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

FORM 10-K/AAmendment No. 2

(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, 2005                                                        
|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
  Rule405 of the Securities Act.                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                              | YES x NO o
|                                                                                                                                                                                                                                                                                                                                                                                              |           
|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 o NO x
|                                                                                                                                                                                                                                                                                                                                                                                              |           
|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/A or any amendment to
this Form
10-K/A.                                     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

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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, 2004, as reported by
the NASDAQ National Market, was approximately $130,085,967. 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.

18,126,639 Shares of Common Stock, $.10 Par
Value, at September 2, 2005

Documents
incorporated by reference: Specified portions of the registrants Proxy
Statement related to the registrants 2005 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/A to
the extent stated herein.

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ZYGO CORPORATION
EXPLANATORY NOTE

In this Form
10-K/A, ZYGO Corporation (ZYGO, we, us, our, or Company) is restating
our previously issued consolidated financial statements for fiscal years 2005,
2004, and 2003 (Restatement), because of inadvertent accounting errors in the
consolidation of our intercompany revenues from certain of our foreign
operations for those periods. The Company also restated the opening retained
earnings and currency translation effects in the accumulated other
comprehensive income balance of the stockholders equity section of the balance
sheet as of July 1, 2002 to reflect adjustments to correct errors in periods
prior to fiscal 2003. These adjustments for periods prior to fiscal 2003 were
not significant to the results of these prior periods. Further information
on the adjustments can be found in note 2, Restatement of Financial
Statements, to the accompanying consolidated financial statements.

This Amendment
No. 2 on Form 10-K/A (the Form 10-K/A) to the Companys Annual
Report on Form 10-K for the year ended June 30, 2005, initially filed with
the Securities and Exchange Commission (the SEC) on September 9, 2005, as
amended by Amendment No. 1 on Form 10-K/A (the Original Filing), is being
filed to reflect restatements of the Companys consolidated balance sheets as
of June 30, 2005 and 2004 and the Companys consolidated statements of
operations, cash flows, and stockholders equity for the years ended June 30,
2005, 2004, and 2003 and the notes related thereto. For a more detailed description
of the Restatement, see note 2, Restatement of Financial Statements, to the
accompanying audited consolidated financial statements and the
section entitled Restatement in Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in this
Form 10-K/A.

For the
convenience of the reader, this Form 10-K/A sets forth the Original Filing
in its entirety. However, this Form 10-K/A amends and restates only
Item 1 of Part I, Items 6, 7, 8 and 9A of Part II, and Item 15(a)
1 and 2 of Part IV of the Original Filing, in each case, solely as a result of,
and to reflect, the Restatement. Other than with respect to referencing to this
document as a Form 10-K/A or as Amendment No. 2, no other information in the
Original Filing is amended hereby. The foregoing items have not been updated to
reflect other events occurring after the Original Filing or to modify or update
those disclosures affected by subsequent events. This Form 10-K/A continues to
speak as of the filing date of the Original Filing for the year ended June 30,
2005. Other events occurring after the filing of the Original Filing or other
disclosures necessary to reflect subsequent events have been or will be
addressed in the Companys amended Quarterly Reports on Form 10-Q/A for
the quarterly periods ended September 30, 2005 and December 31, 2005, which are
being filed concurrently with the filing of this Form 10-K/A, and any
reports filed with the SEC subsequent to the date of this filing. In addition, pursuant
to the rules of the SEC, Item 15 of Part IV of the Original
Filing has been amended to contain the consent of the Companys independent
registered public accounting firm and currently dated certifications from the
Companys Chief Executive Officer and Chief Financial Officer, as required by
Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The consent of the
Companys independent registered public accounting firm and the certifications
of the Companys Chief Executive Officer and Chief Financial Officer are
attached to this Form 10-K/A as Exhibits 23, 31.1, 31.2, and 32.1.

The Company
has not amended and does not intend to amend its previously filed Quarterly
Reports on Form 10-Q for the periods affected by the Restatement prior to
June 30, 2005. For this reason, the consolidated financial statements and
related financial information for the affected periods contained in such
previously filed reports should no longer be relied upon.

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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 2.  | Properties                                                                              |  | 9    | 
|Item 3.  | Legal Proceedings                                                                       |  | 10   | 
|Item 4.  | Submission of Matters to a Vote of Security Holders                                     |  | 10   | 
|         |                                                                                         |  |      | 
|PART II  |                                                                                         |  |      | 
|Item 5.  | Market for the Registrants Common Equity and Related Stockholder
  Matters             |  | 11   | 
|Item 6.  | Selected Consolidated Financial Data                                                    |  | 12   | 
|Item 7.  | Managements Discussion and Analysis of Financial Condition and
  Results of Operations |  | 13   | 
|Item 7A. | Quantitative and Qualitative Disclosures about Market Risks                             |  | 23   | 
|Item 8.  | Financial Statements and Supplementary Data                                             |  | 24   | 
|Item 9.  | Changes in and Disagreements with Accountants on Accounting and
  Financial Disclosure  |  | 24   | 
|Item 9A. | Controls and Procedures                                                                 |  | 24   | 
|Item 9B. | Other Information                                                                       |  | 26   | 
|         |                                                                                         |  |      | 
|PART III |                                                                                         |  |      | 
|Item 10. | Directors and Executive Officers of the Registrant                                      |  | 27   | 
|Item 11. | Executive Compensation                                                                  |  | 27   | 
|Item 12. | Security Ownership of Certain Beneficial Owners and Management                          |  | 27   | 
|Item 13. | Certain Relationships and Related Transactions                                          |  | 27   | 
|Item 14. | Principal Accounting Fees and Services                                                  |  | 27   | 
|         |                                                                                         |  |      | 
|PART IV  |                                                                                         |  |      | 
|Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                        |  | 28   | 
|         |                                                                                         |  |      | 
|-----    | Signatures                                                                              |  | 31   | 
|         |                                                                                         |  |      | 

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/A.

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. 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.

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 more than 245 active and 220 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/A.

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.

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.

2

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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 is enabling this industrys growth with ultra
high precision measurement solutions to improve flat panel display
manufacturing yields. The ZYGO fully automated HS Series systems are an inline
process control, yield enhancement tool. The FPD HS tool measures the
topography of color filter photo components 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 robotics and motion stages, mini-clean environmental
enclosure 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.

Advanced Packaging Metrology: During the manufacture of a semiconductor chip,
after the photolithographic process is complete, the silicon wafer must be
diced into individual chips and packaged for customer use. In advanced chip
packaging fabrication facilities, the ZYGO CP 300 system measures patterned
features and films on the surfaces of diced and un-diced chips, for process
control and yield improvement. The APEX system incorporates a specialized ZYGO
NewView optical profiler and wafer positioning system with pattern recognition
software, and can be configured for clean room or laboratory use.

Semiconductor
Customers include:

|                    |                             
|------------------- | ----------------------------
|Canon               | KLA-Tencor Corporation      
|                    |                             
|Chi Mei Optronics   | Nikon                       
|                    |                             
|HannStar            | Sintek Photronic Corporation
|                    |                             
|Intel               | Zeiss                       
|                    |                             
|Quanta Display Inc. |                             

Industrial Market

ZYGO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 Applications

Consumer Electronics

Consumer electronics, including cell phones, digital cameras, DVD and
CD players, and optical computer drives, all have significant optical content.
Consumer electronic optics, which 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 the latest products in
an over 30 year old product family that revolutionized optical testing and
continues to evolve to meet changing requirements. Consumer electronics
production

3

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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, 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 Industry

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

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. This year, ZYGO introduced the NewView 6200 and NewView 6300 for
these applications, offering increased speed and better performance at a lower
price point. The NewView Delta is a production floor packaged system, also
targeted to this growing market.

Defense/Aerospace

Defense/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.

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. 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. This year, we introduced 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.

4

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Industrial Customers
include:

|                                       |                             
|-------------------------------------- | ----------------------------
|Bosch                                  | Northrop Grumman            
|IntraLase                              | Sandia National Laboratories
|Lawrence Livermore National Laboratory | 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 in the semiconductor and
industrial markets 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 Operations

We operate in industries that are subject to rapid technological change
and engineering innovation. As such, we dedicate substantial resources to
research and development. At June 30, 2005, we employed 120 individuals or
approximately 23% 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 believe that continued enhancement, development,
and commercialization of new and existing products and systems are essential to
maintaining and improving our leadership position.

We have been recognized as an innovator in commercializing technology,
as evidenced by our numerous achievement awards, including:

| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | R&D 100
  Awards in 1978, 1982, 1988 (three awards), 1994, 1996, 1997, 1998, 2002, and
  2003;                      
| |   |                                                                                                                     
| |  | Photonics
  Spectra Circle of Excellence Awards in 1988, 1994, 1996, 1997, 1998, and
  2001;                        
| |   |                                                                                                                     
| |  | Laser Focus
  World Commercial Technology Award in 2001;                                                            
| |   |                                                                                                                     
| |  | American
  Machinist Excellence in Manufacturing Technology Achievement Award for
  Technology & Reliability in 2000

Patents and Other
Intellectual Property

Our success and ability to compete depend substantially on our
technology. We have been developing a portfolio of intellectual property for
over 30 years, and we rely on a combination of patent, copyright, trademark,
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 200 United States
patents issued, of which approximately 165 are currently active, and
approximately 85 foreign patents issued, of which approximately 80 are active,
and we have approximately 80 United States and approximately 140 foreign patent
applications pending. In addition, we have
a number of registered and unregistered trademarks.

While we rely on patent, copyright, trademark, and trade secret laws to
protect our technology, we also believe that 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, 2005 was $66.6 million, an increase of $11.7million, or 21%, as compared
with $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 the fiscal year ended June 30, 2005
totaled $153.1 million and consisted of $74.6million, or 49%, in the
semiconductor segment and $78.5 million, or 51%, in the industrial segment.

5

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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 eight 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, |    
|               |  |                            |    
|               |  | 2005                       |     | 2004       |  | 2003       |  
|               |  |                            |     |            |  |            |  
|               |  | (Restated)                 |     | (Restated) |  | (Restated) |  
|Domestic       |  |                            | 34  | %          |  | 29         | % |  | 30  | %
|Far East:      |  |                            |     |            |  |            |   |  |     |  
|Japan          |  |                            | 43  | %          |  | 53         | % |  | 54  | %
|Pacific Rim    |  |                            | 12  | %          |  | 11         | % |  | 6   | %
|               |  |                            |     |            |  |            |   |  |     |  
|Total Far East |  |                            | 55  | %          |  | 64         | % |  | 60  | %
|Europe         |  |                            | 11  | %          |  | 7          | % |  | 10  | %
|               |  |                            |     |            |  |            |   |  |     |  
|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, 2005, our global sales customer support and service organization
consisted of over 80 people skilled in sales, marketing, optical and electro
component repair, software, application and system integration, diagnostics,
and problem-solving capabilities.

MANUFACTURING, RAW MATERIALS, AND SOURCES OF
SUPPLY

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

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

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

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

6

---



AVAILABLE INFORMATION

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

EMPLOYEES

At June 30, 2005, we employed 526 people of whom 240 were in
manufacturing, 120 were in research and development, 80 were in sales and
marketing, and 86 were in management and administration. Our employees are not
represented by a labor union or a collective bargaining agreement. We regard
our employee relations as good.

EXECUTIVE OFFICERS OF THE REGISTRANT

J. Bruce Robinson 
age 63  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 51  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 55  Vice President,
Corporate Quality and Support ServicesMr. 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 56  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 49  Vice President, Worldwide Sales
and MarketingMr. 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

---



David J. Person - age
57 - 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 A. Smythe - age 53 - Vice President, MarketingMr. Smythe has served as Vice President, Marketing since April 2002.
Previously, he served as our Vice President, Engineering from June 1998 to
April 2002; Vice President, Sales and Marketing, from January 1996 to June
1998; Director of Sales and Marketing from June 1993 to January 1996; and
Manager, Industry from April 1992 to June 1993.

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

Robert J. Stoner  age 42 Vice President, Metrology
and Optical SystemsDr. Stoner has served as Vice President of Business Development in
2002, and has served as Vice President of Metrology and Optical Systems since
2003. From 2000 to 2002, Dr. Stoner was President of Vinestone Corporation, a
software company, and from 1995 to 2000 he was President of Cooper Mountain
Corporation, a technology consulting firm.

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

Carl A. Zanoni - age 64 - 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

---



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 
  Expiration Date | 
|Operation/Location                                                                               |  | Manufacturing  |         | Total                             |  |        
|                                                                                                 |  |                |         |                                   |  |         | 
|Corporate Headquarters, Eastern Regional
  Sales Office, and Instrument and Optics Manufacturing |  |                |         |                                   |  |         |  |  |                   | 
|Middlefield, Connecticut                                                                         |  |                | 89,000  |                                   |  | 153,500 |  |  | Owned             | 
|                                                                                                 |  |                |         |                                   |  |         |  |  |                   | 
|R&D Center                                                                                       |  |                |         |                                   |  |         |  |  |                   | 
|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 - 08/31/06 | 
|                                                                                                 |  |                |         |                                   |  |         |  |  |                   | 
|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 | 
|                                                                                                 |  |                |         |                                   |  |         |  |  |                   | 
|Office                                                                                           |  |                |         |                                   |  |         |  |  |                   | 
|Franklin, Massachusetts                                                                          |  |                | 0       |                                   |  | 350     |  |  | Leased - 09/31/05 | 
|                                                                                                 |  |                |         |                                   |  |         |  |  |                   | 
|Zygo PTE Ltd - Sales Office                                                                      |  |                |         |                                   |  |         |  |  |                   | 
|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 - 10/01/05 | 
|                                                                                                 |  |                |         |                                   |  |         |  |  |                   | 
|Zygo KK                                                                                          |  |                |         |                                   |  |         |  |  |                   | 
|Japan                                                                                            |  |                | 0       |                                   |  | 1,775   |  |  | Leased - 10/31/05 | 
|                                                                                                 |  |                |         |                                   |  |         |  |  |                   | 
|Zygo China                                                                                       |  |                |         |                                   |  |         |  |  |                   | 
|China                                                                                            |  |                | 0       |                                   |  | 1,610   |  |  | Leased - 08/15/06 | 
|                                                                                                 |  |                |         |                                   |  |         |  |  |                   | 
|Zygo Korea                                                                                       |  |                |         |                                   |  |         |  |  |                   | 
|Korea                                                                                            |  |                | 0       |                                   |  | 1,507   |  |  | Leased - 04/12/07 | 
|                                                                                                 |  |                |         |                                   |  |         |  |  |                   | 
|Properties Unoccupied or Leased to Others                                                        |  |                |         |                                   |  |         |  |  |                   | 
|Plymouth, Massachusetts                                                                          |  |                | 0       |                                   |  | 6,600   |  |  | Leased - 05/31/06 | 
|Longmont, Colorado                                                                               |  |                | 0       |                                   |  | 28,110  |  |  | Leased - 05/31/06 | 
|Simi Valley, California                                                                          |  |                | 0       |                                   |  | 6,290   |  |  | Leased - 12/14/05 | 
|                                                                                                 |  |                |         |                                   |  |         |  |  |                   | 
|Total                                                                                            |  |                | 107,846 |                                   |  | 267,166 |  |  |                   | 
|                                                                                                 |  |                |         |                                   |  |         |  |  |                   | 

9

---



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.

10

---



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 2005 and 2004.

|                 |  |                                   |   |                                   |  |      |  |     |      |  |  |  |   |       |  |  |  |   |       |  | 
|---------------- |  | --------------------------------- | - | --------------------------------- |  | ---- |  | --- | ---- |  |  |  | - | ----- |  |  |  | - | ----- |  | 
|                 |  | Fiscal
  Year Ended June 30, 2005 |   | Fiscal
  Year Ended June 30, 2004 | 
|                 |  |                                   |   |                                   | 
|                 |  | High                              |   | Low                               |  | High |  | Low |     
|                 |  |                                   |   |                                   |  |      |  |     |      |  |  |  |   |       |  |  | 
|First
  quarter  |  |                                   | $ | 12.00                             |  |      |  | $   | 8.46 |  |  |  | $ | 15.10 |  |  |  | $ | 7.74  |  | 
|Second
  quarter |  |                                   | $ | 12.67                             |  |      |  | $   | 9.75 |  |  |  | $ | 21.53 |  |  |  | $ | 13.36 |  | 
|Third
  quarter  |  |                                   | $ | 14.48                             |  |      |  | $   | 9.96 |  |  |  | $ | 21.23 |  |  |  | $ | 13.22 |  | 
|Fourth
  quarter |  |                                   | $ | 13.30                             |  |      |  | $   | 9.20 |  |  |  | $ | 16.70 |  |  |  | $ | 9.30  |  | 

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, 2005 was 474. Our closing stock
price as of June 30, 2005 was $9.80.

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

Information
required with respect to Securities Authorized for Issuance Under Equity
Compensation Plans will be included under the caption Equity Compensation
Plan Information in the proxy statement to be filed pursuant to Regulation 14A
for use in connection with our companys 2005 Annual Meeting of Stockholders
(the Proxy Statement) and is incorporated herein by reference.

11

---



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/A. The following information has been restated to reflect
adjustments to the Form 10-K filed on September 9, 2005 and amended on October
18, 2005 that are further discussed in the Explanatory Note in the forepart
of this Form 10-K/A and in note 2, Restatement of Financial Statements to our
consolidated financial statements included in Part II, Item 8, Financial
Statements and Supplementary Data of this Form 10-K/A. The consolidated
statement of operations data set forth below for the years ended June 30, 2002
and 2001 and the consolidated balance sheet data as of June 30, 2003, 2002, and
2001, which are not included in the consolidated financial statements included
in Part II, Item 8, have also been restated.

(Thousands,
except for per share and ratio amounts)

|                                                        |  |                              |         |            |   |            |   |            |         |            |   |         |   |   |         |  
|------------------------------------------------------- |  | ---------------------------- | ------- | ---------- | - | ---------- | - | ---------- | ------- | ---------- | - | ------- | - | - | ------- | -
|                                                        |  | Fiscal Year
  Ended June 30, |        
|                                                        |  |                              |        
|                                                        |  | 2005                         |         | 2004       |   | 2003       |   | 2002 (1)   |         | 2001 (1)   |  
|                                                        |  |                              |         |            |   |            |   |            |         |            |  
|                                                        |  | (Restated)                   |         | (Restated) |   | (Restated) |   | (Restated) |         | (Restated) |  
|                                                        |  |                              |         |            |   |            |   |            |         |            |   |         |   |   |         |  
|Net sales                                               |  | $                            | 141,349 |            | $ | 116,276    |   | $          | 102,221 |            | $ | 80,060  |   | $ | 129,288 |  
|Gross profit                                            |  | $                            | 53,290  |            | $ | 42,680     |   | $          | 35,069  |            | $ | 27,245  |   | $ | 61,129  |  
|% of sales                                              |  |                              | 38      | %          |   | 37         | % |            | 34      | %          |   | 34      | % |   | 47      | %
|                                                        |  |                              |         |            |   |            |   |            |         |            |   |         |   |   |         |  
|Earnings (loss) from
  continuing operations            |  | $                            | 9,350   |            | $ | 4,226      |   | $          | 1,363   |            | $ | (4,071  | ) | $ | 13,506  |  
|% of sales                                              |  |                              | 7       | %          |   | 4          | % |            | 1       | %          |   | (5%     | ) |   | 10      | %
|Earnings (loss) per share
  from continuing operations: |  |                              |         |            |   |            |   |            |         |            |   |         |   |   |         |  
|Basic                                                   |  | $                            | 0.52    |            | $ | 0.24       |   | $          | 0.08    |            | $ | (0.23   | ) | $ | 0.88    |  
|Diluted                                                 |  | $                            | 0.52    |            | $ | 0.23       |   | $          | 0.08    |            | $ | (0.23   | ) | $ | 0.84    |  
|                                                        |  |                              |         |            |   |            |   |            |         |            |   |         |   |   |         |  
|Net earnings (loss)                                     |  | $                            | 8,984   |            | $ | (3,429     | ) | $          | (10,782 | )          | $ | (11,525 | ) | $ | 10,264  |  
|Net earnings (loss) per
  share:                        |  |                              |         |            |   |            |   |            |         |            |   |         |   |   |         |  
|Basic                                                   |  | $                            | 0.50    |            | $ | (0.19      | ) | $          | (0.61   | )          | $ | (0.66   | ) | $ | 0.67    |  
|Diluted                                                 |  | $                            | 0.50    |            | $ | (0.19      | ) | $          | (0.61   | )          | $ | (0.66   | ) | $ | 0.64    |  
|                                                        |  |                              |         |            |   |            |   |            |         |            |   |         |   |   |         |  
|Weighted average number of
  shares:                    |  |                              |         |            |   |            |   |            |         |            |   |         |   |   |         |  
|Basic                                                   |  |                              | 17,950  |            |   | 17,802     |   |            | 17,539  |            |   | 17,414  |   |   | 15,398  |  
|Diluted                                                 |  |                              | 18,140  |            |   | 18,221     |   |            | 17,696  |            |   | 17,414  |   |   | 16,063  |  
|                                                        |  |                              |         |            |   |            |   |            |         |            |   |         |   |   |         |  
|Research, development, and
  engineering                |  | $                            | 13,377  |            | $ | 13,011     |   | $          | 12,659  |            | $ | 17,696  |   | $ | 13,518  |  
|Capital expenditures                                    |  | $                            | 9,987   |            | $ | 7,585      |   | $          | 5,037   |            | $ | 11,381  |   | $ | 13,902  |  
|Depreciation and
  amortization                         |  | $                            | 5,880   |            | $ | 5,717      |   | $          | 5,623   |            | $ | 6,098   |   | $ | 3,760   |  

|                                             |  |            |         |            |   |            |  |            |         |            |   |         |  |   |         | 
|-------------------------------------------- |  | ---------- | ------- | ---------- | - | ---------- |  | ---------- | ------- | ---------- | - | ------- |  | - | ------- | 
|                                             |  | June 30,   |        
|                                             |  |            |        
|                                             |  | 2005       |         | 2004       |   | 2003       |  | 2002 (1)   |         | 2001 (1)   |  
|                                             |  |            |         |            |   |            |  |            |         |            |  
|                                             |  | (Restated) |         | (Restated) |   | (Restated) |  | (Restated) |         | (Restated) |  
|                                             |  |            |         |            |   |            |  |            |         |            |   |         |  |   |         | 
|Working capital                              |  | $          | 63,379  |            | $ | 58,504     |  | $          | 66,920  |            | $ | 65,936  |  | $ | 88,511  | 
|Current ratio                                |  |            | 2.3     |            |   | 3.5        |  |            | 3.3     |            |   | 5.2     |  |   | 4.6     | 
|Total assets                                 |  | $          | 190,182 |            | $ | 156,133    |  | $          | 161,546 |            | $ | 169,385 |  | $ | 186,862 | 
|Long-term debt (including
  current portion) |  | $          |        |            | $ |           |  | $          | 11,374  |            | $ | 12,211  |  | $ | 12,560  | 
|Stockholders equity                         |  | $          | 141,153 |            | $ | 131,352    |  | $          | 130,403 |            | $ | 140,238 |  | $ | 148,909 | 
|Price-earnings ratio                         |  |            | 20      |            |   | N/A        |  |            | N/A     |            |   | N/A     |  |   | 35      | 
|Number of employees at
  year-end            |  |            | 526     |            |   | 476        |  |            | 477     |            |   | 537     |  |   | 648     | 
|Sales per employee  average                 |  | $          | 269     |            | $ | 244        |  | $          | 214     |            | $ | 149     |  | $ | 200     | 
|Book value per share                         |  | $          | 7.94    |            | $ | 7.85       |  | $          | 7.92    |            | $ | 7.99    |  | $ | 8.48    | 
|Market price per share at
  year-end         |  | $          | 9.80    |            | $ | 11.19      |  | $          | 8.00    |            | $ | 8.05    |  | $ | 22.25   | 

|    |                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The selected
  consolidated financial data for the periods ended June 30, 2002 and 2001 have
  been reclassified to conform with the fiscal 2005, 2004, and 2003
  presentation of the discontinued operations and loss on disposal of our
  former TeraOptix unit.

12

---



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

CRITICAL ACCOUNTING POLICIES, SIGNIFICANT
JUDGMENTS, AND ESTIMATES

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

Revenue Recognition and Allowance for
Doubtful Accounts

We recognize
revenue based on guidance provided in SEC Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition 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 will exceed total revenues from the contract. Inherent in the
estimates of market value are managements estimates related to current
economic trends, future demand for our products, and technological
obsolescence. Significant management judgments must be made when providing for
obsolete and excess inventory and losses on contracts. If actual market
conditions are different than those projected by management, additional
inventory write-downs and loss accruals may be required.

Warranty Costs

We provide for
the estimated cost of product warranties at the time revenue is recognized. We
consider historical warranty costs actually incurred and specifically
identified circumstances to establish the warranty liability. The warranty
liability is reviewed on a quarterly basis. Should actual costs differ from
managements estimates, revisions to the estimated warranty

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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 or cash flow loss combined with a history of operating or cash
flow losses or a projection that demonstrates continuing losses, and a current
expectation that, more likely than not, a long-lived asset will be disposed of
significantly before the end of its estimated useful life.

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

Health Insurance

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

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.

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.

We also
perform several development services, which have produced a significant amount
of our revenue over the past three years. In December 2004 and February 2005,
we signed development agreement amendments with Canon Inc. (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. The development services contracts that were signed in
fiscal 2005 are

14

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expected to
represent approximately $41 million in additional revenue over the next several
years, of which $14.2 million has been recognized in fiscal 2005. Our period
over period comparable sales would be adversely affected if we do not continue
to provide these development services.

Overall, sales
to Canon, our single largest customer, decreased approximately 9% in fiscal
2005 from fiscal 2004, representing 37% of total net sales for fiscal 2005 and
49% for fiscal 2004. We experienced, as expected, a decline in certain product
sales to Canon in the third and fourth quarters of fiscal 2005. Despite the
$5.4 million decrease in sales to Canon, our revenues grew 22%, reflecting the
growth in other areas of our business, primarily the flat panel market and
optical systems solutions.

During the
past year, we opened additional regional offices in Taiwan, China, and Korea to
increase our presence in the Pacific Rim region, particularly to take advantage
of opportunities in the semiconductor segment. We expect these new offices to
have a minimal impact on our results of operations in the immediate future, but
also expect that the offices will become increasingly important over time.

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.

An area of
continued revenue growth expected in fiscal 2006 is in our optical systems
solutions. Three years ago we opened a facility in Tucson, Arizona, that
provides contract optical-mechanical manufacturing, utilizing lean
manufacturing technology. Late in fiscal 2003, we launched our Costa Mesa,
California operation that supplies electro-optical system design and
prototyping. Together, these operations enable us to deliver integrated optical
solutions, from design to delivery, primarily to the defense and aerospace
markets. To date, our gross profit as a percentage of sales on optical systems
solutions has been below our typical gross profit percentage for products in
our more mature product lines. We expect that as our sales increase, our gross
profit percentage will also increase, although not to the extent of our more
mature product lines. These products and services typically yield a lower
margin.

Our backlog at
June 30, 2005 was $66.6 million, an increase of $11.7 million from June 30,
2004. Orders were $42.4 million in the fourth quarter as we experienced
continued strength across our product lines and regions. Industrial orders
represented 52% of our fourth quarter orders, led by a large optics order for
$6.0 million, which is expected to be shipped in fiscal 2006. Our semiconductor
backlog of $28.8 million includes $9.8 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 2006 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. 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 from two separate independent third parties. Based on the
offers, management determined that the fair value of the vacant facility was
$2.0 million and an additional impairment charge was recorded. 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.

Restatement

We are
restating our consolidated financial statements for fiscal years 2005, 2004,
and 2003 included in this Form 10-K/A for corrections in the accounting of
intercompany transactions from certain of our foreign operations. Our restated
consolidated financial statements included in this Form 10-K/A also include
disclosure of restated unaudited quarterly results for fiscal 2005 and 2004.
The corrections are the result of our failure to eliminate certain intercompany
revenues attributed to our Singapore and Taiwan offices, which resulted in our
overstating reported revenues, from fiscal 2001 through fiscal 2005. The tax
effects on the corrections and other minor adjustments have also been reflected
in these restatements. The fiscal 2002 and 2001 adjustments were insignificant
and will be corrected through a prior period adjustment to retained earnings
and currency translation effects in the accumulated other comprehensive income
balance of the stockholders equity section of the balance sheet as of July 1,
2002. The fiscal 2003 adjustments will reduce, from previously filed results,
revenues by $0.4 million from

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$102.6
million; earnings from continuing operations by $0.2 million (net of income tax
effects and certain other minor adjustments) from $1.4 million; and earnings
per share from continuing operations by $0.01 from $0.09. Net loss per share,
after discontinued operations, increased by $0.01 from $0.60. The fiscal 2004
adjustments will reduce, from previously filed results, revenues by $0.4
million from $116.6 million; earnings from continuing operations by $20,000
(net of income tax effects and certain other minor adjustments) from $4.2
million; and will have no effect on earnings per share from continuing
operations or net loss per share. The fiscal 2005 adjustments will reduce, from
previously filed results, revenues by $0.8 million from $142.2 million; earnings
from continuing operations by $0.8 million (net of income tax effects and
certain other minor adjustments) from $10.2 million; earnings per share from
continuing operations by $0.04 from $0.56; and net income per share by $0.04
from $0.54.

The restated
financial statements do not affect the Companys business outlook for future
fiscal periods, nor impact the Companys cash position or future cash flows
from operations.

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 follows:

Net Sales By Segment and Geographic Regions

|              |  |                             |       |            |  |                       |   |            |       |  |  |     |  
|------------- |  | --------------------------- | ----- | ---------- |  | --------------------- | - | ---------- | ----- |  |  | --- | -
|(In millions) |  | Twelve Months
        Ended |      
|              |  |                             |      
|              |  | June 30,
        2005       |       | Net Sales% |  | June 30,
        2004 |   | Net Sales% |      
|              |  |                             |       |            |  |                       |   |            |      
|              |  | (Restated)                  |       | (Restated) |  | (Restated)            |   | (Restated) |      
|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 increased
$5.8 million, primarily due to optics sales. Net sales for fiscal 2005 and 2004
included $15.6 million and $16.1 million, respectively, from development
services agreements. In fiscal 2005 we signed two development agreement
amendments with Canon Inc. 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 Inc. These new contracts
totaled approximately $41.0 million of which $14.2 million was recognized as
revenue in the current year. 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 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.

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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. R&D 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 $0.50 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 $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.

Fiscal 2004 Compared
with Fiscal 2003

Net sales of
$116.3 million for fiscal 2004 increased by $14.1 million, or 14%, from the
comparable prior year period sales of $102.2 million. Net sales for fiscal 2004
included $16.1 million from development services agreements, as compared with
$18.8 million in the prior fiscal year. The first developmental services
agreement is expected to be substantially completed in the second quarter of
fiscal 2005 with minimal finishing work through the third quarter. We have
signed an additional agreement letter that has allowed us to begin a new
development project with the expectation that a follow-on contract will be
signed by the fall of this year. For fiscal 2004, net sales in the
semiconductor segment were $66.8 million, or 57% of total net sales, as
compared with $58.9 million, or 58%, in the prior year period and net sales in
the industrial segment were $49.5 million, or 43% of total net sales, as
compared with $43.3 million, or 42%, in the prior year period. The increase in
net sales in the semiconductor segment was primarily due to general increases
in the number of products sold across most product

17

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categories.
The sales of flat panel systems also contributed to the increase. The
industrial sector showed strong sales, particularly large aperture metrology
shipments to the defense and aerospace sectors.

Sales to the Americas, primarily the United States, amounted to $33.9
million in fiscal 2004, an increase of $2.8 million, or 9%, from fiscal 2003
levels of $31.1 million. Sales to Japan during fiscal 2004 amounted to $61.1
million, an increase of $6.4 million, or 12%, from fiscal 2003 sales levels,
primarily due to an increase in orders from Canon, Inc. Sales to Europe/Other,
primarily Europe, amounted to $8.4 million, a decrease of $1.9 million, or 18%,
from fiscal 2003. Sales to the Pacific Rim, excluding Japan, amounted to $12.8
million, an increase of $6.7 million, or 110%, from 2003 sales levels,
primarily due to an increase in flat panel and large aperture sales.

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

Gross profit
for fiscal 2004 totaled $42.7 million, an increase of $7.6 million, or 22%,
from $35.1 million in the prior fiscal year. Gross profit as a percentage of
sales for fiscal 2004 and 2003 was 37% and 34%, respectively. Gross profit for
fiscal 2004 included $3.5 million from the development services agreements, as
compared with $3.8 million for fiscal 2003. The increased margin was primarily
due to product mix with increases in sales on higher margin products and a
decrease in the development services revenue, which carry a lower margin as a
percentage of total revenues.

Selling,
general, and administrative expenses (SG&A) in fiscal 2004 amounted to
$24.6 million, an increase of $3.8 million, or 19%, from fiscal 2003. SG&A
as a percentage of net sales in fiscal 2004 was 21%, as compared with 20% in
fiscal 2003. The increase in SG&A for fiscal 2004 is primarily related to
increases in various personnel costs including incentive programs, and external
commissions.

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

Our operating
profit in fiscal 2004 was $5.1 million, as compared with an operating profit of
$1.6 million in fiscal 2003. Operating profit as a percentage of sales in
fiscal 2004 was 4%, as compared with the operating profit as a percentage of
sales of 2% in fiscal 2003.

The income tax
expense from continuing operations in fiscal 2004 totaled $1.7 million, or 27%
of pretax profits, which compares with an income tax expense of $0.3 million,
or 16% of pretax profits in fiscal 2003. The effective tax rates for fiscal
2004 and 2003 relate primarily to large R&D credits being applied to low
pretax profits from continuing operations. The overall effective tax rate,
including the tax effect of the discontinued operations, for fiscal years 2004
and 2003 was an income tax benefit of 42% and 38%, respectively.

We recorded a
net loss of $3.4 million for fiscal 2004 as compared with a net loss of $10.8
million for fiscal 2003. On a diluted per share basis, the net loss was $0.19
per share for fiscal 2004 as compared with a net loss of $0.61 per share for
fiscal 2003. The net loss for fiscal 2004 includes losses of $1.3 million, net
of tax, related to the operations of our discontinued TeraOptix unit and
charges of $6.4 million, net of tax, related to the disposal of our
discontinued TeraOptix unit. The charge related to the disposal of our
discontinued TeraOptix unit was primarily due to the downward adjustments in
our second and fourth fiscal quarters of 2004 in the fair market value of our
vacant facility in Westborough, Massachusetts. The fourth quarter charge
represents our decision to market the property as general manufacturing space
in contrast to marketing the property with clean room laboratory space. The net
loss for fiscal 2003 includes losses of $2.5 million related to the operations
of our discontinued TeraOptix unit and charges of $9.7 million related to the
disposal of our discontinued TeraOptix unit. The earnings from continuing
operations for fiscal 2004 was $4.2 million, or $0.23 per diluted share, as
compared with earnings from continuing operations of $1.4 million, or $0.08 per
diluted share, for fiscal 2003.

Backlog at
June 30, 2004 totaled $54.9 million, an increase of $17.7 million, or 47%, from
$37.2 million at June 30, 2003. The year-end fiscal 2004 backlog consisted of
$33.2 million, or 60%, in the semiconductor segment and $21.7 million, or 40%,
in the industrial segment. Orders for fiscal 2004 totaled $134.2 million.
Orders by segment for fiscal 2004 consisted of $79.6 million, or 59%, in the
semiconductor segment and $54.6 million, or 41%, in the industrial segment. The
increase in the backlog is primarily related to an increase in both domestic
and Japan region orders. Domestic orders were driven by large custom optics and
optical assembly orders, as well as an increase in orders received by our
applied optics group. Orders

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in Japan
increased as we diversified our customer base in the region, coupled with an
increase in product orders from Canon. We currently have $7.7 million of flat
panel system orders in backlog at June 30, 2004 as compared with $2.7 million
at June 30, 2003.

RELATED
PARTY TRANSACTIONS

Sales to Canon Inc., a stockholder, and Canon Sales Co., Inc., a
distributor of certain of our products in Japan and a subsidiary of Canon Inc.,
amounted to $51.9 million (37% of net sales), $57.3 million (49% of net sales),
and $52.8 million (52% of net sales), for the years ended June 30, 2005, 2004,
and 2003, respectively. Selling prices of products sold to Canon Inc. and Canon
Sales Co., Inc. are based, generally, on the normal terms customarily given to
distributors. Revenues generated from a development contract with Canon are
recorded on a cost-plus basis. At June 30, 2005 and 2004, there was
approximately, in the aggregate, $4.0 million and $10.9 million, respectively,
of trade accounts receivable from Canon.

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 the twelve
months ended June 30, 2005, we recognized revenue of $15.6 million for the
original contract and subsequent addon work compared with $16.1 million for
the comparable prior period.

LIQUIDITY
AND CAPITAL RESOURCES

At June 30,
2005, working capital was $63.4 million, an increase of $4.9 million from the
$58.5 million at June 30, 2004. We maintained cash, cash equivalents, and
marketable securities at June 30, 2005 totaling$56.9million. This represents an
increase of $22.5million from June 30, 2004. The increase in cash was
primarily attributable to progress payments from the developmental services
agreement and cash generated from our operating results. The increase in cash
was partially offset by an increase in inventory and capital expenditures. This
increase in inventory was primarily attributable to an increase in metrology
inventory for flat panel display systems and to other product lines to support
the backlog.

We have sold
our vacant Westborough, Massachusetts, facility. The sale transaction was
completed in the third quarter of fiscal 2005 and generated approximately $1.9
million in cash, net of selling expenses.

There were no
borrowings outstanding under our $3.0 million bank line of credit at June 30,
2005.

Acquisitions
of property, plant, and equipment increased $2.4 million to $10.0 million for
fiscal 2005 from $7.6 million for fiscal 2004. The increase was primarily due
to the completion of construction on an 18,000 square foot addition to our
Middlefield facility which had associated capitalized costs in fiscal 2005 of
$2.7 million.

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

CONTRACTUAL OBLIGATIONS

The following
table summarizes our significant contractual obligations at June 30, 2005, 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     |  | $     | 2.2  |                    | $ | 1.5       |  | $         | 0.7 |                   | $ |  |  | $ |  | 
|Purchase obligations |  |       | 7.8  |                    |   | 3.3       |  |           | 4.5 |                   |   |  |  |   |  | 
|                     |  |       |      |                    |   |           |  |           |     |                   |   |   |  |   |   | 
|Total                |  | $     | 10.0 |                    | $ | 4.8       |  | $         | 5.2 |                   | $ |  |  | $ |  | 
|                     |  |       |      |                    |   |           |  |           |     |                   |   |   |  |   |   | 

19

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RISK FACTORS THAT MAY IMPACT FUTURE RESULTS

Industry
Concentration and Cyclicality

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

Customer
Concentration; Relationship with Canon

During fiscal
2005, 2004, and 2003, sales to Canon Inc. and Canon Sales Co., Inc.
(collectively, Canon), our largest customer in those periods, accounted for
37%, 49%, and 52% 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, 2005 of approximately 7% of our outstanding shares of common stock,
and is a distributor of certain of our products in the Japanese market. A
reduction or delay in orders from this customer, including reductions or delays
due to market, economic, or competitive conditions in the industries in which
we serve, could have a material adverse effect upon our results of operations.
Our customers, including Canon, generally do not enter into long-term
agreements obligating them to purchase our products.

Revenues Derived From
International Sales and Foreign Operations

We sell our
products internationally, primarily to customers in Japan and throughout the
Pacific Rim. Net sales to customers outside the United States accounted for
approximately 66%, 71%, and 70% of our net sales in each of the fiscal years
ended June 30, 2005, 2004, and 2003, respectively, and are expected to continue
to account for a substantial percentage of our net sales.

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

Our sales and
costs are negotiated and paid primarily in U.S. dollars. However, changes in
the values of foreign currencies relative to the value of the U.S. dollar can
render our products comparatively more expensive to the extent locally produced
alternative products are available. Such conditions could negatively impact
international sales of our products and foreign operations, as would changes in
the general economic conditions in those markets. For our sales which are based
in local currency, we are exposed to foreign exchange fluctuations from the
time customers are invoiced in local currency until collection occurs. For
fiscal 2005, approximately 18% of our sales were denominated in foreign
currencies. Management believes the percentage of sales in foreign currencies
may increase in the coming year due to an increase in sales to Japanese
customers denominated in yen. 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.

Risks Associated with
Acquisitions

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

We cannot assure you that any acquisition will result in long-term
benefits to us or that our management will be able to effectively manage the
acquired businesses. We may also incorrectly judge the value or worth of an
acquired company or

20

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business. We have recently disposed or divested ourselves of several
companies or lines of business that were acquired by us in the past few years,
at a significant net loss to us.

Quarterly Fluctuations

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

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

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

Backlog

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

Sales
Cycle

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

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

Prediction of
Manufacturing Requirements

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

21

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Possible Volatility
of Stock Price

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

Competition

We face
competition from a number of companies in all our markets, 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.

Technological Change
and New Product Development

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

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

Dependence on
Proprietary Technology

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

Dependence on Key
Personnel

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

Dependence on
Third-Party Suppliers

We are dependent
on suppliers for raw materials and various electrical, mechanical, and optical
supplies, including fiber and electronic components and modules. Although we enter, either directly or through our
contract manufacturers, into purchase

22

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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 restraints, then we may be at least temporarily unable to
obtain these supplies, thus exposing us to significant delays and additional
costs. Currently there are only a limited
number of companies that are capable of supplying optical materials in the
quantity and of the quality we require.

Undetected Product
Defects

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

Environmental
Regulations

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

Item
7A. Quantitative and Qualitative Disclosures about Market Risks

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

Interest Rate
Sensitivity

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

Fair value of investments as
of June 30, 2005 maturing in:
(Dollars in millions)

|                                 |  |      |      |      |   |      |   |      |     |   |   |     |  
|-------------------------------- |  | ---- | ---- | ---- | - | ---- | - | ---- | --- | - | - | --- | -
|                                 |  | 2006 |      | 2007 |   | 2008 |   | 2009 |    
|                                 |  |      |      |      |   |      |   |      |    
|Cash equivalents                 |  |      |      |      |   |      |   |      |     |   |   |     |  
|Fixed rate
investments           |  | $    | 1.4  |      | $ |     |   | $    |    |   | $ |    |  
|Weighted average interest
  rate |  |      | 3.0  | %    |   |     |   |      |    |   |   |    |  
|                                 |  |      |      |      |   |      |   |      |     |   |   |     |  
|Marketable securities            |  |      |      |      |   |      |   |      |     |   |   |     |  
|Fixed rate
investments           |  | $    | 17.2 |      | $ | 8.3  |   | $    | 8.3 |   | $ | 2.0 |  
|Weighted average interest
  rate |  |      | 3.3  | %    |   | 3.2  | % |      | 3.8 | % |   | 4.1 | %

Exchange Rate Sensitivity

Approximately 82% of our fiscal
2005 sales were in U.S. dollars. At June 30, 2005, our backlog included orders
in U.S. dollars of $57.3million, or 86%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

23

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in export
markets as would changes in the general economic conditions in those markets.
For our sales which are based in local currency, we are exposed to foreign
exchange fluctuations from the time customers are invoiced in local currency
until collection occurs.

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. Management believes the percentage of sales in
foreign currencies may increase in the coming year due to an increase in sales
denominated in yen to Japanese customers.

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

Item
8. Financial Statements and Supplementary Data

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

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

None.

Item
9A. Controls and Procedures

(a) Evaluation
of Disclosure Controls and Procedures

As previously
disclosed in a Current Report on Form 8-K which we filed on March 29, 2006 and
as described in our Explanatory Note to this Form 10-K/A and note 2 to our
accompanying consolidated financial statements, in connection with conducting
an internal review of our tax return, we determined that inadvertent accounting
errors were made in the consolidation of our intercompany revenues from certain
of our foreign operations. The errors are the result of our failure to identify
and eliminate certain intercompany 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. Based on the impact of
the aforementioned accounting errors, we determined to restate our consolidated
financial statements as of June 30, 2005 and for the year ended June 30, 2005.
The consolidated financial statements for fiscal 2003 and 2004 included in this
Form 10-K/A are also being restated. Our restated consolidated financial statements
also include disclosure of restated quarterly results for fiscal 2005 and 2004.

Management has determined
that the internal control deficiency that resulted in the aforementioned
accounting errors is a material weakness, as defined by the Public Company
Accounting Oversight Boards Auditing Standard No. 2. The Public Company
Accounting Oversight Board has defined a material weakness as a significant
deficiency, or combination of significant deficiencies, that results in more
than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. We have determined
that the material weakness was that we did not maintain adequate policies and
procedures to ensure that intercompany accounts were properly reconciled and
intercompany transactions were properly identified and eliminated in the
consolidation process.

We carried out
a re-evaluation, as of June 30, 2005, under the supervision and with the
participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. As a result of this re-evaluation and in
light of the material weakness in internal control over financial reporting
referenced above, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were not effective as of
June 30, 2005.

In response to this material
weakness, management performed additional analyses and other post-closing
procedures to ensure our restated consolidated financial statements were
prepared in accordance with generally accepted accounting principles.
Accordingly, management, including our Chief Executive Officer and Chief Financial
Officer, believes the restated consolidated financial statements included in
this report fairly present, in all material respects, our financial condition,
results of operations and cash flows for the periods presented.

24

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(b) Report of Management on Zygo
Corporations Internal Control Over Financial Reporting (Restated)

Management of
Zygo Corporation (the Company) is 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.

Due to its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, 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.

In the
Companys previously filed Annual Report on Form 10-K for the year ended June
30, 2005, management concluded that the Companys internal control over
financial reporting as of June 30, 2005 was effective based upon criteria in Internal
Control  Integrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission. However, on March 29,
2006, the Company determined that it needed to restate certain of its previously
issued financial statements. As a result of such financial statement
restatement, management reassessed the Companys internal control over
financial reporting and identified the following material weakness in internal
control over financial reporting as of June 30, 2005:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company
  did not have effective policies and procedures to ensure that intercompany
  accounts were properly reconciled and intercompany transactions were properly
  identified and eliminated. Specifically, insufficient technical resources
  were assigned to monitor inter-company accounts, and the Company had
  insufficient supervision and review of the consolidation process. As a result
  of this material weakness, previously issued consolidated financial
  statements contained material errors. The Companys annual consolidated
  financial statements for fiscal 2003, 2004, and 2005 have been restated.

As a result of
the aforementioned material weakness in internal control over financial
reporting, management has revised its previously reported assessment of the
effectiveness of internal control over financial reporting and has concluded
that, as of June 30, 2005, the Companys internal control over financial
reporting was not effective. A material weakness in internal control over financial
reporting is a control deficiency (within the meaning of Auditing Standard
No. 2 of the Public Company Accounting Oversight Board, or PCAOB), or
combination of control deficiencies, that results in there being more than a
remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected.

Our restated
assessment of the effectiveness of the Companys internal control over
financial reporting as of June 30, 2005 has been audited by KPMG LLP, an independent
registered public accounting firm, as stated in their auditors report which is
included in Item 8 of this Form 10-K/A.

c) Changes in
Internal Control Over Financial Reporting

There were no
changes in our internal control over financial reporting that occurred during
the fourth quarter of fiscal 2005 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

(d) Remediation of
Material Weakness

During the
period from April to May 2006, 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 processes and the procedures and
controls surrounding the consolidation process, and increased review and
approval controls by senior financial personnel over the personnel that perform
the consolidation. These improved procedures included ensuring that the
inter-company activity is properly identified and eliminated in consolidation.

25

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|                |  |     |  |                                                                     |  | 
|--------------- |  | --- |  | ------------------------------------------------------------------- |  | 
|                |  |     |  | Zygo Corporation                                                    | 
|June 20,
  2006 |  | By: |  | /s/ J. Bruce
  Robinson                                             |  | 
|                |  |     |  |                                                                     |  | 
|                |  |     |  | J. Bruce
  Robinson                                                 | 
|                |  |     |  | Chairman,
  President and Chief Executive Officer                   | 
|                |  |     |  |                                                                     | 
|June 20,
  2006 |  | By: |  | /s/ Walter
  A. Shephard                                            |  | 
|                |  |     |  |                                                                     |  | 
|                |  |     |  | Walter A.
  Shephard                                                | 
|                |  |     |  | Vice
  President, Finance, Chief Financial Officer,
  and Treasurer | 

Item
9B. Other Information

None.

26

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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
2005 Annual Meeting of Stockholders and is incorporated herein by reference.

Item
11. Executive Compensation

Information
required by this item will be included in our 2005 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 2005 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 2005 Proxy
Statement under the caption Certain Relationships and Related Transactions
and is incorporated herein by reference.

Item 14. Principal Accounting Fees and
Services

Information required by this item will be included in our 2005 Proxy
Statement under the caption Relationship with Independent Public Accountants
and is incorporated herein by reference.

27

---



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-K405 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)*                                                                            
|    |                                                                     |                                                                                                                                                                                                                                                                         
|    | 10.11                                                               | Acquisition
  Agreement dated May 5, 2000, by and among Zygo Corporation, Firefly
  Technologies Inc., and the Shareholders of Firefly Technologies Inc.
  (Companys Current Reports on Form 8-K dated May 8, 2000 and on Form 8-KA
  dated June 30, 2000)*            

28

---



| |       |                                                                                                                                                                                                                                                               
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.12 | Employment
  agreement dated May 5, 2000, between Zygo Corporation and Patrick Tan
  (Exhibit 10.01(e)(2) to the Companys Current Reports on Form 8-K dated May
  8, 2000 and on Form 8-KA dated June 30, 2000)*                                             
| |       |                                                                                                                                                                                                                                                               
| | 10.13 | Promissory
  Note to the amended and restated credit agreement dated May 14, 2001, between
  Zygo Corporation and Fleet National Bank (Exhibit 10.26 to the Companys
  Annual Report on Form 10K 405 for its year ended June 30, 2001)*                      
| |       |                                                                                                                                                                                                                                                               
| | 10.14 | Amended and
  restated credit agreement dated May 14, 2001, between Zygo Corporation and
  Fleet National Bank (Exhibit 10.21 to the Companys Annual Report on Form 10K
  for its year ended June 30, 2002)*                                                 
| |       |                                                                                                                                                                                                                                                               
| | 10.15 | Amended and
  restated credit agreement dated November 22, 2001 between Zygo Corporation
  and Fleet National Bank (Exhibit 10.22 to the Companys Annual Report on Form
  10K for its year ended June 30, 2002)*                                             
| |       |                                                                                                                                                                                                                                                               
| | 10.16 | Amended and
  restated credit agreement dated June 26, 2002 between Zygo Corporation and
  Fleet National Bank (Exhibit 10.23 to the Companys Annual Report on Form 10K
  for its year ended June 30, 2002)*                                                 
| |       |                                                                                                                                                                                                                                                               
| | 10.17 | Subcontract
  B519044 between The Regents of The University of California Lawrence
  Livermore National Laboratory and Zygo Corporation dated January14, 2002
  (Exhibit 10.25 to the Companys Annual Report on Form 10K for its year ended
  June 30, 2002)*
| |       |                                                                                                                                                                                                                                                               
| | 10.18 | 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)*                                                                          
| |       |                                                                                                                                                                                                                                                               
| | 10.19 | 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)*  
| |       |                                                                                                                                                                                                                                                               
| | 10.20 | Master
  Reaffirmation and Amendment No. 3 to Loan Documents dated November 21, 2002,
  between Fleet National Bank and Zygo Corporation. (Exhibit 10.1 to the
  Companys Quarterly Report on Form 10-Q for its quarterly period ended
  December 27, 2002)* 
| |       |                                                                                                                                                                                                                                                               
| | 10.21 | Master
  Reaffirmation and Amendment No. 4 to Loan Documents dated December 18, 2003,
  between Fleet National Bank and Zygo Corporation. (Exhibit 10.1 to the
  Companys Quarterly Report on Form 10-Q for its quarterly period ended
  December 26, 2003)* 
| |       |                                                                                                                                                                                                                                                               
| | 10.22 | 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)*                                                                        
| |       |                                                                                                                                                                                                                                                               
| | 10.23 | 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)*                                        
| |       |                                                                                                                                                                                                                                                               
| | 10.24 | 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)*                                           
| |       |                                                                                                                                                                                                                                                               
| | 10.25 | 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)*                                                     
| |       |                                                                                                                                                                                                                                                               
| | 14.1  | Zygo
  Corporation Code of Ethics (Exhibit 14.1 to the Companys Quarterly Report on
  Form 10-Q for its quarterly period ended March 26, 2004)*                                                                                                              
| |       |                                                                                                                                                                                                                                                               
| | 21.   | Subsidiaries
  of Registrant                                                                                                                                                                                                                                  
| |       |                                                                                                                                                                                                                                                               
| | 23.   | Consent of
  Independent Registered Public Accounting Firm                                                                                                                                                                                                    
| |       |                                                                                                                                                                                                                                                               
| | 24.   | Power of
  Attorney (included in the signature page)                                                                                                                                                                                                          
| |       |                                                                                                                                                                                                                                                               
| | 31.1  | Certification
  of Chief Executive Officer under Rule 13a-14(a)                                                                                                                                                                                               

29

---



| |                                                                                                                                          |                                                                       
| | ---------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------
| | 31.2                                                                                                                                     | Certification
  of Chief Financial Officer under Rule 13a-14(a)       
| |                                                                                                                                          |                                                                       
| | 32.1                                                                                                                                     | Certification
  of Chief Executive Officer and Chief Financial Officer
| |                                                                                                                                          |                                                                       
| | Exhibit
  numbers 10.3, 10.6, 10.7, 10.8, 10.9, 10.10, 10.12, and 10.22, are management
  contracts, compensatory plans or arrangements.

*Incorporated
herein by reference.

30

---



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 | June 26,
  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    |  | June 26,
  2006 |  | 
|                          |  | Executive
  Officer                 |  |                 |  | 
|J. Bruce Robinson         |  |                                     |  |                 |  | 
|                          |  |                                     |  |                 |  | 
|/s/ Walter
  A. Shephard  |  | Vice
  President, Finance, Chief    |  | June 26,
  2006 |  | 
|                          |  | Financial
  Officer, and Treasurer  |  |                 |  | 
|Walter A. Shephard        |  |                                     |  |                 |  | 
|                          |  |                                     |  |                 |  | 
|/s/ Carl A.
  Zanoni      |  | Senior Vice
  President, Technology |  | June 26,
  2006 |  | 
|                          |  | and Director                        |  |                 |  | 
|Carl A. Zanoni            |  |                                     |  |                 |  | 
|                          |  |                                     |  |                 |  | 
|/s/ Eugene
  G. Banucci   |  | Director                            |  | June 26,
  2006 |  | 
|                          |  |                                     |  |                 |  | 
|(Eugene G. Banucci)       |  |                                     |  |                 |  | 
|                          |  |                                     |  |                 |  | 
|/s/ Youssef
  A. El-Mansy |  | Director                            |  | June 26,
  2006 |  | 
|                          |  |                                     |  |                 |  | 
|(Youssef A. El-Mansy)     |  |                                     |  |                 |  | 
|                          |  |                                     |  |                 |  | 
|/s/ Paul F.
  Forman      |  | Director                            |  | June 26,
  2006 |  | 
|                          |  |                                     |  |                 |  | 
|(Paul F. Forman)          |  |                                     |  |                 |  | 
|                          |  |                                     |  |                 |  | 
|/s/ Samuel
  H. Fuller    |  | Director                            |  | June 26,
  2006 |  | 
|                          |  |                                     |  |                 |  | 
|(Samuel H. Fuller)        |  |                                     |  |                 |  | 
|                          |  |                                     |  |                 |  | 
|/s/ Seymour
  E. Liebman  |  | Director                            |  | June 26,
  2006 |  | 
|                          |  |                                     |  |                 |  | 
|(Seymour E. Liebman)      |  |                                     |  |                 |  | 
|                          |  |                                     |  |                 |  | 
|/s/ Robert
  G. McKelvey  |  | Director                            |  | June 26,
  2006 |  | 
|                          |  |                                     |  |                 |  | 
|(Robert G. McKelvey)      |  |                                     |  |                 |  | 
|                          |  |                                     |  |                 |  | 
|/s/ Robert
  B. Taylor    |  | Director                            |  | June 26,
  2006 |  | 
|                          |  |                                     |  |                 |  | 
|(Robert B. Taylor)        |  |                                     |  |                 |  | 
|                          |  |                                     |  |                 |  | 
|/s/ Carol P.
  Wallace    |  | Director                            |  | June 26,
  2006 |  | 
|                          |  |                                     |  |                 |  | 
|(Carol P. Wallace)        |  |                                     |  |                 |  | 
|                          |  |                                     |  |                 |  | 
|/s/ Bruce W.
  Worster    |  | Director                            |  | June 26,
  2006 |  | 
|                          |  |                                     |  |                 |  | 
|(Bruce W. Worster)        |  |                                     |  |                 |  | 

31

---



ZYGO
CORPORATION AND CONSOLIDATED SUBSIDIARIES

Index
to Financial Statements and Schedule

|            |  |                                                                                                    
|----------- |  | ---------------------------------------------------------------------------------------------------
|Page        |  |                                                                                                    
|            |  |                                                                                                    
|F-2 to F3   |  | Reports of Independent Registered Public
  Accounting Firm                                         
|            |  |                                                                                                    
|F-5         |  | Consolidated balance sheets at June 30, 2005 and 2004                                              
|            |  |                                                                                                    
|F-6         |  | Consolidated statements of operations for the years ended
  June 30, 2005, 2004, and 2003          
|            |  |                                                                                                    
|F-7         |  | Consolidated statements of stockholders equity for the years
  ended June 30, 2005, 2004, and 2003
|            |  |                                                                                                    
|F-8         |  | Consolidated statements of cash flows for the years ended
  June 30, 2005, 2004, and 2003          
|            |  |                                                                                                    
|F-9 to F-29 |  | Notes to consolidated financial statements                                                         
|            |  |                                                                                                    
|            |  | Consolidated
  Schedule                                                                            
|            |  |                                                                                                    
|S-1         |  | Report of Independent Registered Public Accounting Firm on Schedule
  II                           
|            |  |                                                                                                    
|S-2         |  | 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

To the Board
of Directors and Stockholders of Zygo Corporation

We have
audited the accompanying consolidated balance sheets of Zygo Corporation and
subsidiaries as of June 30, 2005 and 2004, and the related consolidated
statements of operations, stockholders equity, and cash flows for each of the
years in the three-year period ended June 30, 2005. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our 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 2004, and the results of their operations and their
cash flows for each of the years in the three-year period ended June 30, 2005,
in conformity with U.S. generally accepted accounting principles.

As discussed
in note 2 to the consolidated financial statements, the Company has restated
its consolidated financial statements as of June 30, 2005 and 2004 and for each
of the years in the three-year period ended June 30, 2005.

We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Zygo Corporations
internal control over financial reporting as of June 30, 2005, based on
criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated September
7, 2005, except as to the third, fourth, and fifth paragraphs of Report of
Management on Zygo Corporations Internal Control Over Financial Reporting
(Restated), which are as of June 20, 2006, expressed an unqualified opinion on
managements assessment of, and an adverse opinion on the effective operation
of, internal control over financial reporting as of June 30, 2005.

/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 - 2

---



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board
of Directors and Stockholders of Zygo Corporation

We have
audited managements assessment, included in the accompanying Report of
Management on Zygo Corporations Internal Control Over Financial Reporting
(Restated) under Item 9A(b), that Zygo Corporation did not maintain effective
internal control over financial reporting as of June 30, 2005, because of the
effect of a material weakness identified in managements assessment, based on
criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Zygo Corporations management
is responsible 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
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 audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit 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 audit provides a reasonable basis for our opinion.

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

Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, 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 or procedures may deteriorate.

A material
weakness is a control deficiency, or combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected. The
following material weakness has been identified and included in managements
restated assessment as of June 30, 2005:

The Company
did not have effective policies and procedures to ensure that intercompany
accounts were properly reconciled and intercompany transactions were properly
identified and eliminated. Specifically, insufficient technical resources were
assigned to monitor inter-company accounts, and the Company had insufficient
supervision and review of the consolidation process. As a result of this
material weakness, previously issued consolidated financial statements
contained material errors. The Companys annual consolidated financial
statements for fiscal 2003, 2004, and 2005 have been restated.

As stated in
the fourth paragraph of Report of Management on Zygo Corporations Internal
Control Over Financial Reporting (Restated), managements assessment of the effectiveness
of Zygo Corporations internal control over financial reporting has been
restated to reflect the aforementioned material weakness in internal control
over financial reporting.

We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Zygo
Corporation and subsidiaries as of June 30, 2005 and 2004, and the related
consolidated statements of operations, stockholders equity and cash flows for
each of the years in the three-year period ended June 30, 2005. The
aforementioned material weakness was considered in determining the nature,
timing, and extent of audit tests applied in our audit of the 2005 consolidated
financial statements (as restated), and this report does not affect our report
dated September 7, 2005, except as to note 2 to the consolidated financial
statements which is as of June 20, 2006, which expressed an unqualified opinion
on those consolidated financial statements.

F - 3

---



In our opinion,
managements restated assessment that Zygo Corporation did not maintain
effective internal control over financial reporting as of June 30, 2005, is
fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Also, in our opinion, because of the effect of the material weakness
described above on the achievement of the objectives of the control criteria,
Zygo Corporation did not maintain effective internal control over financial
reporting as of June 30, 2005, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

/s/ KPMG LLP

Stamford,
Connecticut 
September 7, 2005, except as to the third, fourth, and fifth paragraphs of
Report of Management on Zygo Corporations Internal Control Over Financial
Reporting (Restated), which are as of June 20, 2006

F - 4

---



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

|                                                                                                                                                                              |  |               |         |               |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ------------- | - | ------- | -
|                                                                                                                                                                              |  | June 30, 2005 |         | June 30, 2004 |  
|                                                                                                                                                                              |  |               |         |               |  
|                                                                                                                                                                              |  | (Restated)    |         | (Restated)    |  
|Assets                                                                                                                                                                        |  |               |         |               |   |         |  
|Current assets:                                                                                                                                                               |  |               |         |               |   |         |  
|Cash and cash equivalents                                                                                                                                                     |  | $             | 20,949  |               | $ | 9,162   |  
|Marketable securities (note 4)                                                                                                                                                |  |               | 17,242  |               |   | 16,728  |  
|Receivables, net of allowance for doubtful accounts
of $663 and
  $707, respectively (notes 5 and 19)                                                                         |  |               | 28,124  |               |   | 26,337  |  
|Inventories (note 6)                                                                                                                                                          |  |               | 33,727  |               |   | 21,547  |  
|Prepaid expenses                                                                                                                                                              |  |               | 2,126   |               |   | 1,901   |  
|Deferred income taxes (note 17)                                                                                                                                               |  |               | 8,895   |               |   | 3,999   |  
|Assets from discontinued unit held for sale (notes
3 and 11)                                                                                                                  |  |               |        |               |   | 2,012   |  
|                                                                                                                                                                              |  |               |         |               |   |         |  
|Total current assets                                                                                                                                                          |  |               | 111,063 |               |   | 81,686  |  
|                                                                                                                                                                              |  |               |         |               |   |         |  
|Marketable securities (note 4)                                                                                                                                                |  |               | 18,711  |               |   | 8,503   |  
|Property, plant, and equipment, net (note 7)                                                                                                                                  |  |               | 31,420  |               |   | 27,433  |  
|Deferred income taxes (note 17)                                                                                                                                               |  |               | 22,333  |               |   | 32,434  |  
|Intangible assets, net (note 8)                                                                                                                                               |  |               | 5,638   |               |   | 4,999   |  
|Other assets                                                                                                                                                                  |  |               | 1,017   |               |   | 1,078   |  
|                                                                                                                                                                              |  |               |         |               |   |         |  
|Total assets                                                                                                                                                                  |  | $             | 190,182 |               | $ | 156,133 |  
|                                                                                                                                                                              |  |               |         |               |   |         |  
|                                                                                                                                                                              |  |               |         |               |   |         |  
|Liabilities and Stockholders Equity                                                                                                                                          |  |               |         |               |   |         |  
|Current liabilities:                                                                                                                                                          |  |               |         |               |   |         |  
|Accounts payable                                                                                                                                                              |  | $             | 13,510  |               | $ | 10,384  |  
|Accrued progress payments (note 19)                                                                                                                                           |  |               | 21,713  |               |   | 577     |  
|Accrued salaries and wages                                                                                                                                                    |  |               | 6,220   |               |   | 5,794   |  
|Other accrued expenses (note 10)                                                                                                                                              |  |               | 4,731   |               |   | 4,389   |  
|Income taxes payable                                                                                                                                                          |  |               | 1,510   |               |   | 2,038   |  
|                                                                                                                                                                              |  |               |         |               |   |         |  
|Total current liabilities                                                                                                                                                     |  |               | 47,684  |               |   | 23,182  |  
|                                                                                                                                                                              |  |               |         |               |   |         |  
|Other long-term liabilities                                                                                                                                                   |  |               | 96      |               |   | 350     |  
|Minority interest                                                                                                                                                             |  |               | 1,249   |               |   | 1,249   |  
|                                                                                                                                                                              |  |               |         |               |   |         |  
|Total liabilities                                                                                                                                                             |  |               | 49,029  |               |   | 24,781  |  
|                                                                                                                                                                              |  |               |         |               |   |         |  
|                                                                                                                                                                              |  |               |         |               |   |         |  
|Commitments (notes 10 and 12)                                                                                                                                                 |  |               |         |               |   |         |  
|                                                                                                                                                                              |  |               |         |               |   |         |  
|Stockholders equity (notes 14, 15, and 16):                                                                                                                                  |  |               |         |               |   |         |  
|Common stock, $.10 par value per share:
  40,000,000 shares authorized;
  18,423,026 shares issued (18,332,933 in 2004);
  17,975,821 shares outstanding (17,885,728 in 2004) |  |               | 1,842   |               |   | 1,833   |  
|Additional paid-in capital                                                                                                                                                    |  |               | 142,111 |               |   | 141,151 |  
|Retained earnings (deficit)                                                                                                                                                   |  |               | 2,567   |               |   | (6,417  | )
|Accumulated other comprehensive income
(loss):                                                                                                                                |  |               |         |               |   |         |  
|Currency translation effects                                                                                                                                                  |  |               | (112    | )             |   | 10      |  
|Net unrealized gain on marketable securities (note
4)                                                                                                                         |  |               | 32      |               |   | 62      |  
|                                                                                                                                                                              |  |               |         |               |   |         |  
|                                                                                                                                                                              |  |               | 146,440 |               |   | 136,639 |  
|Less treasury stock, at cost; 447,205 common
shares                                                                                                                           |  |               | 5,287   |               |   | 5,287   |  
|                                                                                                                                                                              |  |               |         |               |   |         |  
|Total stockholders equity                                                                                                                                                    |  |               | 141,153 |               |   | 131,352 |  
|                                                                                                                                                                              |  |               |         |               |   |         |  
|Total liabilities and stockholders equity                                                                                                                                    |  | $             | 190,182 |               | $ | 156,133 |  
|                                                                                                                                                                              |  |               |         |               |   |         |  

See
accompanying notes to consolidated financial statements.

F - 5

---



CONSOLIDATED STATEMENTS OF OPERATIONS(Thousands except per share amounts)

|                                                                                |  |                              |            |      |   |            |   |   |            |  
|------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                                                |  | Fiscal
  Year Ended June 30,
|                                                                                |  |                             
|                                                                                |  | 2005                         |            | 2004 |   | 2003       |  
|                                                                                |  |                              |            |      |   |            |  
|                                                                                |  |                              | (Restated) |      |   | (Restated) |   |   | (Restated) |  
|Net sales (note 18)                                                             |  |                              |            |      |   |            |   |   |            |  
|Products                                                                        |  | $                            | 125,732    |      | $ | 100,219    |   | $ | 83,442     |  
|Development services                                                            |  |                              | 15,617     |      |   | 16,057     |   |   | 18,779     |  
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|                                                                                |  |                              | 141,349    |      |   | 116,276    |   |   | 102,221    |  
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Cost of goods sold                                                              |  |                              |            |      |   |            |   |   |            |  
|Products                                                                        |  |                              | 76,921     |      |   | 61,063     |   |   | 52,222     |  
|Development services                                                            |  |                              | 11,138     |      |   | 12,533     |   |   | 14,930     |  
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|                                                                                |  |                              | 88,059     |      |   | 73,596     |   |   | 67,152     |  
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Gross profit                                                                    |  |                              | 53,290     |      |   | 42,680     |   |   | 35,069     |  
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Selling, general, and administrative
  expenses                                 |  |                              | 24,905     |      |   | 24,595     |   |   | 20,803     |  
|Research, development and engineering
  expenses                                |  |                              | 13,377     |      |   | 13,011     |   |   | 12,659     |  
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Operating profit                                                                |  |                              | 15,008     |      |   | 5,074      |   |   | 1,607      |  
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Other income (expense):                                                         |  |                              |            |      |   |            |   |   |            |  
|Interest income                                                                 |  |                              | 885        |      |   | 795        |   |   | 943        |  
|Miscellaneous income (expense), net                                             |  |                              | (98        | )    |   | 352        |   |   | (408       | )
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Total other income                                                              |  |                              | 787        |      |   | 1,147      |   |   | 535        |  
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Earnings from continuing operations before
  income taxes and minority interest |  |                              | 15,795     |      |   | 6,221      |   |   | 2,142      |  
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Income tax expense (note 17)                                                    |  |                              | (5,694     | )    |   | (1,660     | ) |   | (333       | )
|Minority interest                                                               |  |                              | (751       | )    |   | (335       | ) |   | (446       | )
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Earnings from continuing operations                                             |  |                              | 9,350      |      |   | 4,226      |   |   | 1,363      |  
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Discontinued TeraOptix operations, net of
  tax (notes 3 and 11)                |  |                              | (242       | )    |   | (1,263     | ) |   | (2,493     | )
|Charges related to the disposal of
  TeraOptix,                                 |  |                              |            |      |   |            |   |   |            |  
|net of tax (notes 3 and 11)                                                     |  |                              | (124       | )    |   | (6,392     | ) |   | (9,652     | )
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Loss from discontinued operations                                               |  |                              | (366       | )    |   | (7,655     | ) |   | (12,145    | )
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Net earnings (loss)                                                             |  | $                            | 8,984      |      | $ | (3,429     | ) | $ | (10,782    | )
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Basic - Earnings (loss) per share:                                              |  |                              |            |      |   |            |   |   |            |  
|Continuing operations                                                           |  | $                            | 0.52       |      | $ | 0.24       |   | $ | 0.08       |  
|Discontinued operations                                                         |  |                              | (0.02      | )    |   | (0.43      | ) |   | (0.69      | )
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Net earnings (loss)                                                             |  | $                            | 0.50       |      | $ | (0.19      | ) | $ | (0.61      | )
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Diluted - Earnings (loss) per share:                                            |  |                              |            |      |   |            |   |   |            |  
|Continuing operations                                                           |  | $                            | 0.52       |      | $ | 0.23       |   | $ | 0.08       |  
|Discontinued operations                                                         |  |                              | (0.02      | )    |   | (0.42      | ) |   | (0.69      | )
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Net earnings (loss)                                                             |  | $                            | 0.50       |      | $ | (0.19      | ) | $ | (0.61      | )
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Weighted average number of shares:                                              |  |                              |            |      |   |            |   |   |            |  
|Basic                                                                           |  |                              | 17,950     |      |   | 17,802     |   |   | 17,539     |  
|                                                                                |  |                              |            |      |   |            |   |   |            |  
|Diluted                                                                         |  |                              | 18,140     |      |   | 18,221     |   |   | 17,696     |  
|                                                                                |  |                              |            |      |   |            |   |   |            |  

See
accompanying notes to consolidated financial statements.

F - 6

---



CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY
(Thousands of dollars)

|                                                                              |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|----------------------------------------------------------------------------- |  | ----- | ------- | ----------------------- |  | ------------------------------- | - | ---------------------------------------- | ------- | -------------- | - | ---------------- | - | ----------------- | ----- |  | - | ------ | - | - | ------- | 
|                                                                              |  | Total |         | Comp.
  Income
  (Loss) |  | Retained
  Earnings
  (Deficit) |   | Accum.
  Other
  Comp.
  Income
  (Loss) |         | Common
  Stock |   | Treasury
  Stock |   | Paid-In
  Capital |      
|                                                                              |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |      
|Balance at June 30, 2002 (As previously reported)                             |  | $     | 140,005 |                         |  |                                 |   | $                                        | 7,981   |                | $ | (1,868           | ) | $                 | 1,789 |  | $ | (5,287 | ) | $ | 137,390 | 
|Restatement adjustment                                                        |  |       | 233     |                         |  |                                 |   |                                          | (187    | )              |   | 420              |   |                   |       |  |   |        |   |   |         | 
|                                                                              |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Balance at June 30, 2002 (As restated, see Note 2)                            |  |       | 140,238 |                         |  |                                 |   |                                          | 7,794   |                |   | (1,448           | ) |                   | 1,789 |  |   | (5,287 | ) |   | 137,390 | 
|Comprehensive income (loss):                                                  |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Net loss (restated)                                                           |  |       | (10,782 | )                       |  | (10,782                         | ) |                                          | (10,782 | )              |   |                  |   |                   |       |  |   |        |   |   |         | 
|                                                                              |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Other comprehensive income (loss), net of
tax                                 |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Unrealized gain on marketable securities                                      |  |       | 120     |                         |  | 120                             |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Unrealized loss on swap agreement                                             |  |       | (399    | )                       |  | (399                            | ) |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Foreign currency translation effect
(restated)                                |  |       | 268     |                         |  | 268                             |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|                                                                              |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Other comprehensive loss                                                      |  |       |         |                         |  | (11                             | ) |                                          |         |                |   | (11              | ) |                   |       |  |   |        |   |   |         | 
|                                                                              |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Comprehensive loss (restated)                                                 |  |       |         |                         |  | (10,793                         | ) |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|                                                                              |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Non-cash compensation charges related to stock options                        |  |       | 70      |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   | 70      | 
|Employee stock purchase                                                       |  |       | 731     |                         |  |                                 |   |                                          |         |                |   |                  |   |                   | 12    |  |   |        |   |   | 719     | 
|Exercise of employee stock options and related tax effect                     |  |       | 157     |                         |  |                                 |   |                                          |         |                |   |                  |   |                   | 3     |  |   |        |   |   | 154     | 
|                                                                              |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Balance at June 30, 2003 (Restated, see Note 2)                               |  |       | 130,403 |                         |  |                                 |   |                                          | (2,988  | )              |   | (1,459           | ) |                   | 1,804 |  |   | (5,287 | ) |   | 138,333 | 
|Comprehensive income (loss):                                                  |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Net loss (restated)                                                           |  |       | (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
(restated)                                |  |       | 691     |                         |  | 691                             |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|                                                                              |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Other comprehensive income                                                    |  |       |         |                         |  | 1,531                           |   |                                          |         |                |   | 1,531            |   |                   |       |  |   |        |   |   |         | 
|                                                                              |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Comprehensive loss (restated)                                                 |  |       |         |                         |  | (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 (Restated, see Note 2)                               |  |       | 131,352 |                         |  |                                 |   |                                          | (6,417  | )              |   | 72               |   |                   | 1,833 |  |   | (5,287 | ) |   | 141,151 | 
|                                                                              |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Comprehensive income (loss):                                                  |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Net earnings (restated)                                                       |  |       | 8,984   |                         |  | 8,984                           |   |                                          | 8,984   |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|                                                                              |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Other comprehensive income (loss), net of
tax                                 |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Unrealized loss on marketable securities                                      |  |       | (30     | )                       |  | (30                             | ) |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Foreign currency translation effect
(restated)                                |  |       | (122    | )                       |  | (122                            | ) |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|                                                                              |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Other comprehensive loss                                                      |  |       |         |                         |  | (152                            | ) |                                          |         |                |   | (152             | ) |                   |       |  |   |        |   |   |         | 
|                                                                              |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 
|Comprehensive income (restated)                                               |  |       |         |                         |  | 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 (Restated, see Note 2)                               |  | $     | 141,153 |                         |  |                                 |   | $                                        | 2,567   |                | $ | (80              | ) | $                 | 1,842 |  | $ | (5,287 | ) | $ | 142,111 | 
|                                                                              |  |       |         |                         |  |                                 |   |                                          |         |                |   |                  |   |                   |       |  |   |        |   |   |         | 

See accompanying notes to consolidated
financial statements.

F - 7

---



CONSOLIDATED STATEMENTS OF CASH FLOWS(Thousands of dollars)

|                                                                                                    |  |                            |         |            |   |            |   |   |         |  
|--------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | ---------- | - | ---------- | - | - | ------- | -
|                                                                                                    |  | Fiscal Year Ended June 30, |        
|                                                                                                    |  |                            |        
|                                                                                                    |  | 2005                       |         | 2004       |   | 2003       |  
|                                                                                                    |  |                            |         |            |   |            |  
|                                                                                                    |  | (Restated)                 |         | (Restated) |   | (Restated) |  
|Cash provided by (used for) operating
  activities:                                                 |  |                            |         |            |   |            |   |   |         |  
|Net earnings (loss)                                                                                 |  | $                          | 8,984   |            | $ | (3,429     | ) | $ | (10,782 | )
|Adjustments to reconcile net earnings
  (loss) to cash provided by (used for) operating activities: |  |                            |         |            |   |            |   |   |         |  
|Loss from discontinued operations                                                                   |  |                            | 366     |            |   | 7,655      |   |   | 12,145  |  
|Depreciation and amortization                                                                       |  |                            | 5,880   |            |   | 5,717      |   |   | 5,623   |  
|Loss on disposal and impairment of assets                                                           |  |                            | 209     |            |   | 525        |   |   | 489     |  
|Deferred income taxes                                                                               |  |                            | 5,333   |            |   | (436       | ) |   | (530    | )
|Other non-cash items                                                                                |  |                            | 97      |            |   | 191        |   |   | 70      |  
|Changes in operating accounts:                                                                      |  |                            |         |            |   |            |   |   |         |  
|Receivables                                                                                         |  |                            | (1,630  | )          |   | (13,401    | ) |   | 7,528   |  
|Inventories                                                                                         |  |                            | (11,650 | )          |   | (2,796     | ) |   | 4,353   |  
|Prepaid expenses                                                                                    |  |                            | (202    | )          |   | (122       | ) |   | (367    | )
|Accounts payable, accrued expenses, and
  taxes payable                                             |  |                            | 24,109  |            |   | 7,513      |   |   | 3,239   |  
|Minority interest                                                                                   |  |                            | 751     |            |   | 335        |   |   | 447     |  
|                                                                                                    |  |                            |         |            |   |            |   |   |         |  
|Net cash provided by continuing
operations                                                          |  |                            | 32,247  |            |   | 1,752      |   |   | 22,215  |  
|Net cash used for discontinued operations                                                           |  |                            | (423    | )          |   | (1,944     | ) |   | (4,607  | )
|                                                                                                    |  |                            |         |            |   |            |   |   |         |  
|Net cash provided by (used for) operating
  activities                                              |  |                            | 31,824  |            |   | (192       | ) |   | 17,608  |  
|                                                                                                    |  |                            |         |            |   |            |   |   |         |  
|Cash provided by (used for) investing activities:                                                   |  |                            |         |            |   |            |   |   |         |  
|Additions to property, plant, and
equipment                                                         |  |                            | (9,987  | )          |   | (7,585     | ) |   | (5,037  | )
|Purchase of marketable securities                                                                   |  |                            | (28,389 | )          |   | (25,433    | ) |   | (66,317 | )
|Additions to intangibles and other assets                                                           |  |                            | (1,332  | )          |   | (1,138     | ) |   | (957    | )
|Restricted cash with interest from sale of
  Automation Systems Group                               |  |                            |        |            |   |           |   |   | 1,225   |  
|Proceeds from the sale of marketable
  securities and other assets                                  |  |                            | 55      |            |   | 1,001      |   |   |        |  
|Proceeds from maturity of marketable
  securities                                                   |  |                            | 17,556  |            |   | 40,025     |   |   | 51,150  |  
|                                                                                                    |  |                            |         |            |   |            |   |   |         |  
|Net cash provided by (used for) continuing
  operations                                             |  |                            | (22,097 | )          |   | 6,870      |   |   | (19,936 | )
|Net cash provided by discontinued
  operations                                                      |  |                            | 1,918   |            |   | 80         |   |   | 2,841   |  
|                                                                                                    |  |                            |         |            |   |            |   |   |         |  
|Net cash provided by (used for) investing
  activities                                              |  |                            | (20,179 | )          |   | 6,950      |   |   | (17,095 | )
|                                                                                                    |  |                            |         |            |   |            |   |   |         |  
|Cash provided by (used for) financing
  activities:                                                 |  |                            |         |            |   |            |   |   |         |  
|Dividend payments to minority interest                                                              |  |                            | (751    | )          |   | (235       | ) |   | (268    | )
|Employee stock purchase                                                                             |  |                            | 667     |            |   | 578        |   |   | 731     |  
|Exercise of employee stock options                                                                  |  |                            | 226     |            |   | 1,526      |   |   | 157     |  
|                                                                                                    |  |                            |         |            |   |            |   |   |         |  
|Net cash provided by continuing
operations                                                          |  |                            | 142     |            |   | 1,869      |   |   | 620     |  
|Net cash used for discontinued operations                                                           |  |                            |        |            |   | (11,374    | ) |   | (837    | )
|                                                                                                    |  |                            |         |            |   |            |   |   |         |  
|Net cash provided by (used for) financing
  activities                                              |  |                            | 142     |            |   | (9,505     | ) |   | (217    | )
|                                                                                                    |  |                            |         |            |   |            |   |   |         |  
|Net increase (decrease) in cash and cash
  equivalents                                              |  |                            | 11,787  |            |   | (2,747     | ) |   | 296     |  
|Cash and cash equivalents, beginning of
  year                                                      |  |                            | 9,162   |            |   | 11,909     |   |   | 11,613  |  
|                                                                                                    |  |                            |         |            |   |            |   |   |         |  
|Cash and cash equivalents, end of year                                                              |  | $                          | 20,949  |            | $ | 9,162      |   | $ | 11,909  |  
|                                                                                                    |  |                            |         |            |   |            |   |   |         |  

See accompanying
notes to consolidated financial statements.

F - 8

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2005, 2004, and 2003 (Dollars in thousands, except for per share
amounts)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Description of Operations and Principles of
Consolidation

Zygo
Corporation is a worldwide 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 Equivalents

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

Marketable Securities

We consider
investments in securities with maturities at the date of purchase in excess of
three months as marketable securities. Marketable securities consist primarily
of corporate bonds, government agency securities, and tax-exempt bonds. All
securities held by us at June 30, 2005 and 2004, were classified as held to
maturity and recorded at cost. Unrealized holding gains and losses, net of the
related tax effect, on available-for-sale securities are excluded from earnings
and are reported as a separate component of stockholders equity until
realized.

Inventories

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

Property, Plant, and Equipment

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

Intangible Assets

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

Valuation of Long-Lived Assets

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

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

F - 9

---



Income Taxes

Income taxes
are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.

Revenue Recognition

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

Research and
development costs are expensed as incurred.

Earnings Per Share

Basic 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, 2005 |            | June 30, 2004 |  | June 30, 2003 | 
|                                              |  |               |            |               |  |               | 
|                                              |  |               |            |               |  |               | 
|Weighted average shares
  outstanding         |  |               | 17,950,423 |               |  | 17,801,588    |  |  | 17,539,078 | 
|Dilutive effect of stock
  options            |  |               | 189,750    |               |  | 419,782       |  |  | 157,360    | 
|                                              |  |               |            |               |  |               |  |  |            | 
|Diluted weighted average
  shares outstanding |  |               | 18,140,173 |               |  | 18,221,370    |  |  | 17,696,438 | 
|                                              |  |               |            |               |  |               |  |  |            | 

F - 10

---



Stock Based Compensation

We have three
stock-based compensation plans, which are described in note 15. We apply
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations in accounting for our plans.
Since all options were granted with an exercise price equal to the fair market
value on the date of grant, no compensation cost has been recognized for our
fixed option plans. Pro forma information regarding net earnings (loss) and net
earnings (loss) per share is required by SFAS No. 123, Accounting for
Stock-Based Compensation, which requires that the information be determined as
if we had accounted for our stock options granted in fiscal years beginning
after December 15, 1994 under the fair value method of the statement.

The fair value
of options at date of grant was estimated using the Black-Scholes model. Our
pro forma information is as follows:

|                                                                                                                                              |  |            |        |            |   |            |   |   |         |   | 
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- | ------ | ---------- | - | ---------- | - | - | ------- | - | 
|                                                                                                                                              |  | June 30,   |        | June 30,   |   | June 30,   |   |  
|                                                                                                                                              |  | 2005       |        | 2004       |   | 2003       |   |  
|                                                                                                                                              |  |            |        |            |   |            |   |  
|                                                                                                                                              |  | (Restated) |        | (Restated) |   | (Restated) |   |  
|                                                                                                                                              |  |            |        |            |   |            |   |  
|Net earnings (loss), as reported                                                                                                              |  | $          | 8,984  |            | $ | (3,429     | ) | $ | (10,782 | ) | 
|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     | ) |   | (5,209  | ) | 
|                                                                                                                                              |  |            |        |            |   |            |   |   |         |   | 
|Pro forma net earnings (loss)                                                                                                                 |  | $          | 6,465  |            | $ | (9,215     | ) | $ | (15,991 | ) | 
|                                                                                                                                              |  |            |        |            |   |            |   |   |         |   | 
|                                                                                                                                              |  |            |        |            |   |            |   |   |         |   | 
|Net earnings (loss) per share                                                                                                                 |  |            |        |            |   |            |   |   |         |   | 
|Basic - as reported                                                                                                                           |  | $          | 0.50   |            | $ | (0.19      | ) | $ | (0.61   | ) | 
|                                                                                                                                              |  |            |        |            |   |            |   |   |         |   | 
|Basic - pro forma                                                                                                                             |  | $          | 0.36   |            | $ | (0.52      | ) | $ | (0.91   | ) | 
|                                                                                                                                              |  |            |        |            |   |            |   |   |         |   | 
|                                                                                                                                              |  |            |        |            |   |            |   |   |         |   | 
|Diluted - as reported                                                                                                                         |  | $          | 0.50   |            | $ | (0.19      | ) | $ | (0.61   | ) | 
|                                                                                                                                              |  |            |        |            |   |            |   |   |         |   | 
|Diluted - pro forma                                                                                                                           |  | $          | 0.36   |            | $ | (0.51      | ) | $ | (0.90   | ) | 
|                                                                                                                                              |  |            |        |            |   |            |   |   |         |   | 

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

Fair Value of Financial Instruments

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

Use of Estimates

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

Reclassifications

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

Recently Issued Accounting Pronouncements

The Financial
Accounting Standards Board (FASB) issued SFAS No. 123R, Share-Based Payment
(Revised 2004). This statement requires companies to measure and recognize
compensation expense for all share based payments based on their fair value.
The standard becomes effective for interim or annual periods beginning after June
15, 2005. We will adopt SFAS No. 123R in the first quarter of fiscal 2006 using
the modified prospective method. While we are still evaluating the impact of
SFAS No. 123R on our consolidated financial position and results of operations,
our estimate of compensation expense related to share based payments to
employees is not expected to exceed $2.5 million in fiscal 2006. SFAS No. 123R
will primarily result in a change in our method of measuring and recognizing
the fair value of our share-based grants, estimating forfeitures for all
unvested awards, and accounting for awards to retirement eligible employees. In
addition, changes made to our employee stock purchase plan for periods
beginning July 1, 2005 will render the plan non-compensatory in accordance with
SFAS No. 123R.

F - 11

---



The FASB
issued two FASB Staff Positions (FSP) that provide accounting guidance on how
companies should account for the effects of the American Jobs Creation Act of
2004 that was signed into law on October 22, 2004. FSP No. FAS 109-1,
Application of FASB Statement No. 109, Accounting for Income Taxes, to the
Tax Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004, states that the manufacturers deduction provided for
under this legislation should be accounted for as a special deduction instead
of a tax rate change. FSP No. FAS 109-2, Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Provision within the American Jobs
Creation Act of 2004, allows a company additional time to evaluate the effects
of the legislation on any plan for reinvestment or repatriation of foreign
earnings for purposes of applying SFAS No. 109, Accounting for Income Taxes.
These FSPs were effective as of December 21, 2004 and have no material effect
on our consolidated financial position and results of operations.

The FASB
issued SFAS No. 151, Inventory Costs: an amendment of ARB No. 43, Chapter 4,
Inventory Pricing, June 1953. This statement eliminates the so abnormal
criteria in Accounting Research Bulletin (ARB) No. 43 and replaces it with a
requirement that abnormal freight, handling costs, and amounts of wasted
materials (spoilage) should be treated as current-period costs. The standard
becomes effective for annual periods beginning after June 15, 2005. The Company
is currently evaluating the impact of SFAS No. 151 on its consolidated
financial position and results of operations.

The FASB
issued SFAS No. 153, Exchanges of Nonmonetary Assets, that amends Opinion 29
to eliminate the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. The adoption of SFAS No. 153 in
fiscal 2006 is not expected to have a material effect on our financial position
or results of operations.

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 will apply
to accounting changes made after July 1, 2006.

In June 2005,
FASB issued FSP No. 143-1, Accounting for Electronic Equipment Waste
Obligations, that provides guidance on how commercial users and producers of
electronic equipment should recognize and measure asset retirement obligations
associated with the European Directive 2002/96/EC on Waste Electrical and
Electronic Equipment. The adoption of FASB FSP No. 143-1 in the current quarter
did not have a material impact on our consolidated financial statements.

NOTE 2: RESTATEMENT OF FINANCIAL STATEMENTS

We are
restating our consolidated financial statements for fiscal years 2005, 2004,
and 2003 in this Form 10-K/A for corrections in the accounting of intercompany
transactions from certain of our foreign operations. In addition, certain
disclosures in notes 1, 5, 17, and 18 to the consolidated financial statements
contained in this report are being restated to reflect the corrections. Our
restated consolidated financial statements included in this Form 10-K/A also
include disclosure of restated unaudited quarterly results for fiscal 2005 and
2004 in note 21. The corrections are a result of our failure to identify and
eliminate certain intercompany 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. The tax effects on the corrections
and other minor adjustments have also been reflected in these restatements. The
fiscal 2002 and 2001 adjustments were insignificant and were corrected through
an adjustment to retained earnings and currency translation effects in the
accumulated other comprehensive income balance of the stockholders equity
section of the balance sheet as of July 1, 2002.

The impact of
the corrections on the consolidated balance sheets and consolidated statements
of operations is shown in the accompanying tables. Balance sheet adjustments
for June 30, 2005 and 2004 primarily represent adjustments to retained earnings
and currency translation effects to correct the balance sheets for overstating
revenues and failing to properly eliminate intercompany revenues resulting in
an improper entry to currency translation effects. In addition, deferred taxes
were adjusted to reflect the income tax effects of the adjustments noted for
overstating revenues. The balance sheets also reflect minor adjustments to correct
other miscellaneous items identified in the course of the review of the
intercompany transactions, none of which were individually significant.
Adjustments to the statement of operations for fiscal years ended June 30,
2005, 2004, and 2003 primarily represent adjustments to sales to correct the
overstatement of revenues and failing to properly eliminate intercompany
revenues. Income tax expense was adjusted to reflect the income tax effects of
the adjustments noted for overstating revenues. In addition, the statements of
operations reflect minor adjustments to correct other miscellaneous items
identified in the course of the review of the intercompany transactions, none
of which was significant individually or in the aggregate.

F - 12

---



The following table presents the effect of
the Restatement on the consolidated balance sheet at June 30, 2005:

|                                                              |  |                            |         |             |   |             |   |   |         |  
|------------------------------------------------------------- |  | -------------------------- | ------- | ----------- | - | ----------- | - | - | ------- | -
|                                                              |  | As
  previously
  reported |         | Adjustments |   | As Restated |  
|                                                              |  |                            |         |             |   |             |  
|Assets                                                        |  |                            |         |             |   |             |   |   |         |  
|Current assets:                                               |  |                            |         |             |   |             |   |   |         |  
|Cash and cash equivalents                                     |  | $                          | 20,949  |             | $ |            |   | $ | 20,949  |  
|Marketable securities                                         |  |                            | 17,242  |             |   |            |   |   | 17,242  |  
|Receivables, net of allowance for doubtful
  accounts of $663 |  |                            | 28,125  |             |   | (1          | ) |   | 28,124  |  
|Inventories                                                   |  |                            | 33,727  |             |   |            |   |   | 33,727  |  
|Prepaid expenses                                              |  |                            | 2,140   |             |   | (14         | ) |   | 2,126   |  
|Deferred income taxes                                         |  |                            | 8,895   |             |   |            |   |   | 8,895   |  
|Assets from discontinued unit held for
sale                   |  |                            |        |             |   |            |   |   |        |  
|                                                              |  |                            |         |             |   |             |   |   |         |  
|Total current assets                                          |  |                            | 111,078 |             |   | (15         | ) |   | 111,063 |  
|                                                              |  |                            |         |             |   |             |   |   |         |  
|Marketable
  securities                                       |  |                            | 18,711  |             |   |            |   |   | 18,711  |  
|Property,
  plant, and equipment, net                         |  |                            | 31,420  |             |   |            |   |   | 31,420  |  
|Deferred
  income taxes                                       |  |                            | 21,476  |             |   | 857         |   |   | 22,333  |  
|Intangible
  assets, net                                      |  |                            | 5,638   |             |   |            |   |   | 5,638   |  
|Other assets                                                  |  |                            | 1,017   |             |   |            |   |   | 1,017   |  
|                                                              |  |                            |         |             |   |             |   |   |         |  
|Total assets                                                  |  | $                          | 189,340 |             | $ | 842         |   | $ | 190,182 |  
|                                                              |  |                            |         |             |   |             |   |   |         |  
|                                                              |  |                            |         |             |   |             |   |   |         |  
|Liabilities and Stockholders Equity                          |  |                            |         |             |   |             |   |   |         |  
|Current liabilities:                                          |  |                            |         |             |   |             |   |   |         |  
|Accounts payable                                              |  | $                          | 13,510  |             | $ |            |   | $ | 13,510  |  
|Accrued progress payments                                     |  |                            | 21,846  |             |   | (133        | ) |   | 21,713  |  
|Accrued salaries and wages                                    |  |                            | 6,220   |             |   |            |   |   | 6,220   |  
|Other accrued expenses                                        |  |                            | 4,738   |             |   | (7          | ) |   | 4,731   |  
|Income taxes payable                                          |  |                            | 1,510   |             |   |            |   |   | 1,510   |  
|                                                              |  |                            |         |             |   |             |   |   |         |  
|Total current liabilities                                     |  |                            | 47,824  |             |   | (140        | ) |   | 47,684  |  
|                                                              |  |                            |         |             |   |             |   |   |         |  
|Other
  long-term liabilities                                 |  |                            | 96      |             |   |            |   |   | 96      |  
|Minority
  interest                                           |  |                            | 1,249   |             |   |            |   |   | 1,249   |  
|                                                              |  |                            |         |             |   |             |   |   |         |  
|Total
liabilities                                             |  |                            | 49,169  |             |   | (140        | ) |   | 49,029  |  
|                                                              |  |                            |         |             |   |             |   |   |         |  
|                                                              |  |                            |         |             |   |             |   |   |         |  
|Commitments                                                   |  |                            |         |             |   |             |   |   |         |  
|                                                              |  |                            |         |             |   |             |   |   |         |  
|Stockholders equity:                                         |  |                            |         |             |   |             |   |   |         |  
|Common stock, $.10 par value per share:                       |  |                            | 1,842   |             |   |            |   |   | 1,842   |  
|Additional paid-in capital                                    |  |                            | 142,111 |             |   |            |   |   | 142,111 |  
|Retained earnings                                             |  |                            | 3,814   |             |   | (1,247      | ) |   | 2,567   |  
|Accumulated other comprehensive income
  (loss):              |  |                            |         |             |   |             |   |   |         |  
|Currency translation effects                                  |  |                            | (2,341  | )           |   | 2,229       |   |   | (112    | )
|Net unrealized gain on marketable
  securities                |  |                            | 32      |             |   |            |   |   | 32      |  
|                                                              |  |                            |         |             |   |             |   |   |         |  
|                                                              |  |                            | 145,458 |             |   | 982         |   |   | 146,440 |  
|Less treasury stock, at cost; 447,205
  common shares         |  |                            | 5,287   |             |   |            |   |   | 5,287   |  
|                                                              |  |                            |         |             |   |             |   |   |         |  
|Total stockholders equity                                    |  |                            | 140,171 |             |   | 982         |   |   | 141,153 |  
|                                                              |  |                            |         |             |   |             |   |   |         |  
|Total liabilities and stockholders equity                    |  | $                          | 189,340 |             | $ | 842         |   | $ | 190,182 |  
|                                                              |  |                            |         |             |   |             |   |   |         |  

F - 13

---



The following table presents the effect of the Restatement on
the consolidated balance sheet at June 30, 2004:

|                                                            |  |                          |         |             |   |             |   |   |         |  
|----------------------------------------------------------- |  | ------------------------ | ------- | ----------- | - | ----------- | - | - | ------- | -
|                                                            |  | As previously
  reported |         | Adjustments |   | As Restated |  
|                                                            |  |                          |         |             |   |             |  
|Assets                                                      |  |                          |         |             |   |             |   |   |         |  
|Current assets:                                             |  |                          |         |             |   |             |   |   |         |  
|Cash and cash equivalents                                   |  | $                        | 9,162   |             | $ |            |   | $ | 9,162   |  
|Marketable securities                                       |  |                          | 16,728  |             |   |            |   |   | 16,728  |  
|Receivables, net of allowance for doubtful accounts
of $707 |  |                          | 26,338  |             |   | (1          | ) |   | 26,337  |  
|Inventories                                                 |  |                          | 21,547  |             |   |            |   |   | 21,547  |  
|Prepaid expenses                                            |  |                          | 1,915   |             |   | (14         | ) |   | 1,901   |  
|Deferred income taxes                                       |  |                          | 3,999   |             |   |            |   |   | 3,999   |  
|Assets from discontinued unit held for
sale                 |  |                          | 2,012   |             |   |            |   |   | 2,012   |  
|                                                            |  |                          |         |             |   |             |   |   |         |  
|Total current assets                                        |  |                          | 81,701  |             |   | (15         | ) |   | 81,686  |  
|                                                            |  |                          |         |             |   |             |   |   |         |  
|Marketable securities                                       |  |                          | 8,503   |             |   |            |   |   | 8,503   |  
|Property, plant, and
  equipment, net                       |  |                          | 27,433  |             |   |            |   |   | 27,433  |  
|Deferred income taxes                                       |  |                          | 31,738  |             |   | 696         |   |   | 32,434  |  
|Intangible assets, net                                      |  |                          | 4,999   |             |   |            |   |   | 4,999   |  
|Other assets                                                |  |                          | 1,078   |             |   |            |   |   | 1,078   |  
|                                                            |  |                          |         |             |   |             |   |   |         |  
|Total
  assets                                              |  | $                        | 155,452 |             | $ | 681         |   | $ | 156,133 |  
|                                                            |  |                          |         |             |   |             |   |   |         |  
|                                                            |  |                          |         |             |   |             |   |   |         |  
|Liabilities
  and Stockholders Equity                      |  |                          |         |             |   |             |   |   |         |  
|Current liabilities:                                        |  |                          |         |             |   |             |   |   |         |  
|Accounts payable                                            |  | $                        | 10,384  |             | $ |            |   | $ | 10,384  |  
|Accrued progress payments                                   |  |                          | 615     |             |   | (38         | ) |   | 577     |  
|Accrued salaries and wages                                  |  |                          | 5,794   |             |   |            |   |   | 5,794   |  
|Other accrued expenses                                      |  |                          | 4,389   |             |   |            |   |   | 4,389   |  
|Income taxes payable                                        |  |                          | 2,038   |             |   |            |   |   | 2,038   |  
|                                                            |  |                          |         |             |   |             |   |   |         |  
|Total current liabilities                                   |  |                          | 23,220  |             |   | (38         | ) |   | 23,182  |  
|                                                            |  |                          |         |             |   |             |   |   |         |  
|Other long-term liabilities                                 |  |                          | 350     |             |   |            |   |   | 350     |  
|Minority interest                                           |  |                          | 1,238   |             |   | 11          |   |   | 1,249   |  
|                                                            |  |                          |         |             |   |             |   |   |         |  
|Total
  liabilities                                         |  |                          | 24,808  |             |   | (27         | ) |   | 24,781  |  
|                                                            |  |                          |         |             |   |             |   |   |         |  
|                                                            |  |                          |         |             |   |             |   |   |         |  
|Commitments                                                 |  |                          |         |             |   |             |   |   |         |  
|                                                            |  |                          |         |             |   |             |   |   |         |  
|Stockholders
  equity:                                     |  |                          |         |             |   |             |   |   |         |  
|Common stock, $.10 par value per share:                     |  |                          | 1,833   |             |   |            |   |   | 1,833   |  
|Additional paid-in capital                                  |  |                          | 141,151 |             |   |            |   |   | 141,151 |  
|Accumulated deficit                                         |  |                          | (5,996  | )           |   | (421        | ) |   | (6,417  | )
|Accumulated other comprehensive income income
(loss):       |  |                          |         |             |   |             |   |   |         |  
|Currency translation effects                                |  |                          | (1,119  | )           |   | 1,129       |   |   | 10      |  
|Net unrealized gain on marketable
securities                |  |                          | 62      |             |   |            |   |   | 62      |  
|                                                            |  |                          |         |             |   |             |   |   |         |  
|                                                            |  |                          | 135,931 |             |   | 708         |   |   | 136,639 |  
|Less treasury stock, at cost; 447,205 common
shares         |  |                          | 5,287   |             |   |            |   |   | 5,287   |  
|                                                            |  |                          |         |             |   |             |   |   |         |  
|Total stockholders equity                                  |  |                          | 130,644 |             |   | 708         |   |   | 131,352 |  
|                                                            |  |                          |         |             |   |             |   |   |         |  
|Total
  liabilities and stockholders equity                |  | $                        | 155,452 |             | $ | 681         |   | $ | 156,133 |  
|                                                            |  |                          |         |             |   |             |   |   |         |  

F - 14

---



The following
table presents the effect of the Restatement on the fiscal 2005 consolidated
statement of operations:

|                                                                                |  |                              |         |             |   |             |   |   |         |  
|------------------------------------------------------------------------------- |  | ---------------------------- | ------- | ----------- | - | ----------- | - | - | ------- | -
|                                                                                |  | As 
  previously 
  reported |         | Adjustments |   | As Restated |  
|                                                                                |  |                              |         |             |   |             |  
|Net sales                                                                       |  |                              |         |             |   |             |   |   |         |  
|Products                                                                        |  | $                            | 126,550 |             | $ | (818        | ) | $ | 125,732 |  
|Development services                                                            |  |                              | 15,617  |             |   |            |   |   | 15,617  |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|                                                                                |  |                              | 142,167 |             |   | (818        | ) |   | 141,349 |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Cost of
  goods sold                                                            |  |                              |         |             |   |             |   |   |         |  
|Products                                                                        |  |                              | 76,882  |             |   | 39          |   |   | 76,921  |  
|Development services                                                            |  |                              | 11,138  |             |   |            |   |   | 11,138  |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|                                                                                |  |                              | 88,020  |             |   | 39          |   |   | 88,059  |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Gross profit                                                                    |  |                              | 54,147  |             |   | (857        | ) |   | 53,290  |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Selling,
  general, and administrative expenses                                 |  |                              | 24,862  |             |   | 43          |   |   | 24,905  |  
|Research,
  development and engineering expenses                                |  |                              | 13,377  |             |   |            |   |   | 13,377  |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Operating profit                                                                |  |                              | 15,908  |             |   | (900        | ) |   | 15,008  |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Other income
  (expense):                                                       |  |                              |         |             |   |             |   |   |         |  
|Interest income                                                                 |  |                              | 885     |             |   |            |   |   | 885     |  
|Miscellaneous income
(expense), net                                             |  |                              | 1       |             |   | (99         | ) |   | (98     | )
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Total other income
(expense)                                                    |  |                              | 886     |             |   | (99         | ) |   | 787     |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Earnings from continuing
operations before income taxes and
  minority interest |  |                              | 16,794  |             |   | (999        | ) |   | 15,795  |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Income tax expense                                                              |  |                              | (5,856  | )           |   | 162         |   |   | (5,694  | )
|Minority interest                                                               |  |                              | (762    | )           |   | 11          |   |   | (751    | )
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Earnings from continuing operations                                             |  |                              | 10,176  |             |   | (826        | ) |   | 9,350   |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Discontinued TeraOptix operations, net of
  tax                                 |  |                              | (242    | )           |   |            |   |   | (242    | )
|Charges related to the disposal of TeraOptix,
net of tax                        |  |                              | (124    | )           |   |            |   |   | (124    | )
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Loss from discontinued
operations                                               |  |                              | (366    | )           |   |            |   |   | (366    | )
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Net earnings                                                                    |  | $                            | 9,810   |             | $ | (826        | ) | $ | 8,984   |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Basic - Earnings (loss) per share:                                              |  |                              |         |             |   |             |   |   |         |  
|Continuing
operations                                                           |  | $                            | 0.57    |             | $ | (0.05       | ) | $ | 0.52    |  
|Discontinued
operations                                                         |  |                              | (0.02   | )           |   |            |   |   | (0.02   | )
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Net
  earnings                                                                  |  | $                            | 0.55    |             | $ | (0.05       | ) | $ | 0.50    |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Diluted - Earnings (loss) per share:                                            |  |                              |         |             |   |             |   |   |         |  
|Continuing
operations                                                           |  | $                            | 0.56    |             | $ | (0.04       | ) | $ | 0.52    |  
|Discontinued
operations                                                         |  |                              | (0.02   | )           |   |            |   |   | (0.02   | )
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Net
  earnings                                                                  |  | $                            | 0.54    |             | $ | (0.04       | ) | $ | 0.50    |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Weighted average number of shares:                                              |  |                              |         |             |   |             |   |   |         |  
|Basic                                                                           |  |                              | 17,950  |             |   | 17,950      |   |   | 17,950  |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  
|Diluted                                                                         |  |                              | 18,140  |             |   | 18,140      |   |   | 18,140  |  
|                                                                                |  |                              |         |             |   |             |   |   |         |  

F - 15

---



The following table presents the effect of
the Restatement on the fiscal 2004 consolidated statement of operations:

|                                                                                |  |                            |         |             |   |               |   |   |         |  
|------------------------------------------------------------------------------- |  | -------------------------- | ------- | ----------- | - | ------------- | - | - | ------- | -
|                                                                                |  | As
  previously
  reported |         | Adjustments |   | As
  Restated |  
|                                                                                |  |                            |         |             |   |               |  
|Net sales                                                                       |  |                            |         |             |   |               |   |   |         |  
|Products                                                                        |  | $                          | 100,585 |             | $ | (366          | ) | $ | 100,219 |  
|Development services                                                            |  |                            | 16,057  |             |   |              |   |   | 16,057  |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|                                                                                |  |                            | 116,642 |             |   | (366          | ) |   | 116,276 |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Cost of
  goods sold                                                            |  |                            |         |             |   |               |   |   |         |  
|Products                                                                        |  |                            | 61,044  |             |   | 19            |   |   | 61,063  |  
|Development services                                                            |  |                            | 12,533  |             |   |              |   |   | 12,533  |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|                                                                                |  |                            | 73,577  |             |   | 19            |   |   | 73,596  |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Gross profit                                                                    |  |                            | 43,065  |             |   | (385          | ) |   | 42,680  |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Selling, general, and administrative
  expenses                                 |  |                            | 24,595  |             |   |              |   |   | 24,595  |  
|Research, development and engineering
  expenses                                |  |                            | 13,011  |             |   |              |   |   | 13,011  |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Operating profit                                                                |  |                            | 5,459   |             |   | (385          | ) |   | 5,074   |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Other income:                                                                   |  |                            |         |             |   |               |   |   |         |  
|Interest income                                                                 |  |                            | 795     |             |   |              |   |   | 795     |  
|Miscellaneous income,
net                                                       |  |                            | 169     |             |   | 183           |   |   | 352     |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Total other income                                                              |  |                            | 964     |             |   | 183           |   |   | 1,147   |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Earnings from continuing
operations before income taxes and
  minority interest |  |                            | 6,423   |             |   | (202          | ) |   | 6,221   |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Income tax expense                                                              |  |                            | (1,863  | )           |   | 203           |   |   | (1,660  | )
|Minority interest                                                               |  |                            | (312    | )           |   | (23           | ) |   | (335    | )
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Earnings from continuing operations                                             |  |                            | 4,248   |             |   | (22           | ) |   | 4,226   |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Discontinued TeraOptix operations, net of
  tax                                 |  |                            | (1,263  | )           |   |              |   |   | (1,263  | )
|Charges related to the disposal of
  TeraOptix, net of tax                      |  |                            | (6,392  | )           |   |              |   |   | (6,392  | )
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Loss from discontinued
operations                                               |  |                            | (7,655  | )           |   |              |   |   | (7,655  | )
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Net loss                                                                        |  | $                          | (3,407  | )           | $ | (22           | ) | $ | (3,429  | )
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Basic - Earnings (loss) per share:                                              |  |                            |         |             |   |               |   |   |         |  
|Continuing
operations                                                           |  | $                          | 0.24    |             | $ | (0.00         | ) | $ | 0.24    |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Discontinued
operations                                                         |  |                            | (0.43   | )           |   |              |   |   | (0.43   | )
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Net
  earnings (loss)                                                           |  | $                          | (0.19   | )           | $ | (0.00         | ) | $ | (0.19   | )
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Diluted - Earnings (loss) per share:                                            |  |                            |         |             |   |               |   |   |         |  
|Continuing
operations                                                           |  | $                          | 0.23    |             | $ | (0.00         | ) | $ | 0.23    |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Discontinued
operations                                                         |  |                            | (0.42   | )           |   |              |   |   | (0.42   | )
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Net
  earnings (loss)                                                           |  | $                          | (0.19   | )           | $ | (0.00         | ) | $ | (0.19   | )
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Weighted average number of shares:                                              |  |                            |         |             |   |               |   |   |         |  
|Basic                                                                           |  |                            | 17,802  |             |   | 17,802        |   |   | 17,802  |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  
|Diluted                                                                         |  |                            | 18,221  |             |   | 18,221        |   |   | 18,221  |  
|                                                                                |  |                            |         |             |   |               |   |   |         |  

F - 16

---



The following table presents the effect of
the Restatement on the fiscal 2003 consolidated statement of operations:

|                                                                                |  |                            |         |             |   |             |   |   |         |  
|------------------------------------------------------------------------------- |  | -------------------------- | ------- | ----------- | - | ----------- | - | - | ------- | -
|                                                                                |  | As
  previously
  reported |         | Adjustments |   | As Restated |  
|                                                                                |  |                            |         |             |   |             |  
|Net sales                                                                       |  |                            |         |             |   |             |   |   |         |  
|Products                                                                        |  | $                          | 83,798  |             | $ | (356        | ) | $ | 83,442  |  
|Development services                                                            |  |                            | 18,779  |             |   |            |   |   | 18,779  |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|                                                                                |  |                            | 102,577 |             |   | (356        | ) |   | 102,221 |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Cost of goods sold                                                              |  |                            |         |             |   |             |   |   |         |  
|Products                                                                        |  |                            | 52,202  |             |   | 20          |   |   | 52,222  |  
|Development services                                                            |  |                            | 14,930  |             |   |            |   |   | 14,930  |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|                                                                                |  |                            | 67,132  |             |   | 20          |   |   | 67,152  |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Gross profit                                                                    |  |                            | 35,445  |             |   | (376        | ) |   | 35,069  |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Selling, general, and administrative
  expenses                                 |  |                            | 20,776  |             |   | 27          |   |   | 20,803  |  
|Research, development and engineering
  expenses                                |  |                            | 12,659  |             |   |            |   |   | 12,659  |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Operating profit                                                                |  |                            | 2,010   |             |   | (403        | ) |   | 1,607   |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Other income (expense):                                                         |  |                            |         |             |   |             |   |   |         |  
|Interest income                                                                 |  |                            | 943     |             |   |            |   |   | 943     |  
|Miscellaneous income (expense), net                                             |  |                            | (293    | )           |   | (115        | ) |   | (408    | )
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Total other income (expense)                                                    |  |                            | 650     |             |   | (115        | ) |   | 535     |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Earnings from continuing operations before
  income taxes and minority interest |  |                            | 2,660   |             |   | (518        | ) |   | 2,142   |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Income tax expense                                                              |  |                            | (626    | )           |   | 293         |   |   | (333    | )
|Minority interest                                                               |  |                            | (459    | )           |   | 13          |   |   | (446    | )
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Earnings from continuing operations                                             |  |                            | 1,575   |             |   | (212        | ) |   | 1,363   |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Discontinued TeraOptix operations, net of
  tax                                 |  |                            | (2,493  | )           |   |            |   |   | (2,493  | )
|Charges related to the disposal of
  TeraOptix, net of tax                      |  |                            | (9,652  | )           |   |            |   |   | (9,652  | )
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Loss from discontinued operations                                               |  |                            | (12,145 | )           |   |            |   |   | (12,145 | )
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Net loss                                                                        |  | $                          | (10,570 | )           | $ | (212        | ) | $ | (10,782 | )
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Basic - Earnings (loss) per share:                                              |  |                            |         |             |   |             |   |   |         |  
|Continuing operations                                                           |  | $                          | 0.09    |             | $ | (0.01       | ) | $ | 0.08    |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Discontinued operations                                                         |  |                            | (0.69   | )           |   |            |   |   | (0.69   | )
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Net earnings (loss)                                                             |  | $                          | (0.60   | )           | $ | (0.01       | ) | $ | (0.61   | )
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Diluted - Earnings (loss) per share:                                            |  |                            |         |             |   |             |   |   |         |  
|Continuing operations                                                           |  | $                          | 0.09    |             | $ | (0.01       | ) | $ | 0.08    |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Discontinued operations                                                         |  |                            | (0.69   | )           |   |            |   |   | (0.69   | )
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Net earnings (loss)                                                             |  | $                          | (0.60   | )           | $ | (0.01       | ) | $ | (0.61   | )
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Weighted average number of shares:                                              |  |                            |         |             |   |             |   |   |         |  
|Basic                                                                           |  |                            | 17,539  |             |   | 17,539      |   |   | 17,539  |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  
|Diluted                                                                         |  |                            | 17,696  |             |   | 17,696      |   |   | 17,696  |  
|                                                                                |  |                            |         |             |   |             |   |   |         |  

F - 17

---



NOTE 3: DIVESTITURES AND DISCONTINUED OPERATIONS

In September 2002, we
committed to a planned disposition of our TeraOptix business unit (TeraOptix)
which included recording impairment charges for the facility and equipment.
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, the Company also
paid the balance of a related interest rate swap agreement of $1,109. This
payment resulted in an additional charge to discontinued TeraOptix operations,
recorded net of tax. Prior to the payment, in accordance with SFAS No. 133, as
amended, the swap liability was recorded with a corresponding debit, net of
tax, to stockholders equity. The aggregate payment of $12,064 on the mortgage
debt ($10,955) and swap agreement ($1,109) was funded from the Companys
available cash and marketable securities.

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:

|                                                                         |  |                 |       |                 |   |                 |   |   |         |  
|------------------------------------------------------------------------ |  | --------------- | ----- | --------------- | - | --------------- | - | - | ------- | -
|                                                                         |  | June 30,
  2005 |       | June 30,
  2004 |   | June 30,
  2003 |  
|                                                                         |  |                 |       |                 |   |                 |  
|Cash flow from operating
  activities from discontinued operations:      |  |                 |       |                 |   |                 |   |   |         |  
|Loss from discontinued
  operations                                      |  | $               | (366  | )               | $ | (7,655          | ) | $ | (12,145 | )
|Loss on sale and impairment
  of assets                                  |  |                 | 94    |                 |   | 9,817           |   |   | 13,070  |  
|Deferred income taxes                                                    |  |                 | (128  | )               |   | (4,104          | ) |   | (6,506  | )
|Receivables                                                              |  |                 |      |                 |   |                |   |   | 845     |  
|Inventories                                                              |  |                 |      |                 |   |                |   |   | 815     |  
|Prepaid expenses                                                         |  |                 | (23   | )               |   | (2              | ) |   | 20      |  
|Accounts payable and
  accrued expenses                                  |  |                 |      |                 |   |                |   |   | (706    | )
|                                                                         |  |                 |       |                 |   |                 |   |   |         |  
|Net cash used for operating
  activities from discontinued operations    |  | $               | (423  | )               | $ | (1,944          | ) | $ | (4,607  | )
|                                                                         |  |                 |       |                 |   |                 |   |   |         |  
|                                                                         |  |                 |       |                 |   |                 |   |   |         |  
|Cash flow from investing
  activities from discontinued operations:      |  |                 |       |                 |   |                 |   |   |         |  
|Proceeds from sale of
  assets                                           |  | $               | 1,918 |                 | $ | 80              |   | $ | 2,841   |  
|                                                                         |  |                 |       |                 |   |                 |   |   |         |  
|Net cash provided by
  investing activities from discontinued operations |  | $               | 1,918 |                 | $ | 80              |   | $ | 2,841   |  
|                                                                         |  |                 |       |                 |   |                 |   |   |         |  
|                                                                         |  |                 |       |                 |   |                 |   |   |         |  
|Cash flow from financing
  activities from discontinued operations:      |  |                 |       |                 |   |                 |   |   |         |  
|Payments of long-term debt                                               |  | $               |      |                 | $ | (11,374         | ) | $ | (837    | )
|                                                                         |  |                 |       |                 |   |                 |   |   |         |  
|Net cash used for financing
  activities from discontinued operations    |  | $               |      |                 | $ | (11,374         | ) | $ | (837    | )
|                                                                         |  |                 |       |                 |   |                 |   |   |         |  
|                                                                         |  |                 |       |                 |   |                 |   |   |         |  
|Net cash provided by (used
  by) discontinued operations                 |  | $               | 1,495 |                 | $ | (13,238         | ) | $ | (2,603  | )
|                                                                         |  |                 |       |                 |   |                 |   |   |         |  

NOTE 4: MARKETABLE SECURITIES

Marketable securities
consisted primarily of corporate bonds, government agency securities, and
tax-exempt bonds issued by various federal, state, and municipal agencies for
both 2005 and 2004. Marketable securities at June 30, 2005 and 2004 are
reported at cost. The gross unrealized gains on marketable securities of $48
and $90 at June 30, 2005 and 2004, respectively, are shown net of their related
tax effects, resulting in balances of $32 and $62, respectively, as a separate
component of stockholders equity. As of June 30, 2003, we transferred our
marketable securities from available-for-sale to held-to-maturity. Accordingly,
the gross unrealized gains, net of tax, of $32 in stockholders equity
remaining as of June 30, 2005 will continue to be amortized over the remaining
life of the securities. Amortization related to marketable securities was $77
and $43 in fiscal 2005 and
2004, respectively. During fiscal 2004, we sold four securities totaling $1,001
that were classified

F - 18

---



as held to maturity. We sold these securities in order to
comply with changes in our investment policy. The gain realized on the sale of
these securities was $13.

Dividend and interest income
is recognized when earned. Realized gains and losses are included in earnings
and are derived using the specific identification method for determining the
cost of securities sold.

The amortized cost, gross
unrealized holding gains (losses), and fair value of held-to-maturity
securities at June 30, 2005 and 2004 were as follows:

|                                                                       |  |                  |        |                                      |   |                                       |  |              |     |  |   |        | 
|---------------------------------------------------------------------- |  | ---------------- | ------ | ------------------------------------ | - | ------------------------------------- |  | ------------ | --- |  | - | ------ | 
|                                                                       |  | Amortized
  Cost |        | Gross
  Unrealized
  Holding
  Gains |   | Gross
  Unrealized
  Holding
  Losses |  | Fair
  Value |    
|                                                                       |  |                  |        |                                      |   |                                       |  |              |    
|At June 30, 2005 Corporate, federal, state and local
  municipal bonds |  | $                | 35,953 |                                      | $ | 10                                    |  | $            | 188 |  | $ | 35,775 | 
|                                                                       |  |                  |        |                                      |   |                                       |  |              |     |  |   |        | 
|                                                                       |  |                  |        |                                      |   |                                       |  |              |     |  |   |        | 
|At June 30, 2004 Corporate, federal, state and local municipal
bonds   |  | $                | 25,231 |                                      | $ | 3                                     |  | $            | 172 |  | $ | 25,062 | 
|                                                                       |  |                  |        |                                      |   |                                       |  |              |     |  |   |        | 

Maturities of investment
securities classified as held-to-maturity were as follows at June 30, 2005 and
2004:

|                                        |  |                  |        |               |   |                  |  |              |        |  |   |        | 
|--------------------------------------- |  | ---------------- | ------ | ------------- | - | ---------------- |  | ------------ | ------ |  | - | ------ | 
|                                        |  | June 30, 2005    |        | June 30, 2004 |  
|                                        |  |                  |        |               |  
|                                        |  | Amortized
  Cost |        | Fair
  Value  |   | Amortized
  Cost |  | Fair
  Value |       
|                                        |  |                  |        |               |   |                  |  |              |       
|Due within one year                     |  | $                | 17,242 |               | $ | 17,205           |  | $            | 16,728 |  | $ | 16,719 | 
|Due after one year through
  five years |  |                  | 18,711 |               |   | 18,570           |  |              | 8,503  |  |   | 8,343  | 
|                                        |  |                  |        |               |   |                  |  |              |        |  |   |        | 
|                                        |  | $                | 35,953 |               | $ | 35,775           |  | $            | 25,231 |  | $ | 25,062 | 
|                                        |  |                  |        |               |   |                  |  |              |        |  |   |        | 

NOTE 5: ACCOUNTS RECEIVABLE

At June 30, 2005 and 2004,
accounts receivable were as follows:

|                                  |  |               |        |               |   |        |  
|--------------------------------- |  | ------------- | ------ | ------------- | - | ------ | -
|                                  |  | June 30, 2005 |        | June 30, 2004 |  
|                                  |  |               |        |               |  
|                                  |  | (Restated)    |        | (Restated)    |  
|Trade (note
  18)                 |  | $             | 28,018 |               | $ | 26,382 |  
|Other                             |  |               | 769    |               |   | 662    |  
|                                  |  |               |        |               |   |        |  
|                                  |  |               | 28,787 |               |   | 27,044 |  
|Allowance
  for doubtful accounts |  |               | (663   | )             |   | (707   | )
|                                  |  |               |        |               |   |        |  
|                                  |  | $             | 28,124 |               | $ | 26,337 |  
|                                  |  |               |        |               |   |        |  

F - 19

---



NOTE 6: INVENTORIES

At June 30, 2005 and 2004,
inventories were as follows:

|                                       |  |               |        |               |   |        | 
|-------------------------------------- |  | ------------- | ------ | ------------- | - | ------ | 
|                                       |  | June 30, 2005 |        | June 30, 2004 |  
|                                       |  |               |        |               |  
|                                       |  |               |        |               |   |        | 
|Raw materials and
  manufactured parts |  | $             | 14,320 |               | $ | 9,976  | 
|Work in process                        |  |               | 15,927 |               |   | 9,794  | 
|Finished goods                         |  |               | 3,480  |               |   | 1,777  | 
|                                       |  |               |        |               |   |        | 
|                                       |  | $             | 33,727 |               | $ | 21,547 | 
|                                       |  |               |        |               |   |        | 

NOTE 7: PROPERTY, PLANT, AND EQUIPMENT

At June 30,
2005 and 2004, property, plant, and equipment, at cost, were as follows:

|                                             |  |               |         |   |                 |         |                                   |       | 
|-------------------------------------------- |  | ------------- | ------- | - | --------------- | ------- | --------------------------------- | ----- | 
|                                             |  | June 30, 2005 |         |   | June 30,
  2004 |         | Estimated
  Useful Life
  (Years) |      
|                                             |  |               |         |   |                 |         |                                   |      
|                                             |  |               |         |   |                 |         |                                   |       | 
|Land                                         |  | $             | 615     |   | $               | 615     |                                   |      | 
|Building and improvements                    |  |               | 15,759  |   |                 | 11,941  |                                   | 15-40 | 
|Machinery, equipment, and
  office furniture |  |               | 45,501  |   |                 | 40,602  |                                   | 3-8   | 
|Leasehold improvements                       |  |               | 715     |   |                 | 657     |                                   | 1-5   | 
|Construction in progress                     |  |               | 2,997   |   |                 | 3,917   |                                   |      | 
|                                             |  |               |         |   |                 |         |                                   |       | 
|                                             |  |               | 65,587  |   |                 | 57,732  |                                   |       | 
|Less accumulated
  depreciation              |  |               | (34,167 | ) |                 | (30,299 | )                                 |       | 
|                                             |  |               |         |   |                 |         |                                   |       | 
|                                             |  | $             | 31,420  |   | $               | 27,433  |                                   |       | 
|                                             |  |               |         |   |                 |         |                                   |       | 

Depreciation
expense for the fiscal years ended June 30, 2005, 2004, and 2003 was $5,273,
$5,225, and $5,325, respectively.

NOTE 8: INTANGIBLE ASSETS

Intangible
assets, at cost, at June 30, 2005 and 2004 were as follows:

|                         |  |               |        |                 |   |        |  
|------------------------ |  | ------------- | ------ | --------------- | - | ------ | -
|                         |  | June 30, 2005 |        | June 30,
  2004 |  
|                         |  |               |        |                 |  
|                         |  |               |        |                 |   |        |  
|Intangible assets        |  | $             | 7,906  |                 | $ | 6,759  |  
|Accumulated amortization |  |               | (2,268 | )               |   | (1,760 | )
|                         |  |               |        |                 |   |        |  
|                         |  | $             | 5,638  |                 | $ | 4,999  |  
|                         |  |               |        |                 |   |        |  

Intangible
amortization expense was $530 for the fiscal year ended June 30, 2005 and is
estimated to be approximately $305 in fiscal year 2006 and approximately $260
annually in fiscal 2007-2010. Intangible amortization expense for the fiscal
years ended June 30, 2004 and 2003 was $449 and $249, respectively.
Amortization expense related to certain intangible assets is included in cost
of goods sold in the consolidated statements of operations.

NOTE 9: BANK LINE OF CREDIT

We have a
$3,000 unsecured bank line of credit bearing interest at our choice of either
the prime rate (6.00% at June 30, 2005) or the one month LIBOR rate, plus a
variable interest rate of 1.0% to 2.5%, based on a pricing grid related to a
certain debt ratio, adjusted quarterly. The line of credit is available through
November 17, 2005. At June 30, 2005 and 2004, no amounts were outstanding under
the bank line of credit.

F - 20

---



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, 2005 |        | June 30,
  2004 |  
|                                                                       |  |               |        |                 |  
|Beginning balance                                                      |  | $             | 1,486  |                 | $ | 1,215  |  
|Reductions for payments made                                           |  |               | (1,232 | )               |   | (2,305 | )
|Changes in accruals related to warranties issued in the current
period |  |               | 1,136  |                 |   | 1,949  |  
|Changes in accrual related to pre-existing warranties                  |  |               | 6      |                 |   | 627    |  
|                                                                       |  |               |        |                 |   |        |  
|Ending balance                                                         |  | $             | 1,396  |                 | $ | 1,486  |  
|                                                                       |  |               |        |                 |   |        |  

NOTE 11: LONG-TERM DEBT

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

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

NOTE 12: LEASES

We lease
certain manufacturing equipment and facilities under operating leases, some of
which include cost escalation clauses, expiring on various dates through 2009.
Total lease expense, net, charged to operations was $2,270 in fiscal 2005,
$1,720 in fiscal 2004, and $1,453 in fiscal 2003. At June 30, 2005, 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 |  
|                               |  |                                                  |  
|2006                           |  |                                                  | $ | 1,493 |  | 
|2007                           |  |                                                  |   | 480   |  | 
|2008                           |  |                                                  |   | 154   |  | 
|After 2008                     |  |                                                  |   | 54    |  | 
|                               |  |                                                  |   |       |  | 
|Total
  minimum lease payments |  |                                                  | $ | 2,181 |  | 
|                               |  |                                                  |   |       |  | 

NOTE 13: 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, 2005,
2004, and 2003, amounted to $2,070, $1,186, and $359, respectively.

F - 21

---



NOTE 14: STOCK COMPENSATION PLANS

As of June 30,
2005, we have three stock-based compensation plans, which are described below
in note 15. In accordance with SFAS No. 123, a table illustrating the effect on
net earnings (loss) per share as if the Black-Scholes fair value method had
been applied to all stock options is presented in note 1.

The fair value
of these options at the date of grant was estimated with the following
weighted-average assumptions for 2005, 2004, and 2003:

|                             |  |                 |  |                 |  |                
|---------------------------- |  | --------------- |  | --------------- |  | ---------------
|                             |  | June 30,
  2005 |  | June 30,
  2004 |  | June 30,
  2003
|                             |  |                 |  |                 |  |                
|Risk free
  rate of interest |  | 3.8%            |  | 3.9%            |  | 2.9%           
|Dividend
  yield             |  | 0%              |  | 0%              |  | 0%             
|Volatility
  factor          |  | 64-80%          |  | 71-82%          |  | 71-75%         
|Expected
  life of option    |  | 4.5 years       |  | 4.5 years       |  | 4.5 years      

Weighted
average fair values at date of grant for options granted during fiscal 2005,
2004, and 2003 were $6.32, $6.55, and $3.86, respectively.

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

NOTE 15: STOCK OPTION PLANS

Employee Stock Option Plan

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

|                                 |  |               |   |                                       |        |               |           |                                       |   |        |  |                                       |   |   |        | 
|-------------------------------- |  | ------------- | - | ------------------------------------- | ------ | ------------- | --------- | ------------------------------------- | - | ------ |  | ------------------------------------- | - | - | ------ | 
|                                 |  | June 30, 2005 |   | June 30, 2004                         |        | June 30, 2003 |          
|                                
|                                 |  |               |   |                                       |        |               |          
|                                 |  | Shares        |   | Weighted
  Average
  Exercise
  Price |        | Shares        |           | Weighted
  Average
  Exercise
  Price |   | Shares |  | Weighted
  Average
  Exercise
  Price |  
|                                 |  |               |   |                                       |        |               |           |                                       |   |        |  |                                       |  
|                                
|Outstanding at beginning of year |  | 1,350,672     |   | $                                     | 37.525 |               | 1,486,426 |                                       | $ | 36.338 |  | 1,950,719                             |   | $ | 44.527 | 
|Granted                          |  |              |   | $                                     |       |               |          |                                       | $ |       |  | 247,875                               |   | $ | 6.538  | 
|Exercised                        |  | (16,881       | ) | $                                     | 7.006  |               | (89,101   | )                                     | $ | 7.607  |  | (34,124                               | ) | $ | 1.993  | 
|Expired or cancelled             |  | (83,854       | ) | $                                     | 42.198 |               | (46,653   | )                                     | $ | 56.853 |  | (678,044                              | ) | $ | 50.730 | 
|                                 |  |               |   |                                       |        |               |           |                                       |   |        |  |                                       |   |   |        | 
|Oustanding-end of year           |  | 1,249,937     |   | $                                     | 37.624 |               | 1,350,672 |                                       | $ | 37.525 |  | 1,486,426                             |   | $ | 36.338 | 
|                                 |  |               |   |                                       |        |               |           |                                       |   |        |  |                                       |   |   |        | 
|                                 |  |               |   |                                       |        |               |           |                                       |   |        |  |                                       |   |   |        | 

Non-Employee Director Stock Option Plan

The Zygo
Corporation Amended and Restated Non-Employee Director Stock Option Plan
permits the granting of non-qualified options to purchase a total of 620,000
shares (adjusted for splits) of common stock at prices not less than the fair
market value on the date of grant. Under the terms of the Plan, as amended on
September 24, 1999, each new non-employee director (other than a person who was
previously an employee of the Company or any of its subsidiaries) was granted
options to purchase 8,000 shares of common stock, generally, on his or her
first day of service as a non-employee director; and each other non-employee
director was granted options to purchase 3,000 shares of Common stock on an
annual basis. All options are fully exercisable on the date of grant and have a
10-year term. The Plan, as amended, will expire on November 17, 2009. There are
99,000 shares available for future grant under the plan as of June 30, 2005.
The Company does not intend to grant further options under the Non-Employee
Director Stock Option Plan. The Company granted stock options in fiscal 2005
and fiscal 2004 to non-employee directors from the 2002 Equity Incentive Plan.

F - 22

---



|                                   |  |               |  |                                       |        |               |          |                                       |   |        |  |                                       |   |   |        | 
|---------------------------------- |  | ------------- |  | ------------------------------------- | ------ | ------------- | -------- | ------------------------------------- | - | ------ |  | ------------------------------------- | - | - | ------ | 
|                                   |  | June 30, 2005 |  | June 30, 2004                         |        | June 30, 2003 |         
|                                   |  |               |  |                                       |        |               |         
|                                   |  | Shares        |  | Weighted
  Average
  Exercise
  Price |        | Shares        |          | Weighted
  Average
  Exercise
  Price |   | Shares |  | Weighted
  Average
  Exercise
  Price |  
|                                   |  |               |  |                                       |        |               |          |                                       |   |        |  |                                       |  
|                                  
|Outstanding at beginning of
  year |  | 75,000        |  | $                                     | 16.662 |               | 226,000  |                                       | $ | 13.744 |  | 195,000                               |   | $ | 14.880 | 
|Granted                            |  |              |  |                                       |       |               |         |                                       | $ |       |  | 34,000                                |   | $ | 6.559  | 
|Exercised                          |  |              |  |                                       |       |               | (107,000 | )                                     | $ | 2.000  |  | (3,000                                | ) | $ | 6.150  | 
|Expired or cancelled               |  |              |  |                                       |       |               | (44,000  | )                                     | $ | 37.332 |  |                                      |   | $ |       | 
|                                   |  |               |  |                                       |        |               |          |                                       |   |        |  |                                       |   |   |        | 
|Oustanding-end of year             |  | 75,000        |  | $                                     | 16.662 |               | 75,000   |                                       | $ | 16.662 |  | 226,000                               |   | $ | 13.744 | 
|                                   |  |               |  |                                       |        |               |          |                                       |   |        |  |                                       |   |   |        | 

2002 Equity Incentive Plan

The Zygo
Corporation 2002 Equity Incentive Plan permits the granting of incentive stock
options, non-qualified stock options, or restricted stock to purchase a total
of 1,500,000 shares of common stock. The exercise price per share of common
stock covered by an option may not be less than the par value per share on the
date of grant, and in case of an incentive stock option, the exercise price may
not be less than the fair market value per share on the date of grant. The Plan
will expire on August 27, 2012. There are 748,812 shares available for future
grants under the plan as of June 30, 2005. These options generally vest over a
four year period in quarterly increments. The Board of Directors may also amend
the Plan to authorize the grant of other types of equity based awards, without
further action by our stockholders. Non-employee directors are now granted
options to purchase 6,000 shares of common stock on an annual basis and each
new non-employee director is granted options to purchase 12,000 shares of
common stock, generally, on their first day of service.

|                                   |  |               |   |                                       |        |               |         |                                       |   |        |  |                                       |   |   |       | 
|---------------------------------- |  | ------------- | - | ------------------------------------- | ------ | ------------- | ------- | ------------------------------------- | - | ------ |  | ------------------------------------- | - | - | ----- | 
|                                   |  | June 30, 2005 |   | June 30, 2004                         |        | June 30, 2003 |        
|                                   |  |               |   |                                       |        |               |        
|                                   |  | Shares        |   | Weighted
  Average
  Exercise
  Price |        | Shares        |         | Weighted
  Average
  Exercise
  Price |   | Share  |  | Weighted
  Average
  Exercise
  Price |  
|                                   |  |               |   |                                       |        |               |         |                                       |   |        |  |                                       |  
|                                  
|Outstanding at beginning of
  year |  | 477,313       |   | $                                     | 10.363 |               | 72,063  |                                       | $ | 6.044  |  |                                      |   | $ |      | 
|Granted                            |  | 289,200       |   | $                                     | 9.511  |               | 435,350 |                                       | $ | 10.992 |  | 72,163                                |   | $ | 6.044 | 
|Exercised                          |  | (2,975        | ) | $                                     | 8.714  |               | (3,975  | )                                     | $ | 6.518  |  |                                      |   | $ |      | 
|Expired or cancelled               |  | (19,300       | ) | $                                     | 9.814  |               | (26,125 | )                                     | $ | 9.516  |  | (100                                  | ) | $ | 6.051 | 
|                                   |  |               |   |                                       |        |               |         |                                       |   |        |  |                                       |   |   |       | 
|Oustanding-end of year             |  | 744,238       |   | $                                     | 10.053 |               | 477,313 |                                       | $ | 10.363 |  | 72,063                                |   | $ | 6.044 | 
|                                   |  |               |   |                                       |        |               |         |                                       |   |        |  |                                       |   |   |       | 

The following table summarizes
information about all fixed stock options outstanding at June 30, 2005:

|                             |  |                                              |  |                                                     |  |                                     |       |                                            |           |                                     |  |   |       | 
|---------------------------- |  | -------------------------------------------- |  | --------------------------------------------------- |  | ----------------------------------- | ----- | ------------------------------------------ | --------- | ----------------------------------- |  | - | ----- | 
|                             |  | Options
  Outstanding                        |  | Options
  Exercisable                               | 
|                             |  |                                              |  |                                                     | 
|Range of
  Exercise
  Prices |  | Number
  Outstanding
  as of
  June 30, 2005 |  | Weighted
  Average
  Remaining
  Contractual
  Life |  | Weighted
  Average
  Exercise Price |       | Number
  Exercisable as of
  June 30, 2005 |           | Weighted
  Average
  Exercise Price | 
|                             |  |                                              |  |                                                     |  |                                     |       |                                            |           |                                     | 
|$5.20 -
  $7.67              |  | 309,220                                      |  | 6.8                                                 |  | $                                   | 6.51  |                                            | 180,450   |                                     |  | $ | 6.56  | 
|$7.90 -
  $11.75             |  | 779,175                                      |  | 7.4                                                 |  | $                                   | 9.94  |                                            | 320,812   |                                     |  | $ | 10.44 | 
|$12.23 -
  $18.00            |  | 303,213                                      |  | 6.5                                                 |  | $                                   | 14.02 |                                            | 233,002   |                                     |  | $ | 14.02 | 
|$18.37 -
  $27.00            |  | 209,213                                      |  | 5.2                                                 |  | $                                   | 19.01 |                                            | 205,588   |                                     |  | $ | 19.02 | 
|$28.31 -
  $42.44            |  | 5,750                                        |  | 5.3                                                 |  | $                                   | 35.38 |                                            | 5,750     |                                     |  | $ | 35.38 | 
|$42.94 -
  $46.13            |  | 47,200                                       |  | 3.2                                                 |  | $                                   | 44.61 |                                            | 47,200    |                                     |  | $ | 44.61 | 
|$64.63 -
  $90.82            |  | 415,404                                      |  | 5.1                                                 |  | $                                   | 85.32 |                                            | 415,404   |                                     |  | $ | 85.32 | 
|                             |  |                                              |  |                                                    
|$5.20 -
  $90.82             |  | 2,069,175                                    |  | 6.4                                                 |  | $                                   | 26.94 |                                            | 1,408,206 |                                     |  | $ | 35.12 | 
|                             |  |                                              |  |                                                     |  |                                     |       |                                            |           |                                     |  |   |       | 

F - 23

---



NOTE 16: 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, 2005 and 2004, we had withheld
$330 and $467, respectively, for the purchases of shares under this plan, and
in July 2005 and 2004, we issued shares of common stock of approximately 35,000
in each year.

NOTE 17: INCOME TAXES

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

|                                          |  |                            |            |      |   |            |   |   |            |  
|----------------------------------------- |  | -------------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                          |  | Fiscal Year Ended June 30,
|                                          |  |                           
|                                          |  | 2005                       |            | 2004 |   | 2003       |  
|                                          |  |                           
|                                          |  |                            | (Restated) |      |   | (Restated) |   |   | (Restated) |  
|Earnings from continuing
  operations     |  | $                          | 5,694      |      | $ | 1,660      |   | $ | 333        |  
|Discontinued operations                   |  |                            | (85        | )    |   | (679       | ) |   | (1,614     | )
|Disposal of discontinued
  operations     |  |                            | (43        | )    |   | (3,425     | ) |   | (5,101     | )
|Amounts charged to
  stockholders equity |  |                            | (38        | )    |   | (578       | ) |   | (282       | )
|                                          |  |                            |            |      |   |            |   |   |            |  
|                                          |  | $                          | 5,528      |      | $ | (3,022     | ) | $ | (6,664     | )
|                                          |  |                            |            |      |   |            |   |   |            |  

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

|                                               |  |                            |            |      |   |            |   |   |            |  
|---------------------------------------------- |  | -------------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                               |  | Fiscal Year Ended June 30,
|                                               |  |                           
|                                               |  | 2005                       |            | 2004 |   | 2003       |  
|                                               |  |                           
|                                               |  |                            | (Restated) |      |   | (Restated) |   |   | (Restated) |  
|Earnings
  from continuing operations - U.S.   |  | $                          | 11,926     |      | $ | 4,502      |   | $ | 999        |  
|Earnings
  from discontinued operations - U.S. |  |                            | (494       | )    |   | (11,759    | ) |   | (18,860    | )
|Earnings
  from foreign operations             |  |                            | 3,869      |      |   | 1,719      |   |   | 1,143      |  
|                                               |  |                            |            |      |   |            |   |   |            |  
|                                               |  | $                          | 15,301     |      | $ | (5,538     | ) | $ | (16,718    | )
|                                               |  |                            |            |      |   |            |   |   |            |  

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

|                                        |  |                            |            |      |   |            |   |   |            |  
|--------------------------------------- |  | -------------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                        |  | Fiscal Year Ended June 30,
|                                        |  |                           
|                                        |  | 2005                       |            | 2004 |   | 2003       |  
|                                        |  |                           
|                                        |  |                            | (Restated) |      |   | (Restated) |   |   | (Restated) |  
|Currently payable:                      |  |                            |            |      |   |            |   |   |            |  
|Federal                                 |  | $                          | 215        |      | $ | 797        |   | $ |           |  
|State                                   |  |                            | 111        |      |   | 160        |   |   | 138        |  
|Foreign                                 |  |                            | 1,467      |      |   | 539        |   |   | 724        |  
|                                        |  |                            |            |      |   |            |   |   |            |  
|                                        |  |                            | 1,793      |      |   | 1,496      |   |   | 862        |  
|                                        |  |                            |            |      |   |            |   |   |            |  
|Deferred:                               |  |                            |            |      |   |            |   |   |            |  
|Federal                                 |  |                            | 3,830      |      |   | 881        |   |   | (481       | )
|State                                   |  |                            | (72        | )    |   | (614       | ) |   | (9         | )
|Foreign                                 |  |                            | 143        |      |   | (103       | ) |   | (39        | )
|                                        |  |                            |            |      |   |            |   |   |            |  
|                                        |  |                            | 3,901      |      |   | 164        |   |   | (529       | )
|                                        |  |                            |            |      |   |            |   |   |            |  
|Income
  tax from continuing operations |  | $                          | 5,694      |      | $ | 1,660      |   | $ | 333        |  
|                                        |  |                            |            |      |   |            |   |   |            |  

F - 24

---



Income tax
payments were $765 in fiscal 2005. Income tax refunds, net of payments, were
$377 and $2,449 in fiscal 2004 and 2003, respectively.

The total
income tax expense (benefit) differs from the amount computed by applying the
applicable U.S. federal income tax rate of 35% in each of the fiscal years
2005, 2004, and 2003 to earnings before income taxes for the following reasons:

|                                                  |  |                            |            |      |   |            |   |   |            |  
|------------------------------------------------- |  | -------------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                  |  | Fiscal Year Ended June 30,
|                                                  |  |                           
|                                                  |  | 2005                       |            | 2004 |   | 2003       |  
|                                                  |  |                           
|                                                  |  |                            | (Restated) |      |   | (Restated) |   |   | (Restated) |  
|Computed expected tax
  expense                 |  | $                          | 5,529      |      | $ | 2,177      |   | $ | 750        |  
|Increases (reductions) in
  taxes resulting from: |  |                            |            |      |   |            |   |   |            |  
|State taxes, net of federal income tax
benefit    |  |                            | 26         |      |   | (295       | ) |   | 377        |  
|Export tax incentives                             |  |                            | (347       | )    |   | (111       | ) |   | (81        | )
|Research credit                                   |  |                            |           |      |   | (307       | ) |   | (822       | )
|Tax on foreign dividend                           |  |                            | 328        |      |   | 123        |   |   | 255        |  
|Change in federal valuation allowance             |  |                            |           |      |   | 389        |   |   |           |  
|Change in estimate of future year taxes           |  |                            | (129       | )    |   | (160       | ) |   |           |  
|Foreign tax differential                          |  |                            | 217        |      |   | (185       | ) |   | (153       | )
|Other, net                                        |  |                            | 70         |      |   | 29         |   |   | 7          |  
|                                                  |  |                            |            |      |   |            |   |   |            |  
|                                                  |  | $                          | 5,694      |      | $ | 1,660      |   | $ | 333        |  
|                                                  |  |                            |            |      |   |            |   |   |            |  

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, 2005 and 2004
are presented below:

|                                                                                   |  |               |            |               |   |            |  
|---------------------------------------------------------------------------------- |  | ------------- | ---------- | ------------- | - | ---------- | -
|                                                                                   |  | June 30, 2005 |            | June 30, 2004 |  
|                                                                                   |  |               |            |               |  
|                                                                                   |  |               | (Restated) |               |   | (Restated) |  
|                                                                                   |  |               |            |               |   |            |  
|Deferred tax
  assets:                                                             |  |               |            |               |   |            |  
|Accounts receivable                                                                |  | $             | 221        |               | $ | 240        |  
|Accrued liabilities                                                                |  |               | 1,039      |               |   | 1,868      |  
|Inventory valuation                                                                |  |               | 2,631      |               |   | 2,232      |  
|Deferred revenue                                                                   |  |               | 394        |               |   |           |  
|Plant and equipment                                                                |  |               |           |               |   | 4,703      |  
|Intangibles                                                                        |  |               | 27         |               |   | 132        |  
|Federal, foreign, and state net operating
  loss carryforwards (NOL) and credits |  |               | 31,783     |               |   | 30,878     |  
|Contributions                                                                      |  |               | 47         |               |   | 56         |  
|                                                                                   |  |               |            |               |   |            |  
|                                                                                   |  |               | 36,142     |               |   | 40,109     |  
|Less valuation allowance                                                           |  |               | 2,011      |               |   | 3,383      |  
|                                                                                   |  |               |            |               |   |            |  
|Deferred tax asset                                                                 |  |               | 34,131     |               |   | 36,726     |  
|                                                                                   |  |               |            |               |   |            |  
|                                                                                   |  |               |            |               |   |            |  
|Deferred tax
  liabilities:                                                        |  |               |            |               |   |            |  
|Prepaid expenses                                                                   |  |               | (283       | )             |   | (265       | )
|Plant and equipment                                                                |  |               | (2,604     | )             |   |           |  
|Unrealized gain on marketable securities                                           |  |               | (16        | )             |   | (28        | )
|                                                                                   |  |               |            |               |   |            |  
|Deferred tax liability                                                             |  |               | (2,903     | )             |   | (293       | )
|                                                                                   |  |               |            |               |   |            |  
|Net deferred
  tax asset                                                           |  | $             | 31,228     |               | $ | 36,433     |  
|                                                                                   |  |               |            |               |   |            |  

The net
current deferred tax assets and net non-current deferred tax assets as recorded
on the balance sheet as of June 30, 2005 and 2004 are as follows:

F - 25

---



|                                    |  |               |            |               |   |            | 
|----------------------------------- |  | ------------- | ---------- | ------------- | - | ---------- | 
|                                    |  | June 30, 2005 |            | June 30, 2004 |  
|                                    |  |               |            |               |  
|                                    |  |               | (Restated) |               |   | (Restated) | 
|                                   
|Net current
  deferrred tax asset   |  | $             | 8,895      |               | $ | 3,999      | 
|Net
  noncurrent deferred tax asset |  |               | 22,333     |               |   | 32,434     | 
|                                    |  |               |            |               |   |            | 
|Net deferred
  tax asset            |  | $             | 31,228     |               | $ | 36,433     | 
|                                    |  |               |            |               |   |            | 

The deferred
tax provisions for 2005 and 2004 do not reflect the tax benefit of $38 and
$578, respectively, resulting from amounts charged to other comprehensive
income and paid in capital, which includes $26 and $600 from the exercise of
employee stock options in 2005 and 2004, respectively.

During 2005,
we wrote off certain fully reserved state NOLs and credits. The write off of
these state NOLs and credits is primarily responsible for the change in the
valuation allowance, along with the release of certain reserves on foreign NOLs
that we now believe we will be able to utilize. During 2005, we also recorded
changes in deferred tax assets based on expected utilization in future years,
including a benefit for a change in the expected federal tax rate from 34% to
35% based on future expected earnings and a charge for a reduction in the
future expected tax benefit of fixed assets and other accruals.

Management
believes it is more likely than not that the remaining net deferred tax assets
of $31,207 will be realized as the results of future operations are expected to
generate sufficient taxable income to do so.

At June 30,
2005, our share of the cumulative undistributed earnings of foreign
subsidiaries was $2,369. 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,
2005, we have federal, foreign, and state NOL carryforwards of approximately
$63,208, $182, and $93,530, respectively, and various state credit
carryforwards of $4,397. The federal NOL begins to expire in 2019 through 2025,
while the state NOL and credits begin to expire in 2006 through 2025. The
foreign NOL is carried forward until utilized. We also have federal general
business credit carryforwards of approximately $5,468, which is 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 $6, which are available to reduce future federal regular
income taxes, if any, over an indefinite period.

NOTE 18: SEGMENT REPORTING

We operate in
two principal business segments globally: Semiconductor and Industrial. The
segment data is presented below in a manner consistent with managements
internal measurement of the business. Segment data for fiscal 2003 was restated
to reflect our exit from the telecommunications segment.

|                             |  |                 |            |                 |   |                 |   |   |            |  
|---------------------------- |  | --------------- | ---------- | --------------- | - | --------------- | - | - | ---------- | -
|                             |  | June 30,
  2005 |            | June 30,
  2004 |   | June 30,
  2003 |  
|                             |  |                 |            |                 |   |                 |  
|                             |  |                 | (Restated) |                 |   | (Restated)      |   |   | (Restated) |  
|Semiconductor                |  |                 |            |                 |   |                 |   |   |            |  
|Sales                        |  | $               | 79,036     |                 | $ | 66,751          |   | $ | 58,891     |  
|Gross profit                 |  |                 | 30,140     |                 |   | 23,420          |   |   | 19,225     |  
|Gross profit as a % of sales |  |                 | 38         | %               |   | 35              | % |   | 33         | %
|                             |  |                 |            |                 |   |                 |   |   |            |  
|Industrial                   |  |                 |            |                 |   |                 |   |   |            |  
|Sales                        |  | $               | 62,313     |                 | $ | 49,525          |   | $ | 43,330     |  
|Gross profit                 |  |                 | 23,150     |                 |   | 19,260          |   |   | 15,844     |  
|Gross profit as a % of sales |  |                 | 37         | %               |   | 39              | % |   | 37         | %
|                             |  |                 |            |                 |   |                 |   |   |            |  
|Total                        |  |                 |            |                 |   |                 |   |   |            |  
|Sales                        |  | $               | 141,349    |                 | $ | 116,276         |   | $ | 102,221    |  
|Gross profit                 |  |                 | 53,290     |                 |   | 42,680          |   |   | 35,069     |  
|Gross profit as a % of sales |  |                 | 38         | %               |   | 37              | % |   | 34         | %

F - 26

---



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, |        
|                 |  |                            |         |      |   |         | 
|                 |  | 2005                       |         | 2004 |   | 2003    | 
|                 |  |                            |         |      |   |         | 
|Domestic         |  | $                          | 47,973  |      | $ | 33,937  |  | $ | 31,093  | 
|                 |  |                            |         |      |   |         |  |   |         | 
|Far East:        |  |                            |         |      |   |         |  |   |         | 
|Japan            |  |                            | 61,115  |      |   | 61,067  |  |   | 54,690  | 
|Pacific Rim      |  |                            | 17,303  |      |   | 12,806  |  |   | 6,134   | 
|                 |  |                            |         |      |   |         |  |   |         | 
|Total Far
  East |  |                            | 78,418  |      |   | 73,873  |  |   | 60,824  | 
|Europe           |  |                            | 14,958  |      |   | 8,466   |  |   | 10,304  | 
|                 |  |                            |         |      |   |         |  |   |         | 
|Total            |  | $                          | 141,349 |      | $ | 116,276 |  | $ | 102,221 | 
|                 |  |                            |         |      |   |         |  |   |         | 

NOTE 19: RELATED PARTY TRANSACTIONS

Sales to
Canon, Inc., a stockholder representing approximately 7% ownership at June 30,
2005, and Canon Sales Co., Inc., a distributor of certain of our products in
Japan and a subsidiary of Canon Inc., amounted to $51,887 (37% of net sales),
$57,306 (49% of net sales), and $52,773 (52% of net sales), for the years ended
June 30, 2005, 2004, and 2003, 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 2005, 2004, and 2003, we recognized
revenue in the semiconductor segment of $15,617, $16,057, and $18,779,
respectively, for the original contract and subsequent add-on work.

At June 30,
2005 and 2004, there was approximately, in the aggregate, $3,951 and $10,913,
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, 2005 was $11,287.

NOTE 20: 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,
2005, we had three foreign currency forward contracts outstanding. Net gains
recognized from foreign currency forward contracts for fiscal 2005 was $75, and
are included in other income in the consolidated statements of operations.
These gains are substantially offset by foreign exchange losses on intercompany
balances recorded by our subsidiaries. We did not enter into any derivative
instruments to hedge foreign currency exposure prior to the third quarter of
fiscal 2005.

F - 27

---



NOTE 21: QUARTERLY RESULTS (UNAUDITED)The following tables set forth certain unaudited
quarterly financial data as originally reported and as restated (see note 2):

|                                      |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|------------------------------------- |  | --------------------------------------- | ------ | ------------ | - | --------- | - | -------- | ------ | - | - | ------ | -
|                                      |  | For the Fiscal Year Ended June 30, 2005 |       
|                                      |  |                                         |       
|                                      |  | September 30,                           |        | December 31, |   | March 31, |   | June 30, |       
|                                      |  |                                         |        |              |   |           |   |          |       
|As
  Previously Reported              |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Net sales                             |  | $                                       | 27,578 |              | $ | 36,007    |   | $        | 33,687 |   | $ | 44,895 |  
|                                      |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Gross profit                          |  | $                                       | 11,113 |              | $ | 13,258    |   | $        | 13,130 |   | $ | 16,646 |  
|                                      |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Earnings from continuing
  operations |  | $                                       | 1,412  |              | $ | 2,464     |   | $        | 2,375  |   | $ | 3,925  |  
|Loss from discontinued
  operations   |  |                                         | (65    | )            |   | (163      | ) |          | (89    | ) |   | (49    | )
|                                      |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Net earnings                          |  | $                                       | 1,347  |              | $ | 2,301     |   | $        | 2,286  |   | $ | 3,876  |  
|                                      |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Basic earnings (loss) per
  share:    |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Continuing operations                 |  | $                                       | 0.08   |              | $ | 0.14      |   | $        | 0.13   |   | $ | 0.22   |  
|Discontinued operations               |  |                                         |       |              |   | (0.01     | ) |          |       |   |   | (0.01  | )
|                                      |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Net earnings                          |  | $                                       | 0.08   |              | $ | 0.13      |   | $        | 0.13   |   | $ | 0.21   |  
|                                      |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Diluted earnings (loss) per
  share:  |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Continuing operations                 |  | $                                       | 0.08   |              | $ | 0.14      |   | $        | 0.13   |   | $ | 0.21   |  
|Discontinued operations               |  |                                         | (0.01  | )            |   | (0.01     | ) |          |       |   |   |       |  
|                                      |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Net earnings                          |  | $                                       | 0.07   |              | $ | 0.13      |   | $        | 0.13   |   | $ | 0.21   |  
|                                      |  |                                         |        |              |   |           |   |          |        |   |   |        |  

|                                      |  |                                         |       |              |   |           |   |          |       |   |   |       |  
|------------------------------------- |  | --------------------------------------- | ----- | ------------ | - | --------- | - | -------- | ----- | - | - | ----- | -
|                                      |  | For the Fiscal Year Ended June 30, 2005 |      
|                                      |  |                                         |      
|                                      |  | September 30,                           |       | December 31, |   | March 31, |   | June 30, |      
|                                      |  |                                         |       |              |   |           |   |          |      
|Restatement
  Summary                 |  |                                         |       |              |   |           |   |          |       |   |   |       |  
|Net sales                             |  | $                                       | (158  | )            | $ | (212      | ) | $        | (270  | ) | $ | (178  | )
|                                      |  |                                         |       |              |   |           |   |          |       |   |   |       |  
|Gross profit                          |  | $                                       | (169  | )            | $ | (218      | ) | $        | (227  | ) | $ | (243  | )
|                                      |  |                                         |       |              |   |           |   |          |       |   |   |       |  
|Earnings from continuing
  operations |  | $                                       | (95   | )            | $ | (110      | ) | $        | (114  | ) | $ | (507  | )
|Loss from discontinued
  operations   |  |                                         |      |              |   |          |   |          |      |   |   |      |  
|                                      |  |                                         |       |              |   |           |   |          |       |   |   |       |  
|Net earnings                          |  | $                                       | (95   | )            | $ | (110      | ) | $        | (114  | ) | $ | (507  | )
|                                      |  |                                         |       |              |   |           |   |          |       |   |   |       |  
|Basic earnings (loss) per
  share:    |  |                                         |       |              |   |           |   |          |       |   |   |       |  
|Continuing operations                 |  | $                                       | (0.01 | )            | $ | (0.01     | ) | $        | (0.01 | ) | $ | (0.03 | )
|Discontinued operations               |  |                                         |      |              |   |          |   |          |      |   |   |      |  
|                                      |  |                                         |       |              |   |           |   |          |       |   |   |       |  
|Net earnings                          |  | $                                       | (0.01 | )            | $ | (0.01     | ) | $        | (0.01 | ) | $ | (0.03 | )
|                                      |  |                                         |       |              |   |           |   |          |       |   |   |       |  
|Diluted earnings (loss) per
  share:  |  |                                         |       |              |   |           |   |          |       |   |   |       |  
|Continuing operations                 |  | $                                       | (0.01 | )            | $ | (0.01     | ) | $        | (0.01 | ) | $ | (0.02 | )
|Discontinued operations               |  |                                         |      |              |   |          |   |          |      |   |   |      |  
|                                      |  |                                         |       |              |   |           |   |          |       |   |   |       |  
|Net earnings                          |  | $                                       | (0.01 | )            | $ | (0.01     | ) | $        | (0.01 | ) | $ | (0.02 | )
|                                      |  |                                         |       |              |   |           |   |          |       |   |   |       |  
|                                      |  |                                         |       |              |   |           |   |          |       |   |   |       |  

|                                      |  |                                         |            |              |   |            |   |          |            |   |   |            |  
|------------------------------------- |  | --------------------------------------- | ---------- | ------------ | - | ---------- | - | -------- | ---------- | - | - | ---------- | -
|                                      |  | For the Fiscal Year Ended June 30, 2005 |           
|                                      |  |                                         |           
|                                      |  | September 30,                           |            | December 31, |   | March 31,  |   | June 30, |           
|                                      |  |                                         |            |              |   |            |   |          |           
|                                      |  |                                         | (Restated) |              |   | (Restated) |   |          | (Restated) |   |   | (Restated) |  
|As
  Restated                         |  |                                         |            |              |   |            |   |          |            |   |   |            |  
|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 - 28

---



|                                             |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|-------------------------------------------- |  | --------------------------------------- | ------ | ------------ | - | --------- | - | -------- | ------ | - | - | ------ | -
|                                             |  | For the Fiscal Year Ended June 30, 2004 |       
|                                             |  |                                         |       
|                                             |  | September 30,                           |        | December 31, |   | March 31, |   | June 30, |       
|                                             |  |                                         |        |              |   |           |   |          |       
|As
  Previously Reported                     |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Net sales                                    |  | $                                       | 24,247 |              | $ | 27,654    |   | $        | 28,433 |   | $ | 36,308 |  
|                                             |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Gross profit                                 |  | $                                       | 7,777  |              | $ | 10,387    |   | $        | 9,402  |   | $ | 15,499 |  
|                                             |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Earnings (loss) from
  continuing operations |  | $                                       | (663   | )            | $ | 928       |   | $        | 968    |   | $ | 3,015  |  
|Loss from discontinued
  operations          |  |                                         | (162   | )            |   | (1,912    | ) |          | (667   | ) |   | (4,914 | )
|                                             |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Net earnings (loss)                          |  | $                                       | (825   | )            | $ | (984      | ) | $        | 301    |   | $ | (1,899 | )
|                                             |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Basic earnings (loss) per
  share:           |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Continuing operations                        |  | $                                       | (0.04  | )            | $ | 0.05      |   | $        | 0.05   |   | $ | 0.17   |  
|Discontinued operations                      |  |                                         | (0.01  | )            |   | (0.10     | ) |          | (0.03  | ) |   | (0.28  | )
|                                             |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Net earnings (loss)                          |  | $                                       | (0.05  | )            | $ | (0.05     | ) | $        | 0.02   |   | $ | (0.11  | )
|                                             |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Diluted earnings (loss) per
  share:         |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Continuing operations                        |  | $                                       | (0.04  | )            | $ | 0.05      |   | $        | 0.05   |   | $ | 0.17   |  
|Discontinued operations                      |  |                                         | (0.01  | )            |   | (0.10     | ) |          | (0.03  | ) |   | (0.27  | )
|                                             |  |                                         |        |              |   |           |   |          |        |   |   |        |  
|Net earnings (loss)                          |  | $                                       | (0.05  | )            | $ | (0.05     | ) | $        | 0.02   |   | $ | (0.10  | )
|                                             |  |                                         |        |              |   |           |   |          |        |   |   |        |  

|                                      |  |                                         |     |              |   |           |   |          |     |   |   |      |  
|------------------------------------- |  | --------------------------------------- | --- | ------------ | - | --------- | - | -------- | --- | - | - | ---- | -
|                                      |  | For the Fiscal Year Ended June 30, 2004 |    
|                                      |  |                                         |    
|                                      |  | September 30,                           |     | December 31, |   | March 31, |   | June 30, |    
|                                      |  |                                         |     |              |   |           |   |          |    
|Restatement
  Summary                 |  |                                         |     |              |   |           |   |          |     |   |   |      |  
|Net sales                             |  | $                                       | (81 | )            | $ | (91       | ) | $        | (92 | ) | $ | (102 | )
|                                      |  |                                         |     |              |   |           |   |          |     |   |   |      |  
|Gross profit                          |  | $                                       | (85 | )            | $ | (95       | ) | $        | (97 | ) | $ | (108 | )
|                                      |  |                                         |     |              |   |           |   |          |     |   |   |      |  
|Earnings from continuing
  operations |  | $                                       | 73  |              | $ | (22       | ) | $        | (54 | ) | $ | (19  | )
|Loss from discontinued
  operations   |  |                                         |    |              |   |          |   |          |    |   |   |     |  
|                                      |  |                                         |     |              |   |           |   |          |     |   |   |      |  
|Net earnings                          |  | $                                       | 73  |              | $ | (22       | ) | $        | (54 | ) | $ | (19  | )
|                                      |  |                                         |     |              |   |           |   |          |     |   |   |      |  
|Basic earnings (loss) per
  share:    |  |                                         |     |              |   |           |   |          |     |   |   |      |  
|Continuing operations                 |  | $                                       |    |              | $ |          |   | $        |    |   | $ |     |  
|Discontinued operations               |  |                                         |    |              |   |          |   |          |    |   |   |     |  
|                                      |  |                                         |     |              |   |           |   |          |     |   |   |      |  
|Net earnings                          |  | $                                       |    |              | $ |          |   | $        |    |   | $ |     |  
|                                      |  |                                         |     |              |   |           |   |          |     |   |   |      |  
|Diluted earnings (loss) per
  share:  |  |                                         |     |              |   |           |   |          |     |   |   |      |  
|Continuing operations                 |  | $                                       |    |              | $ |          |   | $        |    |   | $ |     |  
|Discontinued operations               |  |                                         |    |              |   |          |   |          |    |   |   |     |  
|                                      |  |                                         |     |              |   |           |   |          |     |   |   |      |  
|Net earnings                          |  | $                                       |    |              | $ |          |   | $        |    |   | $ |     |  
|                                      |  |                                         |     |              |   |           |   |          |     |   |   |      |  

|                                             |  |                                         |            |              |   |            |   |          |            |   |   |            |  
|-------------------------------------------- |  | --------------------------------------- | ---------- | ------------ | - | ---------- | - | -------- | ---------- | - | - | ---------- | -
|                                             |  | For the Fiscal Year Ended June 30, 2004 |           
|                                             |  |                                         |           
|                                             |  | September 30,                           |            | December 31, |   | March 31,  |   | June 30, |           
|                                             |  |                                         |            |              |   |            |   |          |           
|                                             |  |                                         | (Restated) |              |   | (Restated) |   |          | (Restated) |   |   | (Restated) |  
|As
  Restated                                |  |                                         |            |              |   |            |   |          |            |   |   |            |  
|Net sales                                    |  | $                                       | 24,166     |              | $ | 27,563     |   | $        | 28,341     |   | $ | 36,206     |  
|                                             |  |                                         |            |              |   |            |   |          |            |   |   |            |  
|Gross profit                                 |  | $                                       | 7,692      |              | $ | 10,292     |   | $        | 9,305      |   | $ | 15,391     |  
|                                             |  |                                         |            |              |   |            |   |          |            |   |   |            |  
|Earnings (loss) from
  continuing operations |  | $                                       | (590       | )            | $ | 906        |   | $        | 914        |   | $ | 2,996      |  
|Loss from discontinued
  operations          |  |                                         | (162       | )            |   | (1,912     | ) |          | (667       | ) |   | (4,914     | )
|                                             |  |                                         |            |              |   |            |   |          |            |   |   |            |  
|Net earnings (loss)                          |  | $                                       | (752       | )            | $ | (1,006     | ) | $        | 247        |   | $ | (1,918     | )
|                                             |  |                                         |            |              |   |            |   |          |            |   |   |            |  
|Basic earnings (loss) per
  share:           |  |                                         |            |              |   |            |   |          |            |   |   |            |  
|Continuing operations                        |  | $                                       | (0.04      | )            | $ | 0.05       |   | $        | 0.05       |   | $ | 0.17       |  
|Discontinued operations                      |  |                                         | (0.01      | )            |   | (0.10      | ) |          | (0.03      | ) |   | (0.28      | )
|                                             |  |                                         |            |              |   |            |   |          |            |   |   |            |  
|Net earnings (loss)                          |  | $                                       | (0.05      | )            | $ | (0.05      | ) | $        | 0.02       |   | $ | (0.11      | )
|                                             |  |                                         |            |              |   |            |   |          |            |   |   |            |  
|Diluted earnings (loss) per
  share:         |  |                                         |            |              |   |            |   |          |            |   |   |            |  
|Continuing operations                        |  | $                                       | (0.04      | )            | $ | 0.05       |   | $        | 0.05       |   | $ | 0.17       |  
|Discontinued operations                      |  |                                         | (0.01      | )            |   | (0.10      | ) |          | (0.03      | ) |   | (0.27      | )
|                                             |  |                                         |            |              |   |            |   |          |            |   |   |            |  
|Net earnings (loss)                          |  | $                                       | (0.05      | )            | $ | (0.05      | ) | $        | 0.02       |   | $ | (0.10      | )
|                                             |  |                                         |            |              |   |            |   |          |            |   |   |            |  

F - 29

---



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON SCHEDULE II

The Board of
Directors and Stockholders of 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 sheets of
Zygo Corporation and subsidiaries as of June 30, 2005 and 2004, and the related
consolidated statements of operations, stockholders equity and cash flows for
each of the years in the three-year period ended June 30, 2005 as contained in
the 2005 Annual Report to stockholders on Form 10-K/A. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule listed in the
accompanying index on page F-1. This financial statement schedule is the
responsibility of the Companys management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.

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

KPMG LLP

Stamford,
Connecticut
June 20, 2006

S - 1

---



ZYGO CORPORATION AND CONSOLIDATED SUBSIDIARY

SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS

Years ended June 30, 2005, 2004, and
2003

(Thousands of
dollars)

|                                                 |  |                                    |       |           |   |            |   |                              |       |  |   |       | 
|------------------------------------------------ |  | ---------------------------------- | ----- | --------- | - | ---------- | - | ---------------------------- | ----- |  | - | ----- | 
|Description                                      |  | Balance
  at Beginning
  of Period |       | Provision |   | Write-Offs |   | Balance
  at End of
  Period |      
|                                                 |  |                                    |       |           |   |            |   |                              |      
|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 | 
|                                                 |  |                                    |       |           |   |            |   |                              |       |  |   |       | 
|Year Ended June 30, 2003:                        |  |                                    |       |           |   |            |   |                              |       |  |   |       | 
|Allowance for doubtful accounts                  |  | $                                  | 949   |           | $ | 270        |   | $                            | 882   |  | $ | 337   | 
|                                                 |  |                                    |       |           |   |            |   |                              |       |  |   |       | 
|Valuation allowance on net deferred tax
  assets |  | $                                  | 3,803 |           | $ |           |   | $                            | 1,983 |  | $ | 1,820 | 

S - 2

---



EXHIBIT INDEX

|        |      |  |                                                                       
|------- | ---- |  | ----------------------------------------------------------------------
|EXHIBIT |      | 
|TABLE   |      | 
|NUMBER  |      | 
|        |      | 
|        |      | 
|        | 21.  |  | Subsidiaries
  of Registrant                                          
|        |      | 
|        | 23.  |  | Consent of
  Independent Registered Public Accounting Firm            
|        |      | 
|        | 31.1 |  | Certification
  of Chief Executive Officer under Rule 13a-14(a)       
|        |      | 
|        | 31.2 |  | Certification
  of Chief Financial Officer under Rule 13a-14(a)       
|        |      | 
|        | 32.1 |  | Certification
  of Chief Executive Officer and Chief Financial Officer

---