UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K

|           |                                                                                                          
|---------- | ---------------------------------------------------------------------------------------------------------
|(Mark One)
|x          | Annual
  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934                   
|           | For the
  fiscal year ended June 30, 2006                                                                
|           |                                                                                                          
|Or        
|o          | Transition
  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934               
|           | For the
  transition period from
  __________________________________to__________________________________

Commission file number 0-12944

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

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

| |                                                             | 
| | ----------------------------------------------------------- | 
| | Laurel Brook Road, Middlefield, Connecticut 06455-1291      | 
| |                                                             | 
| | (Address of principal executive offices) (Zip Code)         | 
| |                                                             | 
| | (860) 347-8506                                              | 
| |                                                             | 
| | (Registrants telephone number, including area code:)       | 
| |                                                             | 
| | Securities registered pursuant to Section 12(b) of the Act: | 
| |                                                             | 
| | None                                                        | 
| |                                                             | 
| | Securities registered pursuant to Section 12(g) of the Act: | 
| |                                                             | 
| | Common Stock, $.10 Par Value                                | 

Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.

YES o   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 o   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 o

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

Indicate by
check mark whether the registrant is 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 o | Accelerated
  filer x | Non-accelerated
  filer o

Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Act). YES o   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, 2005, as reported by
the NASDAQ National Market, was approximately $167,707,254. 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.

18,231,754 Shares of Common Stock, $.10 Par
Value, at September 1, 2006

Documents
incorporated by reference: Specified portions of the registrants Proxy
Statement related to the registrants 2006 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

|         |  |                                                                                         |  |      | 
|-------- |  | --------------------------------------------------------------------------------------- |  | ---- | 
|         |  |                                                                                         |  | Page
|         |  |                                                                                         |  |     
|        |  | Forward-Looking Statements                                                              |  | 1    | 
|         |  |                                                                                         |  |      | 
|PART I   |  |                                                                                         |  |      | 
|Item 1.  |  | Business                                                                                |  | 2    | 
|        |  | Executive Officers of the Registrant                                                    |  | 7    | 
|Item 1A. |  | Risk Factors                                                                            |  | 9    | 
|Item 1B. |  | Unresolved Staff Comments                                                               |  | 12   | 
|Item 2.  |  | Properties                                                                              |  | 13   | 
|Item 3.  |  | Legal Proceedings                                                                       |  | 14   | 
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                     |  | 14   | 
|         |  |                                                                                         |  |      | 
|PART II  |  |                                                                                         |  |      | 
|Item 5.  |  | Market for the Registrants Common Equity and Related Stockholder
  Matters             |  | 15   | 
|Item 6.  |  | Selected Consolidated Financial Data                                                    |  | 16   | 
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and
  Results of Operations |  | 17   | 
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risks                             |  | 26   | 
|Item 8.  |  | Financial Statements and Supplementary Data                                             |  | 26   | 
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and
  Financial Disclosure  |  | 26   | 
|Item 9A. |  | Controls and Procedures                                                                 |  | 27   | 
|Item 9B. |  | Other Information                                                                       |  | 28   | 
|         |  |                                                                                         |  |      | 
|PART III |  |                                                                                         |  |      | 
|Item 10. |  | Directors and Executive Officers of the Registrant                                      |  | 29   | 
|Item 11. |  | Executive Compensation                                                                  |  | 29   | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                          |  | 29   | 
|Item 13. |  | Certain Relationships and Related Transactions                                          |  | 29   | 
|Item 14. |  | Principal Accountant Fees and Services                                                  |  | 29   | 
|         |  |                                                                                         |  |      | 
|PART IV  |  |                                                                                         |  |      | 
|Item 15. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                        |  | 30   | 
|         |  |                                                                                         |  |      | 
|        |  | Signatures                                                                              |  | 32   | 

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

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

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 optical components and systems
as OEM sub-components and end-user optical systems. ZYGOs measurement
solutions are designed to improve quality, increase productivity and decrease
the overall cost of manufacturing and product development for high-technology
manufacturing processes. The Companys optical component and systems products
provide high-end solutions for laser fusion research, imaging systems, and
measurement system components.

We serve the semiconductor and industrial markets through our three
core product lines, metrology, precision positioning systems, and optical
systems solutions. Our semiconductor product offerings include OEM solutions
and major technology development projects for the semiconductor capital
equipment industry and in-line automated yield improvement systems for both
flat panel displays and advanced semiconductor packaging manufacturing. One of
our strategic initiatives is to expand our product offerings to include
integrated in-line technology. This will allow us to take our patented
technology directly to selected markets. During fiscal 2006, we
announced our first shipment of a new front-end semiconductor metrology tool,
the Z3D-7000, to a leading tier one semiconductor manufacturer.
This tool is for in-line use in manufacturing, demonstrating our ability to
move from our traditional lab environment to the production floor.

Our industrial market products serve the automotive, consumer
electronics, defense/aerospace, and all markets other than semiconductor.
Industrial market products include optical components, optical systems and
measurement-based process control systems for defense and aerospace customers,
and measurement-based process control and yield-enhancement systems for
automotive and consumer electronics customers. During the last
two years, we introduced and marketed the GPI XP/D and GPI FlashPhase
systems. 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.

ZYGOs solutions are primarily based on optical interferometric
technology. ZYGO continues to be a world leader in optical interferometry with
a patent portfolio of approximately 240 active and 210 pending patents, most of
which are related to the broad field of interferometry and its practical
application. ZYGO metrology solutions provide process control for surface shape
and roughness, which are critical to all of the Companys markets. Our
displacement measurement systems are used extensively in ultra-precise wafer
positioning systems for the semiconductor capital equipment industry.

ZYGOs optical component and systems products, used in both
semiconductor and industrial markets, reflect our broad range of capabilities
and provide high-end solutions for our customers. The Companys resources in
this business include high-level design services and proprietary manufacturing
processes, as well as assembly capabilities and our expertise in
interferometric metrology.

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

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

MARKETS, PRODUCTS, AND CUSTOMERS

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

Semiconductor Market

ZYGO serves several areas of the semiconductor market, notably capital
equipment suppliers, the largest area, as well as the flat panel display and
advanced semiconductor packaging. The Company has a broad and growing range of
products that serve these market areas.

2

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Semiconductor Products and Applications

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 ZYGO 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. ZYGOs ZMI 2000 and ZMI 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.

Optical Components: Supporting both the projection lens and stage
positioning systems, ZYGO supplies 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 also manufactures various OEM optical
components for projection optical systems.

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. ZYGOs expertise in optical interferometer technology, and
the practical skills needed to apply this technology, makes us well suited to
deliver custom solutions to leading photolithography equipment suppliers.

Flat Panel Display (FPD): Flat panel displays first were used in laptop
computers and have now grown to be the display of choice for most computer
monitors. Large screen televisions are now common and many are based on flat
panel display technology. ZYGO systems, with ultra high precision measurement
solutions, enable our customers to improve flat panel display manufacturing
yields. The ZYGO One Shot and Sure Shot systems are in-line process control,
yield enhancement tools. The FPD One Shot 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 Sure Shot FPD product provides overlay and CD metrology of the
individual mask layers post lithography and helps identify process control
problems that can lead to product failures and defects related to variances in
illuminescence (called MURA) in the finished display. The Sure Shot tool can
be used as an off line process analysis device, or in-line in conjunction with
closed loop lithography process control.

Semiconductor Process Control: Semiconductor processes used to manufacture
computer, communications, and memory chips incorporate a large number of
metrology steps in order to ensure adequate process control, and thereby obtain
high yields. ZYGO recently introduced the Z3D-7000 product to this market. The
Z3D-7000 precisely measures the physical dimensions of a wide variety of
patterned chip features such as trenches, vias, and contact pads. Such features
are created using carefully engineered sequences of lithographic, deposition,
etch, and polishing processes, all of which must be carefully controlled.
Competing products in this market are typically specially designed to be used
only for certain process steps, and generally are capable of measuring only one
or two number process variables such as film thickness, or step height. The
Z3D-7000 is distinguished by its applicability to a large number of process
steps, and ability to measure a large number of process variables. This makes
the Z3D-7000 valuable to our customers since it enables them to reduce the
number and cost of metrology systems required to effectively control their
processes.

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 ZYGO CP 300i
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 NewView optical profiler and wafer positioning
system with pattern recognition software. It can be configured for clean room
or laboratory use.

3

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Semiconductor
Customers include:

|                  |                        
|----------------- | -----------------------
|Canon             | KLA-Tencor Corporation 
|Chi Mei Optronics | Nikon                  
|AU Optronics      | Applied Materials      
|Intel             | Zeiss SMT Semiconductor
|SVA-NEC           | IPS Alpha              

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

Industrial
Products and ApplicationsConsumer ElectronicsConsumer electronics, including
cell phones, digital cameras, DVD and CD players, and optical computer drives,
all have significant optical content. Consumer electronic optics, which provide
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.

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
an over 30 year old product family that has improved optical testing over those
years 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 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 MetroPro data analysis
software.

PTI 250: 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 ZYGOs industry standard GPI. The system meets
the consumer market demand by combining high-quality optics with ZYGOs
MetroPro data analysis software.

DVD 400: BluRay and HD DVD, the next generation of
systems DVD player and computer memories, 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. ZYGOs 405 nm systems are an enabling
technology for the next generation DVD players and computer memories.

Automotive
IndustryThe 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.

NewView 6200/6300 and Delta 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. ZYGOs 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/AerospaceDefense/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. Nuclear research
for both weapons maintenance programs and the development of nuclear fusion
energy sources also use very large optical lasers at a number of worldwide
facilities, including the National Ignition Facility (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.

4

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Optical Components: The ability to process optics with flat
surfaces is a manufacturing core competency at ZYGO. We have the capability to
machine, polish, and final-coat optical components with flat surfaces ranging
in size from a centimeter to a meter. This capability meets the requirements
for several defense/aerospace programs. For example, ZYGO has a dedicated
production facility to carry out a multi-year program for NIF laser optics used
at Lawrence Livermore National Laboratory, as well as other laser fusion
research projects in the United States and other countries. Other significant
manufacturing programs have included the manufacture of precision sapphire
windows, telescope optics, and prismatic reflectors.

Optical System Group: Defense/aerospace optical systems often push
the state of the art in optical design and manufacturing technologies. ZYGOs
Optical Systems Group has two locations - one in Costa Mesa, California and the
other in Tucson, Arizona. These facilities are focused on designing and
manufacturing leading edge optical systems. Key development and manufacturing
programs include or have included: Helmet-mounted immersive display for flight
training simulation, optical subassemblies for the NIF program, laser surgery
beam delivery systems, and custom imaging systems.

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 GPI XP/D
and GPI FlashPhase systems. 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.
ZYGO is 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.

Industrial
Customers include:

|            |                                       
|----------- | --------------------------------------
|AWE         | Lawrence Livermore National Laboratory
|Caterpillar | Northrop Grumman                      
|Bosch       | Sandia National Laboratories          
|IntraLase   | University of Rochester               

Competition

The industries in
which we participate are intensely competitive and are characterized by price
pressure and rapid technological change. Furthermore, these markets are
dominated by a few market leaders. We are one of a limited number of companies
that develop and market yield-enhancement solutions. Our primary yield
enhancement competitors include Agilents Laser Interferometer Positioning
Systems Division, Veecos Metrology Division, SNU Precision, 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 and
Development and Engineering OperationsWe 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, 2006, we employed 135 individuals or approximately 24%
of our workforce within our research and development and engineering
operations. Our strategy is to form close technical working relationships with
customers and OEM suppliers in our markets to ensure that our products 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 PropertyOur 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, and 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 220 United States
patents issued, of which approximately 170 are currently active, and
approximately 90 foreign patents issued, of which approximately 70 are active,
and we have approximately 70 United States and approximately 140 foreign patent
applications pending. In addition, we have
a number of registered and unregistered trademarks.

5

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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

Backlog at June 30, 2006 was $80.8 million, an increase of $14.2
  million, or 21%, as compared with $66.6 million at June 30, 2005. The fiscal
  2006 year-end backlog consisted of $42.9 million, or 53%, in the semiconductor
  segment and $37.9 million, or 47%, in the industrial segment. Orders for the
  fiscal year ended June 30, 2006 totaled $182.3 million and consisted of $107.1
  million, or 59%, in the semiconductor segment and $75.2 million, or 41%, in
  the industrial 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.

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

|               |  |  |                            |   |  |      |   |  |      |  
|-------------- |  |  | -------------------------- | - |  | ---- | - |  | ---- | -
|               |  |  | Fiscal Year Ended June 30, |  
|               |  |  |                            |  
|               |  |  | 2006                       |   |  | 2005 |   |  | 2004 |  
|               |  |  |                            |   |  |      |   |  |      |  
|Domestic       |  |  | 35                         | % |  | 34   | % |  | 29   | %
|               |  |  |                            |   |  |      |   |  |      |  
|Far East:      |  |  |                            |   |  |      |   |  |      |  
|Japan          |  |  | 45                         | % |  | 43   | % |  | 53   | %
|Pacific Rim    |  |  | 11                         | % |  | 12   | % |  | 11   | %
|               |  |  |                            |   |  |      |   |  |      |  
|Total Far East |  |  | 56                         | % |  | 55   | % |  | 64   | %
|               |  |  |                            |   |  |      |   |  |      |  
|Europe         |  |  | 9                          | % |  | 11   | % |  | 7    | %
|               |  |  |                            |   |  |      |   |  |      |  
|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, 2006,
our global sales customer support and service organization consisted of 91
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 FPD 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 ZYGO optics, optics from third party
vendors, and mechanical sub-systems utilizing ZYGO metrology in this facility.

Certain components and sub-assemblies incorporated into our systems are
obtained from a 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.

6

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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 site that contains reports, proxy, and
information statements, or other information regarding reports that we file
electronically with them at http://www.sec.gov.

EMPLOYEES

At June 30, 2006,
we employed 533 people and 37 temporary agency and independent contractors
worldwide. We employed 262 in manufacturing, 135 in research and development,
91 in sales and marketing, and 82 in management and administration. Our
employees are not represented by a labor union or a collective bargaining
agreement. We regard our employee relations as good.

EXECUTIVE
OFFICERS OF THE REGISTRANT

J. Bruce Robinson  age 64  Chairman, President, and Chief Executive OfficerMr. Robinson has served as our
Chairman, President,
and Chief Executive Officer since November 2000, as President and Chief
Executive Officer from November 1999 to November 2000, and as President from
February 1999 to November 1999. Previously, he spent 25 years with The Foxboro
Company, where his most recent positions were President Worldwide Operations
from 1996 to 1998 and President of European Operations from 1990 to 1996.

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

Walter A. Shephard 
age 52  Vice President, Finance, Chief Financial Officer, and TreasurerMr. Shephard has served as Vice President,
Finance,
Chief Financial Officer, and Treasurer since February 2004. Previously, he was
a Principal with the Loftus Group, LLC, a management consulting firm, from
November 2002 to January 2004. From 1983 to 2001, Mr. Shephard served in
various capacities with GenRad, Inc., including Vice President Finance and
Chief Financial Officer, Vice President of Investor Relations, and Treasurer.

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

William H. Bacon  age 56  Vice President,
Corporate Quality and Support Services

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

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

Douglas J. Eccleston  age 57  Vice
President, Precision Positioning SystemsMr. Eccelston has served as Vice President, Precision
Positioning Systems since March 2003. Previously, from 1977 to 2002, he held
various management positions with Corning Incorporated, including most recently
as a Business General Manager for the Photonic Technologies division.

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

Brian J. Monti  age
50  Vice President, Worldwide Sales and Marketing

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

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

7

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

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

Robert J. Stoner 
age 43 Vice President, MetrologyDr. Stoner has served as Vice President of Metrology since 2004. Previously,
  he served as Vice President of Metrology and Optical Systems from 2003 to 2004
  and Vice President of Business Development from 2002 to 2003. From 2000 to 2002,
  Dr. Stoner was President of Vinestone Corporation, a software company, and from
  1995 to 2000 he was President of Cooper Mountain Corporation, a technology consulting
  firm.

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

Carl A. Zanoni - age
65 - Senior Vice President, TechnologyDr. Zanoni has served as Senior Vice President,
Technology since November 2001. Previously, he served as our Vice President,
Technology from June 1998 to November 2001, and Vice President, Research,
Development and Engineering from April 1992 to June 1998.

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

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

8

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Item 1A. Risk Factors

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
reduction in orders from this customer could materially affect our sales.

During fiscal 2006, 2005, and 2004, sales to Canon,
our largest customer in those periods, accounted for 36%, 37%, and 49% of our
net sales, respectively. We expect that sales to Canon will continue to
represent a significant percentage of our net sales for the foreseeable future.
Canon is an original investor in our company, the owner at June 30, 2006 of
approximately 7% of our outstanding shares of common stock, and is a
distributor of certain of our products in the Japanese market. A reduction or
delay in orders from this customer, including reductions or delays due to
market, economic, or competitive conditions in the industries in which we
serve, could have a material adverse effect upon our results of operations. Our
customers, including Canon, generally do not enter into long-term agreements
obligating them to purchase our products.

We have generated
significant revenues from development agreements which are nearing completion
and may not be able to replace those revenues.

During fiscal 2006, 2005, and 2004, we recorded
revenues from development services of $20.0 million, $15.6 million, and $16.1
million, respectively. The existing development services agreements are
expected to be completed in fiscal 2007 with expected revenues of approximately
$4.0 million recorded in fiscal 2007. Presently, we have no plans and know of
no plans from our customers that would increase our development services
revenue in fiscal 2007 or continue them beyond fiscal 2007. 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 65%, 66%, and 71% of our net
sales in each of the fiscal years ended June 30, 2006, 2005, and 2004,
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 2006, approximately 18% 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.

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;

9

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risks of
entering markets in which we have limited or no direct experience; the
inability to manage the growth expected for various acquisitions; potential
loss of key employees of the acquired companies in the process of integrating
personnel with disparate business backgrounds; and combining different
corporate cultures.

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

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: the effect of our acquisitions and consequent integration; budgeting cycles
of our customers; the size, timing, and recognition of revenue from significant
orders; increased competition; our ability to develop innovative products; the timing
of new product releases by us or our competitors; market acceptance of our
products; changes in our and our competitors pricing policies; changes in
operating expenses and personnel changes; changes in our business strategy; and
general economic factors.

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

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

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 backlog will ultimately result in future
sales. A reduction in backlog during any particular period, or the failure of
our backlog to result in future sales could adversely affect our results of
operations.

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.

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

10

---



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.

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, there can be no assurance that the bases of competition in the
industries in which we compete will not shift.

We may not anticipate and keep pace with rapidly changing technological
  developments in the markets in which we operate which 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.

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

11

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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.

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 2006 that remain unresolved.

12

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Item
2. Properties

Our principal manufacturing facility and
corporate headquarters is located on Laurel Brook Road in Middlefield,
Connecticut. The Middlefield facility consists of one 153,500-square-foot
building on approximately 13 acres.

|                                                                                                     |  |                |  |                |  |                     | 
|---------------------------------------------------------------------------------------------------- |  | -------------- |  | -------------- |  | ------------------- | 
|                                                                                                     |  | Square Footage |  |                | 
|                                                                                                     |  |                |  | Owned / Leased | 
|Operation/Location                                                                                   |  | Manufacturing  |  | Total          |  | Expiration Date     | 
|                                                                                                     |  |                |  |                |  |                     | 
|Corporate Headquarters,
  Eastern Regional Sales Office, and
  Instrument and Optics
  Manufacturing |  |                |  |                |  |                     | 
|Middlefield, Connecticut                                                                             |  | 89,000         |  | 153,500        |  | Owned               | 
|                                                                                                     |  |                |  |                |  |                     | 
|Flat Panel Display
  Engineering & Manufacturing                                                     |  |                |  |                |  |                     | 
|Delray Beach, Florida                                                                                |  | 4,286          |  | 10,323         |  | Leased
  - 06/30/07 | 
|                                                                                                     |  |                |  |                |  |                     | 
|Zygo - Laser Technology (R&D)                                                                        |  |                |  |                |  |                     | 
|Watsonville, California                                                                              |  | 0              |  | 1,452          |  | Leased
  - 04/14/08 | 
|                                                                                                     |  |                |  |                |  |                     | 
|Zygo - Optical Systems                                                                               |  |                |  |                |  |                     | 
|Tucson, Arizona                                                                                      |  | 14,560         |  | 22,560         |  | Leased
  - 08/31/11 | 
|                                                                                                     |  |                |  |                |  |                     | 
|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
  - 09/01/07 | 
|                                                                                                     |  |                |  |                |  |                     | 
|Office                                                                                               |  |                |  |                |  |                     | 
|Franklin, Massachusetts                                                                              |  | 0              |  | 400            |  | Leased
  - 07/01/07 | 
|                                                                                                     |  |                |  |                |  |                     | 
|Zygo PTE Ltd                                                                                         |  |                |  |                |  |                     | 
|Singapore                                                                                            |  | 0              |  | 1,550          |  | Leased
  - 12/27/06 | 
|                                                                                                     |  |                |  |                |  |                     | 
|Zygo Taiwan                                                                                          |  |                |  |                |  |                     | 
|Sales Office                                                                                         |  | 0              |  | 3,961          |  | Leased
  - 12/31/06 | 
|Service Office                                                                                       |  | 0              |  | 2,772          |  | Leased
  - 04/30/07 | 
|                                                                                                     |  |                |  |                |  |                     | 
|ZygoLOT                                                                                              |  |                |  |                |  |                     | 
|Germany                                                                                              |  | 0              |  | 3,702          |  | Leased
  - 10/01/06 | 
|                                                                                                     |  |                |  |                |  |                     | 
|Zygo KK                                                                                              |  |                |  |                |  |                     | 
|Japan                                                                                                |  | 0              |  | 1,775          |  | Leased
  - 10/31/06 | 
|                                                                                                     |  |                |  |                |  |                     | 
|Zygo China                                                                                           |  |                |  |                |  |                     | 
|China                                                                                                |  | 0              |  | 1,610          |  | Leased
  - 08/15/07 | 
|                                                                                                     |  |                |  |                |  |                     | 
|Zygo Korea                                                                                           |  |                |  |                |  |                     | 
|Korea                                                                                                |  | 0              |  | 1,507          |  | Leased
  - 04/12/07 | 
|                                                                                                     |  |                |  |                |  |                     | 
|Total                                                                                                |  | 107,846        |  | 228,712        |  |                     | 
|                                                                                                     |  |                |  |                |  |                     | 

13

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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.

14

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PART II

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

Our shares of
common stock are traded over-the-counter and are quoted on the NASDAQ/National
Market under the symbol ZIGO.  The following table provides information about
the high and low sales prices of the Companys common stock by quarter for
fiscal 2006 and 2005.

|                 |  |                                 |       |                                 |   |       |  |     |       |  |   |      | 
|---------------- |  | ------------------------------- | ----- | ------------------------------- | - | ----- |  | --- | ----- |  | - | ---- | 
|                 |  | Fiscal Year Ended June 30, 2006 |       | Fiscal Year Ended June 30, 2005 |  
|                 |  |                                 |       |                                 |  
|                 |  | High                            |       | Low                             |   | High  |  | Low |      
|                 |  |                                 |       |                                 |   |       |  |     |      
|First
  quarter  |  | $                               | 15.72 |                                 | $ | 9.65  |  | $   | 12.00 |  | $ | 8.46 | 
|Second
  quarter |  | $                               | 16.44 |                                 | $ | 12.95 |  | $   | 12.67 |  | $ | 9.75 | 
|Third
  quarter  |  | $                               | 18.83 |                                 | $ | 13.93 |  | $   | 14.48 |  | $ | 9.96 | 
|Fourth
  quarter |  | $                               | 19.75 |                                 | $ | 14.05 |  | $   | 13.30 |  | $ | 9.20 | 

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

The number of
record holders of our common stock at June 30, 2006 was 460. Our closing stock
price as of June 30, 2006 was $16.39.

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.

Information
required with respect to Securities Authorized for Issuance Under Equity
Compensation Plans will be included under the caption Equity Compensation
Plan Information in the proxy statement to be filed pursuant to Regulation 14A
for use in connection with our companys 2006 Annual Meeting of Stockholders
(the Proxy Statement) and is incorporated herein by reference.

15

---



Item 6. Selected Consolidated Financial Data

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

(Thousands,
except for per share and ratio amounts)

|                                                      |  |                            |         |      |   |         |   |      |         |          |    |         |   |    |        |   
|----------------------------------------------------- |  | -------------------------- | ------- | ---- | - | ------- | - | ---- | ------- | -------- | -- | ------- | - | -- | ------ | --
|                                                      |  | Fiscal Year Ended June 30, |        
|                                                      |  |                            |        
|                                                      |  | 2006                       |         | 2005 |   | 2004    |   | 2003 |         | 2002 (1) |   
|                                                      |  |                            |         |      |   |         |   |      |         |          |   
|Net sales                                             |  | $                          | 168,137 |      | $ | 141,349 |   | $    | 116,276 |          | $  | 102,221 |   | $  | 80,060 |   
|Gross profit                                          |  | $                          | 65,771  |      | $ | 53,290  |   | $    | 42,680  |          | $  | 35,069  |   | $  | 27,245 |   
|% of sales                                            |  |                            | 39      | %    |   | 38      | % |      | 37      | %        |    | 34      | % |    | 34     | % 
|                                                      |  |                            |         |      |   |         |   |      |         |          |    |         |   |    |        |   
|Earnings (loss) from continuing operations            |  | $                          | 14,485  |      | $ | 9,350   |   | $    | 4,226   |          | $  | 1,363   |   | ($ | 4,071  | ) 
|% of sales                                            |  |                            | 9       | %    |   | 7       | % |      | 4       | %        |    | 1       | % |    | (5     | %)
|Earnings (loss) per share from continuing operations: |  |                            |         |      |   |         |   |      |         |          |    |         |   |    |        |   
|Basic                                                 |  | $                          | 0.80    |      | $ | 0.52    |   | $    | 0.24    |          | $  | 0.08    |   | ($ | 0.23   | ) 
|Diluted                                               |  | $                          | 0.79    |      | $ | 0.52    |   | $    | 0.23    |          | $  | 0.08    |   | ($ | 0.23   | ) 
|                                                      |  |                            |         |      |   |         |   |      |         |          |    |         |   |    |        |   
|Net earnings (loss)                                   |  | $                          | 14,485  |      | $ | 8,984   |   | ($   | 3,429   | )        | ($ | 10,782  | ) | ($ | 11,525 | ) 
|Net earnings (loss) per share:                        |  |                            |         |      |   |         |   |      |         |          |    |         |   |    |        |   
|Basic                                                 |  | $                          | 0.80    |      | $ | 0.50    |   | ($   | 0.19    | )        | ($ | 0.61    | ) | ($ | 0.66   | ) 
|Diluted                                               |  | $                          | 0.79    |      | $ | 0.50    |   | ($   | 0.19    | )        | ($ | 0.61    | ) | ($ | 0.66   | ) 
|                                                      |  |                            |         |      |   |         |   |      |         |          |    |         |   |    |        |   
|Weighted average number of shares:                    |  |                            |         |      |   |         |   |      |         |          |    |         |   |    |        |   
|Basic                                                 |  |                            | 18,054  |      |   | 17,950  |   |      | 17,802  |          |    | 17,539  |   |    | 17,414 |   
|Diluted                                               |  |                            | 18,367  |      |   | 18,140  |   |      | 18,221  |          |    | 17,696  |   |    | 17,414 |   
|                                                      |  |                            |         |      |   |         |   |      |         |          |    |         |   |    |        |   
|Research, development, and engineering                |  | $                          | 15,901  |      | $ | 13,377  |   | $    | 13,011  |          | $  | 12,659  |   | $  | 17,696 |   
|Capital expenditures                                  |  | $                          | 7,441   |      | $ | 9,987   |   | $    | 7,585   |          | $  | 5,037   |   | $  | 11,381 |   
|Depreciation and amortization                         |  | $                          | 6,214   |      | $ | 5,880   |   | $    | 5,717   |          | $  | 5,623   |   | $  | 6,098  |   

|                                             |  |          |         |      |   |         |  |      |         |          |   |         |  |   |         | 
|-------------------------------------------- |  | -------- | ------- | ---- | - | ------- |  | ---- | ------- | -------- | - | ------- |  | - | ------- | 
|                                             |  | June 30, |        
|                                             |  |          |        
|                                             |  | 2006     |         | 2005 |   | 2004    |  | 2003 |         | 2002 (1) |  
|                                             |  |          |         |      |   |         |  |      |         |          |  
|Working capital                              |  | $        | 81,914  |      | $ | 63,379  |  | $    | 58,504  |          | $ | 66,920  |  | $ | 65,936  | 
|Current ratio                                |  |          | 2.8     |      |   | 2.3     |  |      | 3.5     |          |   | 3.3     |  |   | 5.2     | 
|Total assets                                 |  | $        | 206,183 |      | $ | 190,182 |  | $    | 156,133 |          | $ | 161,546 |  | $ | 169,385 | 
|Long-term debt (including
  current portion) |  | $        |        |      | $ |        |  | $    |        |          | $ | 11,374  |  | $ | 12,211  | 
|Stockholders equity                         |  | $        | 158,938 |      | $ | 141,153 |  | $    | 131,352 |          | $ | 130,403 |  | $ | 140,238 | 
|Price-earnings ratio                         |  |          | 21      |      |   | 20      |  |      | N/A     |          |   | N/A     |  |   | N/A     | 
|Number of employees at
  year-end            |  |          | 570     |      |   | 526     |  |      | 476     |          |   | 477     |  |   | 537     | 
|Sales per employee 
  average               |  | $        | 295     |      | $ | 269     |  | $    | 244     |          | $ | 214     |  | $ | 149     | 
|Book value per share                         |  | $        | 8.78    |      | $ | 7.85    |  | $    | 7.34    |          | $ | 7.41    |  | $ | 8.04    | 
|Market price per share at
  year-end         |  | $        | 16.39   |      | $ | 9.80    |  | $    | 11.19   |          | $ | 8.00    |  | $ | 8.05    | 

|    |                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The selected consolidated financial data for the
  period ended June 30, 2002 has been reclassified to conform with the fiscal
  2006, 2005, 2004, and 2003 presentation of the discontinued operations and
  loss on disposal of our former TeraOptix unit.

16

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Item 7. Managements Discussion and Analysis
  of Financial Condition and Results of Operations

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 incomes taxes, and valuation of long-lived assets to be critical policies
due to the estimates and judgments involved in each.

Revenue Recognition and Allowance for
Doubtful Accounts

We recognize
revenue based on guidance provided in SEC Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition 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,
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.

17

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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, and the 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.

18

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Health Insurance

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

RESULTS OF OPERATIONS

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

We also perform
development services, which have produced a significant amount of our revenue
over the past four years. In December 2004, we signed an amendment with Canon
Inc. for additional add-on work to our existing development agreement
originally executed in fiscal 2003. In February 2005, we signed two additional
new development agreements with Canon Inc. These development services contracts
with Canon Inc. are expected to be completed during the first half of fiscal
2007. In fiscal 2006, we recognized $20.0 million on these development services
contracts and expect approximately $4 million to be recognized in fiscal 2007.
Our future period over period comparable sales may be adversely affected by the
completion of the development services contracts in the first half of fiscal
2007 resulting in lower development services revenues than in prior fiscal
years. However, increases in overall sales and new product sales growth is
expected to partially, if not entirely, offset the decrease in the development
services revenue.

On July 1,
2005, we adopted SFAS No. 123(R) using a modified prospective method resulting
in the recognition of share-based compensation expense for the fiscal year
ended June 30, 2006 of $1.7 million, and related tax benefits of $0.6 million.
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. For
fiscal 2006, share-based compensation expense increased our cost of sales by
$0.4 million, selling, general, and administrative expenses by $1.0 million,
and research, development, and engineering expenses by $0.3 million.

Overall, sales
to Canon Inc. and Canon Sales Co., Inc. (collectively, Canon), our single
largest customer, represented 36% of our total net sales in fiscal 2006 as
compared with 37% in fiscal 2005. This represented an increase of $9.5 million
in sales in fiscal 2006 as compared with fiscal 2005, with an increase in
development services revenue accounting for $4.4 million of the increase. Sales
to Canon as the end user were $9.3 million in fiscal 2006, an increase of $0.9
million over fiscal 2005. Sales to Canon for distribution to other customers
were $32.0 million in fiscal 2006, an increase of $4.2 million over fiscal
2005. Despite the Canon sales increase, Canon as a percentage of total net
sales decreased slightly as our overall sales increased by $26.8 million.

We believe the
semiconductor segment contains our best sales growth opportunities in the near
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 opened an office in Oregon to house our
semiconductor process metrology group to take advantage of opportunities in the
semiconductor segment. In addition, during fiscal 2006, we announced our first
shipment of a new front-end semiconductor metrology tool, the Z3D 7000TM,
to a leading tier one semiconductor manufacturer. The Z3D 7000TM
optical metrology tool performs high-resolution surface topography measurements
on bare and patterned 200mm and 300mm semiconductor wafers. It provides high
measurement precision at throughputs exceeding those achievable with existing
mechanical profiling techniques, such as atomic force microscopy. This tool is
for in-line use in manufacturing, demonstrating our ability to move from our
traditional lab environment to the production floor. This accomplishment
indicates significant progress in the implementation of our strategic
initiatives and is expected to increase revenues and margins over time.

An area of
continued revenue growth expected in fiscal 2007 is in our optical systems
solutions product line. Our optical systems group, located in Tucson, Arizona
and Costa Mesa, California, provides contract optical-mechanical manufacturing,
electro-optical system design and prototyping utilizing lean manufacturing
technology. These operations enable us to deliver integrated optical solutions,
from design to delivery, primarily to the defense and aerospace markets. These
products and services typically yield a lower margin than our standard
metrology systems. In fiscal 2006, we announced that the Optical  Systems Group had been awarded the first
production order for its next-generation Advanced Helmet Mounted Display
(AHMD). The AHMD is a high-resolution, optical see-through display system that
overlays computer-generated battlefield scenery on the real-world environment.
In addition, our Laser Fusion Optics Group received another production contract
for

19

---



its Laser
Fusion Program which was valued at $1.0 million, with provisions for optional
orders running through 2013 resulting in a total potential value of $45.0
million.

Our backlog at
June 30, 2006 was $80.8 million, an increase of $14.2 million from June 30,
2005. Orders were $48.6 million in the fourth quarter of fiscal 2006 as we
experienced continued strength across our product lines and regions. Our
semiconductor backlog of $42.9 million includes $16.1 million related to future
flat panel shipments. Bookings in the first quarter of our fiscal year tend to
be lower than the fourth quarter of the previous year and we expect the first
quarter of fiscal 2007 to continue that trend.

We
discontinued our telecommunications TeraOptix business unit during fiscal 2003.
Accordingly, the results of TeraOptix have been presented as a separate line
item on the Consolidated Statements of Operations as Discontinued TeraOptix
operations, net of tax, for all periods presented. In addition, the Charges
on the disposal of TeraOptix, net of tax, have been recorded as a separate
line item for all periods presented. All continuing operations line items
presented exclude TeraOptix results. During fiscal 2004, we recorded impairment
charges on our former Westborough telecommunications facility in the second and
fourth fiscal quarters. The total impairment charges recorded in fiscal 2004
were $6.4 million, net of tax of $3.4 million. In fiscal 2005, we recorded an
additional impairment charge and adjustments of $0.1 million, net of tax of
$43,000 to reflect the fair value based on final negotiations of a pending
sale. The sale of the facility was completed in March 2005 for $1.9 million,
net of selling expenses.

20

---



Fiscal
2006 Compared with Fiscal 2005

Net
Sales

|                      |  |                       |       |                 |  |               |   |             |       |  |  |     |  
|--------------------- |  | --------------------- | ----- | --------------- |  | ------------- | - | ----------- | ----- |  |  | --- | -
|                      |  | Twelve
  Months Ended |      
|                      |  |                       |      
|(Dollars in millions) |  | June
  30,
  2006     |       | Net
  Sales
  % |  | June 30,
2005 |   | Net Sales
% |      
|                      |  |                       |       |                 |  |               |   |             |      
|Segment               |  |                       |       |                 |  |               |   |             |       |  |  |     |  
|Semiconductor         |  | $                     | 93.0  |                 |  | 55            | % | $           | 79.0  |  |  | 56  | %
|Industrial            |  |                       | 75.1  |                 |  | 45            | % |             | 62.3  |  |  | 44  | %
|                      |  |                       |       |                 |  |               |   |             |       |  |  |     |  
|Total                 |  | $                     | 168.1 |                 |  | 100           | % | $           | 141.3 |  |  | 100 | %
|                      |  |                       |       |                 |  |               |   |             |       |  |  |     |  

Net sales in the semiconductor segment increased 18%
in fiscal 2006 as compared with the prior year. The increase in net sales of $14.0
million within the semiconductor segment was primarily due to an increase in
net sales to our lithography customers of $7.8 million, development services of
$4.4 million, and product sales for the in-line semiconductor market of $2.0
million.

Net sales in the industrial segment increased 21% in
fiscal 2006 as compared with the prior year. The increase in net sales of $12.8
million within the industrial segment was primarily due to an increased volume
of optical system assemblies of $7.4 million and increased demand in the
Pacific Rim and Japan markets of $4.0 million. We opened offices in China and
Korea in the past two years and have seen a steady increase in sales activity
from those markets.

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,
  2006       |      | Net Sales
  % |  | June 30,
2005 |   | Net Sales% |     
|                      |  |                       |      |               |  |               |   |            |     
|Segment               |  |                       |      |               |  |               |   |            |      |  |  |    |  
|Semiconductor         |  | $                     | 37.0 |               |  | 40            | % | $          | 30.1 |  |  | 38 | %
|Industrial            |  |                       | 28.8 |               |  | 38            | % |            | 23.2 |  |  | 37 | %
|                      |  |                       |      |               |  |               |   |            |      |  |  |    |  
|Total                 |  | $                     | 65.8 |               |  | 39            | % | $          | 53.3 |  |  | 38 | %
|                      |  |                       |      |               |  |               |   |            |      |  |  |    |  
|                      |  |                       |      |               |  |               |   |            |      |  |  |    |  

Gross profit in the semiconductor segment as a
percentage of net sales increased by two percentage points 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 industrial segment as a percentage of sales
increased by one percentage point for fiscal 2006 as compared with the prior
year. This increase was also attributable to the use of new low-cost, high
quality vendors. In fiscal 2006, share-based compensation expenses decreased
overall gross profit by $0.4 million.

21

---



Selling,
general, and administrative expenses (SG&A)

|                      |  |                       |      |            |  |               |   |            |      |  |  |    |  
|--------------------- |  | --------------------- | ---- | ---------- |  | ------------- | - | ---------- | ---- |  |  | -- | -
|                      |  | Twelve
  Months Ended |     
|                      |  |                       |     
|(Dollars in millions) |  | June 30,2006          |      | Net Sales% |  | June 30,
2005 |   | Net Sales% |     
|                      |  |                       |      |            |  |               |   |            |     
|                      |  |                       |      |            |  |               |   |            |      |  |  |    |  
|                      |  | $                     | 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.

Research,
development, and engineering expenses (RD&E)

|                      |  |                       |      |            |  |              |   |            |      |  |  |   |  
|--------------------- |  | --------------------- | ---- | ---------- |  | ------------ | - | ---------- | ---- |  |  | - | -
|                      |  | Twelve
  Months Ended |     
|                      |  |                       |     
|(Dollars in millions) |  | June 30,2006          |      | Net Sales% |  | June 30,2005 |   | Net Sales% |     
|                      |  |                       |      |            |  |              |   |            |     
|                      |  |                       |      |            |  |              |   |            |      |  |  |   |  
|                      |  | $                     | 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 30,2006          |     | Tax Rate% |  | June 30,2005 |   | Tax Rate% |    
|                      |  |                       |     |           |  |              |   |           |    
|                      |  |                       |     |           |  |              |   |           |     |  |  |    |  
|                      |  | $                     | 5.8 |           |  | 28           | % | $         | 5.7 |  |  | 36 | %
|                      |  |                       |     |           |  |              |   |           |     |  |  |    |  

Income tax expense in fiscal 2006 increased slightly by 2% as
  compared with the prior year. The overall tax rate, however, decreased by eight
  percentage points when compared to 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.

22

---



Net
Earnings

|                      |  |                       |      |           |  |               |   |         |     |  |  |   |  
|--------------------- |  | --------------------- | ---- | --------- |  | ------------- | - | ------- | --- |  |  | - | -
|                      |  | Twelve
  Months Ended |     
|                      |  |                       |     
|(Dollars in millions) |  | June 30,2006          |      | Sales
  % |  | June 30,
2005 |   | Sales
% |    
|                      |  |                       |      |           |  |               |   |         |    
|                      |  |                       |      |           |  |               |   |         |     |  |  |   |  
|                      |  | $                     | 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 was $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.

Fiscal
2005 Compared with Fiscal 2004

Net sales of $141.3 million for fiscal 2005 increased
by $25.0 million, or 22%, from the comparable prior year period sales of $116.3
million. Net sales by segment and geographic regions follow:

Net
Sales By Segment and Geographic Regions

|                      |  |                       |       |               |  |               |   |             |       |  |  |     |  
|--------------------- |  | --------------------- | ----- | ------------- |  | ------------- | - | ----------- | ----- |  |  | --- | -
|                      |  | Twelve
  Months Ended |      
|                      |  |                       |      
|(Dollars in millions) |  | June 30,
  2005       |       | Net Sales
  % |  | June 30,
2004 |   | Net Sales
% |      
|                      |  |                       |       |               |  |               |   |             |      
|Segment               |  |                       |       |               |  |               |   |             |       |  |  |     |  
|Semiconductor         |  | $                     | 79.0  |               |  | 56            | % | $           | 66.8  |  |  | 57  | %
|Industrial            |  |                       | 62.3  |               |  | 44            | % |             | 49.5  |  |  | 43  | %
|                      |  |                       |       |               |  |               |   |             |       |  |  |     |  
|Total                 |  | $                     | 141.3 |               |  | 100           | % | $           | 116.3 |  |  | 100 | %
|                      |  |                       |       |               |  |               |   |             |       |  |  |     |  
|                      |  |                       |       |               |  |               |   |             |       |  |  |     |  
|Geographic            |  |                       |       |               |  |               |   |             |       |  |  |     |  
|Domestic              |  | $                     | 48.0  |               |  | 34            | % | $           | 33.9  |  |  | 29  | %
|Europe                |  |                       | 15.0  |               |  | 11            | % |             | 8.4   |  |  | 7   | %
|Japan                 |  |                       | 61.1  |               |  | 43            | % |             | 61.1  |  |  | 53  | %
|Pacific Rim           |  |                       | 17.2  |               |  | 12            | % |             | 12.9  |  |  | 11  | %
|                      |  |                       |       |               |  |               |   |             |       |  |  |     |  
|Total                 |  | $                     | 141.3 |               |  | 100           | % | $           | 116.3 |  |  | 100 | %
|                      |  |                       |       |               |  |               |   |             |       |  |  |     |  

For fiscal 2005, net sales in the semiconductor
segment were $79.0 million, or 56% of total net sales, as compared with $66.8
million, or 57%, in the prior year period. The increase in net sales of $12.2
million within the semiconductor segment was primarily due to an increase in
net sales to the Pacific Rim of $5.3 million, primarily driven by flat panel
sales of $3.3 million and increased metrology volume from China and Taiwan. In
addition, sales in Europe for this segment increased $5.8 million, primarily
due to optics sales. Net sales for fiscal 2005 and 2004 included $15.6 million
and $16.1 million,

23

---



respectively,
from development services agreements. In fiscal 2005, we signed two development
agreement amendments with Canon. for additional add-on work to our existing
development agreement originally executed in fiscal 2003. In February 2005, we
also signed a new development agreement with Canon. These new contracts totaled
approximately $41.0 million of which $14.2 million was recognized as revenue in
the fiscal 2005. It is expected that the remaining revenue will be recognized
during fiscal 2006 and the first half of fiscal 2007.

For fiscal
2005, net sales in the industrial segment were $62.3 million, or 44% of total
net sales, as compared with $49.5 million, or 43%, in the prior year period.
The increase in net sales of $12.8 million within the industrial segment was
primarily due to an increase in domestic sales of $12.3 million and Europe
sales of $0.8 million. The increase in domestic sales was primarily due to
increases in the optical assembly-manufacturing unit of $10.3 million for laser
eye surgery systems, increased engineering services, and optics services for
NIF. Increased sales in Europe was primarily related to an increase in
automotive related sales.

Approximately
82% of all fiscal 2005 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 impact the sales of our products in export markets, as would changes in the
general economic conditions in those markets. The impact of changes in foreign
currency values on our sales cannot be measured. Management believes the
percentage of sales in foreign currencies may increase in the coming year due
to an increase in sales denominated in yen to Japanese customers.

Gross profit
for fiscal 2005 totaled $53.3 million, an increase of $10.6 million, or 25%,
from $42.7 million in the prior fiscal year. Gross profit as a percentage of
sales for fiscal 2005 and 2004 was 38% and 37%, respectively. The increased
margin was primarily due to product mix with increases in sales on higher
margin products and increased margins on the development services revenue, in
which the newer contracts carry a slightly higher margin than did the original
agreement.

Selling,
general, and administrative expenses (SG&A) in fiscal 2005 amounted to
$24.9 million, an increase of $0.3 million, or 1%, from fiscal 2004. SG&A
as a percentage of net sales in fiscal 2005 was 18%, as compared with 21% in
fiscal 2004. SG&A in fiscal 2005 included increases in profit sharing
accruals of $1.0 million, and professional services of $0.8 million, partially
offset by several one-time adjustments aggregating to $0.8 million, reduced bad
debt expense of $0.5 million, and decreases of domestic commissions of $0.2
million.

Research,
development, and engineering expenses (RD&E) in fiscal 2005 increased by
$0.4 million, or 3%, to $13.4 million from $13.0 million in the comparable
prior year period. RD&E as a percentage of net sales in fiscal 2005 was 9%,
as compared with 11% in fiscal 2004. RD&E costs in 2005 were primarily
driven within the Precision Positioning System products with headcount
additions to meet redesign projects and the flat panel area with continued
development of next generation tools.

Our operating
profit in fiscal 2005 was $15.0 million, as compared with an operating profit
of $5.1 million in fiscal 2004. Operating profit as a percentage of sales in
fiscal 2005 was 11%, as compared with the operating profit as a percentage of
sales of 4% in fiscal 2004.

The income tax
expense from continuing operations in fiscal 2005 totaled $5.7 million, or 36%
of pretax profits, which compares with an income tax expense of $1.7 million,
or 27% of pretax profits, in fiscal 2004. The increase in the tax rate was
primarily due to the diminished effect of certain tax credits on a higher
income base and more income associated with higher tax jurisdictions. The
overall effective tax rate, including the tax effect of the discontinued
operations, for fiscal 2005 was 35%, as compared with an income tax benefit of
42% in fiscal 2004.

We recorded
net earnings of $9.0 million for fiscal 2005 as compared with a net loss of
$3.4 million for fiscal 2004. On a diluted per share basis, the net income was
$0.50 per share for fiscal 2005 as compared with a net loss of $0.19 per share
for fiscal 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
net loss for fiscal 2004 included losses of $1.3 million, net of tax, related
to the operations of our discontinued TeraOptix unit and charges of $6.4
million, net of tax, related to the disposal of our discontinued TeraOptix unit
reflecting changes in the fair value of the Westborough facility. The earnings from
continuing operations for fiscal 2005 was $9.4 million, or $0.52 per diluted
share, as compared with earnings from continuing operations of $4.2 million, or
$0.23 per diluted share, for fiscal 2004.

Backlog at
June 30, 2005 totaled $66.6 million, an increase of $11.7 million, or 21%, from
$54.9 million at June 30, 2004. The year-end fiscal 2005 backlog consisted of
$28.8 million, or 43%, in the semiconductor segment and $37.8 million, or 57%,
in the industrial segment. Orders for fiscal 2005 totaled $153.9 million.
Orders by segment for fiscal 2005 consisted of

24

---



$75.4 million,
or 49%, in the semiconductor segment and $78.5 million, or 51%, in the
industrial segment. The increase in the backlog is primarily related to an
increase in domestic region orders. Domestic orders were driven by large custom
optics and optical assembly orders, as well as an increase in orders received
by our applied optics group.

TRANSACTIONS WITH STOCKHOLDER

Sales to
Canon, a stockholder, customer, and distributor of certain of our products in
Japan amounted to $61.4 million (36% of net sales), $51.9 million (37% of net
sales), and $57.3 million (49% of net sales), for the years ended June 30,
2006, 2005, and 2004, 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, 2006 and 2005, there was in the aggregate, $6.0
million and $4.0 million, respectively, of trade accounts receivable from
Canon.

In September
2002, we entered into a contract with Canon related to the development of
certain interferometers. In March 2004, we signed a preliminary agreement to
begin further add-on work; 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, 2006, we recognized
revenue of $20.0 million under these Canon development services contracts
compared with $15.6 million for the comparable prior period.

LIQUIDITY AND CAPITAL RESOURCES

At June 30,
2006, cash and marketable securities was $65.5 million, an increase of $8.6
million from the $56.9 million at June 30, 2005. The increase in cash was
primarily attributable to cash generated from our operating activities,
partially offset by an increase in inventory and capital expenditures. This
increase in inventory was primarily attributable to an increase in inventory
for flat panel display systems and to a lesser extent, for other product lines
to support the backlog.

Cash flows
from operating activities was $16.0 million for fiscal 2006 as compared with
$31.8 million in fiscal 2005. The decrease was primarily due to progress
payments received in late fiscal 2005 related to our development services
agreements. In fiscal 2006, the utilization of the development services
progress payments was partially offset by increased progress payments on flat
panel systems and other customer orders.

Acquisitions
of property, plant, and equipment was $7.4 million in fiscal 2006 as compared
with $10.0 million for fiscal 2005. The decrease was due primarily to the
completion of construction on an 18,000 square foot addition to our Middlefield
facility that occurred in fiscal 2005 which had associated capitalized cost of
$2.7 million.

There were no
borrowings outstanding under our $3.0 million bank line of credit agreement at
June 30, 2006 and 2005. The agreement contains certain financial covenants
which, among others, relate to debt service and consolidated debt ratios.
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, 2006, 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)

|                       |  |       |     |                    |   |           |  |           |     |                     |  
|---------------------- |  | ----- | --- | ------------------ | - | --------- |  | --------- | --- | ------------------- | -
|                       |  | Total |     | Less than
  1 year |   | 1-3 years |  | 3-5 years |     | More than
  5 years |  
|                       |  |       |     |                    |   |           |  |           |     |                     |  
|Operating
  leases     |  | $     | 2.3 |                    | $ | 1.1       |  | $         | 1.2 |                     | $
|Purchase
  obligations |  |       | 4.5 |                    |   | 3.0       |  |           | 1.5 |                     |  
|                       |  |       |     |                    |   |           |  |           |     |                     |  
|Total                  |  | $     | 6.8 |                    | $ | 4.1       |  | $         | 2.7 |                     | $
|                       |  |       |     |                    |   |           |  |           |     |                     |  

25

---



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 Risks

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

Interest Rate Sensitivity

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

Fair value of
investments as of June 30, 2006 maturing in: 
(Dollars in millions)

|                               |  | 2007 |      | 2008 |   | 2009 |   | 2010 |     
|------------------------------ |  | ---- | ---- | ---- | - | ---- | - | ---- | ----
|                               |  |      |      |      |   |      |   |      |     
|Marketable
  securities        |  |      |      |      |   |      |   |      |     
|Fixed rate investments         |  | $    | 21.3 |      | $ | 11.2 |   | $    | 10.1
|Weighted average interest rate |  |      | 4.3  | %    |   | 3.9  | % |      | 4.7 

On June 30,
2006, the Company had variable interest rate money market accounts valued at
$8.7 million.

Exchange Rate Sensitivity

Approximately
82% of our fiscal 2006 net sales were denominated in U.S. dollars. At June 30,
2006, our backlog included orders in U.S. dollars of $76.6 million, or 95% 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.

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. 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.

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.

26

---



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 ZYGO in the reports that it files or submits under the Exchange
Act and were effective in ensuring that information required to be disclosed by
ZYGO in the reports that it files or submits 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.

During our
third quarter of fiscal 2006, in connection with conducting an internal review
of our tax return, we determined that inadvertent accounting errors were made
in the consolidation of our inter-company revenues from certain of our foreign
operations. The errors are the result of our failure to identify and eliminate
certain inter-company revenues attributed to our Singapore and Taiwan offices,
which resulted in our overstating reported revenues, from fiscal 2001 through
the second quarter of fiscal 2006.

In response to
this material weakness, we implemented remedial measures to address the
identified material weakness. We improved procedures related to the recording
and reporting of our inter-company transactions, including dedicating
additional resources to our consolidation process and the procedures and
controls surrounding the consolidation process, and increased our review and
approval controls by senior financial personnel over the personnel that perform
the consolidation. These procedures included ensuring that the inter-company
activity is properly identified and eliminated in consolidation. In our fourth quarter
and in connection with the preparation of our fiscal 2006 financial statements,
we completed the implementation and testing of the remedial measures put in
place to address the material weakness. In connection with this testing, and in
connection with the evaluation described below (Report of Management on Zygo
Corporations Internal Control Over Financial Reporting), management has
determined that the material weakness has been remediated as of June 30, 2006.
Management considers the remediation of the material weakness during our
quarter ended June 30, 2006 to represent a change that has materially affected,
or is reasonably likely to 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, 2006, 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,
2006 based on the specified criteria.

27

---



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 managements assessment and the operating effectiveness of internal
control over financial reporting and issued their reports which are included on
page F-2.

|                     |     |                                                                   | 
|-------------------- | --- | ----------------------------------------------------------------- | 
|                     |     | Zygo Corporation                                                 
|                     |     |                                                                  
|September
  11, 2006 | By: | /s/ J. Bruce
  Robinson                                          
|                     |     |                                                                   | 
|                     |     | J. Bruce
  Robinson                                              
|                     |     | Chairman,
  President and Chief Executive Officer                
|                     |     |                                                                  
|                     |     |                                                                  
|                     |     |                                                                  
|September
  11, 2006 | By: | /s/ Walter
  A. Shephard                                         
|                     |     |                                                                   | 
|                     |     | Walter A.
  Shephard                                             
|                     |     | Vice
  President, Finance, Chief Financial Officer, and Treasurer

Item 9B. Other Information

None.

28

---



PART III

Item 10. Directors and Executive Officers of
the Registrant

Except for the
information concerning executive officers which is set forth in Part I of this
Annual Report, information required by this item will be included under the
captions Election of Board of Directors, Committees of the Board of
Directors, and Other Agreements and Other Matters in our Proxy Statement to
be filed pursuant to Regulation 14A for use in connection with our companys
2006 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 11. Executive Compensation

Information
required by this item will be included in our 2006 Proxy Statement under the
caption Executive Compensation and is incorporated herein by reference.

Item 12. Security Ownership of Certain
Beneficial Owners and Management

Information
required by this item will be included in our 2006 Proxy Statement under the
captions Election of Board of Directors, Equity Compensation Plan
Information, and Principal Stockholders and is incorporated herein by
reference.

Item 13. Certain Relationships and Related
Transactions

Information
required by this item will be included in our 2006 Proxy Statement under the
caption Certain Relationships and Related Transactions and is incorporated
herein by reference.

Item 14. Principal Accountant Fees and
Services

Information
required by this item will be included in our 2006 Proxy Statement under the
caption Relationship with Independent Public Accountants and is incorporated
herein by reference.

29

---



PART IV

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

|    |                                                                     |                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The
  following documents are filed as part of this report:        
|    |                                                                    
|    | 1. and 2.
  Financial Statements and Financial Statement Schedules:
|    |                                                                     |                                                                                                                                                                                                                                                                         
|    |                                                                     | An index to
  the financial statements and financial statement schedules filed is located
  on page F-1.                                                                                                                                                                
|    |                                                                     |                                                                                                                                                                                                                                                                         
|    | 3.                                                                  | EXHIBITS                                                                                                                                                                                                                                                                
|    |                                                                     |                                                                                                                                                                                                                                                                         
|    | 3.(i)                                                               | Restated
  Certificate of Incorporation of the Company and amendments thereto (Exhibit
  3.(i) to the Companys Annual Report on Form 10-K for its year ended June 30,
  1993)*                                                                                         
|    |                                                                     |                                                                                                                                                                                                                                                                         
|    | 3.(ii)                                                              | Certificate
  of Amendment of Certificate of Incorporation, filed June 3, 1996 (Exhibit
  3.(ii) to the Companys Annual Report on Form 10-K 405 for its year ended
  June 30, 1996)*                                                                                   
|    |                                                                     |                                                                                                                                                                                                                                                                         
|    | 3.(iii)                                                             | By-laws of
  the Company (Exhibit (3)(b) to Registration No. 2-87253 on Form S-1
  hereinafter Registration No. 2-87253)*                                                                                                                                             
|    |                                                                     |                                                                                                                                                                                                                                                                         
|    | 10.1                                                                | Confidentiality
  and Non-Competition Agreement dated October 25, 1983, between the Company and
  Carl A. Zanoni (Exhibit (10)(b) to Registration No. 2-87253)*                                                                                                         
|    |                                                                     |                                                                                                                                                                                                                                                                         
|    | 10.2                                                                | Agreement
  dated 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)*                                                                            

30

---



| |                                                                                                                                                             |                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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).                                                                      
| |                                                                                                                                                             |                                                                                                                                                                                                                                                                 
| | 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)*                                                                                                                
| |                                                                                                                                                             |                                                                                                                                                                                                                                                                 
| | 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                                                                                                                                      
| |                                                                                                                                                             |                                                                                                                                                                                                                                                                 
| | 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 and, 10.19 are
  management contracts, compensatory plans or compensatory arrangements.

*Incorporated
herein by reference.

31

---



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
12, 2006
|                   |                                    |  |     
|                   | 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,
  President, and Chief    |  | September 12, 2006
|                          |  |  | Executive
  Officer                 |  |                   
|J. Bruce Robinson         |  |  |                                     |  |                   
|                          |  |  |                                     |  |                   
|/s/ Walter
  A. Shephard  |  |  | Vice
  President, Finance, Chief    |  | September 12, 2006
|                          |  |  | Financial
  Officer, and Treasurer  |  |                   
|Walter A. Shephard        |  |  |                                     |  |                   
|                          |  |  |                                     |  |                   
|/s/ Carl A.
  Zanoni      |  |  | Senior Vice
  President, Technology |  | September 12, 2006
|                          |  |  | and Director                        |  |                   
|Carl A. Zanoni            |  |  |                                     |  |                   
|                          |  |  |                                     |  |                   
|/s/ Eugene
  G. Banucci   |  |  | Director                            |  | September 12, 2006
|                          |  |  |                                     |  |                   
|Eugene G. Banucci         |  |  |                                     |  |                   
|                          |  |  |                                     |  |                   
|/s/ Youssef
  A. El-Mansy |  |  | Director                            |  | September 12, 2006
|                          |  |  |                                     |  |                   
|Youssef A. El-Mansy       |  |  |                                     |  |                   
|                          |  |  |                                     |  |                   
|/s/ Paul F.
  Forman      |  |  | Director                            |  | September 12, 2006
|                          |  |  |                                     |  |                   
|Paul F. Forman            |  |  |                                     |  |                   
|                          |  |  |                                     |  |                   
|/s/ Samuel
  H. Fuller    |  |  | Director                            |  | September 12, 2006
|                          |  |  |                                     |  |                   
|Samuel H. Fuller          |  |  |                                     |  |                   
|                          |  |  |                                     |  |                   
|/s/ Seymour
  E. Liebman  |  |  | Director                            |  | September 12, 2006
|                          |  |  |                                     |  |                   
|Seymour E. Liebman        |  |  |                                     |  |                   
|                          |  |  |                                     |  |                   
|/s/ Robert
  G. McKelvey  |  |  | Director                            |  | September 12, 2006
|                          |  |  |                                     |  |                   
|Robert G. McKelvey        |  |  |                                     |  |                   
|                          |  |  |                                     |  |                   
|/s/ Robert
  B. Taylor    |  |  | Director                            |  | September 12, 2006
|                          |  |  |                                     |  |                   
|Robert B. Taylor          |  |  |                                     |  |                   
|                          |  |  |                                     |  |                   
|/s/ Carol
  Wallace       |  |  | Director                            |  | September 12, 2006
|                          |  |  |                                     |  |                   
|Carol P. Wallace          |  |  |                                     |  |                   
|                          |  |  |                                     |  |                   
|/s/ Bruce W.
  Worster    |  |  | Director                            |  | September 12, 2006
|                          |  |  |                                     |  |                   
|Bruce W. Worster          |  |  |                                     |  |                   

32

---



ZYGO CORPORATION AND CONSOLIDATED
SUBSIDIARIES

Index 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, 2006 and 2005                                              
|            |  |                                                                                                    
|F-5         |  | Consolidated statements of operations for the years ended June 30,
  2006, 2005, and 2004          
|            |  |                                                                                                    
|F-6         |  | Consolidated statements of stockholders equity for the years ended
  June 30, 2006, 2005, and 2004
|            |  |                                                                                                    
|F-7         |  | Consolidated statements of cash flows for the years ended June 30,
  2006, 2005, and 2004          
|            |  |                                                                                                    
|F-8 to F-24 |  | Notes to consolidated financial statements                                                         
|            |  |                                                                                                    
|            |  | Consolidated
  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 Stockholders 
Zygo Corporation 
Middlefield, Connecticut

We
  have audited the accompanying consolidated balance sheet of Zygo Corporation
  and subsidiaries (the Company) as of June 30, 2006, and the related
  consolidated statement of operations, stockholders equity, and cash flows
  for the year ended June 30, 2006. We have also audited managements assessment,
  included in the accompanying Managements Report on Internal Control over
  Financial Reporting in Item 9A, that the Company maintained effective internal
  control over financial reporting as of June 30, 2006, based on the criteria
  established in Internal ControlIntegrated Framework issued 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. Our responsibility is to express
  an opinion on these financial statements, an opinion on managements assessment,
  and an opinion on the effectiveness of the Companys internal control over
  financial reporting based on our audit.

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. An audit of financial statements includes 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, evaluating
managements assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinion.

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 the board
  of 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 the Company as of
June 30, 2006, and the results of their operations and their cash flows for the
year ended June 30, 2006, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, managements
assessment that the Company maintained effective internal control over
financial reporting as of June 30, 2006, is fairly stated, in all material
respects, based on the criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of June 30,
2006, based on the criteria established in Internal ControlIntegrated
Framework issued 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 LLP 
Hartford, Connecticut September
12, 2006

F - 2

---



REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of
Directors and Stockholders 
Zygo Corporation:

We have
audited the accompanying consolidated balance sheet of Zygo Corporation and
subsidiaries (the Company) as of June 30, 2005, and the related consolidated
statements of operations, stockholders equity, and cash flows for the years
ended June 30, 2005 and 2004. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Zygo Corporation
and subsidiaries as of June 30, 2005, and the results of their operations and
their cash flows for the years ended June 30, 2005 and 2004, in conformity with
U.S. generally accepted accounting principles.

/s/ KPMG LLP 
Stamford, Connecticut 
September 7, 2005, except as to note 2 to the consolidated 
financial statements which is as of June 20, 2006

F - 3

---



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

|                                                                                                                                    |  |               |         |                 |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | --------------- | - | ------- | -
|                                                                                                                                    |  | June 30,
2006 |         | June 30,
  2005 |  
|                                                                                                                                    |  |               |         |                 |  
|Assets                                                                                                                              |  |               |         |                 |   |         |  
|Current assets:                                                                                                                     |  |               |         |                 |   |         |  
|Cash and cash equivalents                                                                                                           |  | $             | 20,318  |                 | $ | 20,949  |  
|Marketable securities (note 4)                                                                                                      |  |               | 21,415  |                 |   | 17,242  |  
|Receivables, net of allowance for doubtful
  accounts of $588 and $663, respectively (notes 5 and 17)                               |  |               | 33,759  |                 |   | 28,124  |  
|Inventories (note 6)                                                                                                                |  |               | 38,082  |                 |   | 33,727  |  
|Prepaid expenses                                                                                                                    |  |               | 2,106   |                 |   | 2,126   |  
|Deferred income taxes (note 15)                                                                                                     |  |               | 11,959  |                 |   | 8,895   |  
|                                                                                                                                    |  |               |         |                 |   |         |  
|Total current assets                                                                                                                |  |               | 127,639 |                 |   | 111,063 |  
|                                                                                                                                    |  |               |         |                 |   |         |  
|Marketable securities (note 4)                                                                                                      |  |               | 23,743  |                 |   | 18,711  |  
|Property, plant, and equipment, net (note
  7)                                                                                      |  |               | 32,631  |                 |   | 31,420  |  
|Deferred income taxes (note 15)                                                                                                     |  |               | 15,433  |                 |   | 22,333  |  
|Intangible assets, net (note 8)                                                                                                     |  |               | 5,925   |                 |   | 5,638   |  
|Other assets                                                                                                                        |  |               | 812     |                 |   | 1,017   |  
|                                                                                                                                    |  |               |         |                 |   |         |  
|Total assets                                                                                                                        |  | $             | 206,183 |                 | $ | 190,182 |  
|                                                                                                                                    |  |               |         |                 |   |         |  
|                                                                                                                                    |  |               |         |                 |   |         |  
|Liabilities and Stockholders Equity                                                                                                |  |               |         |                 |   |         |  
|Current liabilities:                                                                                                                |  |               |         |                 |   |         |  
|Accounts payable                                                                                                                    |  | $             | 13,987  |                 | $ | 13,510  |  
|Accrued progress payments (note 17)                                                                                                 |  |               | 17,031  |                 |   | 21,713  |  
|Accrued salaries and wages                                                                                                          |  |               | 8,445   |                 |   | 6,220   |  
|Other accrued expenses (note 10)                                                                                                    |  |               | 4,258   |                 |   | 4,731   |  
|Income taxes payable                                                                                                                |  |               | 2,004   |                 |   | 1,510   |  
|                                                                                                                                    |  |               |         |                 |   |         |  
|Total current liabilities                                                                                                           |  |               | 45,725  |                 |   | 47,684  |  
|                                                                                                                                    |  |               |         |                 |   |         |  
|Other long-term liabilities                                                                                                         |  |               | 101     |                 |   | 96      |  
|Minority interest                                                                                                                   |  |               | 1,419   |                 |   | 1,249   |  
|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; 18,552,684 shares issued (18,423,026 in
  2005); 18,105,479 shares outstanding (17,975,821
  in 2005) |  |               | 1,855   |                 |   | 1,842   |  
|Additional paid-in capital                                                                                                          |  |               | 145,225 |                 |   | 142,111 |  
|Retained earnings                                                                                                                   |  |               | 17,052  |                 |   | 2,567   |  
|Accumulated other comprehensive income
  (loss):                                                                                    |  |               |         |                 |   |         |  
|Currency translation effects                                                                                                        |  |               | 74      |                 |   | (112    | )
|Net unrealized gain on marketable
  securities (note 4)                                                                             |  |               | 19      |                 |   | 32      |  
|                                                                                                                                    |  |               |         |                 |   |         |  
|                                                                                                                                    |  |               | 164,225 |                 |   | 146,440 |  
|Less treasury stock, at cost; 447,205
  common shares                                                                               |  |               | 5,287   |                 |   | 5,287   |  
|                                                                                                                                    |  |               |         |                 |   |         |  
|Total stockholders equity                                                                                                          |  |               | 158,938 |                 |   | 141,153 |  
|                                                                                                                                    |  |               |         |                 |   |         |  
|Total liabilities and stockholders equity                                                                                          |  | $             | 206,183 |                 | $ | 190,182 |  
|                                                                                                                                    |  |               |         |                 |   |         |  

See
accompanying notes to consolidated financial statements.

F - 4

---



CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands except per share amounts)

|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|------------------------------------------------------------------------------------- |  | -------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                      |  | Fiscal
Year Ended June 30, |        
|                                                                                      |  |                            |        
|                                                                                      |  | 2006                       |         | 2005 |   | 2004    |  
|                                                                                      |  |                            |         |      |   |         |  
|Net sales (note 17):                                                                  |  |                            |         |      |   |         |   |   |         |  
|Products                                                                              |  | $                          | 148,123 |      | $ | 125,732 |   | $ | 100,219 |  
|Development services                                                                  |  |                            | 20,014  |      |   | 15,617  |   |   | 16,057  |  
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|                                                                                      |  |                            | 168,137 |      |   | 141,349 |   |   | 116,276 |  
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Cost of goods sold:                                                                   |  |                            |         |      |   |         |   |   |         |  
|Products                                                                              |  |                            | 88,119  |      |   | 76,921  |   |   | 61,063  |  
|Development services                                                                  |  |                            | 14,247  |      |   | 11,138  |   |   | 12,533  |  
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|                                                                                      |  |                            | 102,366 |      |   | 88,059  |   |   | 73,596  |  
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Gross profit                                                                          |  |                            | 65,771  |      |   | 53,290  |   |   | 42,680  |  
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Selling, general, and administrative expenses                                         |  |                            | 31,125  |      |   | 24,905  |   |   | 24,595  |  
|Research, development, and engineering expenses                                       |  |                            | 15,901  |      |   | 13,377  |   |   | 13,011  |  
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Operating profit                                                                      |  |                            | 18,745  |      |   | 15,008  |   |   | 5,074   |  
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Other income:                                                                         |  |                            |         |      |   |         |   |   |         |  
|Interest income                                                                       |  |                            | 2,119   |      |   | 885     |   |   | 795     |  
|Miscellaneous income (expense), net                                                   |  |                            | 262     |      |   | (98     | ) |   | 352     |  
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Total other income                                                                    |  |                            | 2,381   |      |   | 787     |   |   | 1,147   |  
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Earnings from continuing operations before income tax expense and
  minority interest |  |                            | 21,126  |      |   | 15,795  |   |   | 6,221   |  
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Income tax expense (note 15)                                                          |  |                            | (5,849  | )    |   | (5,694  | ) |   | (1,660  | )
|Minority interest                                                                     |  |                            | (792    | )    |   | (751    | ) |   | (335    | )
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Earnings from continuing operations                                                   |  |                            | 14,485  |      |   | 9,350   |   |   | 4,226   |  
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Discontinued TeraOptix operations, net of tax (note 3)                                |  |                            |        |      |   | (242    | ) |   | (1,263  | )
|Charges related to the disposal of TeraOptix, net of tax (note
3)                     |  |                            |        |      |   | (124    | ) |   | (6,392  | )
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Loss from discontinued operations                                                     |  |                            |        |      |   | (366    | ) |   | (7,655  | )
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Net earnings (loss)                                                                   |  | $                          | 14,485  |      | $ | 8,984   |   | $ | (3,429  | )
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Basic - Earnings (loss) per share:                                                    |  |                            |         |      |   |         |   |   |         |  
|Continuing operations                                                                 |  | $                          | 0.80    |      | $ | 0.52    |   | $ | 0.24    |  
|Discontinued operations                                                               |  |                            |        |      |   | (0.02   | ) |   | (0.43   | )
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Net earnings (loss)                                                                   |  | $                          | 0.80    |      | $ | 0.50    |   | $ | (0.19   | )
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Diluted - Earnings (loss) per share:                                                  |  |                            |         |      |   |         |   |   |         |  
|Continuing operations                                                                 |  | $                          | 0.79    |      | $ | 0.52    |   | $ | 0.23    |  
|Discontinued operations                                                               |  |                            |        |      |   | (0.02   | ) |   | (0.42   | )
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Net earnings (loss)                                                                   |  | $                          | 0.79    |      | $ | 0.50    |   | $ | (0.19   | )
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Weighted average number of shares:                                                    |  |                            |         |      |   |         |   |   |         |  
|Basic                                                                                 |  |                            | 18,054  |      |   | 17,950  |   |   | 17,802  |  
|                                                                                      |  |                            |         |      |   |         |   |   |         |  
|Diluted                                                                               |  |                            | 18,367  |      |   | 18,140  |   |   | 18,221  |  
|                                                                                      |  |                            |         |      |   |         |   |   |         |  

See
accompanying notes to consolidated financial statements.

F - 5

---



CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY(Thousands of dollars)

|                                                                              |  |       |         |                                     |   |                                 |   |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   |         | 
|----------------------------------------------------------------------------- |  | ----- | ------- | ----------------------------------- | - | ------------------------------- | - | ------------------------------------------------------ | ------ | -------------- | - | ---------------- | - | -------------- | ----- |  | - | ------ | - | - | ------- | 
|                                                                              |  | Total |         | Compre-
  hensive
  Income
  (Loss) |   | Retained
  Earnings
  (Deficit) |   | Accumulated
  Other
  Compre-hensive
  Income
  (Loss) |        | Common
  Stock |   | Treasury
  Stock |   | Paid-InCapital |      
|                                                                              |  |       |         |                                     |   |                                 |   |                                                        |        |                |   |                  |   |                |      
|Balance at June 30, 2003                                                      |  | $     | 130,403 |                                     |   |                                 |   | $                                                      | (2,988 | )              | $ | (1,459           | ) | $              | 1,804 |  | $ | (5,287 | ) | $ | 138,333 | 
|Comprehensive income (loss):                                                  |  |       |         |                                     |   |                                 |   |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   |         | 
|Net loss                                                                      |  |       | (3,429  | )                                   | $ | (3,429                          | ) |                                                        | (3,429 | )              |   |                  |   |                |       |  |   |        |   |   |         | 
|                                                                              |  |       |         |                                     |   |                                 |   |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   |         | 
|Other comprehensive income (loss), net of tax:                                |  |       |         |                                     |   |                                 |   |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   |         | 
|Unrealized loss on marketable securities                                      |  |       | (74     | )                                   |   | (74                             | ) |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   |         | 
|Reclassification adjustment for loss on swap agreement included in
net
  loss |  |       | 914     |                                     |   | 914                             |   |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   |         | 
|Foreign currency translation effect                                           |  |       | 691     |                                     |   | 691                             |   |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   |         | 
|                                                                              |  |       |         |                                     |   |                                 |   |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   |         | 
|Other comprehensive income                                                    |  |       |         |                                     |   | 1,531                           |   |                                                        |        |                |   | 1,531            |   |                |       |  |   |        |   |   |         | 
|                                                                              |  |       |         |                                     |   |                                 |   |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   |         | 
|Comprehensive loss                                                            |  |       |         |                                     | $ | (1,898                          | ) |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   |         | 
|                                                                              |  |       |         |                                     |   |                                 |   |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   |         | 
|Non-cash compensation charges related to stock options                        |  |       | 269     |                                     |   |                                 |   |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   | 269     | 
|Tax benefit for deductible expenses charged to equity                         |  |       | 474     |                                     |   |                                 |   |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   | 474     | 
|Employee stock purchase                                                       |  |       | 578     |                                     |   |                                 |   |                                                        |        |                |   |                  |   |                | 9     |  |   |        |   |   | 569     | 
|Exercise of employee stock options and related tax effect                     |  |       | 1,526   |                                     |   |                                 |   |                                                        |        |                |   |                  |   |                | 20    |  |   |        |   |   | 1,506   | 
|                                                                              |  |       |         |                                     |   |                                 |   |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   |         | 
|Balance at June 30, 2004                                                      |  |       | 131,352 |                                     |   |                                 |   |                                                        | (6,417 | )              |   | 72               |   |                | 1,833 |  |   | (5,287 | ) |   | 141,151 | 
|                                                                              |  |       |         |                                     |   |                                 |   |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   |         | 
|Comprehensive income (loss):                                                  |  |       |         |                                     |   |                                 |   |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   |         | 
|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 (loss):                                                  |  |       |         |                                     |   |                                 |   |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   |         | 
|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 | 
|                                                                              |  |       |         |                                     |   |                                 |   |                                                        |        |                |   |                  |   |                |       |  |   |        |   |   |         | 

See
accompanying notes to consolidated financial statements.

F - 6

---



CONSOLIDATED STATEMENTS OF CASH FLOWS(Thousands of dollars)

|                                                                                                    |  |                            |         |      |   |         |   |   |         |  
|--------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                                    |  | Fiscal
Year Ended June 30, |        
|                                                                                                    |  |                            |        
|                                                                                                    |  | 2006                       |         | 2005 |   | 2004    |  
|                                                                                                    |  |                            |         |      |   |         |  
|Cash provided by (used for) operating
  activities:                                                 |  |                            |         |      |   |         |   |   |         |  
|Net earnings (loss)                                                                                 |  | $                          | 14,485  |      | $ | 8,984   |   | $ | (3,429  | )
|Adjustments to reconcile net earnings
  (loss) to cash provided by (used for) operating activities: |  |                            |         |      |   |         |   |   |         |  
|Loss from discontinued operations                                                                   |  |                            |        |      |   | 366     |   |   | 7,655   |  
|Depreciation and amortization                                                                       |  |                            | 6,214   |      |   | 5,880   |   |   | 5,717   |  
|Loss on disposal and impairment of assets                                                           |  |                            | 266     |      |   | 209     |   |   | 525     |  
|Deferred income taxes                                                                               |  |                            | 3,836   |      |   | 5,333   |   |   | (436    | )
|Compensation cost related to share-based
  payments arrangements                                    |  |                            | 1,698   |      |   |        |   |   |        |  
|Excess tax benefits from share-based
  payment arrangements                                         |  |                            | (128    | )    |   |        |   |   |        |  
|Other                                                                                               |  |                            | 5       |      |   | 97      |   |   | 191     |  
|Changes in operating accounts:                                                                      |  |                            |         |      |   |         |   |   |         |  
|Receivables                                                                                         |  |                            | (5,438  | )    |   | (1,630  | ) |   | (13,401 | )
|Inventories                                                                                         |  |                            | (3,959  | )    |   | (11,650 | ) |   | (2,796  | )
|Prepaid expenses                                                                                    |  |                            | 20      |      |   | (202    | ) |   | (122    | )
|Accounts payable, accrued expenses, and
  taxes payable                                             |  |                            | (1,773  | )    |   | 24,109  |   |   | 7,513   |  
|Minority interest                                                                                   |  |                            | 792     |      |   | 751     |   |   | 335     |  
|                                                                                                    |  |                            |         |      |   |         |   |   |         |  
|Net cash provided by continuing
operations                                                          |  |                            | 16,018  |      |   | 32,247  |   |   | 1,752   |  
|Net cash used for discontinued operations                                                           |  |                            |        |      |   | (423    | ) |   | (1,944  | )
|                                                                                                    |  |                            |         |      |   |         |   |   |         |  
|Net cash provided by (used for) operating
  activities                                              |  |                            | 16,018  |      |   | 31,824  |   |   | (192    | )
|                                                                                                    |  |                            |         |      |   |         |   |   |         |  
|Cash provided by (used for) investing
  activities:                                                 |  |                            |         |      |   |         |   |   |         |  
|Additions to property, plant, and
equipment                                                         |  |                            | (7,441  | )    |   | (9,987  | ) |   | (7,585  | )
|Purchase of marketable securities                                                                   |  |                            | (31,336 | )    |   | (28,389 | ) |   | (25,433 | )
|Additions to intangibles and other assets                                                           |  |                            | (816    | )    |   | (1,332  | ) |   | (1,138  | )
|Proceeds from the sale of marketable
  securities and other assets                                  |  |                            | 9       |      |   | 55      |   |   | 1,001   |  
|Proceeds from maturity of marketable
  securities                                                   |  |                            | 22,000  |      |   | 17,556  |   |   | 40,025  |  
|                                                                                                    |  |                            |         |      |   |         |   |   |         |  
|Net cash provided by (used for) continuing
  operations                                             |  |                            | (17,584 | )    |   | (22,097 | ) |   | 6,870   |  
|Net cash provided by discontinued
  operations                                                      |  |                            |        |      |   | 1,918   |   |   | 80      |  
|                                                                                                    |  |                            |         |      |   |         |   |   |         |  
|Net cash provided by (used for) investing
  activities                                              |  |                            | (17,584 | )    |   | (20,179 | ) |   | 6,950   |  
|                                                                                                    |  |                            |         |      |   |         |   |   |         |  
|Cash provided by (used for) financing
  activities:                                                 |  |                            |         |      |   |         |   |   |         |  
|Dividend payments to minority interest                                                              |  |                            | (622    | )    |   | (751    | ) |   | (235    | )
|Employee stock purchase                                                                             |  |                            | 492     |      |   | 667     |   |   | 578     |  
|Excess tax benefits from share-based
  payment arrangements                                         |  |                            | 128     |      |   |        |   |   |        |  
|Exercise of employee stock options                                                                  |  |                            | 937     |      |   | 226     |   |   | 1,526   |  
|                                                                                                    |  |                            |         |      |   |         |   |   |         |  
|Net cash provided by continuing
operations                                                          |  |                            | 935     |      |   | 142     |   |   | 1,869   |  
|Net cash used for discontinued operations                                                           |  |                            |        |      |   |        |   |   | (11,374 | )
|                                                                                                    |  |                            |         |      |   |         |   |   |         |  
|Net cash provided by (used for) financing
  activities                                              |  |                            | 935     |      |   | 142     |   |   | (9,505  | )
|                                                                                                    |  |                            |         |      |   |         |   |   |         |  
|Net increase (decrease) in cash and cash
  equivalents                                              |  |                            | (631    | )    |   | 11,787  |   |   | (2,747  | )
|Cash and cash equivalents, beginning of
  year                                                      |  |                            | 20,949  |      |   | 9,162   |   |   | 11,909  |  
|                                                                                                    |  |                            |         |      |   |         |   |   |         |  
|Cash and cash equivalents, end of year                                                              |  | $                          | 20,318  |      | $ | 20,949  |   | $ | 9,162   |  
|                                                                                                    |  |                            |         |      |   |         |   |   |         |  

See
accompanying notes to consolidated financial statements.

F - 7

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2006,
2005, and 2004
(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 bonds and government
agency securities. All securities held by us at June 30, 2006 and 2005, were
classified as held to maturity and recorded at amortized cost.

Inventories Inventories 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

---



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. 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 2006 and 2004, reimbursements
totaled $1,176 and $12, 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, 2006 |            | June 30,
  2005 |  | June 30,
  2004 | 
|                                                        |  |               |            |                 |  |                 | 
|                                                        |  |               |            |                 |  |                 |  |  |            | 
|Weighted
  average shares outstanding                   |  |               | 18,053,596 |                 |  | 17,950,423      |  |  | 17,801,588 | 
|Dilutive
  effect of stock options and restricted stock |  |               | 313,470    |                 |  | 189,750         |  |  | 419,782    | 
|                                                        |  |               |            |                 |  |                 |  |  |            | 
|Diluted
  weighted average shares outstanding           |  |               | 18,367,066 |                 |  | 18,140,173      |  |  | 18,221,370 | 
|                                                        |  |               |            |                 |  |                 |  |  |            | 

F - 9

---



Share-Based CompensationWe have two share-based compensation plans, which are
described in note 12. 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 resulting
in the recognition of share-based compensation expense for the fiscal year
ended June 30, 2006 of $1,698, and 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
and 2004 based on the fair value method under SFAS No. 123.

|                                                                                                                                                     |  |                 |        |                 |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------ | --------------- | - | ------ | -
|                                                                                                                                                     |  | June 30,
  2005 |        | June 30,
  2004 |  
|                                                                                                                                                     |  |                 |        |                 |  
|Net earnings (loss), as reported                                                                                                                     |  | $               | 8,984  |                 | $ | (3,429 | )
|Deduct: Total stock-based employee 
  compensation expense determined under 
  fair value based method for all awards, net 
  of related tax effects |  |                 | (2,519 | )               |   | (5,786 | )
|                                                                                                                                                     |  |                 |        |                 |   |        |  
|Pro forma net earnings (loss)                                                                                                                        |  | $               | 6,465  |                 | $ | (9,215 | )
|                                                                                                                                                     |  |                 |        |                 |   |        |  
|                                                                                                                                                     |  |                 |        |                 |   |        |  
|Net earnings (loss) per share                                                                                                                        |  |                 |        |                 |   |        |  
|Basic - as reported                                                                                                                                  |  | $               | 0.50   |                 | $ | (0.19  | )
|                                                                                                                                                     |  |                 |        |                 |   |        |  
|Basic - pro forma                                                                                                                                    |  | $               | 0.36   |                 | $ | (0.52  | )
|                                                                                                                                                     |  |                 |        |                 |   |        |  
|                                                                                                                                                     |  |                 |        |                 |   |        |  
|Diluted - as reported                                                                                                                                |  | $               | 0.50   |                 | $ | (0.19  | )
|                                                                                                                                                     |  |                 |        |                 |   |        |  
|Diluted - pro forma                                                                                                                                  |  | $               | 0.36   |                 | $ | (0.51  | )
|                                                                                                                                                     |  |                 |        |                 |   |        |  

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

---



Recently Issued Accounting PronouncementsIn May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections, which primarily changes the requirements for
the accounting for and reporting of a change in accounting principle for all
voluntary changes or when an accounting pronouncement does not include specific
transition provisions. This applies to any future accounting changes beginning
in fiscal 2007.

In
November 2005, the FASB issued FASB Staff Positions (FSP) SFAS 115-1 and
SFAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments. FSP SFAS 115-1 and SFAS 124-1 address the
determination as to when an investment is considered impaired, whether that
impairment is other than temporary, and the measurement of an impairment loss.
They also include accounting considerations subsequent to the recognition of an
other-than-temporary impairment and require certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. We will be adopting FSP SFAS 115-1 and SFAS 124-1 beginning in
fiscal 2007 and expect the effect on our consolidated financial statements to
be immaterial.

In February
2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140
which is effective for fiscal years beginning after September 15, 2006. The
statement was issued to clarify the application of FASB Statement No. 133
to beneficial interests in securitized financial assets and to improve the
consistency of accounting for similar financial instruments, regardless of the
form of the instruments. Currently, we do not invest in hybrid instruments or
securitized financial assets and would expect any effect on our consolidated
financial statements in the future to be immaterial.

In June 2006, the FASB
issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in our financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes. The provisions of FIN 48 are
effective for our fiscal year beginning July 1, 2007. We are currently
evaluating the impact of the provisions of FIN 48.

NOTE 2: RESTATEMENT OF FINANCIAL STATEMENTSThe
consolidated financial statements for fiscal years 2005 and 2004 have been
restated for corrections in the accounting of intercompany transactions from
certain of our foreign operations. The fiscal 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. The
fiscal 2004 adjustments reduced revenues by $366; earnings from continuing
operations by $23; and had no effect on earnings per diluted share from
continuing operations or net loss per diluted share.

NOTE 3: DIVESTITURES AND DISCONTINUED OPERATIONSIn September 2002, we committed to a planned
disposition of our TeraOptix business unit (TeraOptix) which included
recording impairment charges for the facility and equipment. During fiscal
2004, we recorded additional impairment charges on the facility in the second
and fourth fiscal quarters. In the second quarter of fiscal 2004, the
impairment charge was based on the then current fair value based on an
appraisal from an independent third party. During the fourth quarter of fiscal
2004, management changed the marketing of the facility to a general purpose
manufacturing facility from clean room space. We received offers on the
building during the fourth quarter of fiscal 2004 from two separate independent
third parties. Based on the offers, management determined that the fair value
of the vacant facility was $2,012 and an additional impairment charge was
recorded. The total impairment charges recorded in fiscal 2004 were $6,392, net
of tax of $3,425. 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.

In fiscal
2004, we paid off the mortgage debt of $10,955 on the facility. The mortgage
debt had carried interest at 7.5% per annum at the time of repayment, and
required monthly principal payments of $70, plus interest, until April 2007 and
a balloon payment of $8,200 in May 2007. In connection with the debt repayment,
we also paid the balance of a related interest rate swap agreement of $1,109.
This payment resulted in an additional charge to discontinued TeraOptix
operations, recorded net of tax. Prior to the payment, in accordance with SFAS No.
133, as amended, the swap liability was recorded with a corresponding debit,
net of tax, to stockholders equity. The aggregate payment of $12,064 on the
mortgage debt ($10,955) and swap agreement ($1,109) was funded from the our
available cash and marketable securities.

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

F - 11

---



|                                                                         |  |                 |       |                 |   |         |  
|------------------------------------------------------------------------ |  | --------------- | ----- | --------------- | - | ------- | -
|                                                                         |  | June 30,
  2005 |       | June 30,
  2004 |  
|                                                                         |  |                 |       |                 |  
|Cash flow from operating activities from
  discontinued operations:      |  |                 |       |                 |   |         |  
|Loss from discontinued operations                                        |  | $               | (366  | )               | $ | (7,655  | )
|Loss on sale and impairment of assets                                    |  |                 | 94    |                 |   | 9,817   |  
|Deferred income taxes                                                    |  |                 | (128  | )               |   | (4,104  | )
|Prepaid expenses                                                         |  |                 | (23   | )               |   | (2      | )
|                                                                         |  |                 |       |                 |   |         |  
|Net cash used for operating activities from
  discontinued operations    |  |                 | (423  | )               |   | (1,944  | )
|                                                                         |  |                 |       |                 |   |         |  
|                                                                         |  |                 |       |                 |   |         |  
|Cash flow from investing activities from
  discontinued operations:      |  |                 |       |                 |   |         |  
|Proceeds from sale of assets                                             |  |                 | 1,918 |                 |   | 80      |  
|                                                                         |  |                 |       |                 |   |         |  
|Net cash provided by investing activities
  from discontinued operations |  |                 | 1,918 |                 |   | 80      |  
|                                                                         |  |                 |       |                 |   |         |  
|                                                                         |  |                 |       |                 |   |         |  
|Cash flow from financing activities from
  discontinued operations:      |  |                 |       |                 |   |         |  
|Payments of long-term debt                                               |  |                 |      |                 |   | (11,374 | )
|                                                                         |  |                 |       |                 |   |         |  
|Net cash used for financing activities from
  discontinued operations    |  |                 |      |                 |   | (11,374 | )
|                                                                         |  |                 |       |                 |   |         |  
|                                                                         |  |                 |       |                 |   |         |  
|Net cash provided by (used for) discontinued
  operations                |  | $               | 1,495 |                 | $ | (13,238 | )
|                                                                         |  |                 |       |                 |   |         |  

NOTE 4: MARKETABLE SECURITIES

Marketable
securities consisted primarily of corporate bonds and government agency
securities for fiscal 2006 and 2005. Marketable securities at June 30, 2006 and
2005 are reported at cost. Straight-line amortization related to marketable
securities was $131, $107, and $142 in fiscal 2006, 2005 and 2004,
respectively.

As of June 30,
2003, we transferred our marketable securities from available-for-sale to
held-to-maturity. Accordingly, the gross unrealized gains, net of tax, of $19
in stockholders equity remaining as of June 30, 2006 will continue to be
amortized over the remaining life of the securities. Amortization, net of tax,
related to the unrealized gain was $13, $30, and $97 in fiscal 2006, 2005, and
2004, 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.

The amortized
cost, gross unrealized gains (losses), and fair value of held-to-maturity
securities at June 30, 2006 and 2005 were as follows:

|                                                                           |  |                   |        |                              |   |                               |  |               |     |  |   |        | 
|-------------------------------------------------------------------------- |  | ----------------- | ------ | ---------------------------- | - | ----------------------------- |  | ------------- | --- |  | - | ------ | 
|                                                                           |  | Amortized 
  Cost |        | Gross 
  Unrealized 
  Gains |   | Gross 
  Unrealized 
  Losses |  | Fair 
  Value |    
|                                                                           |  |                   |        |                              |   |                               |  |               |    
|                                                                           |  |                   |        |                              |   |                               |  |               |     |  |   |        | 
|At June 30, 2006 
  Corporate, federal, state 
  and local municipal bonds |  | $                 | 45,158 |                              | $ |                              |  | $             | 592 |  | $ | 44,566 | 
|                                                                           |  |                   |        |                              |   |                               |  |               |     |  |   |        | 
|                                                                           |  |                   |        |                              |   |                               |  |               |     |  |   |        | 
|At June 30, 2005 
  Corporate, federal, state 
  and local municipal bonds |  | $                 | 35,953 |                              | $ | 10                            |  | $             | 188 |  | $ | 35,775 | 
|                                                                           |  |                   |        |                              |   |                               |  |               |     |  |   |        | 

F - 12

---



Maturities of
investment securities classified as held-to-maturity at June 30 2006 and 2005
were as follows:

|                                      |  |                  |        |               |   |                  |  |              |        |  |   |        | 
|------------------------------------- |  | ---------------- | ------ | ------------- | - | ---------------- |  | ------------ | ------ |  | - | ------ | 
|                                      |  | June 30, 2006    |        | June 30, 2005 |  
|                                      |  |                  |        |               |  
|                                      |  | Amortized
  Cost |        | Fair
  Value  |   | Amortized
  Cost |  | Fair
  Value |       
|                                      |  |                  |        |               |   |                  |  |              |       
|Due within one year                   |  | $                | 21,415 |               | $ | 21,261           |  | $            | 17,242 |  | $ | 17,205 | 
|Due after one year through five years |  |                  | 23,743 |               |   | 23,305           |  |              | 18,711 |  |   | 18,570 | 
|                                      |  |                  |        |               |   |                  |  |              |        |  |   |        | 
|                                      |  | $                | 45,158 |               | $ | 44,566           |  | $            | 35,953 |  | $ | 35,775 | 
|                                      |  |                  |        |               |   |                  |  |              |        |  |   |        | 

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, 2006 and 2005.

|                          |  |                     |        |                            |   |              |   |                            |        |  |   |      |  
|------------------------- |  | ------------------- | ------ | -------------------------- | - | ------------ | - | -------------------------- | ------ |  | - | ---- | -
|                          |  | Fiscal Year 2006    |       
|                          |  | Less than 12 months |        | More than 12 months        |  
|                          |  | Market Value        |        | Gross 
  Unrealized Losses |   | Market Value |   | Gross 
  Unrealized Losses |       
|                          |  |                     |        |                            |   |              |   |                            |       
|                         
|Corporate
  and other     |  | $                   | 21,149 |                            | $ | (174         | ) | $                          | 18,718 |  | $ | (359 | )
|US Governement
  Agencies |  |                     | 2,985  |                            |   | (16          | ) |                            | 1,714  |  |   | (43  | )
|                          |  |                     |        |                            |   |              |   |                            |        |  |   |      |  
|                          |  | $                   | 24,134 |                            | $ | (190         | ) | $                          | 20,432 |  | $ | (402 | )
|                          |  |                     |        |                            |   |              |   |                            |        |  |   |      |  
|                          |  |                     |        |                            |   |              |   |                            |        |  |   |      |  

|                          |  |                     |        |                            |   |              |   |                            |       |  |   |      |  
|------------------------- |  | ------------------- | ------ | -------------------------- | - | ------------ | - | -------------------------- | ----- |  | - | ---- | -
|                          |  | Fiscal Year 2005    |       
|                          |  | Less than 12 months |        | Less than 12 months        |  
|                          |  | Market Value        |        | Gross 
  Unrealized Losses |   | Market Value |   | Gross 
  Unrealized Losses |      
|                          |  |                     |        |                            |   |              |   |                            |      
|                          |  |                     |        |                            |   |              |   |                            |       |  |   |      |  
|Corporate
  and other     |  | $                   | 25,984 |                            | $ | (26          | ) | $                          | 5,577 |  | $ | (109 | )
|US
  Governement Agencies |  |                     | 2,725  |                            |   | (23          | ) |                            | 1,489 |  |   | (30  | )
|                          |  |                     |        |                            |   |              |   |                            |       |  |   |      |  
|                          |  | $                   | 28,709 |                            | $ | (49          | ) | $                          | 7,066 |  | $ | (139 | )
|                          |  |                     |        |                            |   |              |   |                            |       |  |   |      |  

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, 2006 and 2005.

NOTE 5: ACCOUNTS RECEIVABLE

At June 30,
2006 and 2005, accounts receivable were as follows:

|                                  |  |               |        |               |   |        |  
|--------------------------------- |  | ------------- | ------ | ------------- | - | ------ | -
|                                  |  | June 30, 2006 |        | June 30, 2005 |  
|                                  |  |               |        |               |  
|                                  |  |               |        |               |   |        |  
|Trade (note
  16)                 |  | $             | 33,429 |               | $ | 28,018 |  
|Other                             |  |               | 918    |               |   | 769    |  
|                                  |  |               |        |               |   |        |  
|                                  |  |               | 34,347 |               |   | 28,787 |  
|Allowance
  for doubtful accounts |  |               | (588   | )             |   | (663   | )
|                                  |  |               |        |               |   |        |  
|                                  |  | $             | 33,759 |               | $ | 28,124 |  
|                                  |  |               |        |               |   |        |  

F - 13

---



NOTE 6: INVENTORIES

At June 30,
2006 and 2005, inventories were as follows:

|                                       |  |               |        |               |   |        | 
|-------------------------------------- |  | ------------- | ------ | ------------- | - | ------ | 
|                                       |  | June 30, 2006 |        | June 30, 2005 |  
|                                       |  |               |        |               |  
|                                       |  |               |        |               |   |        | 
|Raw
  materials and manufactured parts |  | $             | 17,536 |               | $ | 14,320 | 
|Work in
  process                      |  |               | 17,321 |               |   | 15,927 | 
|Finished
  goods                       |  |               | 3,225  |               |   | 3,480  | 
|                                       |  |               |        |               |   |        | 
|                                       |  | $             | 38,082 |               | $ | 33,727 | 
|                                       |  |               |        |               |   |        | 

NOTE 7: PROPERTY, PLANT, AND EQUIPMENT

At June 30,
2006 and 2005, property plant, and equipment, at cost, were as follows:

|                                             |  |   |               |   |   |               |   |  |                                     | 
|-------------------------------------------- |  | - | ------------- | - | - | ------------- | - |  | ----------------------------------- | 
|                                             |  |   | June 30, 2006 |   |   | June 30, 2005 |   |  | Estimated 
  Useful Life 
  (Years) | 
|                                             |  |   |               |   |   |               |   |  |                                     | 
|                                            
|Land                                         |  | $ | 615           |   | $ | 615           |   |  |                                    | 
|Building and
  improvements                  |  |   | 16,848        |   |   | 15,759        |   |  | 15-40                               | 
|Machinery,
  equipment, and office furniture |  |   | 49,889        |   |   | 45,501        |   |  | 3-8                                 | 
|Leasehold
  improvements                     |  |   | 772           |   |   | 715           |   |  | 1-5                                 | 
|Construction
  in progress                   |  |   | 2,916         |   |   | 2,997         |   |  |                                    | 
|                                             |  |   |               |   |   |               |   |  |                                     | 
|                                             |  |   | 71,040        |   |   | 65,587        |   |  |                                     | 
|Less
  accumulated depreciation              |  |   | (38,409       | ) |   | (34,167       | ) |  |                                     | 
|                                             |  |   |               |   |   |               |   |  |                                     | 
|                                             |  | $ | 32,631        |   | $ | 31,420        |   |  |                                     | 
|                                             |  |   |               |   |   |               |   |  |                                     | 

Depreciation
expense for the fiscal years ended June 30, 2006, 2005, and 2004 was $5,734,
$5,273, and $5,225, respectively.

NOTE 8: INTANGIBLE ASSETS

Intangible
assets, at cost, at June 30, 2006 and 2005 were as follows:

|                         |  |   |               |   |   |               |   |  |                                     | 
|------------------------ |  | - | ------------- | - | - | ------------- | - |  | ----------------------------------- | 
|                         |  |   | June 30, 2006 |   |   | June 30, 2005 |   |  | Estimated 
  Useful Life 
  (Years) | 
|                         |  |   |               |   |   |               |   |  |                                     | 
|                        
|Patents and trademarks   |  | $ | 7,042         |   | $ | 6,556         |   |  | 15-17                               | 
|License agreements       |  |   | 1,350         |   |   | 1,350         |   |  | 5                                   | 
|                         |  |   |               |   |   |               |   |  |                                     | 
|                         |  |   | 8,392         |   |   | 7,906         |   |  |                                     | 
|Accumulated amortization |  |   | (2,467        | ) |   | (2,268        | ) |  |                                     | 
|                         |  |   |               |   |   |               |   |  |                                     | 
|Total                    |  | $ | 5,925         |   | $ | 5,638         |   |  |                                     | 
|                         |  |   |               |   |   |               |   |  |                                     | 

Intangible
amortization expense for the fiscal years ended June 30, 2006, 2005 and 2004
was $362, $530, and $449, respectively. Amortization expense related to
intangible assets is included in cost of goods sold in the consolidated
statements of operations.

F - 14

---



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, 2006) 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,
2006. At June 30, 2006 and 2005, no amounts were outstanding under the bank
line of credit.

NOTE 10: WARRANTY

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

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

|                                                                         |  |               |       |                 |   |        |  
|------------------------------------------------------------------------ |  | ------------- | ----- | --------------- | - | ------ | -
|                                                                         |  | June 30, 2006 |       | June 30,
  2005 |  
|                                                                         |  |               |       |                 |  
|Beginning balance                                                        |  | $             | 1,396 |                 | $ | 1,486  |  
|Reductions for payments made                                             |  |               | (882  | )               |   | (1,232 | )
|Changes in accruals related to warranties
  issued in the current period |  |               | 1,541 |                 |   | 1,490  |  
|Changes in accrual related to pre-existing
  warranties                  |  |               | (395  | )               |   | (348   | )
|                                                                         |  |               |       |                 |   |        |  
|Ending balance                                                           |  | $             | 1,660 |                 | $ | 1,396  |  
|                                                                         |  |               |       |                 |   |        |  

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
2011. Total lease expense, net, charged to operations was $1,663 in fiscal
2006, $2,270 in fiscal 2005, and $1,720 in fiscal 2004. At June 30, 2006, the
minimum future lease commitments, including vacant facilities, under
noncancellable leases payable over the remaining lives of the leases, net of
sublease rentals, are as follows:

|                               |  |                                        |       | 
|------------------------------ |  | -------------------------------------- | ----- | 
|Year ending June 30,           |  | Minimum 
  Future Lease 
  Commitments |      
|                               |  |                                        |      
|                              
|2007                           |  | $                                      | 1,073 | 
|2008                           |  |                                        | 570   | 
|2009                           |  |                                        | 372   | 
|2010                           |  |                                        | 276   | 
|2011                           |  |                                        | 11    | 
|                               |  |                                        |       | 
|Total
  minimum lease payments |  | $                                      | 2,302 | 
|                               |  |                                        |       | 

F - 15

---



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, 2006,
2005, and 2004, amounted to $2,847, $2,070, and $1,186, respectively.

NOTE 13: SHARE-BASED COMPENSATION PLANS

Share-Based
Compensation Plans

Zygo 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 1,500,000 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. Non-employee directors are granted fully exercisable
options to purchase 6,000 shares of common stock on an annual basis and each
new non-employee director is granted fully exercisable options to purchase
12,000 shares of common stock on his or her first day of service, in all
instances at the market value per share on the date of grant. Effective with
the 2006 annual meeting, as part of directors compensation for services to our
company, non-employee directors will be granted 5,000 restricted shares, which
will 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.

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 2006, 2005, and
2004 were $5.41, $6.32 and $6.55, respectively. The table below indicates the
key assumptions used in the option valuation calculations for options granted
in fiscal 2006, 2005, and 2004, and a discussion of our methodology for
developing each of the assumptions used in the valuation model:

F - 16

---



|                        |  |                               |           |      |  |             |   |  |             |  
|----------------------- |  | ----------------------------- | --------- | ---- |  | ----------- | - |  | ----------- | -
|                        |  | Fiscal
  Years Ended June 30, |          
|                        |  |                               |          
|                        |  | 2006                          |           | 2005 |  | 2004        |  
|                        |  |                               |           |      |  |             |  
|Term                    |  |                               | 4.1 Years |      |  | 4.5
  Years |   |  | 4.5
  Years |  
|Volatility              |  |                               | 52.9      | %    |  | 64-80       | % |  | 71-82       | %
|Dividend yield          |  |                               | 0.0       | %    |  | 0.0         | % |  | 0.0         | %
|Risk-free interest rate |  |                               | 3.9-4.4   | %    |  | 3.2-3.9     | % |  | 2.5-3.5     | %
|Forfeiture rate         |  |                               | 10.6      | %    |  | 4.0         | % |  | 0.0         | %

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.

Stock
OptionsIncluded 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 2006, 2005, and 2004.

|                                    |  |               |           |                                       |   |               |  |                                       |           |        |   |                                       |  |  |           |   |   |       | 
|----------------------------------- |  | ------------- | --------- | ------------------------------------- | - | ------------- |  | ------------------------------------- | --------- | ------ | - | ------------------------------------- |  |  | --------- | - | - | ----- | 
|                                    |  | June 30, 2006 |           | June 30, 2005                         |   | June 30, 2004 | 
|                                    |  |               |           |                                       |   |               | 
|                                    |  | Shares        |           | Weighted
  Average
  Exercise
  Price |   | Shares        |  | Weighted
  Average
  Exercise
  Price |           | Shares |   | Weighted
  Average
  Exercise
  Price | 
|                                    |  |               |           |                                       |   |               |  |                                       |           |        |   |                                       | 
|                                   
|Outstanding
  at beginning of year  |  |               | 2,069,175 |                                       | $ | 26.95         |  |                                       | 1,902,985 |        | $ | 29.89                                 |  |  | 1,784,489 |   | $ | 32.25 | 
|Granted                             |  |               | 186,000   |                                       | $ | 11.80         |  |                                       | 289,200   |        | $ | 9.51                                  |  |  | 435,350   |   | $ | 10.99 | 
|Exercised                           |  |               | (83,340   | )                                     | $ | 9.07          |  |                                       | (19,856   | )      | $ | 7.26                                  |  |  | (200,076  | ) | $ | 4.59  | 
|Expired or
  cancelled              |  |               | (89,199   | )                                     | $ | 33.20         |  |                                       | (103,154  | )      | $ | 36.14                                 |  |  | (116,778  | ) | $ | 38.91 | 
|                                    |  |               |           |                                       |   |               |  |                                       |           |        |   |                                       |  |  |           |   |   |       | 
|Options -
  Outstanding-end of year |  |               | 2,082,636 |                                       | $ | 26.03         |  |                                       | 2,069,175 |        | $ | 26.95                                 |  |  | 1,902,985 |   | $ | 29.89 | 
|                                    |  |               |           |                                       |   |               |  |                                       |           |        |   |                                       |  |  |           |   |   |       | 
|Options -
  Exercisable-end of year |  |               | 1,585,574 |                                       | $ | 31.19         |  |                                       | 1,408,206 |        | $ | 35.12                                 |  |  | 1,077,967 |   | $ | 37.46 | 
|                                    |  |               |           |                                       |   |               |  |                                       |           |        |   |                                       |  |  |           |   |   |       | 

At June 30,
2006, outstanding options at the end of the year had an intrinsic value of
$8,862 with a weighted average remaining contractual life of 5.9 years. In
addition, exercisable options at the end of the year had an intrinsic value of
$5,466 with a weighted average remaining contractual life of 5.3 years.

F - 17

---



The following
table summarizes information about our stock options granted under our
share-based compensation plans as of the fiscal year ended June 30, 2006.

|                             |  |                                              |  |                                                      |     |                                     |  |                                            |       |                                   |  |           |  |  |   |       |  |  | 
|---------------------------- |  | -------------------------------------------- |  | ---------------------------------------------------- | --- | ----------------------------------- |  | ------------------------------------------ | ----- | --------------------------------- |  | --------- |  |  | - | ----- |  |  | 
|                             |  | Options Outstanding                          |  | Options Exercisable                                  |    
|                             |  |                                              |  |                                                      |    
|Range of
  Exercise
  Prices |  | Number
  Outstanding
  as of
  June 30, 2006 |  | Weighted 
  Average
  Remaining
  Contractual
  Life |     | Weighted
  Average
  Exercise Price |  | Number
  Exercisable as of
  June 30, 2006 |       | Weighted Average
  Exercise Price | 
|                             |  |                                              |  |                                                      |     |                                     |  |                                            |       |                                   | 
|$5.20 -
  $7.67              |  | 271,045                                      |  |                                                      | 6.1 |                                     |  | $                                          | 6.50  |                                   |  | 207,133   |  |  | $ | 6.52  |  | 
|$7.90 -
  $11.75             |  | 838,700                                      |  |                                                      | 6.8 |                                     |  | $                                          | 10.00 |                                   |  | 423,800   |  |  | $ | 10.22 |  | 
|$12.29 -
  $18.40            |  | 346,813                                      |  |                                                      | 6.4 |                                     |  | $                                          | 14.15 |                                   |  | 330,063   |  |  | $ | 14.06 |  | 
|$18.64 -
  $27.00            |  | 194,310                                      |  |                                                      | 4.4 |                                     |  | $                                          | 19.04 |                                   |  | 192,810   |  |  | $ | 19.04 |  | 
|$28.31 -
  $42.44            |  | 5,050                                        |  |                                                      | 4.3 |                                     |  | $                                          | 35.18 |                                   |  | 5,050     |  |  | $ | 35.18 |  | 
|$42.94 -
  $45.50            |  | 27,200                                       |  |                                                      | 4.1 |                                     |  | $                                          | 43.50 |                                   |  | 27,200    |  |  | $ | 43.50 |  | 
|$65.69 -
  $90.82            |  | 399,518                                      |  |                                                      | 4.2 |                                     |  | $                                          | 85.36 |                                   |  | 399,518   |  |  | $ | 85.36 |  | 
|                             |  |                                              |  |                                                      |     |                                     |  |                                            |       |                                   |  |           |  |  |   |       |  | 
|$  5.20 -
  $90.82           |  | 2,082,636                                    |  |                                                      | 5.9 |                                     |  | $                                          | 26.03 |                                   |  | 1,585,574 |  |  | $ | 31.19 |  | 
|                             |  |                                              |  |                                                      |     |                                     |  |                                            |       |                                   |  |           |  |  |   |       |  | 
|                             |  |                                              |  |                                                      |     |                                     |  |                                            |      

As of June 30,
2006, there was $1,996 of total unrecognized compensation cost related to stock
options. These costs are expected to be recognized over a weighted average
period of 1.9 years.

The total
intrinsic value of stock options exercised was $650 and the total fair value of
stock awards vested was $1,925 during the fiscal year ended June 30, 2006.

Cash received
from stock option exercises and the associated tax benefit for the fiscal year
ended June 30, 2006 was $937.

Restricted
StockThe following table summarizes information about
restricted stock awards granted under share-based compensation plans for the
fiscal year ended June 30, 2006:

|                                          |  |               |         |                                       |   |        | 
|----------------------------------------- |  | ------------- | ------- | ------------------------------------- | - | ------ | 
|                                          |  | June 30, 2006 |        
|                                          |  |               |        
|                                          |  | Shares        |         | Weighted
  Average
  Exercise
  Price |  
|                                          |  |               |         |                                       |  
|                                         
|Non vested
  balance at beginning of year |  |               |        |                                       | $ |       | 
|Granted                                   |  |               | 154,800 |                                       | $ | 11.462 | 
|Vested                                    |  |               |        |                                       | $ |       | 
|Forfeited                                 |  |               | (6,600  | )                                     | $ | 10.400 | 
|                                          |  |               |         |                                       |   |        | 
|Non vested
  balance at end of year       |  |               | 148,200 |                                       | $ | 11.509 | 
|                                          |  |               |         |                                       |   |        | 

As of June 30,
2006, there was $ 1,484 of total unrecognized compensation costs related to
restricted stock awards. These costs are expected to be recognized over a
weighted average period of 3.04 years.

At June 30,
2006, an aggregate of 537,637 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.

F - 18

---



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, 2006 and 2005, we had withheld $163 and $330, respectively, for the
purchases of shares under this plan, and in July 2006 and 2005, we issued
approximately 10,000 and 35,000 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, |      
|                                        |  |                            |      
|                                        |  | 2006                       |       | 2005 |   | 2004  |  
|                                        |  |                            |       |      |   |       |  
|Earnings from continuing operations     |  | $                          | 5,849 |      | $ | 5,694 |   | $ | 1,660  |  
|Discontinued operations                 |  |                            |      |      |   | (85   | ) |   | (679   | )
|Disposal of discontinued operations     |  |                            |      |      |   | (43   | ) |   | (3,425 | )
|Amounts charged to stockholders equity |  |                            | (229  | )    |   | (38   | ) |   | (578   | )
|                                        |  |                            |       |      |   |       |   |   |        |  
|                                        |  | $                          | 5,620 |      | $ | 5,528 |   | $ | (3,022 | )
|                                        |  |                            |       |      |   |       |   |   |        |  

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

|                                             |  |                            |        |      |   |        |   |   |         |  
|-------------------------------------------- |  | -------------------------- | ------ | ---- | - | ------ | - | - | ------- | -
|                                             |  | Fiscal Year Ended June 30, |       
|                                             |  |                            |       
|                                             |  | 2006                       |        | 2005 |   | 2004   |  
|                                             |  |                            |        |      |   |        |  
|Earnings from continuing operations - U.S.   |  | $                          | 17,759 |      | $ | 11,926 |   | $ | 4,502   |  
|Earnings from discontinued operations - U.S. |  |                            |       |      |   | (494   | ) |   | (11,759 | )
|Earnings from foreign operations             |  |                            | 3,367  |      |   | 3,869  |   |   | 1,719   |  
|                                             |  |                            |        |      |   |        |   |   |         |  
|                                             |  | $                          | 21,126 |      | $ | 15,301 |   | $ | (5,538  | )
|                                             |  |                            |        |      |   |        |   |   |         |  

Income tax expense attributable to earnings from
continuing operations consists of:

|                                        |  |                            |       |      |   |       |   |   |       |  
|--------------------------------------- |  | -------------------------- | ----- | ---- | - | ----- | - | - | ----- | -
|                                        |  | Fiscal Year Ended June 30, |      
|                                        |  |                            |      
|                                        |  | 2006                       |       | 2005 |   | 2004  |  
|                                        |  |                            |       |      |   |       |  
|Currently
  payable:                    |  |                            |       |      |   |       |   |   |       |  
|Federal                                 |  | $                          | 382   |      | $ | 215   |   | $ | 797   |  
|State                                   |  |                            | 158   |      |   | 111   |   |   | 160   |  
|Foreign                                 |  |                            | 1,264 |      |   | 1,467 |   |   | 539   |  
|                                        |  |                            |       |      |   |       |   |   |       |  
|                                        |  |                            | 1,804 |      |   | 1,793 |   |   | 1,496 |  
|                                        |  |                            |       |      |   |       |   |   |       |  
|Deferred:                               |  |                            |       |      |   |       |   |   |       |  
|Federal                                 |  |                            | 4,006 |      |   | 3,830 |   |   | 881   |  
|State                                   |  |                            | 118   |      |   | (72   | ) |   | (614  | )
|Foreign                                 |  |                            | (79   | )    |   | 143   |   |   | (103  | )
|                                        |  |                            |       |      |   |       |   |   |       |  
|                                        |  |                            | 4,045 |      |   | 3,901 |   |   | 164   |  
|                                        |  |                            |       |      |   |       |   |   |       |  
|Income tax from
  continuing operations |  | $                          | 5,849 |      | $ | 5,694 |   | $ | 1,660 |  
|                                        |  |                            |       |      |   |       |   |   |       |  

Income tax payments, net of refunds, were $1,316 and
$765 in fiscal 2006 and 2005, respectively. Income tax refunds, net of
payments, were $377 in fiscal 2004.

The total income tax expense differs from the amount
computed by applying the applicable U.S. federal income tax rate of 35% in
fiscal 2006, 2005, and 2004 to earnings before income taxes for the following
reasons:

F - 19

---



|                                                  |  |                            |        |      |   |       |   |   |       |  
|------------------------------------------------- |  | -------------------------- | ------ | ---- | - | ----- | - | - | ----- | -
|                                                  |  | Fiscal Year Ended June 30, |       
|                                                  |  |                            |       
|                                                  |  | 2006                       |        | 2005 |   | 2004  |  
|                                                  |  |                            |        |      |   |       |  
|                                                  |  |                            |        |      |   |       |   |   |       |  
|Computed
  expected tax expense                 |  | $                          | 7,394  |      | $ | 5,529 |   | $ | 2,177 |  
|Increases
  (reductions) in taxes resulting from: |  |                            |        |      |   |       |   |   |       |  
|State taxes, net
  of federal income tax benefit  |  |                            | 179    |      |   | 26    |   |   | (295  | )
|Export tax
  incentives                           |  |                            | (2,034 | )    |   | (347  | ) |   | (111  | )
|Research credit                                   |  |                            |       |      |   |      |   |   | (307  | )
|Tax on foreign
  dividend                         |  |                            | 326    |      |   | 328   |   |   | 123   |  
|Change in
  federal valuation allowance           |  |                            |       |      |   |      |   |   | 389   |  
|Change in estimate
  of future year taxes         |  |                            |       |      |   | (129  | ) |   | (160  | )
|Foreign tax
  differential                        |  |                            | (68    | )    |   | 217   |   |   | (185  | )
|Other, net                                        |  |                            | 52     |      |   | 70    |   |   | 29    |  
|                                                  |  |                            |        |      |   |       |   |   |       |  
|                                                  |  | $                          | 5,849  |      | $ | 5,694 |   | $ | 1,660 |  
|                                                  |  |                            |        |      |   |       |   |   |       |  

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, 2006 and 2005 are presented below:

|                                                                                   |  |               |        |               |   |        |  
|---------------------------------------------------------------------------------- |  | ------------- | ------ | ------------- | - | ------ | -
|                                                                                   |  | June 30, 2006 |        | June 30, 2005 |  
|                                                                                   |  |               |        |               |  
|Deferred tax
  assets:                                                             |  |               |        |               |   |        |  
|Accounts
  receivable                                                              |  | $             | 195    |               | $ | 221    |  
|Accrued liabilities                                                                |  |               | 1,216  |               |   | 1,039  |  
|Inventory
  valuation                                                              |  |               | 2,729  |               |   | 2,631  |  
|Deferred revenue                                                                   |  |               | 625    |               |   | 394    |  
|Stock option
  compensation                                                        |  |               | 592    |               |   |       |  
|Intangibles                                                                        |  |               | 30     |               |   | 27     |  
|Federal,
  foreign, and state net operating loss carryforwards (NOL) and credits |  |               | 27,246 |               |   | 31,783 |  
|Contributions                                                                      |  |               | 60     |               |   | 47     |  
|                                                                                   |  |               |        |               |   |        |  
|                                                                                   |  |               | 32,693 |               |   | 36,142 |  
|Less valuation
  allowance                                                         |  |               | 1,630  |               |   | 2,011  |  
|                                                                                   |  |               |        |               |   |        |  
|Deferred tax
  asset                                                               |  |               | 31,063 |               |   | 34,131 |  
|                                                                                   |  |               |        |               |   |        |  
|                                                                                   |  |               |        |               |   |        |  
|Deferred tax
  liabilities:                                                        |  |               |        |               |   |        |  
|Prepaid expenses                                                                   |  |               | (301   | )             |   | (283   | )
|Plant and
  equipment                                                              |  |               | (3,363 | )             |   | (2,604 | )
|Unrealized gain
  on marketable securities                                         |  |               | (7     | )             |   | (16    | )
|                                                                                   |  |               |        |               |   |        |  
|Deferred tax
  liability                                                           |  |               | (3,671 | )             |   | (2,903 | )
|                                                                                   |  |               |        |               |   |        |  
|Net deferred tax
  asset                                                           |  | $             | 27,392 |               | $ | 31,228 |  
|                                                                                   |  |               |        |               |   |        |  

The net current deferred tax assets and net
non-current deferred tax assets as recorded on the balance sheet as of June 30,
2006 and 2005 are as follows:

| |                                   |  |               |        |               |   |        | 
| | --------------------------------- |  | ------------- | ------ | ------------- | - | ------ | 
| |                                   |  | June 30, 2006 |        | June 30, 2005 |  
| |                                   |  |               |        |               |  
| |                                   |  |               |        |               |   |        | 
| | Net current deferrred tax asset   |  | $             | 11,959 |               | $ | 8,895  | 
| | Net noncurrent deferred tax asset |  |               | 15,433 |               |   | 22,333 | 
| |                                   |  |               |        |               |   |        | 
| | Net deferred tax asset            |  | $             | 27,392 |               | $ | 31,228 | 
| |                                   |  |               |        |               |   |        | 

F - 20

---



The deferred tax provisions for 2006 and 2005 do not
reflect the tax benefit of $229 and $38, respectively, resulting from amounts
charged to other comprehensive income and paid in capital, which includes $189
and $26 from the exercise of employee stock options in 2006 and 2005,
respectively.

During 2006, we wrote off certain reserved R&D tax
credits. This write-off is primarily responsible for the change in the
valuation allowance, along with the utilization of certain fully reserved state
net operating losses.

Management believes it is more likely than not that
the remaining net deferred tax assets of $27,392 will be realized as the
results of future operations are expected to generate sufficient taxable income
to do so.

At June 30, 2006, our share of the cumulative
undistributed earnings of foreign subsidiaries was $2,898. 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, 2006, we have federal, foreign, and state
NOL carryforwards of approximately $52,011, $182, and $50,829, respectively,
and various state credit carryforwards of $5,038. The federal NOL will expire
from fiscal 2021 through fiscal 2025, while the state NOL and credits will
expire from fiscal 2007 through fiscal 2025. The foreign NOL is carried forward
until utilized. We also have federal general business credit carryforwards of
approximately $4,701, 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 $350, which
are available to reduce future federal regular income taxes, if any, over an
indefinite period.

The Company has elected the alternative method of
calculating its tax pool for FAS123(R) purposes.

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 and years after will be
negatively impacted by the repeal of the EIE. The Company will only be able to
claim 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.

NOTE 16:
SEGMENT REPORTING

We operate in two principal business segments
globally: Semiconductor and Industrial. The segment data is presented below in
a manner consistent with managements internal measurement of the business.

|                               |  |                                |         |      |   |         |   |   |         |  
|------------------------------ |  | ------------------------------ | ------- | ---- | - | ------- | - | - | ------- | -
|                               |  | For Fiscal Year Ended June 30, |        
|                               |  |                                |        
|                               |  | 2006                           |         | 2005 |   | 2004    |  
|                               |  |                                |         |      |   |         |  
|Semiconductor                  |  |                                |         |      |   |         |   |   |         |  
|Sales                          |  | $                              | 92,992  |      | $ | 79,036  |   | $ | 66,751  |  
|Gross profit                   |  |                                | 36,959  |      |   | 30,140  |   |   | 23,420  |  
|Gross profit as
  a % of sales |  |                                | 40      | %    |   | 38      | % |   | 35      | %
|                               |  |                                |         |      |   |         |   |   |         |  
|Industrial                     |  |                                |         |      |   |         |   |   |         |  
|Sales                          |  | $                              | 75,145  |      | $ | 62,313  |   | $ | 49,525  |  
|Gross profit                   |  |                                | 28,812  |      |   | 23,150  |   |   | 19,260  |  
|Gross profit as
  a % of sales |  |                                | 38      | %    |   | 37      | % |   | 39      | %
|                               |  |                                |         |      |   |         |   |   |         |  
|Total                          |  |                                |         |      |   |         |   |   |         |  
|Sales                          |  | $                              | 168,137 |      | $ | 141,349 |   | $ | 116,276 |  
|Gross profit                   |  |                                | 65,771  |      |   | 53,290  |   |   | 42,680  |  
|Gross profit as
  a % of sales |  |                                | 39      | %    |   | 38      | % |   | 37      | %

F - 21

---



ZYGOs Metrology, which includes development services,
Optical Systems Solutions, and Precision Positioning Systems (PPS) product
lines are sold into its two business segments. Supplementary sales and gross
profit data for the last three years by product line is as follows:

|                               |  |                            |         |      |   |         |   |   |         |  
|------------------------------ |  | -------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                               |  | Fiscal Year Ended June 30, |        
|                               |  |                            |        
|                               |  | 2006                       |         | 2005 |   | 2004    |  
|                               |  |                            |         |      |   |         |  
|Metrology                      |  |                            |         |      |   |         |   |   |         |  
|Sales                          |  | $                          | 83,839  |      | $ | 68,896  |   | $ | 64,651  |  
|Gross profit                   |  |                            | 38,350  |      |   | 30,377  |   |   | 28,363  |  
|Gross profit as
  a % of sales |  |                            | 46      | %    |   | 44      | % |   | 44      | %
|                               |  |                            |         |      |   |         |   |   |         |  
|Optical Systems Solutions      |  |                            |         |      |   |         |   |   |         |  
|Sales                          |  | $                          | 42,257  |      | $ | 36,928  |   | $ | 19,324  |  
|Gross profit                   |  |                            | 8,953   |      |   | 6,848   |   |   | 3,041   |  
|Gross profit as
  a % of sales |  |                            | 21      | %    |   | 19      | % |   | 16      | %
|                               |  |                            |         |      |   |         |   |   |         |  
|PPS                            |  |                            |         |      |   |         |   |   |         |  
|Sales                          |  | $                          | 42,041  |      | $ | 35,525  |   | $ | 32,301  |  
|Gross profit                   |  |                            | 18,468  |      |   | 16,065  |   |   | 11,276  |  
|Gross profit as
  a % of sales |  |                            | 44      | %    |   | 45      | % |   | 35      | %
|                               |  |                            |         |      |   |         |   |   |         |  
|Total                          |  |                            |         |      |   |         |   |   |         |  
|Sales                          |  | $                          | 168,137 |      | $ | 141,349 |   | $ | 116,276 |  
|Gross profit                   |  |                            | 65,771  |      |   | 53,290  |   |   | 42,680  |  
|Gross profit as
  a % of sales |  |                            | 39      | %    |   | 38      | % |   | 37      | %

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 were as
follows:

|               |  |                            |         |      |   |         |  |   |         | 
|-------------- |  | -------------------------- | ------- | ---- | - | ------- |  | - | ------- | 
|               |  | Fiscal Year Ended June 30, |        
|               |  |                            |         |      |   |         | 
|               |  | 2006                       |         | 2005 |   | 2004    | 
|               |  |                            |         |      |   |         | 
|Domestic       |  | $                          | 58,446  |      | $ | 47,973  |  | $ | 33,937  | 
|               |  |                            |         |      |   |         |  |   |         | 
|Far East:      |  |                            |         |      |   |         |  |   |         | 
|Japan          |  |                            | 76,595  |      |   | 61,115  |  |   | 61,067  | 
|Pacific Rim    |  |                            | 18,233  |      |   | 17,303  |  |   | 12,806  | 
|               |  |                            |         |      |   |         |  |   |         | 
|Total Far East |  |                            | 94,828  |      |   | 78,418  |  |   | 73,873  | 
|Europe         |  |                            | 14,863  |      |   | 14,958  |  |   | 8,466   | 
|               |  |                            |         |      |   |         |  |   |         | 
|Total          |  | $                          | 168,137 |      | $ | 141,349 |  | $ | 116,276 | 
|               |  |                            |         |      |   |         |  |   |         | 

F - 22

---



NOTE 17:
TRANSACTIONS WITH STOCKHOLDER

Sales to Canon, Inc., a stockholder representing
approximately 7% ownership at June 30, 2006, and Canon Sales Co., Inc., a
distributor of certain of our products in Japan and a subsidiary of Canon Inc.,
amounted to $61,366 (36% of net sales), $51,887 (37% of net sales), and $57,306
(49% of net sales), for the years ended June 30, 2006, 2005, and 2004,
respectively. Selling prices of products sold to Canon, Inc. and Canon Sales
Co., Inc. are based, generally, on the normal terms given to distributors.
Revenues generated from development contracts are recorded on a cost-plus
basis.

In September 2002, we entered into a contract with
Canon Inc. related to the development of certain interferometers. In March
2004, we signed a preliminary agreement to begin further add-on work; the
definitive agreement for this additional work was signed in December 2004. In
February 2005, we entered into two additional agreements with Canon Inc.
related to the development of prototype production tools and accessories.
During fiscal 2006, 2005, and 2004, we recognized revenue in the semiconductor
segment of $20,014, $15,617, and $16,057, respectively, for the original
contract and subsequent add-on work.

At June 30, 2006 and 2005, there were, in the
aggregate, $5,966 and $3,951, respectively, of trade accounts receivable from
Canon, Inc. and Canon Sales Co., Inc. In addition, Canon Inc. paid us progress
payments in accordance with the terms of the development contract. The total
progress payments related to the development contract remaining at June 30,
2006 was $2,120.

NOTE 18:
HEDGING ACTIVITIES

During the third quarter of fiscal 2005, we entered
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, 2006, we had seven foreign currency
forward contracts outstanding aggregating to $6,197. Net losses recognized from
foreign currency forward contracts for fiscal 2006 was $27, and are included in
other income in the consolidated statements of operations. These losses are
substantially offset by foreign exchange gains on intercompany balances
recorded by our subsidiaries. We did not enter into any derivative instruments
to hedge foreign currency exposure prior to the third quarter of fiscal 2005.

F - 23

---



NOTE 19:
QUARTERLY RESULTS (UNAUDITED)

The following table sets forth certain unaudited
quarterly financial data:

|                           |  |                                           |        |                |   |           |  |          |        |  |   |        | 
|-------------------------- |  | ----------------------------------------- | ------ | -------------- | - | --------- |  | -------- | ------ |  | - | ------ | 
|                           |  | 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   | 
|                           |  |                                           |        |                |   |           |  |          |        |  |   |        | 

|                                      |  |                                           |        |                |   |           |   |          |        |   |   |        |  
|------------------------------------- |  | ----------------------------------------- | ------ | -------------- | - | --------- | - | -------- | ------ | - | - | ------ | -
|                                      |  | For the
  Fiscal Year Ended June 30, 2005 |       
|                                      |  |                                           |       
|                                      |  | September
  30,                           |        | December
  31, |   | March 31, |   | June 30, |       
|                                      |  |                                           |        |                |   |           |   |          |       
|                                      |  |                                           |        |                |   |           |   |          |        |   |   |        |  
|Net sales                             |  | $                                         | 27,420 |                | $ | 35,795    |   | $        | 33,417 |   | $ | 44,717 |  
|                                      |  |                                           |        |                |   |           |   |          |        |   |   |        |  
|Gross profit                          |  | $                                         | 10,944 |                | $ | 13,040    |   | $        | 12,903 |   | $ | 16,403 |  
|                                      |  |                                           |        |                |   |           |   |          |        |   |   |        |  
|                                      |  |                                           |        |                |   |           |   |          |        |   |   |        |  
|Earnings from
  continuing operations |  | $                                         | 1,317  |                | $ | 2,354     |   | $        | 2,261  |   | $ | 3,418  |  
|Loss from
  discontinued operations   |  |                                           | (65    | )              |   | (163      | ) |          | (89    | ) |   | (49    | )
|                                      |  |                                           |        |                |   |           |   |          |        |   |   |        |  
|Net earnings                          |  | $                                         | 1,252  |                | $ | 2,191     |   | $        | 2,172  |   | $ | 3,369  |  
|                                      |  |                                           |        |                |   |           |   |          |        |   |   |        |  
|                                      |  |                                           |        |                |   |           |   |          |        |   |   |        |  
|Basic earnings
  (loss) per share:    |  |                                           |        |                |   |           |   |          |        |   |   |        |  
|Continuing
  operations               |  | $                                         | 0.07   |                | $ | 0.13      |   | $        | 0.12   |   | $ | 0.19   |  
|Discontinued
  operations             |  |                                           |       |                |   | (0.01     | ) |          |       |   |   | (0.01  | )
|                                      |  |                                           |        |                |   |           |   |          |        |   |   |        |  
|Net earnings                          |  | $                                         | 0.07   |                | $ | 0.12      |   | $        | 0.12   |   | $ | 0.18   |  
|                                      |  |                                           |        |                |   |           |   |          |        |   |   |        |  
|                                      |  |                                           |        |                |   |           |   |          |        |   |   |        |  
|Diluted earnings
  (loss) per share:  |  |                                           |        |                |   |           |   |          |        |   |   |        |  
|Continuing
  operations               |  | $                                         | 0.07   |                | $ | 0.13      |   | $        | 0.12   |   | $ | 0.19   |  
|Discontinued
  operations             |  |                                           | (0.01  | )              |   | (0.01     | ) |          |       |   |   |       |  
|                                      |  |                                           |        |                |   |           |   |          |        |   |   |        |  
|Net earnings                          |  | $                                         | 0.06   |                | $ | 0.12      |   | $        | 0.12   |   | $ | 0.19   |  
|                                      |  |                                           |        |                |   |           |   |          |        |   |   |        |  

* * * * *

F - 24

---



REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders 
Zygo Corporation
Middlefield, Connecticut

We have audited the consolidated financial statements
of Zygo Corporation and subsidiaries (the Company) as of June 30, 2006, and
for the fiscal year ended June 30, 2006, managements assessment of the
effectiveness of the Companys internal control over financial reporting as of
June 30, 2006, and the effectiveness of the Companys internal control over
financial reporting as of June 30, 2006, and have issued our report thereon
dated September 12, 2006, (which 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 audit 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 audit. In our opinion, such consolidated 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/ Deloitte & Touche LLP
|Hartford, Connecticut    
|September 12, 2006       

S - 1

---



REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE II

The Board of Directors and Stockholders
Zygo Corporation:

Under date of September 7, 2005, except as to note 2
to the consolidated financial statements which is as of June 20, 2006, we
reported on the consolidated balance sheet of Zygo Corporation and subsidiaries
as of June 30, 2005, and the related consolidated statements of operations,
stockholders equity and cash flows for the years ended June 30, 2005 and 2004
as contained in the 2006 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 LLP                                                
|Stamford, Connecticut                                       
|September 7, 2005, except as to note 2 to the
  consolidated
|financial statements which is as of June 20, 2006           

S - 2

---



ZYGO CORPORATION AND CONSOLIDATED SUBSIDIARIES

SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS

Years
ended June 30, 2006, 2005, and 2004

(Thousands of dollars)

|                                                 |  |                                     |       |           |   |                        |   |                            |       |  |   |       | 
|------------------------------------------------ |  | ----------------------------------- | ----- | --------- | - | ---------------------- | - | -------------------------- | ----- |  | - | ----- | 
|Description                                      |  | Balance at
  Beginning of 
  Period |       | Provision |   | Write-Offs
  and Other |   | Balance at
  End of Period |      
|                                                 |  |                                     |       |           |   |                        |   |                            |      
|                                                 |  |                                     |       |           |   |                        |   |                            |       |  |   |       | 
|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 | 
|                                                 |  |                                     |       |           |   |                        |   |                            |       |  |   |       | 
|Year Ended June 30, 2004                         |  |                                     |       |           |   |                        |   |                            |       |  |   |       | 
|Allowance for
  doubtful accounts                |  | $                                   | 337   |           | $ | 374                    |   | $                          | 4     |  | $ | 707   | 
|                                                 |  |                                     |       |           |   |                        |   |                            |       |  |   |       | 
|Valuation
  allowance on net deferred tax assets |  | $                                   | 1,820 |           | $ | 1,563                  |   | $                          |      |  | $ | 3,383 | 

S - 3

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EXHIBIT
INDEX

|                      |                                                                                                                                                                       
|--------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT
  TABLENUMBER |                                                                                                                                                                       
|                      |                                                                                                                                                                       
|                      |                                                                                                                                                                       
|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                                              

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