gross Profit*

Twelve
            Months Ended(Dollars in millions)
      
      June 30,
      
      Net Sales
      
      June 30,
      
      Net Sales2006
      
      %
      
      2005
      
      %SegmentMetrology
      
      $
      56.8
      
      45
      %
      
      $
      46.4
      
      44
      %Optics
      
      
      9.0
      
      21
      %
      
      
      6.9
      
      19
      %Total
      
      $
      65.8
      
      39
      %
      
      $
      53.3
      
      38
      %


Gross profit in the Metrology segment as a percentage of net sales increased by a percentage point in fiscal 2006 as compared with the prior year. The increased gross profit as a percentage of net sales was primarily due to
our concentrated effort to utilize new low-cost, high-quality vendors. Margins on development services remained flat year over year at 29%. Gross profit in the Optics segment as a percentage of sales increased by two percentage points in fiscal 2006
as compared with the prior year. The increased profit as a percentage of net sales was also primarily due to utilizing new low-cost, high-quality vendors. In fiscal 2006, share-based compensation expenses decreased overall gross profit by $0.4
million.

* Restated with new segment information. See Note 16 to consolidated financial statements.

Selling, General, and Administrative Expenses ("SG&A")

Twelve
            Months Ended(Dollars
              in millions)
      
      June 30,
      
      Net Sales
      
      June 30,
      
      Net Sales2006
      
      %
      
      2005
      
      %$
      31.2
      
      19
      %
      
      $
      24.9
      
      `18
      %


SG&A in fiscal 2006 as compared with fiscal 2005 included increases in sales and marketing of $2.8 million primarily due to increases in technical support and service personnel and increases in marketing activities
in Japan and Korea, and in optical systems worldwide. In addition, employee benefits cost increased $2.2 million and outside services increased $0.4 million related to computer infrastructure costs. In fiscal 2006, share-based compensation
expenses related to SG&A were $1.0 million.

25

---



Research, Development, and Engineering Expenses (RD&E)

Twelve Months Ended(Dollars in millions)
      
      June 30,
      
      Net Sales
      
      June 30,
      
      Net Sales2006
      
      %
      
      2005
      
      %$
      15.9
      
      9
      %
      
      $
      13.4
      
      9
      %


RD&E costs in fiscal 2006 were primarily driven by semiconductor initiatives of $1.5 million, metrology projects of $1.4 million, and costs associated with the newly opened Oregon office of $0.9 million. In
fiscal 2006, share-based compensation expense related to RD&E was $0.3 million.

Income Tax Expense

Twelve Months Ended(Dollars in millions)
      
      June 30,
      
      Tax Rate
      
      June 30,
      
      Tax Rate2006
      
      %
      
      2005
      
      %$
      5.8
      
      28
      %
      
      $
      5.7
      
      36
      %


Income tax expense in fiscal 2006 increased by 2% as compared with the prior year. The overall tax rate, however, decreased by eight percentage points when compared with the prior year primarily due to the redetermination
of our fiscal 2005 and 2004 extraterritorial income exclusion (EIE). Due to this redetermination, the Company recorded an aggregate tax benefit of $1.2 million in the current fiscal year, related to fiscal 2005 and 2004.

Net Earnings

Twelve Months Ended(Dollars in millions)
      
      June 30,
      
      Sales
      
      June 30,
      
      Sales2006
      
      %
      
      2005
      
      %$
      14.5
      
      9%
      
      
      $
      9.0
      
      6
      %


Net earnings in fiscal 2006 increased by 61% as compared with the prior year. Net earnings per diluted share were $0.79 for fiscal 2006, as compared with $0.50 per diluted share for fiscal 2005. The increased
earnings were primarily the result of increased net sales, increased gross profits as a percentage of sales due in part to the effects of our cost control initiatives and the effect of the EIE credit related to fiscal 2005 and 2004. The net earnings
for fiscal 2005 included losses of $0.3 million, net of tax, related to the operations of our discontinued TeraOptix unit and charges of $0.1 million, net of tax, related to the disposal of our discontinued TeraOptix unit. The charge related
to the disposal of our discontinued TeraOptix unit was primarily due to the sale of our vacant facility in Westborough, Massachusetts in the third quarter of fiscal 2005. The earnings from continuing operations for fiscal 2006 were $14.5
million, or $0.79 per diluted share, as compared with earnings from continuing operations of $9.4 million, or $0.52 per diluted share, for fiscal 2005.

Backlog

Backlog at June 30, 2006 totaled $80.8 million, an increase of $14.2 million, or 21%, from $66.6 million at June 30, 2005. The year-end fiscal 2006 backlog consisted of $42.9 million, or 53%, in the
semiconductor segment and $37.9 million, or 47%, in the industrial segment. Orders for fiscal 2006 totaled $182.3 million. Orders by segment for fiscal 2006 consisted of $107.1 million, or 59%, in the semiconductor segment and $75.2
million, or 41%, in the industrial segment. The increase in the backlog is reflective of strength across all segments especially lithography related orders.

26

---



TRANSACTIONS WITH STOCKHOLDER

Sales to Canon, a stockholder, customer, and distributor of certain of our products in Japan amounted to $48.1 million (27% of net sales), $61.4 million (36% of net sales), and $51.9 million (37% of net sales)
for the years ended June 30, 2007, 2006, and 2005, respectively. Selling prices of products sold to Canon are based, generally, on the normal terms customarily given to distributors. Revenues generated from a development contract with Canon are
recorded on a cost-plus basis. At June 30, 2007 and 2006, there was in the aggregate,$4.5 million and $6.0 million, respectively, of trade accounts receivable from
Canon.

In September 2002, we entered into a contract with Canon related to the development of certain interferometers. In March 2004, we signed a preliminary agreement to begin further add-on work; the definitive agreement for
this additional work was signed in December 2004. In February 2005, we entered into two additional agreements with Canon related to the development of prototype production tools and accessories. During the twelve months ended June 30, 2007, we
recognized revenue of $4.1 million under the Canon development services contract compared with $20.0 million for the comparable prior period. Our development services contract with Canon Inc. was completed during the third quarter of fiscal
2007

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2007, cash and marketable securities was $70.2 million, an increase of $4.7 million from $65.5 million at June 30, 2006. The increase in cash was primarily attributable to cash generated from our
operating activities, partially offset by an increase in inventory and capital expenditures and a significant decrease in progress payments. This increase in inventory was primarily attributable to an increase in inventory for semiconductor systems
and to a lesser extent, for certain other product lines.

Cash flows from operating activities were $15.1 million for fiscal 2007 as compared with $16.0 million in fiscal 2006. The decrease was primarily due to progress payments received in fiscal 2006 related to our
development services agreements, flat panel systems, and optics contracts. In fiscal 2007, we utilized the progress payments in excess of new progress payments for flat panel systems and the end of the development services agreement.

Acquisitions of property, plant, and equipment were $10.1 million in fiscal 2007 as compared with $7.4 million for fiscal 2006. The increase was due primarily to the additional equipment for the manufacture and
demonstration of the new semiconductor products, test equipment for increased efficiency, and tooling for the manufacture of new products.

There were no borrowings outstanding under our $3.0 million bank line of credit agreement at June 30, 2007 and 2006. The agreement contains certain financial covenants which, among others, relate to debt service and
consolidated debt ratios

In August 2007, our Board of Directors approved a stock repurchase program of up to $25.0 million. We expect the repurchase of the stock to be paid by the combination of current earnings and current cash and cash
equivalent balances. Although cash requirements will fluctuate based on the timing and extent of various factors, management believes that cash generated from operations, together with the liquidity provided by existing cash balances and borrowing
capability, will be sufficient to satisfy our liquidity requirements for the next 12 months.

CONTRACTUAL OBLIGATIONS

The following table summarizes our significant contractual obligations at June 30, 2007, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

|                     |  |                        |     |            |   |           |  |           |     |         |   |           |  |   |  
|-------------------- |  | ---------------------- | --- | ---------- | - | --------- |  | --------- | --- | ------- | - | --------- |  | - | -
|                     |  | Payments Due By Period
|                     |  | (Dollars in millions) 
|                     |  |                        |     |            |   |           |  |           |     |         |   |          
|                     |  |                        |     | Less than  |   |           |  |           |     |         |   | More than
|                     |  | Total                  |     | 1
    year |   | 1-3 years |  | 3-5 years |     | 5 years
|Operating leases     |  | $                      | 3.0 |            | $ | 1.2       |  | $         | 1.8 |         | $ | -         |  | $ | -
|Purchase obligations |  |                        | 4.3 |            |   | 3.0       |  |           | 1.3 |         |   | -         |  |   | -
|Total                |  | $                      | 7.3 |            | $ | 4.2       |  | $         | 3.1 |         | $ | -         |  | $ | -

27

---



OFF-BALANCE SHEET ARRANGEMENTS

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt, or operating parts of our business that are not consolidated into our
financial statements. We have not guaranteed any obligations of a third party.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

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

Interest Rate Sensitivity

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

|                                                           |  |      |      |      |  |      |      |      |  |      |     |            |  |   |     |   |  |   |     |   |  |   |     |  
|---------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | --- | ---------- |  | - | --- | - |  | - | --- | - |  | - | --- | -
|Fair value of investments as of June 30, 2007 maturing in: |  |      |      |      |  |      |      |      |  |      |     |            |  |   |     |  
|(Dollars in millions)                                      |  |      |      |      |  |      |      |      |  |      |     |            |  |   |     |   |  |   |     |   |  |   |     |  
|                                                           |  | 2008 |      | 2009 |  | 2010 |      | 2011 |  | 2012 |     | Thereafter
|Marketable securities                                      |  |      |      |      |  |      |      |      |  |      |     |            |  |   |     |   |  |   |     |   |  |   |     |  
|Fixed rate investments                                     |  | $    | 29.3 |      |  | $    | 14.7 |      |  | $    | 8.1 |            |  | $ | -   |   |  | $ | -   |   |  | $ | -   |  
|Weighted average interest rate                             |  |      | 4.8  | %    |  |      | 4.8  | %    |  |      | 5.3 | %          |  |   | 0.0 | % |  |   | 0.0 | % |  |   | 0.0 | %

On June 30, 2007, the Company had variable interest rate money market accounts valued at $9.1 million.

Marketable Securities Fair Market Value Sensitivity

At June 30, 2007, our investment portfolio included certain investments, aggregating $1.6 million, in entities believed to have risk exposure in sub-prime markets. We have reviewed, along with our investment advisor,
current investment ratings, company specific events, and general economic conditions in determining whether there is a significant decline in fair value that is other than temporary. To the extent we determine that a decline in fair value is other
than temporary, the marketable security is valued at the current fair value and an impairment charge is reflected in earnings. In addition, if the investment grades of the securities decline, liquidity in the market may be restricted or the market
value of the security may decline. There is the potential that, if credit limits tighten significantly, the issuer may not have access to the capital markets to pay off the securities at the time of maturity.

Exchange Rate Sensitivity

Approximately 79% of our fiscal 2007 net sales were denominated in U.S. dollars. At June 30, 2007, our backlog included orders in U.S. dollars of $64.4million, or 89%of the total backlog. Substantially all of our costs are negotiated and paid in U.S. dollars. Significant changes in the values of foreign
currencies relative to the value of the U.S. dollar can impact sales of our products in export markets as would changes in the general economic conditions in those markets. For our sales that are based in local currency, we are exposed to foreign
exchange fluctuations from the time customers are invoiced in local currency until collection occurs.

We enter into forward contracts to reduce the impact
of adverse fluctuations on earnings associated with foreign currency exchange
rate changes. We do not enter into any derivative transactions for speculative
purposes. These contracts are entered into for periods consistent with the currency
transaction exposures, generally three to six months. Any gains and
losses on the fair value of these contracts would largely offset
corresponding losses and gains  on the underlying transactions. The majority
of our foreign currency transactions and foreign operations are denominated in
the euro and Japanese yen. In the absence of a substantial increase in sales
orders in currencies other than U.S. dollars, we believe a 10% appreciation or
depreciation of the U.S. dollar against the euro and yen would have an immaterial
impact on our consolidated financial position and results of operations.

28

---



Item 8. Financial Statements and Supplementary Data

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

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

None.

Item 9A. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation, as of the end of the period covered by this report, of the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our
disclosure controls and procedures were effective in recording, processing, summarizing and reporting on a timely basis information required to be disclosed by us in the reports that we file or submit under the Exchange Act and were effective in
ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.

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

Report of Management on Zygo Corporations Internal Control Over Financial Reporting

We, as members of management of Zygo Corporation (the "Company"), are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is identified in Exchange Act Rule
13a-15(f). The Company's internal control over financial reporting is a process designed to provide reasonable assurance to the Company's management and Board of Directors regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of
the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been
detected. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures
may deteriorate.

Under the supervision and with the participation of management, including our principal executive and financial officers, we assessed the Company's internal control over financial reporting as of June 30, 2007, based on
criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, we concluded that the
Company maintained effective internal control over financial reporting as of June 30, 2007 based on the specified criteria.

29

---



Deloitte & Touche LLP, the independent registered public accounting firm that also audited the Company's consolidated financial statements included in this Form 10-K, audited the operating effectiveness of internal control
over financial reporting and issued their attestation report which is included on page F-2.

|                   |  |     |                                                  
|------------------ |  | --- | -------------------------------------------------
|                   |  |     | Zygo Corporation                                 
|                  
|                  
|September 19, 2007 |  | By: | /s/ J. Bruce Robinson                            
|                   |  |     | J. Bruce Robinson                                
|                   |  |     | Chairman and Chief Executive Officer             
|                  
|                  
|                  
|                  
|September 19, 2007 |  | By: | /s/ Walter A. Shephard                           
|                   |  |     | Walter A. Shephard                               
|                   |  |     | Vice President, Finance, Chief Financial Officer,
|                   |  |     | and Treasurer                                    

Item 9B. Other Information

None.

30

---



PART III

Item 10. Directors, and Executive Officers and Corporate Governance

Except for the information concerning executive officers which is set forth in Part I of this Annual Report,information required by this item will be
included under the captions Election of Board of Directors and Corporate Governance in our Proxy Statement to be filed pursuant to Regulation 14A for use in connection with our companys 2007 Annual Meeting of
Stockholders and is incorporated herein by reference.

Item 11. Executive Compensation

Information required by this item will be included in our 2007 Proxy Statement under the captions Compensation of Executive Officers and Corporate Governance is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this item will be included in our 2007 Proxy Statement under the captions Equity Compensation Plan Information, and Security Ownership of Certain Beneficial Owners and is
incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information required by this item will be included in our 2007 Proxy Statement under the captions Certain Relationships and Related Transactions, Election of Board of Directors, and Corporate
Governance and is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

Information required by this item will be included in our 2007 Proxy Statement under the caption Relationship with Independent Public Accountants and is incorporated herein by reference.

31

---



PART IV

Item 15. Exhibits, Financial Statement Schedules

|    |                                                               |  |                                                                                                                 
|--- | ------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------
|(a) | The following documents are
    filed as part of this report:
|   
|    | 1. and 2.                                                     |  | Consolidated Financial
    Statements and Financial Statement Schedule:                                         
|   
|    |                                                               |  | An index to the consolidated financial statements and financial statement schedule 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                                                           |  | Zygo Corporation Code of Ethics (Exhibit 14.1 to the Companys Quarterly Report on Form 10-Q for its            
|    |                                                               |  | quarterly period ended March 26, 2004)*                                                                         
|   
|    | 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 November 20, 1980, between the Company and Canon Inc. regarding exchange of                     
|    |                                                               |  | information (Exhibit (10)(y) to Registration No. 2-87253)*                                                      
|   
|    | 10.3                                                          |  | Amended and Restated Zygo Corporation Profit Sharing Plan (Exhibit 10.15 to the Companys Annual                
|    |                                                               |  | Report on Form 10-K 405 for its year ended June 30, 1995)*                                                      
|   
|    | 10.4                                                          |  | 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)*                                                   
|   
|    | 10.5                                                          |  | 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)*                            
|   
|    | 10.6                                                          |  | 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)*                                                                         
|   
|    | 10.7                                                          |  | 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-K 405 for            
|    |                                                               |  | its year ended June 30, 1996)*                                                                                  
|   
|    | 10.8                                                          |  | Employment agreement dated January 15, 1999, between Zygo Corporation and J. Bruce Robinson (Exhibit            
|    |                                                               |  | 10.34 to the Company's Annual Report on Form 10-K 405 for its year ended June 30, 1999)*                        
|   
|    | 10.9                                                          |  | Zygo Corporation Amended and Restated Non-Employee Director Stock Option Plan ratified and approved             
|    |                                                               |  | by the Companys Stockholders on November 17, 1999 (Exhibit to the Company's Definitive Proxy                   
|    |                                                               |  | Statement for its year ended June 30, 1999)*                                                                    
|   
|    | 10.10                                                         |  | Employment agreement dated July 1, 1999, between Zygo Corporation and Brian J. Monti (Exhibit 10.22 to          
|    |                                                               |  | the Company's Annual Report on Form 10-K 405 for its year ended June 30, 2000)*                                 

32

---



| |       |  |                                                                                                         
| | ----- |  | --------------------------------------------------------------------------------------------------------
| | 10.11 |  | Subcontract B519044 between The Regents of The University of California Lawrence Livermore National     
| |       |  | Laboratory and Zygo Corporation dated January 14, 2002 (Exhibit 10.25 to the Company's Annual Report    
| |       |  | on Form 10-K for its year ended June 30, 2002)*                                                         
|
| | 10.12 |  | Development Agreement dated September 11, 2002, between Zygo Corporation and Canon, Inc. (Exhibit       
| |       |  | 99.2 to the Company's Current Reports on Form 8-K dated September 17, 2002)*                            
|
| | 10.13 |  | Development and Manufacturing Support Services Agreement effective December 1, 2001, between Zygo       
| |       |  | Corporation and Philips Electronics North America Corporation. (Exhibit 99.1 to the Company's Current   
| |       |  | Reports on Form 8-K dated October 22, 2002)*                                                            
|
| | 10.14 |  | Offer Letter dated February 10, 2004 between Zygo Corporation and Walter Shephard. (Exhibit 10.30 to the
| |       |  | Company's Annual Report on Form 10-K for its year ended June 30, 2004)*                                 
|
| | 10.15 |  | Development Agreement Amendment dated December 20, 2004, between Zygo Corporation and Canon Inc.        
| |       |  | (Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for its quarterly period ended December 31,
| |       |  | 2004)*                                                                                                  
|
| | 10.16 |  | Development Agreement Amendment dated February 26, 2005, between Zygo Corporation and Canon Inc.        
| |       |  | (Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for its quarterly period ended March 31,   
| |       |  | 2005)*                                                                                                  
|
| | 10.17 |  | Development Agreement dated February 23, 2005, between Zygo Corporation and Canon Inc. (Exhibit 10.2    
| |       |  | to the Company's Quarterly Report on Form 10-Q for its quarterly period ended March 31, 2005)*          
|
| | 10.18 |  | Zygo Corporation 2002 Equity Incentive Plan Restricted Stock Agreement. (Exhibit 10.1 to the Company's  
| |       |  | Quarterly Report on Form 10-Q for its quarterly period ended September 30, 2005).                       
|
| | 10.19 |  | Zygo Corporation 2002 Equity Incentive Plan Stock Option Agreement. (Exhibit 10.2 to the Company's      
| |       |  | Quarterly Report on Form 10-Q for its quarterly period ended September 30, 2005).                       
|
| | 10.20 |  | Employment contract dated October 23, 2006 between Zygo Corporation and James Northup. (Exhibit 10.1    
| |       |  | to the Company's Quarterly Report on Form 10-Q for its quarterly period ended December 31, 2006)*       
|
| | 10.21 |  | Employment contract dated November 20, 2006 between Zygo Corporation and John Stack. (Exhibit 10.2 to   
| |       |  | the Company's Quarterly Report on Form 10-Q for its quarterly period ended December 31, 2006)*          
|
| | 10.22 |  | Agreement dated February 8, 2007 between Zygo Corporation and Carl A. Zanoni. (Exhibit 10.1 to the      
| |       |  | Company's Quarterly Report on Form 10-Q for its quarterly period ended March 31, 2007)*                 
|
| | 10.23 |  | Employment contract dated June 15, 2007 between Zygo Corporation and Walter A. Shephard.                
|
| | 21.   |  | Subsidiaries of Registrant                                                                              
|
| | 23.1  |  | Consent of Independent Registered Public Accounting Firm                                                
|
| | 23.2  |  | Consent of Independent Registered Public Accounting Firm                                                
|
| | 24.   |  | Power of Attorney (included in the signature page)                                                      
|
| | 31.1  |  | Certification Pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted
| |       |  | Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                               
|
| | 31.2  |  | Certification Pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted
| |       |  | Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                               
|
| | 32.1  |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to                                
| |       |  | Section 906 of the Sarbanes-Oxley Act of 2002                                                           

33

---



| |      |  |                                                                         
| | ---- |  | ------------------------------------------------------------------------
| | 32.2 |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
| |      |  | Section 906 of the Sarbanes-Oxley Act of 2002                           

Exhibit numbers 10.3, 10.6, 10.7, 10.8, 10.9, 10.10, 10.14, 10.18, 10.19, 10.20, 10.21, 10.22, and 10.23 are management contracts, compensatory plans or compensatory arrangements.

*Incorporated herein by reference.

34

---



SIGNATURES

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

|                              |                                  |      |                    | 
|----------------------------- | -------------------------------- | ---- | ------------------ | 
|ZYGO CORPORATION              |                                  |      |                   
|Registrant                    |                                  |      |                   
|                             
|By     /s/ Walter A. Shephard |                                  | Date | September 19, 2007
|                              | Walter A. Shephard               |      |                    | 
|                              | Vice President, Finance,  Chief  |      |                    | 
|                              | Financial Officer, and Treasurer |      |                    | 

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

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

|                        |  |                                              |                   
|----------------------- |  | -------------------------------------------- | ------------------
|/s/ J. Bruce Robinson   |  | Chairman and Chief Executive Officer         | September 19, 2007
|J. Bruce Robinson       |  | (principal executive officer)                |                   
|                       
|/s/ Walter A. Shephard  |  | Vice President, Finance, Chief               | September 19, 2007
|Walter A. Shephard      |  | Financial Officer, and Treasurer             |                   
|                        |  | (principal financial and accounting officer) |                   
|                       
|/s/ Carl A. Zanoni      |  | Senior Vice President, Technology            | September 19, 2007
|Carl A. Zanoni          |  | and Director                                 |                   
|                       
|                        |  | Director                                     |                   
|Eugene G. Banucci       |  |                                              |                   
|                       
|/s/ Youssef A. El-Mansy |  | Director                                     | September 19, 2007
|Youssef A. El-Mansy     |  |                                              |                   
|                       
|/s/ Samuel H. Fuller    |  | Director                                     | September 19, 2007
|Samuel H. Fuller        |  |                                              |                   
|                       
|/s/ Seymour E. Liebman  |  | Director                                     | September 19, 2007
|Seymour E. Liebman      |  |                                              |                   
|                       
|/s/ Robert G. McKelvey  |  | Director                                     | September 19, 2007
|Robert G. McKelvey      |  |                                              |                   
|                       
|/s/ Robert B. Taylor    |  | Director                                     | September 19, 2007
|Robert B. Taylor        |  |                                              |                   
|                       
|/s/ Carol P. Wallace    |  | Director                                     | September 19, 2007
|Carol P. Wallace        |  |                                              |                   
|                       
|/s/ Bruce W. Worster    |  | Director                                     | September 19, 2007
|Bruce W. Worster        |  |                                              |                   

35

---



ZYGO CORPORATION AND CONSOLIDATED SUBSIDIARIESIndex to Consolidated Financial Statements and Schedule

|            |                                                                                                  
|----------- | -------------------------------------------------------------------------------------------------
|Page        |                                                                                                  
|            |                                                                                                  
|F-2         | Report of Independent Registered Public Accounting Firm                                          
|            |                                                                                                  
|F-3         | Report of Independent Registered Public Accounting Firm                                          
|            |                                                                                                  
|F-4         | Consolidated balance sheets at June 30, 2007 and 2006                                            
|            |                                                                                                  
|F-5         | Consolidated statements of operations for the years ended June 30, 2007, 2006, and 2005          
|            |                                                                                                  
|F-6         | Consolidated statements of stockholders' equity for the years ended June 30, 2007, 2006, and 2005
|            |                                                                                                  
|F-7         | Consolidated statements of cash flows for the years ended June 30, 2007, 2006, and 2005          
|            |                                                                                                  
|F-8 to F-23 | Notes to consolidated financial statements                                                       
|           
|            | Supplemental Schedule                                                                            
|            |                                                                                                  
|S-1         | Report of Independent Registered Public Accounting Firm                                          
|            |                                                                                                  
|S-2         | Report of Independent Registered Public Accounting Firm on Schedule II                           
|            |                                                                                                  
|S-3         | Schedule II -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

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and StockholdersZygo CorporationMiddlefield, Connecticut

We have audited the accompanying consolidated balance sheets of Zygo Corporation and subsidiaries (the "Company") as of June 30, 2007 and 2006, and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the two years in the period ended June 30, 2007. We also have audited the Company's internal control over financial reporting as of June 30, 2007, based on the criteria established in Internal Control  Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Zygo Corporations Internal Control
Over Financial Reporting (Item 9A). Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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, 2007 and 2006, and the results of
their operations and their cash flows for each of the two years in the period ended June 30, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of June 30, 2007, based on the criteria established in Internal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

As discussed in Notes 1 and 13 to the consolidated financial statements, the Company changed its method of accounting for stock options as of July 1, 2005.

/s/ Deloitte & Touche LLPHartford, ConnecticutSeptember 19, 2007

F - 2

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and StockholdersZygo Corporation:

We have audited the accompanying consolidated statements of operations, stockholders equity, and cash flows of Zygo Corporation and subsidiaries (the Company) for the year ended June 30, 2005. 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 audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Zygo Corporation and subsidiaries for the year ended June 30,
2005, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLPStamford, ConnecticutSeptember 7, 2005, except as to notes 2 and 16 (as it relates to2005 disclosures) to the consolidated financial statements whichare as of June 20, 2006 and September 10, 2007, respectively

F - 3

---



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

|                                                |                                                                       |                                                                       |                               |               |         |               |         |         | 
|----------------------------------------------- | --------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------- | ------------- | ------- | ------------- | ------- | ------- | 
|                                                |                                                                       |                                                                       |                               | June 30, 2007 |         | June 30, 2006 |        
|Assets                                          |                                                                       |                                                                       |                               |               |         |              
|                                                | Current assets:                                                       |                                                                       |                               |               |         |               |        
|                                                |                                                                       | Cash and cash equivalents                                             | $                             | 17,826        |         | $             | 20,318  |        
|                                                |                                                                       | Marketable securities (note 4)                                        |                               | 29,453        |         |               | 21,415  |        
|                                                |                                                                       | Receivables, net of allowance for doubtful accounts of $333 and $588, |                               |               |         |               |         |        
|                                                |                                                                       |                                                                       | respectively (notes 5 and 17) |               | 32,476  |               |         | 33,759  | 
|                                                |                                                                       | Inventories (note 6)                                                  |                               | 43,048        |         |               | 38,082  |        
|                                                |                                                                       | Prepaid expenses                                                      |                               | 2,240         |         |               | 2,106   |        
|                                                |                                                                       | Deferred income taxes (note 15)                                       | 15,077                        |               | 11,959  |              
|                                                |                                                                       |                                                                       | Total current assets          |               | 140,120 |               |         | 127,639 | 
|Marketable securities (note 4)                  |                                                                       | 22,879                                                                |                               |               | 23,743  |              
|Property, plant, and equipment, net (note 7)    |                                                                       | 36,349                                                                |                               |               | 32,631  |              
|Deferred income taxes (note 15)                 |                                                                       | 5,700                                                                 |                               |               | 15,433  |              
|Intangible assets, net (note 8)                 |                                                                       | 6,110                                                                 |                               |               | 5,925   |              
|Other assets                                    | 436                                                                   |                                                                       | 812                           |              
|Total assets                                    | $                                                                     | 211,594                                                               |                               | $             | 206,183 |              
|                                               
|Liabilities and Stockholders' Equity            |                                                                       |                                                                       |                               |               |         |              
|                                                | Current liabilities:                                                  |                                                                       |                               |               |         |               |        
|                                                |                                                                       | Accounts payable                                                      | $                             | 8,720         |         | $             | 13,987  |        
|                                                |                                                                       | Accrued progress payments (note 17)                                   |                               | 8,770         |         |               | 17,031  |        
|                                                |                                                                       | Accrued salaries and wages                                            |                               | 9,056         |         |               | 8,445   |        
|                                                |                                                                       | Other accrued expenses (note 10)                                      |                               | 4,637         |         |               | 4,258   |        
|                                                |                                                                       | Income taxes payable                                                  |                               | 1,103         |         |               | 2,004   |        
|                                                |                                                                       |                                                                       | Total current liabilities     |               | 32,286  |               |         | 45,725  | 
|Other long-term liabilities                     |                                                                       | 555                                                                   |                               |               | 101     |              
|Minority interest                               |                                                                       | 976                                                                   |                               |               | 1,419   |              
|Commitments and contingencies (notes 10 and 11) |                                                                       |                                                                       |                               |               |         |              
|                                               
|Stockholders' equity (notes 13, 14 and 15):     |                                                                       |                                                                       |                               |               |         |              
|                                                | Common stock, $ .10 par value per share:                              |                                                                       |                               |               |         |               |        
|                                                |                                                                       | 40,000,000 shares authorized;                                         |                               |               |         |               |         |        
|                                                |                                                                       | 18,692,478 shares issued (18,552,684 in 2006);                        |                               |               |         |               |         |        
|                                                |                                                                       | 18,242,192 shares outstanding (18,105,479 in 2006)                    |                               | 1,869         |         |               | 1,855   |        
|                                                | Additional paid-in capital                                            |                                                                       | 148,844                       |               |         | 145,225       |        
|                                                | Retained earnings                                                     |                                                                       | 32,194                        |               |         | 17,052        |        
|                                                | Accumulated other comprehensive income:                               |                                                                       |                               |               |         |               |        
|                                                |                                                                       | Currency translation effects                                          |                               | 205           |         |               | 74      |        
|                                                |                                                                       | Net unrealized gain on marketable securities (note 4)                 |                               | -             |         |               | 19      |        
|                                                |                                                                       |                                                                       |                               |               | 183,112 |               |         | 164,225 | 
|                                                | Less treasury stock, at cost; 450,286 common shares (447,205 in 2006) |                                                                       | 5,335                         |               |         | 5,287         |        
|                                                |                                                                       | Total stockholders' equity                                            |                               | 177,777       |         |               | 158,938 |        
|Total liabilities and stockholders' equity      | $                                                                     | 211,594                                                               |                               | $             | 206,183 |              

See accompanying notes to consolidated financial statements.

F - 4

---



CONSOLIDATED STATEMENTS OF OPERATIONS(Thousands except per share amounts)

|                                                       |                                     |                                            |                                          |                            |         |        |         |       |         |        |         |      |         | 
|------------------------------------------------------ | ----------------------------------- | ------------------------------------------ | ---------------------------------------- | -------------------------- | ------- | ------ | ------- | ----- | ------- | ------ | ------- | ---- | ------- | 
|                                                       |                                     |                                            |                                          | Fiscal Year Ended June 30,
|                                                       |                                     |                                            |                                          | 2007                       |         |        | 2006    |       | 2005   
|Net sales (note 17):                                   |                                     |                                            |                                          |                            |         |        |         |       |         |        |        
|                                                       | Products                            | $                                          | 176,937                                  |                            |         | $      | 148,123 |       |         | $      | 125,732 |     
|                                                       | Development services                |                                            | 4,051                                    |                            |         |        | 20,014  |       |         |        | 15,617  |     
|                                                       |                                     |                                            |                                          |                            | 180,988 |        |         |       | 168,137 |        |         |      | 141,349 | 
|Cost of goods sold:                                    |                                     |                                            |                                          |                            |         |        |         |       |         |        |        
|                                                       | Products                            |                                            | 100,835                                  |                            |         |        | 88,119  |       |         |        | 76,921  |     
|                                                       | Development services                |                                            | 2,970                                    |                            |         |        | 14,247  |       |         |        | 11,138  |     
|                                                       |                                     |                                            |                                          |                            | 103,805 |        |         |       | 102,366 |        |         |      | 88,059  | 
|                                                       | Gross profit                        |                                            | 77,183                                   |                            |         |        | 65,771  |       |         |        | 53,290  |     
|                                                      
|Selling, general, and administrative expenses          |                                     | 32,876                                     |                                          |                            |         | 31,125 |         |       |         | 24,905 |        
|Research, development, and engineering expenses        |                                     | 22,038                                     |                                          |                            |         | 15,901 |         |       |         | 13,377 |        
|                                                       | Operating profit                    |                                            | 22,269                                   |                            |         |        | 18,745  |       |         |        | 15,008  |     
|                                                      
|Other income:                                          |                                     |                                            |                                          |                            |         |        |         |       |         |        |        
|                                                       | Interest income                     |                                            | 2,990                                    |                            |         |        | 2,119   |       |         |        | 885     |     
|                                                       | Miscellaneous income (expense), net |                                            | (9                                       | )                          |         |        | 262     |       |         |        | (98     | )   
|                                                       |                                     | Total other income                         |                                          | 2,981                      |         |        |         | 2,381 |         |        |         | 787  |        
|                                                       |                                     | Earnings from continuing operations before |                                          |                            |         |        |         |       |         |        |         |      |        
|                                                       |                                     |                                            | income tax expense and minority interest |                            | 25,250  |        |         |       | 21,126  |        |         |      | 15,795  | 
|                                                      
|Income tax expense (note 15)                           |                                     | (9,132                                     | )                                        |                            |         | (5,849 | )       |       |         | (5,694 | )      
|Minority interest                                      |                                     | (976                                       | )                                        |                            |         | (792   | )       |       |         | (751   | )      
|Earnings from continuing operations                    |                                     | 15,142                                     |                                          |                            |         | 14,485 |         |       |         | 9,350  |        
|                                                      
|Discontinued TeraOptix operations, net of tax (note 3) |                                     | -                                          |                                          |                            |         | -      |         |       |         | (242   | )      
|Charges related to the disposal of TeraOptix,          |                                     |                                            |                                          |                            |         |        |         |       |         |        |        
|                                                       | net of tax (note 3)                 |                                            | -                                        |                            |         |        | -       |       |         |        | (124    | )   
|                                                       |                                     | Loss from discontinued operations          |                                          | -                          |         |        |         | -     |         |        |         | (366 | )      
|Net earnings                                           | $                                   | 15,142                                     |                                          |                            |         | 14,485 |         |       | $       | 8,984  |        
|                                                      
|Basic - Earnings (loss) per share:                     |                                     |                                            |                                          |                            |         |        |         |       |         |        |        
|                                                       | Continuing operations               | $                                          | 0.83                                     |                            |         |        | 0.80    |       |         | $      | 0.52    |     
|                                                       | Discontinued operations             |                                            | -                                        |                            |         |        | -       |       |         |        | (0.02   | )   
|                                                       | Net earnings                        | $                                          | 0.83                                     |                            |         |        | 0.80    |       |         | $      | 0.50    |     
|Diluted - Earnings (loss) per share:                   |                                     |                                            |                                          |                            |         |        |         |       |         |        |        
|                                                       | Continuing operations               | $                                          | 0.81                                     |                            |         |        | 0.79    |       |         | $      | 0.52    |     
|                                                       | Discontinued operations             |                                            | -                                        |                            |         |        | -       |       |         |        | (0.02   | )   
|                                                       | Net earnings                        | $                                          | 0.81                                     |                            |         |        | 0.79    |       |         | $      | 0.50    |     
|                                                      
|Weighted average number of shares:                     |                                     |                                            |                                          |                            |         |        |         |       |         |        |        
|                                                       | Basic                               |                                            | 18,156                                   |                            |         |        | 18,054  |       |         |        | 17,950  |     
|                                                       | Diluted                             |                                            | 18,601                                   |                            |         |        | 18,367  |       |         |        | 18,140  |     

See accompanying notes to consolidated financial statements.

F - 5

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(Thousands of dollars)

|                                               |       |         |        |         |           |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|---------------------------------------------- | ----- | ------- | ------ | ------- | --------- | -------- | ------ | ------- | ------- | ----------- | ----- | -------- | ------- | ------- |  | - | ------ | - | - | -------
|                                               |       |         |        |         |           |          |        |         |         | Accumulated |       |          |         |         |  |   |        |   |  
|                                               |       |         |        |         |           |          |        |         |         | Other       |       |          |         |         |  |   |        |   |  
|                                               |       |         |        | Compre- |           |          |        |         | Compre- |             |       |          |         |         |  |   |        |  
|                                               |       |         |        | hensive |           | Retained |        | hensive |         |             |       |          |         |         |  |   |       
|                                               |       |         |        | Income  |           | Earnings |        | Income  |         | Common      |       | Treasury |         | Paid-In
|                                               | Total |         | (Loss) |         | (Deficit) |          | (Loss) |         | Stock   |             | Stock |          | Capital
|Balance at July 1, 2004                        | $     | 131,352 |        |         |           |          | $      | (6,417  | )       | $           | 72    |          | $       | 1,833   |  | $ | (5,287 | ) | $ | 141,151
|Comprehensive income:                          |       |         |        |         |           |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|Net earnings                                   |       | 8,984   |        | $       | 8,984     |          |        | 8,984   |         |             |       |          |         |         |  |   |        |   |   |        
|Other comprehensive income (loss), net of tax: |       |         |        |         |           |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|Unrealized loss on marketable securities       |       | (30     | )      |         | (30       | )        |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|Foreign currency translation effect            |       | (122    | )      |         | (122      | )        |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|Other comprehensive (loss)                     |       |         |        |         | (152      | )        |        |         |         |             | (152  | )        |         |         |  |   |        |   |   |        
|Comprehensive Income                           |       |         |        | $       | 8,832     |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|Non-cash compensation charges                  |       |         |        |         |           |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|related to stock options                       |       | 76      |        |         |           |          |        |         |         |             |       |          |         |         |  |   |        |   |   | 76     
|Employee stock purchase                        |       | 667     |        |         |           |          |        |         |         |             |       |          |         | 7       |  |   |        |   |   | 660    
|Exercise of employee stock options             |       |         |        |         |           |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|and related tax effect                         |       | 226     |        |         |           |          |        |         |         |             |       |          |         | 2       |  |   |        |   |   | 224    
|Balance at June 30, 2005                       |       | 141,153 |        |         |           |          |        | 2,567   |         |             | (80   | )        |         | 1,842   |  |   | (5,287 | ) |   | 142,111
|Comprehensive income:                          |       |         |        |         |           |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|Net earnings                                   |       | 14,485  |        | $       | 14,485    |          |        | 14,485  |         |             |       |          |         |         |  |   |        |   |   |        
|Other comprehensive income (loss), net of tax: |       |         |        |         |           |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|Unrealized loss on marketable securities       |       | (13     | )      |         | (13       | )        |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|Foreign currency translation effect            |       | 186     |        |         | 186       |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|Other comprehensive income                     |       |         |        |         | 173       |          |        |         |         |             | 173   |          |         |         |  |   |        |   |   |        
|Comprehensive income                           |       |         |        | $       | 14,658    |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|Non-cash compensation charges                  |       |         |        |         |           |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|related to stock options                       |       | 1,698   |        |         |           |          |        |         |         |             |       |          |         |         |  |   |        |   |   | 1,698  
|Employee stock purchase                        |       | 492     |        |         |           |          |        |         |         |             |       |          |         | 5       |  |   |        |   |   | 487    
|Exercise of employee stock options             |       |         |        |         |           |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|and related tax effect                         |       | 937     |        |         |           |          |        |         |         |             |       |          |         | 8       |  |   |        |   |   | 929    
|Balance at June 30, 2006                       |       | 158,938 |        |         |           |          |        | 17,052  |         |             | 93    |          |         | 1,855   |  |   | (5,287 | ) |   | 145,225
|Comprehensive income:                          |       |         |        |         |           |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|Net earnings                                   |       | 15,142  |        | $       | 15,142    |          |        | 15,142  |         |             |       |          |         |         |  |   |        |   |   |        
|Other comprehensive income (loss), net of tax: |       |         |        |         |           |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|Unrealized loss on marketable securities       |       | (19     | )      |         | (19       | )        |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|Foreign currency translation effect            |       | 131     |        |         | 131       |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|Other comprehensive income                     |       |         |        |         | 112       |          |        |         |         |             | 112   |          |         |         |  |   |        |   |   |        
|Comprehensive income                           |       |         |        | $       | 15,254    |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|Non-cash compensation charges                  |       |         |        |         |           |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|related to stock options                       |       | 2,189   |        |         |           |          |        |         |         |             |       |          |         |         |  |   |        |   |   | 2,189  
|Employee stock purchase                        |       | 323     |        |         |           |          |        |         |         |             |       |          |         | 2       |  |   |        |   |   | 321    
|Repurchase of company stock                    |       | (48     | )      |         |           |          |        |         |         |             |       |          |         |         |  |   | (48    | ) |   |        
|Exercise of employee stock options             |       |         |        |         |           |          |        |         |         |             |       |          |         |         |  |   |        |   |   |        
|and related tax effect                         |       | 1,121   |        |         |           |          |        |         |         |             |       |          |         | 12      |  |   |        |   |   | 1,109  
|Balance at June 30, 2007                       | $     | 177,777 |        |         |           |          | $      | 32,194  |         | $           | 205   |          | $       | 1,869   |  | $ | (5,335 | ) | $ | 148,844

See accompanying notes to consolidated financial statements.

F - 6

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CONSOLIDATED STATEMENTS OF CASH FLOWS(Thousands of dollars)

|                                                              |                            |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------- | -------------------------- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                              | Fiscal Year Ended June 30,
|                                                              |                            | 2007    |   |  |   | 2006    |   |  |   | 2005    |  
|Cash provided by operating activities:                        |                            |         |   |  |   |         |   |  |   |         |  
|Net earnings                                                  | $                          | 15,142  |   |  | $ | 14,485  |   |  | $ | 8,984   |  
|Adjustments to reconcile net earnings to cash                 |                            |         |   |  |   |         |   |  |   |         |  
|provided by operating activities:                             |                            |         |   |  |   |         |   |  |   |         |  
|Loss from discontinued operations                             |                            | -       |   |  |   | -       |   |  |   | 366     |  
|Depreciation and amortization                                 |                            | 6,519   |   |  |   | 6,214   |   |  |   | 5,880   |  
|Loss on disposal of assets                                    |                            | 190     |   |  |   | 266     |   |  |   | 209     |  
|Deferred income taxes                                         |                            | 6,606   |   |  |   | 3,836   |   |  |   | 5,333   |  
|Compensation cost related to share-based payment arrangements |                            | 2,189   |   |  |   | 1,698   |   |  |   | -       |  
|Excess tax benefits from share-based payment arrangements     |                            | (190    | ) |  |   | (128    | ) |  |   | -       |  
|Minority interest                                             |                            | 976     |   |  |   | 792     |   |  |   | 751     |  
|Other                                                         |                            | 111     |   |  |   | 5       |   |  |   | 97      |  
|Changes in operating accounts:                                |                            |         |   |  |   |         |   |  |   |         |  
|Receivables                                                   |                            | 1,833   |   |  |   | (5,438  | ) |  |   | (1,630  | )
|Inventories                                                   |                            | (4,964  | ) |  |   | (3,959  | ) |  |   | (11,650 | )
|Prepaid expenses                                              |                            | (138    | ) |  |   | 20      |   |  |   | (202    | )
|Accounts payable, accrued expenses, and taxes payable         |                            | (13,193 | ) |  |   | (1,773  | ) |  |   | 24,109  |  
|Net cash provided by continuing operations                    |                            | 15,081  |   |  |   | 16,018  |   |  |   | 32,247  |  
|Net cash used for discontinued operations                     |                            | -       |   |  |   | -       |   |  |   | (423    | )
|Net cash provided by operating activities                     |                            | 15,081  |   |  |   | 16,018  |   |  |   | 31,824  |  
|Cash used for investing activities:                           |                            |         |   |  |   |         |   |  |   |         |  
|Additions to property, plant, and equipment                   |                            | (10,149 | ) |  |   | (7,441  | ) |  |   | (9,987  | )
|Purchase of marketable securities                             |                            | (38,546 | ) |  |   | (31,336 | ) |  |   | (28,389 | )
|Additions to intangibles and other assets                     |                            | (490    | ) |  |   | (816    | ) |  |   | (1,332  | )
|Proceeds from the sale of other assets                        |                            | 24      |   |  |   | 9       |   |  |   | 55      |  
|Proceeds from maturity of marketable securities               |                            | 31,402  |   |  |   | 22,000  |   |  |   | 17,556  |  
|Net cash used for continuing operations                       |                            | (17,759 | ) |  |   | (17,584 | ) |  |   | (22,097 | )
|Net cash provided by discontinued operations                  |                            | -       |   |  |   | -       |   |  |   | 1,918   |  
|Net cash used for investing activities                        |                            | (17,759 | ) |  |   | (17,584 | ) |  |   | (20,179 | )
|Cash provided by financing activities:                        |                            |         |   |  |   |         |   |  |   |         |  
|Dividend payments to minority interest                        |                            | (1,287  | ) |  |   | (622    | ) |  |   | (751    | )
|Employee stock purchase                                       |                            | 323     |   |  |   | 492     |   |  |   | 667     |  
|Excess tax benefits from share-based payment arrangements     |                            | 190     |   |  |   | 128     |   |  |   | -       |  
|Repurchase of company stock                                   |                            | (48     | ) |  |   | -       |   |  |   | -       |  
|Exercise of employee stock options                            |                            | 1,121   |   |  |   | 937     |   |  |   | 226     |  
|Net cash provided by financing activities                     |                            | 299     |   |  |   | 935     |   |  |   | 142     |  
|Effect of exchange rate changes on cash and cash equivalents  |                            | (113    | ) |  |   | -       |   |  |   | -       |  
|Net increase (decrease) in cash and cash equivalents          |                            | (2,492  | ) |  |   | (631    | ) |  |   | 11,787  |  
|Cash and cash equivalents, beginning of year                  |                            | 20,318  |   |  |   | 20,949  |   |  |   | 9,162   |  
|Cash and cash equivalents, end of year                        | $                          | 17,826  |   |  | $ | 20,318  |   |  | $ | 20,949  |  

See accompanying notes to consolidated financial statements.

F - 7

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTSYears Ended June 30, 2007, 2006, and 2005(Dollars in thousands, except for per share amounts)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Operations and Principles of ConsolidationZygo Corporation is a worldwide supplier in optical metrology instruments, precision optics, and elecro-optical design and manufacturing services, serving customers in the semiconductor capital equipment and industrial
markets. The accompanying consolidated financial statements include the accounts of Zygo Corporation and its subsidiaries (ZYGO, we, us, our or Company). All material transactions and
accounts with the subsidiaries have been eliminated from the consolidated financial statements.

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

Marketable SecuritiesWe consider investments in securities with maturities at the date of purchase in excess of three months as marketable securities. Marketable securities consist primarily of corporate and government agency securities. All
securities held by us at June 30, 2007 and 2006 were classified as held-to-maturity and recorded at amortized cost.

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

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

Intangible AssetsIntangible assets include patents, trademarks, and license agreements. The cost of intangible assets is amortized on a straight-line basis, over estimated useful lives ranging from 5-17 years.

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

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

F - 8

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Income TaxesIncome taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. As of June 30, 2007 and 2006,
income tax contingencies are evaluated on the criteria in SFAS No. 5 based on their probability of occurring.

Revenue RecognitionWe recognize revenue based on guidance provided in Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, and in accordance with Emerging
Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, our
price is fixed or determinable, and collectibility is reasonably assured. We recognize revenue on our standard products when title passes to the customer upon shipment. While our standard products generally require installation, the installation is
considered a perfunctory performance obligation. The standard products do not have customer acceptance criteria. Generally, software is a component of our standard product and, as such, is not separately recognized as revenue. Standalone software
products are recognized as revenue when they are shipped. We have standard rights of return that we account for as a warranty provision under SFAS No. 5, Accounting for Contingencies. We do not have any price protection agreements or
other post shipment obligations. For custom equipment where customer acceptance is part of the sales agreement, revenue is recognized when the customer has accepted the product. In cases where custom equipment does not have customer acceptance as
part of the sales agreement, we recognize revenue upon shipment, as long as the system meets the specifications as agreed upon with the customer. Certain transactions have multiple deliverables, with the deliverables clearly defined. To the extent
that the secondary deliverables are other than perfunctory, we recognize the revenue on each deliverable, if separable, or on the completion of all deliverables, if not separable. Revenue generated from development contracts are recorded on a
cost-plus basis in the period services are rendered.

Research and DevelopmentResearch and development costs are expensed as incurred. Reimbursements from customers for research and development costs are recorded as offsets to the expenses. In fiscal 2007 and 2006, reimbursements totaled $170 and
$1,176, respectively. There were no reimbursements from customers for research and development costs in fiscal 2005.

Earnings Per ShareBasic and diluted earnings per share are calculated in accordance with SFAS No. 128, Earnings Per Share. The following table sets forth the reconciliation of weighted average shares outstanding and diluted weighted average shares outstanding:

|                                                      |               |  |               |  |              
|----------------------------------------------------- | ------------- |  | ------------- |  | -------------
|                                                      | June 30, 2007 |  | June 30, 2006 |  | June 30, 2005
|                                                     
|Weighted average shares outstanding                   | 18,155,627    |  | 18,053,596    |  | 17,950,423   
|Dilutive effect of stock options and restricted stock | 445,675       |  | 313,470       |  | 189,750      
|Diluted weighted average shares outstanding           | 18,601,302    |  | 18,367,066    |  | 18,140,173   

F - 9

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Share-Based CompensationWe have two share-based compensation plans, which are described in Note 13. In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123(R), Share-Based Payment (as amended).
SFAS No. 123(R) eliminates the alternative to use the intrinsic value method of accounting that was provided in SFAS No. 123, which generally resulted in no compensation expense recorded in the financial statements related to the issuance of equity
awards to employees and directors to the extent issued at fair market value. SFAS No. 123(R) requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS No. 123(R) establishes fair value
as the measurement objective in accounting for share-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting generally for all share-based payment transactions with employees. SFAS 123(R)
does not require the recording of compensation expense in periods prior to the date of adoption.

On July 1, 2005, we adopted SFAS No. 123(R) using a modified prospective method. Compensation expense for the fiscal year ended June 30, 2007 was $2,189, with a related tax benefit of $788. Share-based compensation
expense for fiscal 2007 increased cost of sales by $244, selling, general, and administration by $1,497, and research, development, and engineering by $448. Compensation expense for the fiscal year ended June 30, 2006 was $1,698,
with a related tax benefit of $608. Share-based compensation expense for fiscal 2006 increased cost of sales by $419, selling, general, and administration by $1,023, and research, development, and engineering by $256. Under this
application, we are required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.In addition, we made changes to our employee stock purchase plan for periods beginning after July 1, 2005, which rendered the plan non-compensatory in accordance with SFAS No. 123(R).

Prior to the adoption of SFAS No. 123(R), we applied Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for our
plans. The following table details the effect on net earnings and earnings per share had compensation expense for the employee share-based awards been recorded for fiscal years ended June 30, 2005 based on the fair value method under SFAS No.
123.

|                                            |                     |        |  
|------------------------------------------- | ------------------- | ------ | -
|                                            | June 30,
      2005
|                                           
|Net earnings, as reported                   | $                   | 8,984  |  
|Deduct: Total stock-based employee          |                     |        |  
|compensation expense determined under       |                     |        |  
|fair value based method for all awards, net |                     |        |  
|of related tax effects                      |                     | (2,519 | )
|Pro forma net earnings                      | $                   | 6,465  |  
|                                           
|Net earnings per share                      |                     |        |  
|Basic - as reported                         | $                   | 0.50   |  
|Basic - pro forma                           | $                   | 0.36   |  
|                                           
|Diluted - as reported                       | $                   | 0.50   |  
|Diluted - pro forma                         | $                   | 0.36   |  

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

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

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

F - 10

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Recently Issued Accounting PronouncementsIn February 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value, with unrealized gains and losses related to these
financial instruments reported in earnings at each subsequent reporting date. This Statement is effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. The Company is in the process of evaluating the
impact of SFAS 159 on our financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin 108 (SAB 108) to address diversity in practice in quantifying financial statement misstatements. SAB 108 requires that we quantify misstatements based
on their impact on each of our financial statements and related disclosures. SAB 108 was effective as of the end of our 2007 fiscal year, allowing a one-time transitional cumulative effect adjustment to retained earnings as of June 30, 2007 for
errors that were not previously deemed material, but are material under the guidance in SAB 108. The adoption of SAB 108 did not have a material effect on our financial statements.

In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" ("SFAS 158"). SFAS 158 requires employers to fully recognize the obligations associated
with single-employer defined benefit pension, retiree healthcare, and other post-retirement plans in their financial statements. The provisions of SFAS 158 are effective as of the end of our fiscal year ending June 30, 2007. The impact of the
provisions of SFAS 158 did not have a material effect on our company.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for our fiscal year beginning July 1, 2008. We are currently evaluating the impact of the provisions of SFAS 157 on our company.

In June 2006, the FASB issued Interpretation No. 48 (FIN No. 48), Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. The Interpretation provides a recognition threshold and measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. Under FIN No. 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood
of being realized upon ultimate settlement. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for us beginning July 1, 2007.
While the Company is continuing to evaluate the impact of the interpretation on the consolidated financial statements, the Company expects the cumulative effect of adoption to reduce opening retained earnings by no more than $4.8 million with a
corresponding increase in reserves for uncertain tax positions, primarily related to certain federal tax credit carryforwards.

NOTE 2: RESTATEMENT OF FINANCIAL STATEMENTS

The consolidated financial statements for fiscal year 2005 have been restated in 2006 for corrections in the accounting of intercompany transactions from certain of our foreign operations. The fiscal year 2005 adjustments reduced
revenues by $818; earnings from continuing operations by $825; and earnings per diluted share from continuing operations and net income per diluted share by $0.04.

F - 11

---



NOTE 3: DIVESTITURES AND DISCONTINUED OPERATIONS

In September 2002, we committed to a planned disposition of our TeraOptix business unit (TeraOptix) which included recording impairment charges for the facility and equipment. In fiscal 2005, we recorded an
additional impairment charge and adjustments of $124, net of tax of $43, to reflect the fair value based on final negotiations of a pending sale. The sale of the facility was completed in March 2005 for $1,918, net of selling expenses.

|                                                                       |              |       |  
|---------------------------------------------------------------------- | ------------ | ----- | -
|                                                                       | June 30,2005
|                                                                      
|Cash flow from operating activities from discontinued operations:      |              |       |  
|Loss from discontinued operations                                      | $            | (366  | )
|Loss on sale and impairment of assets                                  |              | 94    |  
|Deferred income taxes                                                  |              | (128  | )
|Prepaid expenses                                                       |              | (23   | )
|Net cash used for operating activities from discontinued operations    |              | (423  | )
|                                                                      
|Cash flow from investing activities from discontinued operations:      |              |       |  
|Proceeds from sale of assets                                           |              | 1,918 |  
|Net cash provided by investing activities from discontinued operations |              | 1,918 |  
|                                                                      
|Net cash provided by discontinued operations                           | $            | 1,495 |  

NOTE 4: MARKETABLE SECURITIES

Marketable securities consisted primarily of corporate and government agency securities for fiscal 2007 and 2006. Marketable securities at June 30, 2007 and 2006 are reported at amortized cost. Straight-line amortization
related to discounts and premiums on the purchase of marketable securities was $(30), $131, and $107 in fiscal 2007, 2006, and 2005, respectively. As of June 30, 2003, we transferred our marketable securities from available-for-sale to
held-to-maturity. Accordingly, the gross unrealized gains have been amortized over the remaining life. Amortization, net of tax, related to the unrealized gain was $19, $13, and $30 in fiscal 2007, 2006, and 2005, respectively.

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. No sales were
made in the three years ended June 30, 2007.

The amortized cost, gross unrealized gains and losses, and fair value of held-to-maturity securities at June 30, 2007 and 2006 were as follows:

|                          |           |        |  |            |       |  |            |       |       |  |   |       
|------------------------- | --------- | ------ |  | ---------- | ----- |  | ---------- | ----- | ----- |  | - | ------
|                          |           |        |  |            | Gross |  |            | Gross |       |  |  
|                          | Amortized |        |  | Unrealized |       |  | Unrealized |       | Fair 
|                          | Cost      |        |  | Gains      |       |  | Losses     |       | Value
|At June 30, 2007          |           |        |  |            |       |  |            |       |       |  |   |       
|Corporate, federal, state |           |        |  |            |       |  |            |       |       |  |   |       
|and local municipal bonds | $         | 52,332 |  | $          | 4     |  | $          | (202  | )     |  | $ | 52,134
|                          |           |        |  |            |       |  |            |       |       |  |   |       
|At June 30, 2006          |           |        |  |            |       |  |            |       |       |  |   |       
|Corporate, federal, state |           |        |  |            |       |  |            |       |       |  |   |       
|and local municipal bonds | $         | 45,158 |  | $          | -     |  | $          | (592  | )     |  | $ | 44,566

Maturities of investment securities classified as held-to-maturity at June 30, 2007 and 2006 were as follows:

|                           |               |        |               |   |           |  |       |        |  |   |       
|-------------------------- | ------------- | ------ | ------------- | - | --------- |  | ----- | ------ |  | - | ------
|                           | June 30, 2007 |        | June 30, 2006
|                           | Amortized     |        | Fair          |   | Amortized |  | Fair 
|                           | Cost          |        | Value         |   | Cost      |  | Value
|Due within one year        | $             | 29,453 |               | $ | 29,366    |  | $     | 21,415 |  | $ | 21,261
|Due after one year through |               |        |               |   |           |  |       |        |  |   |       
|five years                 |               | 22,879 |               |   | 22,768    |  |       | 23,743 |  |   | 23,305
|                           | $             | 52,332 |               | $ | 52,134    |  | $     | 45,158 |  | $ | 44,566

F - 12

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The following table shows our investments gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at
June 30, 2007 and 2006.

|                       |                     |                     |        |            |              |   |                  |   |              |  |        |      |            |            |   |        |  |   |      |  
|---------------------- | ------------------- | ------------------- | ------ | ---------- | ------------ | - | ---------------- | - | ------------ |  | ------ | ---- | ---------- | ---------- | - | ------ |  | - | ---- | -
|                       |                     |                     |        |            |              |   | Fiscal Year 2007 |   |              |  |        |      |            |           
|                       | Less than 12 months | More than 12 months |        | Total     
|                       |                     |                     |        | Gross      |              |   |                  |   | Gross        |  |        |      |            | Gross     
|                       |                     |                     |        | Unrealized |              |   |                  |   | Unrealized   |  |        |      |            | Unrealized
|                       | Market Value        |                     | Losses |            | Market Value |   | Losses           |   | Market Value |  | Losses
|Corporate and other    | $                   | 17,938              |        | $          | (53          | ) |                  | $ | 15,098       |  | $      | (127 | )          |            | $ | 33,036 |  | $ | (180 | )
|US Government Agencies |                     | 9,396               |        |            | (18          | ) |                  |   | 496          |  |        | (4   | )          |            |   | 9,892  |  |   | (22  | )
|                       | $                   | 27,334              |        | $          | (71          | ) |                  | $ | 15,594       |  | $      | (131 | )          |            | $ | 42,928 |  | $ | (202 | )
|                      
|                       |                     |                     |        |            |              |   | Fiscal Year 2006 |   |              |  |        |      |            |           
|                       | Less than 12 months | More than 12 months |        | Total     
|                       |                     |                     |        | Gross      |              |   |                  |   | Gross        |  |        |      |            | Gross     
|                       |                     |                     |        | Unrealized |              |   |                  |   | Unrealized   |  |        |      | Unrealized
|                       | Market Value        |                     | Losses |            | Market Value |   | Losses           |   | Market Value |  | Losses
|Corporate and other    | $                   | 17,049              |        | $          | (174         | ) |                  | $ | 18,718       |  | $      | (359 | )          |            | $ | 35,767 |  | $ | (533 | )
|US Government Agencies |                     | 2,985               |        |            | (16          | ) |                  |   | 1,714        |  |        | (43  | )          |            |   | 4,699  |  |   | (59  | )
|                       | $                   | 20,034              |        | $          | (190         | ) |                  | $ | 20,432       |  | $      | (402 | )          |            | $ | 40,466 |  | $ | (592 | )

In determining whether investment holdings are other than temporarily impaired, we consider the nature, cause, severity, and duration of the impairment. We and our investment advisors use analyst reports, credit ratings and
other items as part of our review. No investments were considered to be other than temporarily impaired at June 30, 2007 and 2006.

NOTE 5: RECEIVABLES

At June 30, 2007 and 2006, receivables were as follows:

|                                                            |                   |        |                   |  |   |        |  
|----------------------------------------------------------- | ----------------- | ------ | ----------------- |  | - | ------ | -
|                                                            | June 30, 2007     |        | June 30, 2006    
|                                                           
|Trade (note 17)                                             | $                 | 31,033 |                   |  | $ | 33,429 |  
|Other                                                       |                   | 1,776  |                   |  |   | 918    |  
|                                                            |                   | 32,809 |                   |  |   | 34,347 |  
|Allowance for doubtful accounts                             |                   | (333   | )                 |  |   | (588   | )
|                                                            | $                 | 32,476 |                   |  | $ | 33,759 |  
|                                                            |                   |        |                   |  |   |        |  
|                                                           
|NOTE 6: INVENTORIES                                        
|                                                           
|At June 30, 2007 and 2006, inventories
    were as follows:
|                                                           
|                                                            | June
    30, 2007 |        | June
    30, 2006
|                                                           
|Raw
        materials and manufactured parts                | $                 | 20,268 |                   |  | $ | 17,536 |  
|Work
        in process                                     |                   | 17,115 |                   |  |   | 17,321 |  
|Finished
        goods                                      |                   | 5,665  |                   |  |   | 3,225  |  
|                                                            | $                 | 43,048 |                   |  | $ | 38,082 |  

F - 13

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NOTE 7: PROPERTY, PLANT, AND EQUIPMENT

At June 30, 2007 and 2006, property plant, and equipment, at cost, were as follows:

|                                           |               |         |               |  |         |         |   |  |            
|------------------------------------------ | ------------- | ------- | ------------- |  | ------- | ------- | - |  | -----------
|                                           |               |         |               |  |         |         |   |  | Estimated  
|                                           |               |         |               |  |         |         |   |  | Useful Life
|                                           | June 30, 2007 |         | June 30, 2006 |  | (Years)
|                                          
|Land                                       | $             | 615     |               |  | $       | 615     |   |  | -          
|Building and improvements                  |               | 17,085  |               |  |         | 16,848  |   |  | 15-40      
|Machinery, equipment, and office furniture |               | 56,395  |               |  |         | 49,889  |   |  | 3-8        
|Leasehold improvements                     |               | 795     |               |  |         | 772     |   |  | 1-5        
|Construction in progress                   |               | 5,231   |               |  |         | 2,916   |   |  | -          
|                                           |               | 80,121  |               |  |         | 71,040  |   |  |            
|Less accumulated depreciation              |               | (43,772 | )             |  |         | (38,409 | ) |  |            
|                                           | $             | 36,349  |               |  | $       | 32,631  |   |  |            

Depreciation expense for the fiscal years ended June 30, 2007, 2006, and 2005 was $6,246, $5,734, and $5,273, respectively.

NOTE 8: INTANGIBLE ASSETS

Intangible assets, at cost, at June 30, 2007 and 2006 were as follows:

|                         |               |        |               |  |             |        |   |  |          
|------------------------ | ------------- | ------ | ------------- |  | ----------- | ------ | - |  | ---------
|                         |               |        |               |  |             |        |   |  | Estimated
|                         |               |        |               |  | Useful Life
|                         | June 30, 2007 |        | June 30, 2006 |  | (Years)    
|Patents and trademarks   | $             | 7,504  |               |  | $           | 7,042  |   |  | 12-17    
|License agreements       |               | -      |               |  |             | 1,350  |   |  | 5        
|                         |               | 7,504  |               |  |             | 8,392  |   |  |          
|Accumulated amortization |               | (1,394 | )             |  |             | (2,467 | ) |  |          
|Total                    | $             | 6,110  |               |  | $           | 5,925  |   |  |          

Intangible amortization expense for the fiscal years ended June 30, 2007, 2006 and 2005 was $322, $362, and $530, respectively. Intangible amortization expense is estimated to be approximately $500 in fiscal
2008 and approximately $530 annually in fiscal 2009-2012. Amortization expense related to intangible assets is included in cost of goods sold in the consolidated statements of operations.

NOTE 9: BANK LINE OF CREDIT

We have a $3,000 unsecured bank line of credit agreement bearing interest at our choice of either the prime rate (8.25% at June 30, 2007) or the one month LIBOR rate plus a variable interest rate of 1.0% to 2.5%, based
on a pricing grid related to a certain debt ratio, adjusted quarterly. The agreement contains certain financial covenants which, among others, relate to debt service and consolidated debt ratios. The line of credit is available through November 17,
2007. At June 30, 2007 and 2006, no amounts were outstanding under the bank line of credit.

NOTE 10: WARRANTY LIABILITY

A limited warranty is provided on our products for periods typically ranging from 3 to 18 months and allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances
requires management to make estimates of product return rates and expected costs to repair or replace products under warranty. If actual return rates or repair and replacement costs, or both, differ significantly from managements estimates,
adjustments to recognize additional expense may be required.

F - 14

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

|                                                      |               |        |               |  |   |       |  
|----------------------------------------------------- | ------------- | ------ | ------------- |  | - | ----- | -
|                                                      | June 30, 2007 |        | June 30, 2006
|Beginning balance                                     | $             | 1,660  |               |  | $ | 1,396 |  
|Reductions for payments made                          |               | (1,566 | )             |  |   | (882  | )
|Changes in accruals related to warranties issued      |               |        |               |  |   |       |  
|in the current period                                 |               | 2,293  |               |  |   | 1,541 |  
|Changes in accrual related to pre-existing warranties |               | (835   | )             |  |   | (395  | )
|Ending balance                                        | $             | 1,552  |               |  | $ | 1,660 |  

NOTE 11: LEASES

We lease certain manufacturing equipment and facilities under operating leases, some of which include cost escalation clauses, expiring on various dates through fiscal 2012. Total lease expense, net, charged to operations
was $1,363, $1,663, and $2,270 in fiscal 2007, 2006, 2005, respectively. At June 30, 2007, the minimum future lease commitments under noncancellable leases payable over the remaining lives of the leases are as follows:

|                             |              |      
|---------------------------- | ------------ | -----
|                             | Minimum     
|                             | Future Lease
|Year ending June 30,         | Commitments 
|2008                         | $            | 1,166
|2009                         |              | 885  
|2010                         |              | 634  
|2011                         |              | 286  
|2012                         |              | 11   
|Total minimum lease payments | $            | 2,982

NOTE 12: PROFIT-SHARING PLAN

We maintain a deferred profit-sharing plan under which substantially all full-time employees are eligible to participate. The profit-sharing plan consists of a cash distribution and a contribution to our 401(k) program.
Profit-sharing contributions are determined annually at the discretion of the Board of Directors. We also maintain a 401(k) tax deferred payroll deduction program and an Employee Stock Ownership Program. Under the 401(k) program, employees may

contribute a tax-deferred amount of up to 60% of their compensation, as defined. We may contribute to the 401(k) program an amount determined annually at the discretion of the Board of Directors. Under the Employee Stock Ownership Program, we may,
at the discretion of the Board of Directors, contribute our own stock or contribute cash to purchase our own stock. The purchased stock's fair market value can not exceed the maximum amount of employee stock ownership credit as determined under
Section 416 of the Internal Revenue Code. Our contribution expenses related to the plans for the years ended June 30, 2007, 2006, and 2005, amounted to $3,630, $2,847, and $2,070, respectively.

NOTE 13: SHARE-BASED COMPENSATION PLANS

Share-Based Compensation PlansZygo has two share-based compensation plans. The Zygo Corporation 2002 Equity Incentive Plan (2002 Plan) permits the granting of stock options to purchase shares of common stock and the granting of restricted
stock up to a total of 3,300,000 shares. The exercise price per share of common stock covered by an option may not be less than the par value per share on the date of grant, and in the case of an incentive stock option, the exercise price may not be
less than the market value per share on the date of grant. These options generally vest over a four year period at a rate of 25% each year. Generally, restricted stock awards have 50% of their restrictions lapse after three years and the remaining
50% lapse after four years. The 2002 Plan will expire on August 27, 2012. Pursuant to the terms of the 2002 Plan, the Board of Directors may also amend the 2002 Plan to authorize the grant of other types of equity-based awards, without further
action by our stockholders. Options issued to non-employee directors are now issued under this plan. As part of directors compensation for services to our company, non-employee directors are granted 5,000 restricted shares, which vest after
one year, on an annual basis and each new non-employee director will be granted options to purchase 16,000 shares of common stock on his or her first day of service, at the market value per share on the date of grant. These options will vest over a four year period at
a rate of 25% each year.

F - 15

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The Zygo Corporation Amended and Restated Non-Employee Director Stock Option Plan (Director 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 market value of the stock on the date of grant. Under the terms of the Director Plan, as amended on September 24, 1999, each new non-employee director (other than a person who was previously an employee of
ZYGO or any of our subsidiaries) was granted an option to purchase 8,000 shares of common stock, generally, on his or her first day of service as a non-employee director; and each other non-employee director was granted an option to purchase 3,000
shares of common stock on an annual basis. All options were fully exercisable on the date of grant and had a 10-year term. The Director Plan, as amended, will expire on November 17, 2009. The Company ceased granting options under this plan in fiscal
2003 and does not intend to grant further options under the Director Plan.

On June 26, 2001, the Board of Directors granted a warrant to purchase 25,000 shares of our common stock to the Zetetic Institute, a non-profit organization that provides assistance to us in connection with certain research
and development activities. The warrant has an exercise price of $18.64 per share, the closing price of the common stock on the date of the grant, and vested in equal annual increments over the four-year period following the date of grant. The
warrant will expire in fiscal 2011.

We use the Black-Scholes option-pricing model to calculate the fair value of stock option awards. The key assumptions for this valuation method include the expected term of the option, stock price volatility, risk-free
interest rate, dividend yield, exercise price, and forfeiture rate. Under the assumptions indicated below, the weighted-average fair value of stock option grants for fiscal 2007, 2006, and 2005 were $6.23, $5.41 and $6.32, respectively.
The table below indicates the key assumptions used in the option valuation calculations for options granted in fiscal 2007, 2006, and 2005, and a discussion of our methodology for developing each of the assumptions used in the valuation model:

|                        |                             |  |           |  |          
|----------------------- | --------------------------- |  | --------- |  | ---------
|                        | Fiscal Years Ended June 30,
|                        | 2007                        |  | 2006      |  | 2005     
|Term                    | 4.1 Years                   |  | 4.1 Years |  | 4.5 Years
|Volatility              | 52.1%                       |  | 52.9%     |  | 64-80%   
|Dividend yield          | 0.0%                        |  | 0.0%      |  | 0.0%     
|Risk-free interest rate | 4.7-4.8%                    |  | 3.9-4.4%  |  | 3.2-3.9% 
|Forfeiture rate         | 10.7%                       |  | 10.6%     |  | 4.0%     

Term This is the period of time over which the options granted are expected to remain outstanding. Options granted have a maximum term of ten years. An increase in the expected
term will increase compensation expense.

Volatility This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. Volatilities are based on implied volatilities from traded options of
ZYGOs shares, historical volatility of ZYGOs shares, and other factors, such as expected changes in volatility arising from planned changes in ZYGOs business operations. An increase in the expected volatility will increase
compensation expense.

Risk-Free Interest Rate This is the U.S. Treasury rate for the week of the grant having a term equal to the expected term of the option. An increase in the risk-free interest
rate will increase compensation expense.

Dividend Yield We did not make any dividend payments during the last five fiscal years and we have no plans to pay dividends in the foreseeable future. An increase in the
dividend yield will decrease compensation expense.

Forfeiture Rate This is the estimated percentage of options granted that are expected to be forfeited or canceled before becoming fully vested. An increase in the forfeiture
rate will decrease compensation expense.

F - 16

---



Stock Options
Included in the information below are outstanding options from the Zygo Corporation Amended and Restated Non-Qualified Stock Option Plan which expired in fiscal 2003, to the extent the options remain available for exercise.

The following table summarizes information about our
stock options granted under our share-based compensation plans for fiscal 2007,
2006, and 2005.

|                                           |                         |   |                       |          |                       |  |           |   |          |   |       |  |           |          |  |   |      
|------------------------------------------ | ----------------------- | - | --------------------- | -------- | --------------------- |  | --------- | - | -------- | - | ----- |  | --------- | -------- |  | - | -----
|                                           | June
          30, 2007 |   | June
        30, 2006 |          | June
        30, 2005
|                                          
|                                           |                         |   |                       | Weighted |                       |  |           |   | Weighted |   |       |  |           | Weighted
|                                           |                         |   |                       | Average  |                       |  |           |   | Average  |   |       |  |           | Average 
|                                           |                         |   |                       | Exercise |                       |  |           |   | Exercise |   |       |  |           | Exercise
|                                           | Shares                  |   | Price                 |          | Shares                |  | Price     |   | Shares   |   | Price
|                                          
|Outstanding at beginning
        of year   | 2,082,636               |   |                       | $        | 26.03                 |  | 2,069,175 |   |          | $ | 26.95 |  | 1,902,985 |          |  | $ | 29.89
|Granted                                    | 175,000                 |   |                       | $        | 13.47                 |  | 186,000   |   |          | $ | 11.80 |  | 289,200   |          |  | $ | 9.51 
|Exercised                                  | (108,740                | ) |                       | $        | 8.85                  |  | (83,340   | ) |          | $ | 9.07  |  | (19,856   | )        |  | $ | 7.26 
|Expired or cancelled                       | (91,130                 | ) |                       | $        | 27.75                 |  | (89,199   | ) |          | $ | 33.20 |  | (103,154  | )        |  | $ | 36.14
|Options - Outstanding-end
        of year  | 2,057,766               |   |                       | $        | 25.80                 |  | 2,082,636 |   |          | $ | 26.03 |  | 2,069,175 |          |  | $ | 26.95
|Options vested or expected
        to vest | 2,018,558               |   |                       | $        | 26.05                 |  | 2,054,698 |   |          | $ | 26.25 |  | 1,942,339 |          |  | $ | 27.02
|Options - Exercisable-end
        of year  | 1,668,766               |   |                       | $        | 29.13                 |  | 1,585,574 |   |          | $ | 31.19 |  | 1,408,206 |          |  | $ | 35.12

At June 30, 2007, outstanding options at the end of the year had an intrinsic value of $5,418 with a weighted average remaining contractual life of 5.3 years. At June 30, 2007, options vested or expected to vest at the
end of the year had an intrinsic value of $5,342 with a weighted average remaining contractual life of 5.2 years. In addition, exercisable options at the end of the year had an intrinsic value of $4,256 with a weighted average remaining
contractual life of 4.6 years.

The following table summarizes information about our stock options granted under our share-based compensation plans as of June 30, 2007.

|         |                |                       |                     |             |                     |                |   |                       |  |                    |  |  |   |      
|-------- | -------------- | --------------------- | ------------------- | ----------- | ------------------- | -------------- | - | --------------------- |  | ------------------ |  |  | - | -----
|         |                |                       | Options Outstanding |             | Options Exercisable
|         |                |                       |                     |             | Weighted            |                |   |                       |  |                    |  |  |   |      
|         |                |                       | Number              |             | Average             |                |   |                       |  |                    |  |  |  
|Range of |                | Outstanding           |                     | Remaining   |                     | Weighted       |   | Number                |  | Weighted          
|Exercise |                | as of                 |                     | Contractual |                     | Average        |   | Exercisable
    as of |  | Average           
|Prices   |                | June
        30, 2007 |                     | Life        |                     | Exercise Price |   | June 30, 2007         |  | Exercise
    Price
|$        | 5.20 - $ 7.80  |                       | 229,280             |             | 5.1                 |                | $ | 6.52                  |  | 229,280            |  |  | $ | 6.52 
|$        | 7.90 - $11.85  |                       | 751,050             |             | 5.8                 |                | $ | 10.02                 |  | 534,300            |  |  | $ | 10.12
|$        | 12.29 - $18.44 |                       | 494,788             |             | 6.7                 |                | $ | 13.97                 |  | 323,038            |  |  | $ | 14.15
|$        | 18.64 - $27.96 |                       | 168,700             |             | 3.9                 |                | $ | 19.06                 |  | 168,200            |  |  | $ | 19.06
|$        | 28.31 - $42.47 |                       | 4,750               |             | 3.2                 |                | $ | 35.14                 |  | 4,750              |  |  | $ | 35.14
|$        | 42.94 - $64.41 |                       | 27,200              |             | 3.1                 |                | $ | 43.50                 |  | 27,200             |  |  | $ | 43.50
|$        | 65.69 - $98.53 |                       | 381,998             |             | 3.2                 |                | $ | 85.31                 |  | 381,998            |  |  | $ | 85.31
|$        | 5.20 - $98.53  |                       | 2,057,766           |             | 5.3                 |                | $ | 25.80                 |  | 1,668,766          |  |  | $ | 29.13

As of June 30, 2007, there was $1,658 of total unrecognized compensation cost related to stock options. These costs are expected to be recognized over a weighted average period of 2.4 years.

The total intrinsic value of stock options exercised was $778 and the total fair value of stock awards vested was $1,267 during the fiscal year ended June 30, 2007.

Cash received from stock option exercises and the associated tax benefit for the fiscal year ended June 30, 2007 was $962.

F - 17

---



Restricted Stock
The following table summarizes information about restricted stock awards granted under share-based compensation plans for the fiscal years ended June 30, 2007 and 2006:

|                                        |                   |   |                   |          |        |  |            |         |          |   |      
|--------------------------------------- | ----------------- | - | ----------------- | -------- | ------ |  | ---------- | ------- | -------- | - | -----
|                                        | June
    30, 2007 |   | June
    30, 2006
|                                        |                   |   |                   |          |        |  |            |         |         
|                                        |                   |   |                   | Weighted |        |  |            |         | Weighted
|                                        |                   |   | Average           |          |        |  |            | Average
|                                        | Shares            |   | Fair Value        |          | Shares |  | Fair Value
|Non vested balance at beginning of year | 148,200           |   |                   | $        | 11.51  |  | -          |         |          | $ | -    
|Granted                                 | 261,450           |   |                   | $        | 13.92  |  | 154,800    |         |          | $ | 11.46
|Vested                                  | (8,457            | ) |                   | $        | 16.33  |  | -          |         |          | $ | -    
|Forfeited                               | (33,017           | ) |                   | $        | 13.86  |  | (6,600     | )       |          | $ | 10.40
|Non vested balance at end of year       | 368,176           |   |                   | $        | 12.90  |  | 148,200    |         |          | $ | 11.51

As of June 30, 2007, there was $3,600 of total unrecognized compensation costs related to restricted stock awards. These costs are expected to be recognized over a weighted average period of 2.8 years.

At June 30, 2007, an aggregate of 1,948,062 shares remained available for future grants under our share-based compensation plans, which cover stock awards and stock options. We issue shares to satisfy stock option exercises
and restricted stock awards, as applicable.

NOTE 14: EMPLOYEE STOCK PURCHASE PLAN

In November 2000, we adopted a non-compensatory Employee Stock Purchase Plan (ESPP). Under the ESPP, employees who elect to participate have the ability to purchase common stock at a 5% discount from the market
value of such stock (15% discount from the market value for the period from November 2000 until June 30, 2005). The ESPP permits an enrolled employee to make contributions to purchase shares of common stock by having withheld from his or her salary
an amount between 1% and 10% of compensation. The total number of shares of common stock that may be issued under the ESPP is 500,000. At June 30, 2007 and 2006, we had withheld from employees $145 and $163, respectively, for the purchases
of shares under this plan, and in July 2007 and 2006, we issued approximately 10,325 and 10,278 shares of common stock, respectively.

NOTE 15: INCOME TAXES

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

|                                        |                            |       |      |  |      |       |   |  |   |       |  
|--------------------------------------- | -------------------------- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                        | Fiscal Year Ended June 30,
|                                        | 2007                       |       | 2006 |  | 2005
|Earnings from continuing operations     | $                          | 9,132 |      |  | $    | 5,849 |   |  | $ | 5,694 |  
|Discontinued operations                 |                            | -     |      |  |      | -     |   |  |   | (85   | )
|Disposal of discontinued operations     |                            | -     |      |  |      | -     |   |  |   | (43   | )
|Amounts charged to stockholders' equity |                            | (164  | )    |  |      | (229  | ) |  |   | (38   | )
|                                        | $                          | 8,968 |      |  | $    | 5,620 |   |  | $ | 5,528 |  

F - 18

---



The income tax expense (benefit) for operations listed above were provided on the following pre-tax book income amounts:

|                                                                       |                            |        |      |      |      |        |      |  |   |        |  
|---------------------------------------------------------------------- | -------------------------- | ------ | ---- | ---- | ---- | ------ | ---- |  | - | ------ | -
|                                                                       | Fiscal Year Ended June 30,
|                                                                       | 2007                       |        |      | 2006 |      |        | 2005
|Earnings from continuing operations - U.S.                             | $                          | 21,612 |      |      | $    | 17,759 |      |  | $ | 11,926 |  
|Loss from discontinued operations - U.S.                               |                            | -      |      |      |      | -      |      |  |   | (494   | )
|Earnings from foreign operations                                       |                            | 3,638  |      |      |      | 3,367  |      |  |   | 3,869  |  
|                                                                       | $                          | 25,250 |      |      | $    | 21,126 |      |  | $ | 15,301 |  
|                                                                       |                            |        |      |      |      |        |      |  |   |        |  
|                                                                      
|The provision for income
      taxes  consists
      of the following:
|                                                                      
|                                                                       | Fiscal Year Ended June 30,
|                                                                       | 2007                       |        | 2006 |      | 2005
|Current:                                                               |                            |        |      |      |      |        |      |  |   |        |  
|Federal                                                                | $                          | 403    |      |      | $    | 382    |      |  | $ | 215    |  
|State                                                                  |                            | 325    |      |      |      | 158    |      |  |   | 111    |  
|Foreign                                                                |                            | 1,626  |      |      |      | 1,264  |      |  |   | 1,467  |  
|                                                                       |                            | 2,354  |      |      |      | 1,804  |      |  |   | 1,793  |  
|Deferred:                                                              |                            |        |      |      |      |        |      |  |   |        |  
|Federal                                                                |                            | 6,411  |      |      |      | 4,006  |      |  |   | 3,830  |  
|State                                                                  |                            | 439    |      |      |      | 118    |      |  |   | (72    | )
|Foreign                                                                |                            | (72    | )    |      |      | (79    | )    |  |   | 143    |  
|                                                                       |                            | 6,778  |      |      |      | 4,045  |      |  |   | 3,901  |  
|                                                                       |                            |        |      |      |      |        |      |  |   |        |  
|Total                                                                  | $                          | 9,132  |      |      | $    | 5,849  |      |  | $ | 5,694  |  

Income tax payments, net of refunds, were $3,272, $1,316, and $765 in fiscal 2007, 2006, and 2005, respectively.

The total income tax expense differs from the amount computed by applying the applicable U.S. federal income tax rate of 35% in fiscal 2007, 2006, and 2005 to earnings before income taxes for the following reasons:

|                                                |                            |       |      |  |      |        |   |  |   |       |  
|----------------------------------------------- | -------------------------- | ----- | ---- |  | ---- | ------ | - |  | - | ----- | -
|                                                | Fiscal Year Ended June 30,
|                                                | 2007                       |       | 2006 |  | 2005
|                                               
|Computed "expected tax expense"                 | $                          | 8,837 |      |  | $    | 7,394  |   |  | $ | 5,529 |  
|Increases (reductions) in taxes resulting from: |                            |       |      |  |      |        |   |  |   |       |  
|State taxes, net of federal income tax benefit  |                            | 497   |      |  |      | 179    |   |  |   | 26    |  
|Export tax incentives                           |                            | (372  | )    |  |      | (2,034 | ) |  |   | (347  | )
|Research credit                                 |                            | (62   | )    |  |      | -      |   |  |   | -     |  
|Tax on foreign dividend                         |                            | -     |      |  |      | 326    |   |  |   | 328   |  
|Change in estimate of future year taxes         |                            | -     |      |  |      | -      |   |  |   | (129  | )
|Foreign tax differential                        |                            | 208   |      |  |      | (68    | ) |  |   | 217   |  
|Other, net                                      |                            | 24    |      |  |      | 52     |   |  |   | 70    |  
|                                                | $                          | 9,132 |      |  | $    | 5,849  |   |  | $ | 5,694 |  

During fiscal 2006, the Company completed a redetermination of its fiscal 2005 and 2004 Extraterritorial Income Exclusion (EIE). Due to this redetermination, the Company recorded a tax benefit of $1,192. The
Companys tax rate for fiscal 2007 was negatively impacted by the repeal of the EIE. The Company claimed a benefit on foreign trading income from foreign sales through December 31, 2006. The Company does not expect any significant tax benefit
from the Manufacturing Deduction as provided in IRC Sec. 199 due to its NOL position.

During fiscal 2006, the Company released a foreign tax reserve of $328 upon the completion of the taxing authorities audit in the foreign jurisdiction.

F - 19

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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, 2007 and 2006 are presented below:

|                                                     |               |        |               |  |   |        |  
|---------------------------------------------------- | ------------- | ------ | ------------- |  | - | ------ | -
|                                                     | June 30, 2007 |        | June 30, 2006
|Deferred tax assets:                                 |               |        |               |  |   |        |  
|Accounts receivable                                  | $             | 93     |               |  | $ | 195    |  
|Accrued liabilities                                  |               | 1,497  |               |  |   | 1,216  |  
|Inventory valuation                                  |               | 3,210  |               |  |   | 2,729  |  
|Deferred revenue                                     |               | 160    |               |  |   | 625    |  
|Stock option compensation                            |               | 1,190  |               |  |   | 592    |  
|Intangibles                                          |               | 20     |               |  |   | 30     |  
|Federal, foreign, and state                          |               |        |               |  |   |        |  
|net operating loss carryforwards ("NOL") and credits |               | 20,321 |               |  |   | 27,246 |  
|Contributions                                        |               | 33     |               |  |   | 60     |  
|                                                     |               | 26,524 |               |  |   | 32,693 |  
|Less valuation allowance                             |               | 2,170  |               |  |   | 1,630  |  
|Deferred tax asset                                   |               | 24,354 |               |  |   | 31,063 |  
|                                                    
|Deferred tax liabilities:                            |               |        |               |  |   |        |  
|Prepaid expenses                                     |               | (136   | )             |  |   | (301   | )
|Plant and equipment                                  |               | (3,441 | )             |  |   | (3,363 | )
|Unrealized gain on marketable securities             |               | -      |               |  |   | (7     | )
|Deferred tax liability                               |               | (3,577 | )             |  |   | (3,671 | )
|Net deferred tax asset                               | $             | 20,777 |               |  | $ | 27,392 |  

The net current deferred tax assets and net non-current deferred tax assets as recorded on the balance sheet as of June 30, 2007 and 2006 are as follows:

|                                  |               |        |               |  |   |        | 
|--------------------------------- | ------------- | ------ | ------------- |  | - | ------ | 
|                                  | June 30, 2007 |        | June 30, 2006
|                                  |               |        |               |  |   |        | 
|Net current deferrred tax asset   | $             | 15,077 |               |  | $ | 11,959 | 
|Net noncurrent deferred tax asset |               | 5,700  |               |  |   | 15,433 | 
|Net deferred tax asset            | $             | 20,777 |               |  | $ | 27,392 | 

The deferred tax provisions for 2007 and 2006 do not reflect the tax benefit of $164 and $229, respectively, resulting from amounts charged to other comprehensive income and paid in capital, which includes $164
and $189 from the exercise of employee stock options in 2007 and 2006, respectively.

During 2007, the valuation allowance changed primarily due to the generation of additional tax credits that were fully valued, along with the utilization of fully valued net operating losses.

Management believes it is more likely than not that the remaining net deferred tax assets of $20,777 as of June 30, 2007 will be realized as the results of future operations are expected to generate sufficient taxable
income to do so.

At June 30, 2007, our share of the cumulative undistributed earnings of foreign subsidiaries was $2,654. No provision has been made for U.S. or additional foreign taxes on the undistributed earnings of foreign
subsidiaries because we intend to continue to reinvest these earnings. Determination of the amount of unrecognized deferred tax liability associated with these earnings is not practicable.

At June 30, 2007, we have federal, foreign, and state NOL carryforwards of approximately $29,928, $351, and $22,681, respectively, and various state credit carryforwards of $5,879. The federal NOL will
expire from fiscal 2022 through fiscal 2025, while the state NOL and credits will expire from fiscal 2007 through fiscal 2025. The foreign NOL will begin to expire in 2014. We also have federal general business credit carryforwards of approximately
$4,763, which are available to reduce federal income taxes, if any, through 2019 and begin to expire in 2012. In addition, the Company also has alternative minimum tax credit carryforwards of approximately $788, which are available to reduce
future federal regular income taxes, if any, over an indefinite period.

F - 20

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NOTE 16: SEGMENT REPORTING

During the second quarter of fiscal 2007, we reorganized the business into two operating divisions  Metrology Solutions (Metrology segment) and Optical Systems (Optics segment). Consistent with our new business
structure, beginning with the second quarter in fiscal 2007, we reported our segments as Metrology and Optics. The Metrology segment consistes of OEM and in-line products primarily for the semiconductor and industrial markets. The Optics segment
consists of components and opto-mechanical assemblies primarily for the medical, defense, and aerospace industries, which are included in the industrial market. The chief operating decision-maker uses this information to allocate resources. Prior to
the second quarter, our segments were reported as Semiconductor and Industrial. Prior year segment information has been restated in a manner consistent with our new reporting segments.

|                             |                            |         |      |  |               |         |               |  |   |         |  
|---------------------------- | -------------------------- | ------- | ---- |  | ------------- | ------- | ------------- |  | - | ------- | -
|                             | Fiscal Year Ended June 30,
|                             | 2007                       |         | 2006 |  | 2005         
|Metrology                    |                            |         |      |  | (as restated) |         | (as restated)
|Sales                        | $                          | 132,264 |      |  | $             | 125,880 |               |  | $ | 104,421 |  
|Gross profit                 |                            | 62,189  |      |  |               | 56,818  |               |  |   | 46,442  |  
|Gross profit as a % of sales |                            | 47      | %    |  |               | 45      | %             |  |   | 44      | %
|                            
|Optics                       |                            |         |      |  |               |         |               |  |   |         |  
|Sales                        | $                          | 48,724  |      |  | $             | 42,257  |               |  | $ | 36,928  |  
|Gross profit                 |                            | 14,994  |      |  |               | 8,953   |               |  |   | 6,848   |  
|Gross profit as a % of sales |                            | 31      | %    |  |               | 21      | %             |  |   | 19      | %
|                            
|Total                        |                            |         |      |  |               |         |               |  |   |         |  
|Sales                        | $                          | 180,988 |      |  | $             | 168,137 |               |  | $ | 141,349 |  
|Gross profit                 |                            | 77,183  |      |  |               | 65,771  |               |  |   | 53,290  |  
|Gross profit as a % of sales |                            | 43      | %    |  |               | 39      | %             |  |   | 38      | %

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

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

|               |                            |         |      |  |      |         |  |  |   |         | 
|-------------- | -------------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|               | Fiscal Year Ended June 30,
|               | 2007                       |         | 2006 |  | 2005
|              
|Domestic       | $                          | 71,330  |      |  | $    | 58,446  |  |  | $ | 47,973  | 
|Far East:      |                            |         |      |  |      |         |  |  |   |         | 
|Japan          |                            | 66,613  |      |  |      | 76,595  |  |  |   | 61,115  | 
|Pacific Rim    |                            | 23,985  |      |  |      | 18,233  |  |  |   | 17,303  | 
|Total Far East |                            | 90,598  |      |  |      | 94,828  |  |  |   | 78,418  | 
|Europe         |                            | 19,060  |      |  |      | 14,863  |  |  |   | 14,958  | 
|Total          | $                          | 180,988 |      |  | $    | 168,137 |  |  | $ | 141,349 | 

F - 21

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NOTE 17: TRANSACTIONS WITH STOCKHOLDER

Sales to Canon, Inc., a stockholder representing approximately 7% ownership at June 30, 2007, and Canon Sales Co., Inc., a distributor of certain of our products in Japan and a subsidiary of Canon Inc. (collectively
Canon), amounted to $48,147 (27% of net sales) $61,366 (36% of net sales), and $51,887 (37% of net sales), for the years ended June 30, 2007, 2006, and 2005, respectively. Selling prices of products sold to Canon are based,
generally, on the normal terms given to distributors. Revenues generated from development contracts are recorded on a cost-plus basis.

In September 2002, we entered into a contract with Canon related to the development of certain interferometers. In March 2004, we signed a preliminary agreement to begin further add-on work; the definitive agreement for
this additional work was signed in December 2004. In February 2005, we entered into two additional agreements with Canon related to the development of prototype production tools and accessories. Work on these development services was completed
during the third quarter of fiscal 2007. During fiscal 2007, 2006, and 2005, we recognized revenue in the Metrology segment of $4,051, $20,014, and $15,617, respectively, for the original contract and subsequent add-on work. At June 30,
2007 and 2006, there were, in the aggregate, $4,515 and $5,966, respectively, of trade accounts receivable from Canon.

NOTE 18: HEDGING ACTIVITIES

We enter into foreign currency forward contracts to reduce the impact of adverse fluctuations on earnings associated with foreign currency exchange rate changes. We do not enter into any derivative transactions for
speculative purposes. These contracts are not designated as cash flow, fair value, or net investment hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, and therefore, are marked-to-market
with changes in fair value recorded to earnings. These contracts are entered into for periods consistent with the currency transaction exposures, generally three to six months. Any gains and losses on the fair value of these contracts would largely
offset corresponding losses and gains on the underlying transactions.

As of June 30, 2007, we had eight foreign currency forward contracts outstanding aggregating to $8,500. Net unrealizable gains recognized from foreign currency forward contracts for fiscal 2007 was $148, and are
included in other income in the consolidated statements of operations. These gains are substantially offset by foreign exchange losses on intercompany balances recorded by our subsidiaries.

F - 22

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NOTE 19: QUARTERLY RESULTS (UNAUDITED)

The following table sets forth certain unaudited quarterly financial data:

|                           |                                         |        |              |   |           |  |          |        |  |   |       
|-------------------------- | --------------------------------------- | ------ | ------------ | - | --------- |  | -------- | ------ |  | - | ------
|                           | For the Fiscal Year Ended June 30, 2007
|                           | September 30,                           |        | December 31, |   | March 31, |  | June 30,
|Net sales                  | $                                       | 41,107 |              | $ | 44,682    |  | $        | 48,655 |  | $ | 46,544
|Gross profit               | $                                       | 17,791 |              | $ | 19,767    |  | $        | 20,411 |  | $ | 19,214
|Net earnings               | $                                       | 3,652  |              | $ | 3,714     |  | $        | 3,966  |  | $ | 3,810 
|Basic earnings per share   | $                                       | 0.20   |              | $ | 0.20      |  | $        | 0.22   |  | $ | 0.21  
|Diluted earnings per share | $                                       | 0.20   |              | $ | 0.20      |  | $        | 0.21   |  | $ | 0.20  
|                          
|                          
|                          
|                           | For the Fiscal Year Ended June 30, 2006
|                           | September 30,                           |        | December 31, |   | March 31, |  | June 30,
|Net sales                  | $                                       | 34,329 |              | $ | 43,608    |  | $        | 43,048 |  | $ | 47,152
|Gross profit               | $                                       | 13,153 |              | $ | 17,192    |  | $        | 16,447 |  | $ | 18,979
|Net earnings               | $                                       | 2,193  |              | $ | 3,680     |  | $        | 4,097  |  | $ | 4,515 
|Basic earnings per share   | $                                       | 0.12   |              | $ | 0.20      |  | $        | 0.23   |  | $ | 0.25  
|Diluted earnings per share | $                                       | 0.12   |              | $ | 0.20      |  | $        | 0.22   |  | $ | 0.24  

* * * * *

F - 23

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and StockholdersZygo CorporationMiddlefield, Connecticut

We have audited the consolidated financial statements of Zygo Corporation and subsidiaries (the "Company")
as of June 30, 2007 and 2006, and for each of the two years in the period ended
June 30, 2007, and the Company's internal control over financial reporting as
of June 30, 2007, and have issued our report thereon dated September 19, 2007
(which report expresses an unqualified opinion and includes an explanatory paragraph
concerning the change in the Companys method of accounting for stock options); such consolidated financial statements and report is included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of the Company listed on page
F-1 of this Form 10-K. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

/s/ Deloitte & Touche LLPHartford, ConnecticutSeptember 19, 2007

S - 1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE II

The Board of Directors and StockholdersZygo Corporation:

Under date of September 7, 2005, except as to notes 2 and 16 (as it relates to 2005 disclosures) to the consolidated financial statements which are as of June 20, 2006 and September 10, 2007, respectively, we reported on
the consolidated statements of operations, stockholders equity and cash flows of Zygo Corporation and subsidiaries for the year ended June 30, 2005 as contained in the 2007 Annual Report on Form 10-K. In connection with our audit of the
aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule listed in the accompanying index on page F-1. This financial statement schedule is the responsibility of the Companys
management. Our responsibility is to express an opinion on this financial statement schedule based on our audit.

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.

/s/ KPMG LLPStamford, ConnecticutSeptember 7, 2005, except as to notes 2 and 16 (as it relates to2005 disclosures) to the consolidated financial statements whichare as of June 20, 2006 and September 10, 2007, respectively

S - 2

---



ZYGO CORPORATION AND CONSOLIDATED SUBSIDIARY 
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 
Years ended June 30, 2007, 2006, and 2005

(Thousands of dollars)

|                                               |              |       |           |   |           |   |             |   |                      |  |   |      
|---------------------------------------------- | ------------ | ----- | --------- | - | --------- | - | ----------- | - | -------------------- |  | - | -----
|                                              
|                                               | Balance at   |       |           |   |           |   |             |   |                      | 
|                                               | Beginning of |       |           |   |           |   | Write-Offs  |   | Balance
          at
|Description                                    | Year         |       | Provision |   | and Other |   | End of Year
|                                               |              |       |           |   |           |   |            
|Year Ended June 30, 2007                       |              |       |           |   |           |   |             |   |                      |  |   |      
|Allowance for doubtful accounts                | $            | 588   |           | $ | (245      | ) |             | $ | 10                   |  | $ | 333  
|                                               |              |       |           |   |           |   |             |   |                      |  |   |      
|Valuation allowance on net deferred tax assets | $            | 1,630 |           | $ | 564       |   |             | $ | 24                   |  | $ | 2,170
|                                               |              |       |           |   |           |   |             |   |                      |  |   |      
|Year Ended June 30, 2006                       |              |       |           |   |           |   |             |   |                      |  |   |      
|Allowance for doubtful accounts                | $            | 663   |           | $ | 65        |   |             | $ | 140                  |  | $ | 588  
|                                               |              |       |           |   |           |   |             |   |                      |  |   |      
|Valuation allowance on net deferred tax assets | $            | 2,011 |           | $ | 416       |   |             | $ | 797                  |  | $ | 1,630
|                                               |              |       |           |   |           |   |             |   |                      |  |   |      
|Year Ended June 30, 2005                       |              |       |           |   |           |   |             |   |                      |  |   |      
|Allowance for doubtful accounts                | $            | 707   |           | $ | (11       | ) |             | $ | 33                   |  | $ | 663  
|                                               |              |       |           |   |           |   |             |   |                      |  |   |      
|Valuation allowance on net deferred tax assets | $            | 3,383 |           | $ | -         |   |             | $ | 1,372                |  | $ | 2,011

S - 3

---



EXHIBIT INDEX

|        |     |  |                                                                                                         
|------- | --- |  | --------------------------------------------------------------------------------------------------------
|EXHIBIT |     | 
|TABLE   |     | 
|NUMBER  |     | 
|        |     |  |                                                                                                         
|10      | .23 |  | Employment contract dated June 15, 2007 between Zygo Corporation and Walter A. Shephard.                
|        |     |  |                                                                                                         
|21      |     |  | Subsidiaries of Registrant                                                                              
|        |     |  |                                                                                                         
|23      | .1  |  | Consent of Independent Registered Public Accounting Firm                                                
|        |     |  |                                                                                                         
|23      | .2  |  | Consent of Independent Registered Public Accounting Firm                                                
|        |     |  |                                                                                                         
|31      | .1  |  | Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted
|        |     |  | Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                               
|        |     |  |                                                                                                         
|31      | .2  |  | Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted
|        |     |  | Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                               
|        |     |  |                                                                                                         
|32      | .1  |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to                                
|        |     |  | Section 906 of the Sarbanes-Oxley Act of 2002                                                           
|        |     |  |                                                                                                         
|32      | .2  |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to                                
|        |     |  | Section 906 of the Sarbanes-Oxley Act of 2002                                                           

---