|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|WASHINGTON,
 D.C. 20549           
|                                  
|FORM 10-K                         

|           |                                                                                           
|---------- | ------------------------------------------------------------------------------------------
|(Mark One)
|x          | Annual Report Pursuant to Section 13 or 15(d) of the
 Securities Exchange Act of 1934     
|           | For the
 fiscal year ended June 30, 2010                                                  
|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 |  | (IRS Employer Identification Number)
|incorporation or organization)  |  |                                     

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

|                                                                                                                                                                                                                                                                                                                                                                                                
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Indicate by
 check mark if the registrant is a well-known seasoned issuer, as defined in
 Rule 405 of the Securities Act.                                                                                                                                                                                                                                                                       
|YES o NO x                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                
|Indicate by
 check mark if the registrant is not required to file reports pursuant to
 Section 13 or Section 15(d) of the Act.                                                                                                                                                                                                                                                                  
|YES o NO x                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                
|Indicate by
 check mark whether the registrant (1) has filed all reports required to be
 filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
 the preceding 12 months (or for such shorter period that the registrant was
 required to file such reports), and (2) has been subject to such filing
 requirements for the past 90 days.                                   
|YES x NO o                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                
|Indicate by
 check mark whether the registrant has submitted electronically and posted on
 its corporate Web site, if any, every Interactive Data File required to be
 submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of
 this chapter) during the preceding 12 months (or for such shorter period that
 the registrant was required to submit and post such files). (1)
|YES o NO o                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                
|Indicate by
 check mark if disclosure of delinquent filers pursuant to Item 405 of
 Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will
 not be contained, to the best of registrants knowledge, in definitive proxy
 or information statements incorporated by reference in Part III of this Form
 10-K or any amendment to this Form 10-K.                          
|x                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                
|Indicate by
 check mark whether the registrant is a large accelerated filer, an
 accelerated filer, a non-accelerated filer, or a smaller reporting company.
 See the definitions of large accelerated filer, accelerated filer and
 smaller reporting company in rule 12b-2 of the Exchange act. (Check one):                                                                            

|                                                                       |                             
|---------------------------------------------------------------------- | ----------------------------
|Large
 accelerated filer o                                             | Accelerated
 filer x        
|Non-accelerated
 filer o (Do not check if a smaller reporting company) | Smaller
 reporting company o

(1) The
registrant is not currently required to submit Interactive Data Files pursuant
to Rule 405 of Regulation S-T.

---



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

The aggregate
market value of the registrants Common Stock held by non-affiliates, based
upon the closing price of the Common Stock on December 31, 2009, as reported by
the NASDAQ National Market, was $57,314,894. 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.

17,540,983 Shares of Common Stock, $.10 Par
Value, at September 1, 2010

Documents
incorporated by reference: Specified portions of the registrants Proxy
Statement related to the registrants 2010 Annual Meeting of Stockholders, to
be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 with
the Securities and Exchange Commission, are incorporated by reference into Part
II (Item 5) and Part III (Items 10-14) of this Annual Report on Form 10-K to
the extent stated herein.

---



TABLE OF CONTENTS

|          |  |                                                                                                                    |  |      | 
|--------- |  | ------------------------------------------------------------------------------------------------------------------ |  | ---- | 
|          |  |                                                                                                                    |  | Page
|          |  |                                                                                                                    |  |     
|-----     |  | Forward-Looking
 Statements                                                                                        |  | 1    | 
|          |  |                                                                                                                    |  |      | 
|PART I    |  |                                                                                                                    |  |      | 
|          |  |                                                                                                                    |  |      | 
|Item
 1.  |  | Business                                                                                                           |  | 2    | 
|          |  |                                                                                                                    |  |      | 
|-----     |  | Executive
 Officers of the Registrant                                                                              |  | 9    | 
|          |  |                                                                                                                    |  |      | 
|Item
 1A. |  | Risk
 Factors                                                                                                      |  | 10   | 
|          |  |                                                                                                                    |  |      | 
|Item
 1B. |  | Unresolved
 Staff Comments                                                                                         |  | 14   | 
|          |  |                                                                                                                    |  |      | 
|Item
 2.  |  | Properties                                                                                                         |  | 15   | 
|          |  |                                                                                                                    |  |      | 
|Item
 3.  |  | Legal
 Proceedings                                                                                                 |  | 15   | 
|          |  |                                                                                                                    |  |      | 
|PART II   |  |                                                                                                                    |  |      | 
|          |  |                                                                                                                    |  |      | 
|Item
 5.  |  | Market
 for the Registrants Common Equity, Related Stockholder Matters and Issuer
 Purchases of Equity Securities |  | 16   | 
|          |  |                                                                                                                    |  |      | 
|Item
 6.  |  | Selected
 Financial Data                                                                                           |  | 18   | 
|          |  |                                                                                                                    |  |      | 
|Item
 7.  |  | Managements
 Discussion and Analysis of Financial Condition and Results of Operations                             |  | 19   | 
|          |  |                                                                                                                    |  |      | 
|Item
 7A. |  | Quantitative and Qualitative Disclosures about Market
 Risk                                                        |  | 32   | 
|          |  |                                                                                                                    |  |      | 
|Item
 8.  |  | Financial
 Statements and Supplementary Data                                                                       |  | 32   | 
|          |  |                                                                                                                    |  |      | 
|Item
 9.  |  | Changes
 in and Disagreements With Accountants on Accounting and Financial Disclosure                              |  | 32   | 
|          |  |                                                                                                                    |  |      | 
|Item
 9A. |  | Controls
 and Procedures                                                                                           |  | 33   | 
|          |  |                                                                                                                    |  |      | 
|Item
 9B. |  | Other
 Information                                                                                                 |  | 34   | 
|          |  |                                                                                                                    |  |      | 
|PART III  |  |                                                                                                                    |  |      | 
|          |  |                                                                                                                    |  |      | 
|Item
 10. |  | Directors,
 Executive Officers and Corporate Governance                                                            |  | 34   | 
|          |  |                                                                                                                    |  |      | 
|Item
 11. |  | Executive
 Compensation                                                                                            |  | 34   | 
|          |  |                                                                                                                    |  |      | 
|Item
 12. |  | Security
 Ownership of Certain Beneficial Owners and Management and Related Stockholder
 Matters                   |  | 34   | 
|          |  |                                                                                                                    |  |      | 
|Item 13.  |  | Certain
 Relationships and Related Transactions, and Director Independence                                         |  | 34   | 
|          |  |                                                                                                                    |  |      | 
|Item
 14. |  | Principal
 Accountant Fees and Services                                                                            |  | 34   | 
|          |  |                                                                                                                    |  |      | 
|PART IV   |  |                                                                                                                    |  |      | 
|          |  |                                                                                                                    |  |      | 
|Item
 15. |  | Exhibits,
 Financial Statement Schedules                                                                           |  | 35   | 
|          |  |                                                                                                                    |  |      | 
|-----     |  | Signatures                                                                                                         |  | 38   | 

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.

---



FORWARD-LOOKING STATEMENTS

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

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

1

---



PART I

Item 1. Business

OVERVIEW

Zygo
Corporation (Zygo, we, us, our, or Company) designs, develops,
and manufactures ultra-high precision measurement solutions to improve our
customers manufacturing yields, and top-tier optical sub-systems and
components for original equipment manufacturers (OEM) and end-user
applications. We operate within two divisions. Our Metrology Solutions Division
(also referred to herein as the Metrology segment) manufactures products to
improve quality, increase productivity, and decrease the overall cost of
product development and manufacturing for high-technology companies. Our
Optical Systems Division (also referred to herein as the Optics segment)
provides leading-edge product development and manufacturing services that
leverage a variety of core technologies across medical, defense, semiconductor,
laser fusion research, biomedical, and other industrial markets. The Metrology
Solutions Division, has manufacturing locations in Middlefield, Connecticut; Montreal
Canada; and Shanghai, China. The Optical Systems Division, has manufacturing
locations in Middlefield, Connecticut; Tucson, Arizona; and Costa Mesa,
California.

Our current
focus is on worldwide markets that are engaged in research and manufacture of
high volume, precision components being used to support emerging and growing
high technology applications in industries such as consumer electronics, solar
energy, automotive engineering, LED lighting, medical, military and defense. We
continue to focus on business opportunities around the globe and particularly
in the Asian marketplace, as evidenced by the continued investment in and
expansion of our joint venture in China.

Over the last
five fiscal quarters, we have divested ourselves of our Semiconductor and Flat
Panel Display (FPD) product lines and shut down our IC packaging operations
in Singapore in order to concentrate on our core technologies. We continue to
sell OEM sensor heads related to semiconductor and FPD systems manufactured
through our Instruments product line. In October 2009, we and Toho Technology
Corporation of Nagoya, Japan announced a strategic business partnership,
pursuant to which Toho will have the exclusive right to Zygos technology in
the manufacturing and distribution of products to the large substrate FPD
market.

In January
2010, Dr. Chris L. Koliopoulos was appointed President and Chief Executive
Officer and also became a member of the Board of Directors of Zygo. On January
22, 2010, we completed the acquisition of Zemetrics, Inc. (Zemetrics), a
small interferometric metrology company in which Dr. Koliopoulos was a major
shareholder. The acquisition of Zemetrics, which has recently introduced an
advanced product in the optical instrumentation market, further strengthens our
offering in our core markets, which is a strategic focus for us. Zemetrics is
included in the Metrology segment.

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

2

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Business Segments & Products

Our products
and services in our two reportable divisions are based on our core
technologies, process knowledge and extensive experience in optical design,
mechanical engineering, software and algorithms, and optical fabrication. Most
products are proprietary or incorporate proprietary technology in their design.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Metrology Solutions Division                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Our
 Metrology Solutions Division includes 3D surface metrology products,
 precision positioning systems, and custom engineered solutions. We offer a
 comprehensive line of metrology products and solutions to address
 requirements of precision manufacturing industries and advanced research. Our
 systems are commonly used to quantitatively measure surface characteristics
 and critical parameters, including topography and roughness, shape,
 dimensions, thickness, optical characteristics and defects.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | As a
 stand-alone lab instrument, or on the shop floor, or integrated as part of a
 larger system or process in production, Zygo metrology products provide
 precise measurements for quality control, process feedback and machine
 control. Many applications exist in a variety of markets where precision and
 consistency are critical to the process or the enablement of advanced
 research and process development, including the automotive, consumer
 electronics, medical, aerospace, military, materials research, optics, flat
 panel displays, and semiconductor industries. The inherent precision,
 reliability and speed of Zygos metrology measurement technologies help to
 reduce cost of ownership, which is a significant factor for many users.
 Demand for our products continues to be driven by advancement of next
 generation devices and technology, complex processing methods and tighter
 manufacturing tolerances across many industries.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | We are
 considered to be a world leader in optical interferometry with a patent
 portfolio of over 360 patents, many of which are related to the broad field
 of interferometry and its practical application. We continually strive to
 strengthen our product offerings and advance our competitive position by
 developing new products and solutions to meet our customers needs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Our
 metrology product offerings in our larger markets include the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 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 Series 3D Optical Profilers                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Our high
 precision metrology equipment is well suited for fuel injector components,
 which are ground or lapped to tolerances of one-hundred billionths of a
 meter. Our patented FDA data acquisition system for the NewView optical
 profiler meets this high-precision measurement requirement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Consumer Electronics                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Consumer
 electronics, including cell phones, digital cameras, DVD and CD players, and
 optical computer drives, have significant optical content. Consumer
 electronic optics, which provides imaging and data storage, are manufactured
 in quantities in the hundreds of thousands to millions of components per
 year. These complex miniature optical systems require precise optical
 testingfrom development to in-line process controlwhich our
 measurement-based process control and yield enhancement systems are designed
 to perform.                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | VeriFire Asphere System                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The VeriFire
 Asphere provides high resolution 3-Dimensional surface metrology for aspheric
 shaped surfaces using patented non-contact interferometric techniques for
 production and process control. Aspheres are important in consumer
 electronics products, cameras, military/defense optics, and commercial optics
 and represent a growing segment in the optics markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

3

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | VeriFire Systems                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | The
 development of new optical systems for any application requires flexible and
 easy to use test equipment. The ZYGO VeriFire systems are our latest products
 in our established product family that has improved optical testing and
 continues to evolve to meet changing requirements. Consumer electronics
 production applications for larger optics, greater than a 25 mm diameter, and
 research and development for any size application rely on these products for
 critical developmental data and process control feedback in production. These
 products are widely used due to their configuration flexibility in both
 hardware set ups and ZYGOs MetroPro data analysis software.                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Defense/Aerospace                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | GPI and VeriFire Systems                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Developing
 state-of-the-art optical designs and manufacturing technology for the
 defense/aerospace market also requires leading edge 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. Our VeriFire Asphere rapidly measures asphere shaped
 optics in a production environment. Our GPI PE continues our move to the
 production floor, providing laboratory level results in a production
 environment. Using patented algorithms, the GPI PE removes the degrading
 effects of vibration from the measurement without the need for new expensive
 hardware. This system is primarily used in the production of military and
 commercial optics. We are also active in designing and manufacturing custom
 systems for defense/aerospace applications, especially interferometers that
 operate at infrared wavelengths, which are unique to this market.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Semiconductor Products                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The
 transistor and associated integrated circuit have transformed the way people
 work, live and play, creating several multi-billion dollar industries that
 thrive through innovation, technology, and ultra-large scale integration of
 micro/nano circuitry. These industries provide components used in everyday
 appliances, including the more modern mobile phones and wireless internet
 devices. Due to the ubiquity of the integrated circuit, it is sometimes
 difficult to fathom the complexities involved in development and
 manufacturing. State-of-the-art microprocessors have in excess of a billion
 transistors comprised of components which have physical dimensions as small
 as 32 nm.                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | In June
 2009, we agreed to a supply agreement with Nanometrics, whereby we will
 supply certain interferometer sensors to Nanometrics for incorporation into
 the UniFire line of automated metrology systems. The in-line semiconductor
 systems we developed over the last five years, encompassing the UniFire
 product line, will now be manufactured, sold, and serviced through
 Nanometrics. These systems are designed to help semiconductor and data
 storage customers control their high volume manufacturing process. The semiconductor
 metrology products target device wafer based applications prior to die
 singulation.                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 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 systems, mask
 and reticle writers, and yield improvement metrology tools rely on
 displacement measuring interferometers to provide precise feedback to control
 the position of the silicon wafer. Our Metrology Solutions Divisions ZMI
 7700 series precision positioning feedback systems are designed primarily for
 photolithography systems. They are also used in a broad range of
 semiconductor metrology and back-end process tools.                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Printed Circuit Board Substrates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Printed
 circuit substrates interface IC flip chip packages to printed circuit boards.
 These substrates make the circuit connection via arrays of miniature solder
 bumps and balls and ZYGO manufactures several tools to measure these bump and
 ball arrays for process control and yield improvement. Several products serve
     this market, including the Nano CSP2000 and Nano2 series, providing high-throughput, fully-automated
 100% 2D/3D inspection of C4 bumps for chip scale packaging (CSPs) strips to
 support high-volume manufacturing and process yields.                                                                                                                                                                                                                                                                                                                                                                                                                                     

4

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Technology Development Projects                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Photolithography
 scanners image the electronic circuit pattern through a precision projection
 lens. The optical performance of the lenses required for next-generation
 photolithography scanners often exceeds the capabilities of commercially
 available measurement systems. Our expertise in optical interferometer
 technology, and the practical skills needed to apply this technology, make us
 well suited to deliver custom solutions to leading photolithography equipment
 suppliers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In the third
 quarter of fiscal 2010, we acquired Zemetrics, Inc. (Zemetrics), an Arizona-based
 manufacturer of optical metrology systems. The acquisition of Zemetrics
 provided us with additional innovative technology and complementary product
 portfolio that we believe will provide opportunities for future growth in
 several key markets, including data storage, high brightness light-emitting
 diode and consumer electronics. We believe that the addition of the product
 lines from Zemetrics will expand the opportunities for both our existing
 products, as well as the acquired products, through exposure to new markets
 and applications. We also plan to leverage the acquired technology to bring
 more innovative and differentiated product solutions to market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Optical Systems Division                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Our Optical
 Systems Division specializes in producing high precision integrated optical
 systems and system-critical optical components for a variety of applications
 that include medical laser delivery systems, U.S. Department of Defense applications,
 3D medical imaging, and semiconductor lithography. We believe that the
 division creates long-term customer value through, among other things,
 proprietary manufacturing technology, design for manufacturing and assembly
 services and specialized manufacturing know-how required to produce medical
 devices regulated by the U.S. Food and Drug Administration.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Our optical
 systems services include integrated system design, assembly and manufacture
 of precision optical components and electro-optical systems. Products and
 application areas of focus include medical laser delivery systems, 3D dental
 imaging, military head mounted displays, and opto-electronic surveillance
 devices. We are also one of the worlds largest manufacturers of laser fusion
 optics and meter-class plano optics, including through the use of advanced
 materials such as sapphire.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Supporting
 both the projection lens and stage positioning systems, we supply high
 precision stage mirrors and lithographic lenses to leading photolithographic
 OEMs and end users. In addition, we design and manufacture deep UV
 objectives, inspection systems and components to a wide range of industrial
 customers as well as supporting the optical needs of our Metrology Solutions
 division.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Defense/Aerospace                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Defense and
 aerospace companies use optical technology in a broad range of applications.
 One application is the enhancement of human sight through imaging systems,
 such as telescopes, that are used in satellite and airborne reconnaissance,
 fire-control systems, and hand-held viewers. Defense Department areas of
 focus include fire control, remote sensing, flight simulation, avionics,
 tracking, stealth systems and high energy weapon systems. Our Optical Systems
 Division participates in a variety of defense applications ranging from high
 performance sapphire electro magnetic interference (EMI) windows used in
 stealth aircraft and ships to satellite optical sensing packages and state of
 the art flight simulation helmet mounted displays. In addition to mainstream
 Defense Department and foreign government applications, we are a leading
 manufacturer of several critical path components to the largest nuclear
 research laser system ever deployed by the National Ignition Facility
 (NIF), which is used for both weapons maintenance programs and the
 development of nuclear fusion energy sources. In addition, our Optical
 Systems Division has expanded into long range surveillance systems valuable
 to homeland security applications, such as nuclear power plant perimeter
 control, border surveillance, and seaport monitoring.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Nuclear
 research for both weapons maintenance programs and the development of nuclear
 fusion energy sources also use large optical lasers at a number of worldwide
 facilities, including NIF. In addition, projection systems in computer-based
 flight and battlefield simulation use sophisticated optical systems. Several
 of our products support these and other defense/aerospace programs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Medical/Biomedical                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The medical
 and biomedical markets are growing rapidly. The increased demand for high
 precision medical devices continues to be driven by an aging population and
 consumers desire to improve their quality of life. Our Optical Systems
 Division addresses this demand with specialized design for manufacturing and
 assembly services tailored to producing high-end diagnostic, processing and
 surgical devices. In addition, the group offers a variety of process control
 advantages including medical device quality management systems, such as ISO
 13485:2003. Key application                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

5

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | areas are
 diagnostic and surgical ophthalmic devices, inter-oral 3D imaging, and
 biomedical cell sorting. Supporting these applications are our facilities in
 Tucson, Arizona (manufacturing) and Costa Mesa, California (development and
 prototype manufacturing). Strategically located, these facilities are capable
 of providing highly focused engineering support to fast growing medical and
 biomedical regions for both manufacturing and research.

Sales, Marketing and Service

We market our
full range of products throughout the United States and in most foreign
markets. Our sales are largely generated through our direct worldwide sales
force, with a small percentage of sales made through independent agents and
distributors. We have sales and service centers positioned closely to our major
customers or concentrations of business opportunity throughout the Americas,
Europe and Asia. We believe that our business relationships with the major
customers within all of our key markets are generally favorable, and that we
are in a good position to respond promptly to variations in customer
requirements and technology trends.

We require our
sales representatives to have technical expertise and a thorough understanding
of the businesses of our customers and our prospective customers. In a typical
sale process, one of our representatives will provide a potential customer with
information about our products, including specifications and performance data,
as well as a product demonstration using samples provided by the customer. The
sales cycle for our systems typically ranges from three to twelve months, but
can be longer for complex system sales or when our customers are evaluating new
applications of our technology.

Our products
are supported by a global service organization of factory trained technicians
and engineers, and backed by a standard twelve month warranty. We also offer
customers optional service contracts for our products of one year or more in
duration after expiration of any warranty.

Competition

We participate
in markets that are highly dynamic and globally competitive across all of our
divisions. Additionally, many of the markets for our products are subject to
constant change, due largely to evolving customer needs. As we attempt to
respond to this change, the competition landscape as well as the specific
strategies of competitors likewise may change. Moreover, one or more of our
competitors might achieve a technological advancement that could put us at a
competitive disadvantage.

Although there
are no firms that compete with us across our full range of product lines and
services, we face competition in each business segment in domestic and foreign
markets. Certain of our competitors have substantially greater resources than
us, or may be smaller regional producers with lower overhead costs and profit
requirements, particularly in Asia. Our strategy is to offer technologically
advanced products that are price competitive in our markets, and to link the
product offerings with market knowledge and customer service. We believe this
serves to differentiate our products in many markets. Due to the critical mass
necessary to support our large installed base of systems, as well as the highly
specialized nature of our products, we have experienced minimal competition in
our service business.

Our overall
focus is typically on niche and value-added segments where we can
differentiate, through technological and product value advantage, our products
from our competitions products. The following further discusses the
competitive landscape in each of our strategic business divisions.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Metrology Solutions Division                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Our
 principal competitors for the sale of metrology products and services include
 Veeco, Ametek, Agilent, KLA-Tencor and 4D Technology. We believe the key
 competitive factors are performance, range of features, reliability, price
 and service. We believe that we are competitive with respect to each of these
 factors, although we have faced increasing pressure on purchase price due to
 aggressive pricing practices of competitors. Our ability to remain
 competitive depends in part upon our success in developing new and enhanced
 systems and introducing these systems at competitive prices on a timely
 basis. Intense price competition in the sale of metrology products in the
 past has adversely affected our profit margins.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Our
 Metrology Solutions Division offers products which we believe are leaders in
 most of the segments it serves, including semiconductor, flat panel displays,
 precision machining, research and optics, A key strategy in this segment is
 to continue to develop and produce precise 3D surface metrology products that
 are technology leaders in the markets where they participate, particularly as
 the need for more advanced application use is demanded, and where adoption
 and volume is continuously growing. On a regional basis, this segment
 participates in North America, Europe and Asia. It faces competition in each
 of these locations from a wide variety of companies, from very large
 multinational                          

6

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | manufacturers
 to much smaller, regional companies. As with our other segment, this segment
 must address the continual threat of commoditization, particularly with
 respect to products that have matured in their life cycle.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Optical Systems Division                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Our Optical
 Systems Division offers precision optical products and integrated
 electro-optical systems that serve the critical needs of the military,
 defense, medical and semiconductor segments. We have a strong reputation and presence
 worldwide, particularly in North America and Europe. Our business also
 includes government contract and consulting work. We have multiple
 competitors across our served markets. We typically compete on price and
 delivery, as well as quality and service. Our experience in design and
 manufacture of complex optical systems design is a core competency and we are
 committed to protecting our intellectual property and designs, particularly
 in regions where such laws are not as strictly enforced. We also strive to
 continuously differentiate our product offerings, to help avoid
 commoditization of certain products. Competitors include, but are not limited
 to, L-3 Tinsley, Exotic Electro-Optics, Sagem, and Elcan Optical
 Technologies.

Research and Development

We maintain
our position as a market leader in metrology and optics through continuous and
focused investment in research and development of new technology, products and
applications. Research and development activities constitute an important and
vital part of our overall business strategy as the markets we serve are
typically characterized by rapid technological changes and advances.
Accordingly, the success of our strategy is in part dependent on our ability to
develop market-leading products and solutions, which is primarily driven by
close relationships with our customers, coupled with efforts in research and
development.

Through
continual investment in research and development, we seek to expand our
leadership position in metrology products and optical subsystems. In order to
remain as a market leader in our core market segments, Zygo works with our
customers to both address their current needs as well as their evolving
requirements to remain designed into their product lifecycle. In addition, as
part of our development efforts, we focus on lowering the production costs of
our products.

We hold
approximately 360 patents and have additional patent applications on file
related to both business segments. The patents are of varying duration and
provide some protection from competition. Although we vigorously defend our
patents, we believe that our patents are most valuable when combined with our
products, technology, competencies and customer-focus, value-added solutions.
On occasion, we also engage in joint research and development projects with
some of our customers and other parties. We also own a number of registered and
unregistered trademarks and have acquired certain technology that we believe to
be of importance to our business. We believe that continued enhancement,
development, and commercialization of new and existing products and systems are
essential to maintaining and improving our position in the markets in which we
operate.

Patents and Other Intellectual PropertyOur success and ability to compete depend
substantially on our technology. We have been developing a portfolio of
intellectual property for over 30 years, and we rely on a combination of
patent, copyright, trademark, 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 312 United
States patents issued, of which approximately 240 are currently active, and
approximately 160 foreign patents issued, of which approximately 120 are
active. We have approximately 35 United States and approximately 130 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. We do not
expect expirations in the near future related to our active patents to have a
material effect on our business.

BACKLOG AND ORDERSBacklog at June 30, 2010 was $44.9 million, an
increase of $6.8 million as compared with $38.1 million at June 30, 2009. The
fiscal 2010 year-end backlog consisted of $21.4 million, or 48%, in the
Metrology segment and $23.5 million, or 52%, in the Optics segment. Orders for
the fiscal year ended June 30, 2010 totaled $108.1 million and consisted of
$68.7 million, or 64%, in the Metrology segment and $39.4 million, or 36%, in
the Optics segment.

7

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MARKETING AND SALESOur sales and marketing strategy is to establish
and/or solidify strategic relationships with leading OEMs and end-users in
targeted sectors within our markets. The selling process for our products is
performed through our worldwide sales organization operating out of regional
sales offices in California, China, Connecticut, Germany, Japan, Singapore, and
Taiwan. Supporting this core sales team are business development, marketing,
service, and engineering specialists representing our various optics and
metrology units in Connecticut, Arizona, California, Canada, and Singapore.
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 (based on shipping
destination, including sales delivered through distributors) during the past
three years:

|               |  |                            |     |      |  |      |   |  |     |  
|-------------- |  | -------------------------- | --- | ---- |  | ---- | - |  | --- | -
|               |  | Fiscal Year Ended June 30, |    
|               |  |                            |    
|               |  | 2010                       |     | 2009 |  | 2008 |  
|               |  |                            |     |      |  |      |  
|Americas       |  |                            | 54  | %    |  | 48   | % |  | 49  | %
|               |  |                            |     |      |  |      |   |  |     |  
|Far East:      |  |                            |     |      |  |      |   |  |     |  
|Japan          |  |                            | 18  | %    |  | 23   | % |  | 28  | %
|Pacific Rim    |  |                            | 15  | %    |  | 17   | % |  | 9   | %
|               |  |                            |     |      |  |      |   |  |     |  
|Total Far East |  |                            | 33  | %    |  | 40   | % |  | 37  | %
|               |  |                            |     |      |  |      |   |  |     |  
|Europe         |  |                            | 13  | %    |  | 12   | % |  | 14  | %
|               |  |                            |     |      |  |      |   |  |     |  
|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, 2010,
our global sales customer support and service organization consisted of 70
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
SUPPLYOur principal manufacturing activities are conducted
at our facilities in Middlefield, Connecticut and Tucson, Arizona. We also
perform manufacturing activities in our Canada, Singapore, and China
facilities.

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

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

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

8

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AVAILABLE INFORMATIONWe make available free of charge through our website,
www.zygo.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, proxy statements, and all amendments to those
reports as soon as reasonably practicable after such material is electronically
filed with the Securities and Exchange Commission (SEC). These reports may
also be obtained without charge by contacting Investor Relations, Zygo
Corporation, Corporate Headquarters, Laurel Brook Road, Middlefield,
Connecticut 06455-1291, phone: (860) 347-8506. Our internet website and the
information contained therein or incorporated therein are not intended to be
incorporated into this Annual Report on Form 10-K. In addition, the public may
read and copy any materials we file with the SECs Public Reference Room at 100
F Street, NE, Room 1580, Washington, DC 20549 or may obtain information by
calling the SEC at 800-SEC-0330. Moreover, the SEC maintains an internet
website that contains reports, proxy, and information statements, or other
information regarding reports that we file electronically with them at
http://www.sec.gov.

EMPLOYEESAt June 30, 2010, we employed 454 people and 13
temporary and independent contractors worldwide. We employed 217 in
manufacturing, 110 in research and development, 70 in sales and marketing, and
57 in management and administration. Our employees are not represented by a
labor union or a collective bargaining agreement. We regard our employee
relations as satisfactory.

EXECUTIVE
OFFICERS OF THE REGISTRANT 
Chris L. Koliopoulos  age 57  Chairman, President, and Chief Executive
OfficerDr. Koliopoulos joined our company in January 2010 and
serves as our Chairman, President, and Chief Executive Officer. Previously he
has served as President and CEO of ADE Corporation from 2002 to 2006, and as a
private investor, director, and advisor to Zemetrics, Inc. from 2007 to 2010.

John M. Stack  age 45 - President, Optical
Systems DivisionMr. Stack joined our company in November 2006 and has
served as President of the Optical Systems Division since December 2006.
Previously he spent 18 years with Edmund Optics Inc., a supplier of optics and
optical components, where his most recent position was President and Chief
Operating Officer from 2001 to 2006. Prior to that Mr. Stack held several
management positions at Edmund Optics Inc. including Executive Vice President,
Director of Engineering and Application Engineering Manager.

Douglas J. Eccleston  age 61  Senior Vice
President, Worldwide OperationsMr. Eccelston has served as Senior Vice President,
Precision Positioning Systems since February 2007 and as Vice President,
Precision Positioning Systems from March 2003 to January 2007. 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.

William H. Bacon  age 60  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.

David J. Person - age 62 - 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 announced his intention to retire from the
Company in September 2010.

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

9

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Item 1A. Risk
Factors

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

General economic conditions and the related
deterioration in the global business environment could have a material adverse
effect on our business, operating results and financial condition.Global consumer confidence has eroded amidst concerns over, among
other things, declining asset values, inflation, volatility in energy costs,
geopolitical issues, the availability and cost of credit, rising unemployment,
and the stability and solvency of financial institutions, financial markets,
businesses and sovereign nations. These concerns have slowed global economic
growth and have resulted in recessions in numerous countries, including many of
those in North America, Europe and Asia, where the Company does substantially
all of its business. As these economic conditions continue to persist, or if
they worsen, a number of negative effects on our business could result,
including customers or potential customers reducing or delaying orders, the
insolvency of key suppliers which could result in production delays, the
inability of customers to obtain credit, and the insolvency of one or more
customers. Any of these effects could impact our ability to effectively manage
inventory levels and collect receivables, create unabsorbed costs due to lower
net sales, and ultimately decrease our net sales and profitability including
write-downs of assets.

We are subject to environmental laws and
regulations and may have liabilities arising from environmental matters.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 applicable regulations could subject us to future liabilities or the
suspension of production. We are aware of certain levels of contamination on
our property which are below reportable levels. In addition, we are aware of
certain contamination on an adjacent property that we formerly owned. The
future effect of environmental matters, including potential liabilities, is
often difficult to estimate. We are unable to determine or reasonably estimate
the amount of cost, if any, that we might incur or for which we may potentially
be responsible to remediate the situation or for damages which may have
resulted or result from the situation. In addition, environmental 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
such regulations.

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

We have determined that our disclosure
controls and procedures and our internal control over financial reporting are
currently not effective. The lack of effective internal controls could
materially adversely affect our financial condition and ability to carry out
our business plan.In connection with our financial results for the
fourth quarter of fiscal 2010, our management team for financial reporting, under
the supervision and with the participation of our Chief Executive Officer and
our Corporate Controller acting as the Principal Financial Officer, conducted
an evaluation of the effectiveness of the design and operation of our internal
controls and the remediation of a material weakness reported in our third
quarter 10-Q filing for the period ended March 31, 2010 related to errors in
accounting for unusual or complex transactions. We began the process of
implementing additional controls in our financial reporting process in the
fourth quarter of fiscal 2010. However, certain controls designed and
implemented to address the identified material weakness in the period-end
financial reporting process have not had a sufficient period of time to operate
for our management to conclude that they are operating effectively, and certain
controls have not been fully implemented at June 30, 2010. As a result we have
concluded that a material weakness in our internal control over financial
reporting continues to exist and that our internal control over financial
reporting was not effective. Until we have been able to test the operating
effectiveness of remediated internal controls and ensure the effectiveness of
our disclosure controls and procedures, any material weaknesses may materially
adversely affect our ability to report accurately our financial condition,
results of operations, and our cash flows in the future in a timely and reliable
manner. In addition, although we continually review and evaluate internal control
systems to allow management to report on the sufficiency of our internal controls,
we cannot assure you that we will not discover additional weaknesses in our
internal control over financial reporting. Any such additional weakness or
failure to remediate the existing weakness could materially adversely affect
our financial condition or ability to comply with applicable financial
reporting requirements.

10

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Recent changes to senior management could
affect the operation of the Company.In January 2010, we announced the appointment of Dr.
Koliopoulos as our new President and Chief Executive Officer. In August 2010,
Walter Shephard, our then Chief Financial Officer, stepped down from his
position with Zygo. In addition, as previously announced, Zygos Vice President
of Human Resources will be retiring from the Company effective September 15,
2010. We have initiated a search for Mr. Shephards successor, which is
ongoing. The changes in senior management and the search for a new Chief
Financial Officer could adversely impact the Company due to a lack of
historical knowledge and familiarity with all aspects of the Companys business
and operations by new senior management.

We have been dependent on sales to one large
customer; the loss of this customer or expected near-term reduction in orders
from this customer has and would materially affect our sales and profitability.During fiscal 2010, 2009, and 2008, sales to Canon,
our largest customer in each of those periods, accounted for 9%, 14%, and 19%
of our net sales, respectively. We expect that sales to Canon will continue to
represent a significant, yet declining, percentage of our net sales for the
near future. Canon is an original investor in our company, the owner at June
30, 2010 of approximately 7% of our outstanding shares of common stock, and is
a distributor of certain of our products in the Japanese market. A reduction or
delay in orders from this customer, including reductions or delays due to
market, economic, or competitive conditions in the industries in which we or
our customer serves, could have a material adverse effect upon our results of
operations. Our customers, including Canon, generally do not enter into
long-term agreements obligating them to purchase our products.

Our substantial international sales are
subject to risk.We sell our products internationally, primarily to
customers in Japan and throughout the Pacific Rim. Net sales to customers
outside the United States accounted for approximately 46%, 52%, and 51% of our
net sales in each of the fiscal years ended June 30, 2010, 2009, and 2008,
respectively, and are expected to continue to account for a substantial
percentage of our net sales.

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

Our sales and
costs are negotiated and paid primarily in U.S. dollars. However, changes in
the values of foreign currencies relative to the value of the U.S. dollar can
render our products comparatively more expensive to the extent locally produced
alternative products are available. Such conditions could negatively affect
international sales of our products and foreign operations, as would changes in
the general economic conditions in those markets. For our sales that are based
in local currency, we are exposed to foreign exchange fluctuations from the
time customers are invoiced in local currency until collection occurs. For
fiscal 2010, approximately 24% of our sales were denominated in foreign
currencies. We hedge 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 nor do we designate such
hedges for hedge accounting purposes. These contracts are entered into for
periods consistent with the currency transaction exposures, generally three to
nine 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.

Acquisitions may entail certain operational
and financial risks.Our growth strategy includes expanding our products
and services, and we may seek acquisitions or make internal investments 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.

11

---



We cannot
assure you that any acquisition, including the acquisition of the assets of
Solvision, Inc., which generated losses in fiscal 2010, 2009 and 2008, or of
the Zemetrics assets, will result in long-term benefits to us or that our
management will be able to effectively manage the acquired businesses. We may
also incorrectly judge the value or worth of an acquired company or business or
of a line of business to which we devote internal resources and funding. We
have in the past disposed or divested ourselves of several companies or lines
of business that previously were acquired by us or in which we internally
invested, at a significant net loss to us.

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

Due to these
and other factors, we believe that quarter-to-quarter comparisons of our
operating results may not be meaningful. You should not rely on our results for
one quarter as any indication of our future performance. In future periods, our
operating results may be below the expectations of public market analysts or investors.
If this occurs, the price of our common stock would likely decrease. Current
conditions in the domestic and global economies are extremely uncertain. As a
result, it is difficult to estimate the level of growth for the economy as a
whole or of capital expenditures in the semiconductor and industrial markets.
Because various components of our budgeting and forecasting are dependent on
estimates of spending within these markets, the prevailing economic uncertainty
renders estimates of future revenue and expenses even more difficult than usual
to make.

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

Our lengthy sales cycle could affect our
manufacturing schedule and cause us to incur expenses without realizing sales.Our lengthy and variable qualification and sales cycle
makes it difficult to predict the timing of a sale or whether a sale will be
made, which may cause us to have excess manufacturing capacity or inventory and
negatively affect our operating results. As is typical in the industry, our
customers generally expend significant efforts in evaluating and qualifying our
products and manufacturing process. This evaluation and qualification process
frequently results in a lengthy sales cycle, typically ranging from three to
six months and sometimes longer. While our customers are evaluating our
products and before they place an order with us, we may incur substantial
sales, marketing, and research and development expenses, expend significant
management efforts, increase manufacturing capacity and order long-lead-time
supplies prior to receiving an order. Even after this evaluation process, it is
possible that a potential customer will not purchase our products. In addition,
product purchases are frequently subject to unplanned processing and other
delays, particularly with respect to larger customers for which our products
represent a very small percentage of their overall purchasing 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 and make us more susceptible to the
effects of general economic downturns.

12

---



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

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

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

Our inability to anticipate and keep pace with
rapidly changing technological developments in the markets in which we operate
could have a material adverse effect on our business.The market for our products is characterized by
rapidly changing technology. Our future success will continue to depend upon
our ability to enhance our current products and to develop and introduce new
products that keep pace with technological developments and evolving industry
standards, respond to changes in customer requirements, and achieve market
acceptance. The development of new technologically advanced products is a
complex and uncertain process requiring high levels of innovation, as well as
the accurate anticipation of technological and market trends. With continuing
advances in technology, potential product advancements require an increasing
allocation of resources, including potentially more resources than we then
would have available.

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
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.

13

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

Our business depends on management and
technical personnel who are in great demand.Our success depends in large part upon the continued
services of many of our highly skilled personnel involved in management,
research, development and engineering, sales and marketing, manufacturing, and
support and upon our ability to attract and retain additional highly qualified
employees. Our employees may voluntarily terminate their employment with us at
any time. Competition for these individuals from a variety of employers,
including our competitors and companies in computer or technology-related
industries, at times is intense. In response to the difficult economic
environment, we instituted certain reductions in workforce, furlough programs,
and temporary pay reductions in the past two years, which may further make it
difficult to attract and retain highly qualified personnel. We cannot assure
you that we will be able to retain our existing personnel or attract and retain
additional personnel.

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

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

Item 1B.
Unresolved Staff Comments

We have
received no written comments regarding our periodic or current reports from the
staff of the SEC that were issued 180 days or more preceding the end of our
fiscal year 2010 that remain unresolved.

14

---



Item 2.
Properties

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

|                                                                                                  |  |                |         |                                 |  |         |  |                    | 
|------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ------------------------------- |  | ------- |  | ------------------ | 
|                                                                                                  |  | Square Footage |         |                                 | 
|                                                                                                  |  |                |         | Owned / Leased
 Expiration Date | 
|Operation/Location                                                                                |  | Manufacturing  |         | Total                           |  |        
|                                                                                                  |  |                |         |                                 |  |         | 
|Corporate Headquarters,
 Eastern Regional Sales Office, and
 Metrology and Optics 
 Manufacturing |  |                |         |                                 |  |         |  |                    | 
|Middlefield, Connecticut                                                                          |  |                | 89,000  |                                 |  | 153,500 |  | Owned              | 
|                                                                                                  |  |                |         |                                 |  |         |  |                    | 
|Zygo -
 Optical Systems 
 Tucson, Arizona                                                         |  |                | 14,560  |                                 |  | 22,560  |  | Leased
 - 08/31/11 | 
|                                                                                                  |  |                |         |                                 |  |         |  |                    | 
|Zygo -
 Optical Systems 
 Costa Mesa, California                                                  |  |                | 0       |                                 |  | 13,714  |  | Leased
 - 10/18/10 | 
|                                                                                                  |  |                |         |                                 |  |         |  |                    | 
|Western Regional Sales
 Office and R&D Center
 Fremont, California                                |  |                | 0       |                                 |  | 5,975   |  | Leased
 - 02/01/11 | 
|                                                                                                  |  |                |         |                                 |  |         |  |                    | 
|Zygo -
 Laser Technology Metrology (R&D)
 Watsonville, California                                 |  |                | 0       |                                 |  | 1,452   |  | Leased
 - 04/30/11 | 
|                                                                                                  |  |                |         |                                 |  |         |  |                    | 
|Office
 Franklin, Massachusetts                                                                   |  |                | 0       |                                 |  | 400     |  | Leased
 - 07/01/11 | 
|                                                                                                  |  |                |         |                                 |  |         |  |                    | 
|Zygo PTE
 Ltd
 Singapore                                                                          |  |                | 0       |                                 |  | 2,174   |  | Leased
 - 12/31/12 | 
|                                                                                                  |  |                |         |                                 |  |         |  |                    | 
|Zygo
 Taiwan
 Sales and Service Office                                                            |  |                | 0       |                                 |  | 675     |  | Leased
 - 01/31/11 | 
|Sales and Service Office                                                                          |  |                | 0       |                                 |  | 993     |  | Leased
 - 04/30/12 | 
|                                                                                                  |  |                |         |                                 |  |         |  |                    | 
|ZygoLOT
 Germany                                                                                  |  |                | 0       |                                 |  | 3,702   |  | Leased
 - 10/01/10 | 
|                                                                                                  |  |                |         |                                 |  |         |  |                    | 
|Zygo KK
 Japan                                                                                    |  |                | 0       |                                 |  | 1,705   |  | Leased
 - 07/31/11 | 
|                                                                                                  |  |                |         |                                 |  |         |  |                    | 
|Zygo Lamda
 China                                                                                 |  |                | 3,552   |                                 |  | 12,206  |  | Leased
 - 09/16/12 | 
|                                                                                                  |  |                |         |                                 |  |         |  |                    | 
|Zygo
 Canada, Inc.
 Canada                                                                        |  |                | 2,447   |                                 |  | 6,851   |  | Leased
 - 07/31/13 | 
|                                                                                                  |  |                |         |                                 |  |         |  |                    | 
|Zemetrics
 Tucson, AZ                                                                             |  |                | 6,089   |                                 |  | 12,178  |  | Leased
 - 02/28/11 | 
|                                                                                                  |  |                |         |                                 |  |         |  |                    | 
|Property
 Subleased to Others
 Hillsboro, Oregon                                                  |  |                | 0       |                                 |  | 6,410   |  | Leased
 - 12/31/12 | 
|                                                                                                  |  |                |         |                                 |  |         |  |                    | 
|Housing
 Middletown, CT                                                                           |  |                | 0       |                                 |  | 1,120   |  | Leased
 - 03/31/11 | 
|                                                                                                  |  |                |         |                                 |  |         |  |                    | 
|Total                                                                                             |  |                | 115,648 |                                 |  | 245,615 |  |                    | 
|                                                                                                  |  |                |         |                                 |  |         |  |                    | 

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 adverse effect on our
financial condition, results of operation or liquidity.

15

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PART II

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

Our shares of common stock
are traded over-the-counter and are quoted on the NASDAQ/National Market under
the symbol ZIGO. The following table provides information about the high and
low sales prices of the Companys common stock by quarter for fiscal 2010 and
2009.

|               |  |                                 |       |                                 |   |      |  |     |       |  |   |      | 
|-------------- |  | ------------------------------- | ----- | ------------------------------- | - | ---- |  | --- | ----- |  | - | ---- | 
|               |  | Fiscal Year Ended June 30, 2010 |       | Fiscal Year Ended June 30, 2009 |  
|               |  |                                 |       |                                 |  
|               |  | High                            |       | Low                             |   | High |  | Low |      
|               |  |                                 |       |                                 |   |      |  |     |      
|First quarter  |  | $                               | 7.44  |                                 | $ | 4.69 |  | $   | 13.79 |  | $ | 8.80 | 
|Second quarter |  | $                               | 7.82  |                                 | $ | 6.35 |  | $   | 12.47 |  | $ | 4.66 | 
|Third quarter  |  | $                               | 10.88 |                                 | $ | 7.22 |  | $   | 7.93  |  | $ | 3.06 | 
|Fourth quarter |  | $                               | 10.00 |                                 | $ | 6.56 |  | $   | 6.42  |  | $ | 4.11 | 

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

The number of record holders
of our common stock at September 1, 2010 was 451. Our closing stock price as of
June 30, 2010 was $8.11.

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

As previously announced, in
August 2007, our Board of Directors authorized the repurchase of up to $25.0
million of our outstanding common stock. As of June 30, 2010, we have
repurchased outstanding common shares having an aggregate market value of $20.0
million (determined at the time of their respective repurchases). Repurchases
occur from time to time as market conditions warrant through transactions in
the open market. The share repurchases are effected pursuant to a plan in
conformity with Rule 10b5-1 under the Securities Exchange Act of 1934. This
rule allows public companies to adopt written, pre-arranged stock trading plans
when they do not have material, non-public information in their possession. The
adoption of this stock trading plan allows us to repurchase our shares during
periods when we otherwise might be prevented from doing so under insider
trading laws or because of self-imposed trading blackout periods. There were no
repurchases under this stock trading plan in fiscal 2010 and 2009.

In January 2010, the Company
entered into an agreement to purchase all of the outstanding stock and to
retire the outstanding shareholder notes of Zemetrics, Inc., an Arizona
corporation (Zemetrics), in exchange for 361,217 unregistered shares of the
Companys common stock.

We also at times grant
restricted stock awards. These awards generally allow recipients to sell a
portion of the stock award back to us, in order to cover tax liabilities
resulting from the vesting of the award.

Common stock repurchases
under our authorized purchase plan and restricted stock repurchases in
connection with the surrender of shares to cover taxes upon vesting in each quarter
of fiscal 2010 were as follows:

|                                     |  |                                    |  |                               |  |                                                                                      |       |                                                                                                           |  |  |   |  |  |   |     |  | 
|------------------------------------ |  | ---------------------------------- |  | ----------------------------- |  | ------------------------------------------------------------------------------------ | ----- | --------------------------------------------------------------------------------------------------------- |  |  | - |  |  | - | --- |  | 
|Period                               |  | Total number of
 shares
 purchased |  | Average price
 paid per share |  | Total number of
 shares purchased as
 part of publicly
 announced
 plans or programs |       | Aproximate dollar
 value of shares that
 may yet be purchased
 under the plans or
 programs (in millions) | 
|                                     |  |                                    |  |                               |  |                                                                                      |       |                                                                                                           | 
|                                     |  |                                    |  |                               |  |                                                                                      |       |                                                                                                           |  |  |   |  |  |   |     |  | 
|July 1, 2009 - September
 30, 2009   |  | 31,925                             |  |                               |  | $                                                                                    | 6.61  |                                                                                                           |  |  |  |  |  | $ | 5.0 |  | 
|October 1, 2009 - December
 31, 2009 |  | 3,763                              |  |                               |  | $                                                                                    | 6.87  |                                                                                                           |  |  |  |  |  | $ | 5.0 |  | 
|January 1, 2010 - March 31,
 2010    |  | 13,602                             |  |                               |  | $                                                                                    | 10.87 |                                                                                                           |  |  |  |  |  | $ | 5.0 |  | 
|April 1, 2010 - June 30,
 2010       |  | 377                                |  |                               |  | $                                                                                    | 8.12  |                                                                                                           |  |  |  |  |  | $ | 5.0 |  | 
|                                     |  |                                    |  |                               |  |                                                                                      |       |                                                                                                           |  |  |   |  |  |   |     |  | 
|                                     |  |                                    |  |                               |  |                                                                                      |       |                                                                                                           |  |  |   |  |  |   |     |  | 

16

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Common stock repurchases
under our authorized purchase plan and restricted stock repurchases in
connection with the surrender of shares to cover taxes upon vesting in the
fourth quarter of fiscal year 2010 were as follows:

|                                |  |                                   |  |                               |  |                                                                                      |      |                                                                                                            |  |  |   |  |  |   |     |  | 
|------------------------------- |  | --------------------------------- |  | ----------------------------- |  | ------------------------------------------------------------------------------------ | ---- | ---------------------------------------------------------------------------------------------------------- |  |  | - |  |  | - | --- |  | 
|Period                          |  | Total number of
 shares purchased |  | Average price
 paid per share |  | Total number of
 shares purchased as
 part of publicly
 announced
 plans or programs |      | Approximate dollar
 value of shares that
 may yet be purchased
 under the plans or
 programs (in millions) | 
|                                |  |                                   |  |                               |  |                                                                                      |      |                                                                                                            | 
|                                |  |                                   |  |                               |  |                                                                                      |      |                                                                                                            |  |  |   |  |  |   |     |  | 
|April 1, 2010 - April 30,
 2010 |  |                                  |  |                               |  |                                                                                      |     |                                                                                                            |  |  |  |  |  | $ | 5.0 |  | 
|May 1, 2010 - May 31, 2010      |  | 377                               |  |                               |  | $                                                                                    | 8.12 |                                                                                                            |  |  |  |  |  | $ | 5.0 |  | 
|June 1, 2010 - June 30,
 2010   |  |                                  |  |                               |  |                                                                                      |     |                                                                                                            |  |  |  |  |  | $ | 5.0 |  | 

PERFORMANCE GRAPH

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

The graph below compares
cumulative total return of our common stock with the cumulative total return of
(i) the NASDAQ Composite, and (ii) a group of peer companies weighted to
reflect differing market capitalizations. Companies in the new peer group are
Nanometrics, Inc., Rudolph Technologies, Inc., II-VI, Incorporated, Electro
Scientific Industries, Inc., Faro Technologies, Inc., Cognex Corp., FEI Co.,
Keithley Instrument, and Ultratech, Inc. Companies in the old peer group are
Nanometrics, Inc., Rudolph Technologies, Inc., Veeco Instruments, Inc, II-VI,
Incorporated, Mattson Technology, Inc., Electro Scientific Industries, Inc.,
GSI Group Inc., and Ultratech, Inc. The new peer group consists of issuers
selected primarily based on market capitalization and the markets they serve.

|                 |  |          |        |          |  |          |  |          |        |          |  |          |  |  |       |  |  |        | 
|---------------- |  | -------- | ------ | -------- |  | -------- |  | -------- | ------ | -------- |  | -------- |  |  | ----- |  |  | ------ | 
|                 |  |          |        |          |  |          |  |          |        |          |  |          |  |  |       |  |  |        | 
|                 |  | 06/30/05 |        | 06/30/06 |  | 06/30/07 |  | 06/30/08 |        | 06/30/09 |  | 06/30/10 | 
|                 |  |          |        |          |  |          |  |          |        |          |  |          | 
|                 |  |          |        |          |  |          |  |          |        |          |  |          |  |  |       |  |  |        | 
|ZYGO CORPORATION |  |          | 100.00 |          |  | 167.24   |  |          | 145.81 |          |  | 100.29   |  |  | 47.55 |  |  | 82.75  | 
|NASDAQ COMPOSITE |  |          | 100.00 |          |  | 106.47   |  |          | 128.53 |          |  | 114.15   |  |  | 92.32 |  |  | 107.12 | 
|NEW PEER GROUP   |  |          | 100.00 |          |  | 93.70    |  |          | 108.72 |          |  | 95.20    |  |  | 68.69 |  |  | 84.24  | 
|OLD PEER GROUP   |  |          | 100.00 |          |  | 107.55   |  |          | 115.28 |          |  | 95.08    |  |  | 57.63 |  |  | 101.76 | 

(LINE GRAPH)

17

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Item 6. Selected Financial Data

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

(Thousands, except for per
share, number of employees, percentages, and ratio amounts)

|                                                                                 |  |                             |         |      |    |         |   |      |         |      |   |         |   |   |         |  
|-------------------------------------------------------------------------------- |  | --------------------------- | ------- | ---- | -- | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                 |  | Fiscal
 Year Ended June 30, |        
|                                                                                 |  |                             |        
|                                                                                 |  | 2010                        |         | 2009 |    | 2008    |   | 2007 |         | 2006 |  
|                                                                                 |  |                             |         |      |    |         |   |      |         |      |  
|Net revenues                                                                     |  | $                           | 101,330 |      | $  | 114,734 |   | $    | 158,463 |      | $ | 180,988 |   | $ | 168,137 |  
|Gross margin                                                                     |  |                             | 41,969  |      |    | 32,433  |   |      | 64,681  |      |   | 77,183  |   |   | 65,771  |  
|% of sales                                                                       |  |                             | 41      | %    |    | 28      | % |      | 41      | %    |   | 43      | % |   | 39      | %
|                                                                                 |  |                             |         |      |    |         |   |      |         |      |   |         |   |   |         |  
|Net earnings (loss) from continuing operations                                   |  |                             | (2,668  | )    |    | (61,210 | ) |      | 3,337   |      |   | 16,118  |   |   | 15,277  |  
|Loss from discontinued operations, net of tax                                    |  |                             | (2,669  | )    |    | (4,059  | ) |      | (700    | )    |   |        |   |   |        |  
|                                                                                 |  |                             |         |      |    |         |   |      |         |      |   |         |   |   |         |  
|Net earnings (loss) including noncontrolling interest                            |  |                             | (5,337  | )    |    | (65,269 | ) |      | 2,637   |      |   | 16,118  |   |   | 15,277  |  
|Less: Net earnings attributabe to noncontrolling interest                        |  |                             | 957     |      |    | 795     |   |      | 1,398   |      |   | 976     |   |   | 792     |  
|                                                                                 |  |                             |         |      |    |         |   |      |         |      |   |         |   |   |         |  
|Net earnings (loss) attributable to Zygo Corporation                             |  | $                           | (6,294  | )    | $  | (66,064 | ) | $    | 1,239   |      | $ | 15,142  |   | $ | 14,485  |  
|                                                                                 |  |                             |         |      |    |         |   |      |         |      |   |         |   |   |         |  
|% of sales                                                                       |  |                             | -6      | %    |    | -58     | % |      | 1       | %    |   | 8       | % |   | 9       | %
|                                                                                 |  |                             |         |      |    |         |   |      |         |      |   |         |   |   |         |  
|Net earnings (loss) from continuing operations attributable to Zygo
 Corporation |  | $                           | (3,625  | )    | $  | (62,005 | ) | $    | 1,939   |      | $ | 15,142  |   | $ | 14,485  |  
|                                                                                 |  |                             |         |      |    |         |   |      |         |      |   |         |   |   |         |  
|% of sales                                                                       |  |                             | -4      | %    |    | -54     | % |      | 1       | %    |   | 8       | % |   | 9       | %
|                                                                                 |  |                             |         |      |    |         |   |      |         |      |   |         |   |   |         |  
|Basic - Net Earnings (loss) per share attributable to Zygo
 Corporation:         |  |                             |         |      |    |         |   |      |         |      |   |         |   |   |         |  
|Continuing operations                                                            |  | ($                          | 0.21    | )    | ($ | 3.68    | ) | $    | 0.11    |      | $ | 0.83    |   | $ | 0.80    |  
|Discontinued operations                                                          |  |                             | (0.16   | )    |    | (0.24   | ) |      | (0.04   | )    |   |        |   |   |        |  
|                                                                                 |  |                             |         |      |    |         |   |      |         |      |   |         |   |   |         |  
|Net earnings (loss) per share                                                    |  | ($                          | 0.37    | )    | ($ | 3.92    | ) | $    | 0.07    |      | $ | 0.83    |   | $ | 0.80    |  
|                                                                                 |  |                             |         |      |    |         |   |      |         |      |   |         |   |   |         |  
|Diluted - Net Earnings (loss) per share attributable to Zygo
 Corporation:       |  |                             |         |      |    |         |   |      |         |      |   |         |   |   |         |  
|Continuing operations                                                            |  | ($                          | 0.21    | )    | ($ | 3.68    | ) | $    | 0.11    |      | $ | 0.81    |   | $ | 0.79    |  
|Discontinued operations                                                          |  |                             | (0.16   | )    |    | (0.24   | ) |      | (0.04   | )    |   |        |   |   |        |  
|                                                                                 |  |                             |         |      |    |         |   |      |         |      |   |         |   |   |         |  
|Net earnings (loss) per share                                                    |  | ($                          | 0.37    | )    | ($ | 3.92    | ) | $    | 0.07    |      | $ | 0.81    |   | $ | 0.79    |  
|                                                                                 |  |                             |         |      |    |         |   |      |         |      |   |         |   |   |         |  
|Weighted average number of shares:                                               |  |                             |         |      |    |         |   |      |         |      |   |         |   |   |         |  
|Basic                                                                            |  |                             | 17,183  |      |    | 16,843  |   |      | 17,295  |      |   | 18,156  |   |   | 18,054  |  
|Diluted                                                                          |  |                             | 17,183  |      |    | 16,843  |   |      | 17,648  |      |   | 18,601  |   |   | 18,367  |  
|                                                                                 |  |                             |         |      |    |         |   |      |         |      |   |         |   |   |         |  
|Research, development, and engineering                                           |  | $                           | 14,284  |      | $  | 23,234  |   | $    | 23,971  |      | $ | 22,038  |   | $ | 15,901  |  
|Capital expenditures                                                             |  | $                           | 1,441   |      | $  | 4,255   |   | $    | 6,580   |      | $ | 10,149  |   | $ | 7,441   |  
|Depreciation and amortization                                                    |  | $                           | 6,125   |      | $  | 7,960   |   | $    | 7,352   |      | $ | 6,519   |   | $ | 6,214   |  
|                                                                                 |  |                             |         |      |    |         |   |      |         |      |   |         |   |   |         |  
|                                                                                 |  | June
 30,                   |        
|                                                                                 |  |                             |        
|                                                                                 |  | 2010                        |         | 2009 |    | 2008    |   | 2007 |         | 2006 |  
|                                                                                 |  |                             |         |      |    |         |   |      |         |      |  
|Working capital                                                                  |  | $                           | 72,485  |      | $  | 69,742  |   | $    | 104,851 |      | $ | 107,834 |   | $ | 81,914  |  
|Current ratio                                                                    |  |                             | 4.2     |      |    | 4.3     |   |      | 5.7     |      |   | 4.3     |   |   | 2.8     |  
|Total assets                                                                     |  | $                           | 125,165 |      | $  | 124,099 |   | $    | 190,008 |      | $ | 211,594 |   | $ | 206,183 |  
|Stockholders equity                                                             |  | $                           | 100,596 |      | $  | 100,027 |   | $    | 164,790 |      | $ | 178,753 |   | $ | 160,357 |  
|Price-earnings ratio                                                             |  |                             |        |      |    |        |   |      | 140     |      |   | 18      |   |   | 21      |  
|Number of employees at year-end                                                  |  |                             | 454     |      |    | 484     |   |      | 595     |      |   | 575     |   |   | 570     |  
|Sales per employee  average                                                     |  | $                           | 223     |      | $  | 237     |   | $    | 266     |      | $ | 315     |   | $ | 295     |  
|Book value per share                                                             |  | $                           | 5.75    |      | $  | 5.91    |   | $    | 9.85    |      | $ | 9.80    |   | $ | 8.86    |  
|Market price per share at year-end                                               |  | $                           | 8.11    |      | $  | 4.66    |   | $    | 9.83    |      | $ | 14.29   |   | $ | 16.39   |  

18

---



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

CRITICAL ACCOUNTING POLICIES, SIGNIFICANT
JUDGMENTS, AND ESTIMATES

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

Revenue Recognition and Allowance for
Doubtful AccountsWe recognize
revenue based on guidance provided in SEC Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition and in accordance with authoritative guidance issued
by the Financial Accounting Standard Board (FASB) pertaining to 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 collectability 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 for defective products that we
account for as a warranty provision under authoritative guidance of 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
related authoritative guidance. 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.

Certain
customer transactions include payment terms whereby we receive a partial
payment of the total order amount prior to the related sale being recognized in
our financial statements. These advance payments are included in accrued
progress payments and deferred revenue in the consolidated balance sheet.
Generally, these progress payments relate to orders for custom equipment that
require a lengthy build cycle and, in some cases, acceptance by the customer.
We may negotiate payment terms with these customers on these particular orders
and secure certain payments prior to or on shipment of the equipment. These
payments remain in accrued progress payments and deferred revenue until our
applicable revenue recognition criteria have been met.

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.

19

---



Inventory ValuationInventories
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 quarterly 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, over a reasonable period of time, is written down to
its estimated market value, if less than its cost. Contracts with fixed prices
are evaluated to determine if estimated total costs will exceed revenues. A
loss provision is recorded when the judgment is made that actual costs incurred
plus estimated costs remaining to be incurred based on managements estimates
will exceed total revenues from the contract. Inherent in the estimates of
market value are managements estimates related to current economic trends,
future demand for our products, and technological obsolescence. Management
estimates future product sales and service requirements, and evaluates
technological changes and other possible uses to determine if inventory is
excess or obsolete. If actual market conditions are different than those
projected by management, additional inventory adjustments negatively or
positively affecting earnings may be required.

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

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

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

Accounting for Income TaxesDeferred
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 basis, and operating loss and tax credit carryforwards. Authoritative
guidance issued by the FASB pertaining to 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. Management has considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance. In fiscal 2009, management determined that it is more
likely than not that we would not be able to realize our deferred tax assets in
the future and an adjustment to record a full valuation allowance was charged
to income tax expense, which remains at June 30, 2010. Should management
determine that it would be able to realize all or part of its net deferred tax
assets in the future, an adjustment to the valuation allowance would increase
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.

20

---



Valuation of Long-Lived AssetsIn accordance
with authoritative guidance issued by the FASB pertaining to accounting for the
impairment or disposal of long-lived assets, the carrying value of intangible
assets and other long-lived assets is reviewed on a regular basis for the
existence of facts or circumstances, both internally and externally, that may
suggest impairment. Some factors we consider important, which could trigger the
impairment review, include a significant decrease in the market value of an
asset, a significant change in the extent or manner in which an asset is used,
a significant adverse change in the business climate that could affect the
value of an asset, an accumulation of costs for an asset in excess of the
amount originally expected, a current period operating loss or cash flow
decline combined with a history of operating loss or cash flow uses or a projection
that demonstrates continuing losses, and a current expectation that, it is more
likely than not, a long-lived asset will be disposed of at a loss before the
end of its estimated useful life.

If one or more
of such facts or circumstances exist, we evaluate the carrying value of
long-lived assets to determine if an 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. During fiscal 2010, we recorded an
impairment charge on goodwill assets. During the year ended June 30, 2010, we
believe that there has been no other indicator of impairment. During fiscal
2009, we recorded impairment charges on property, plant, and equipment,
intangible assets, and marketable securities.

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

21

---



OVERVIEW

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

In January
2010, Dr. Chris L. Koliopoulos was appointed President and Chief Executive
Officer and also became a member of the Board of Directors of Zygo. On January
22, 2010, we completed the acquisition of Zemetrics, Inc. (Zemetrics), a
small interferometric metrology company in which Dr. Koliopoulos was a major
shareholder, for 361,217 shares of our common stock. The purchase price for
Zemetrics was valued at $3.9 million. The acquisition of Zemetrics, which has
recently introduced an advanced product in the optical instrumentation market,
further strengthens our offering in our core markets, which is a strategic
focus for us. Zemetrics is included in the Metrology segment. The purchase
price was allocated to tangible and intangible assets. Intangible assets
included goodwill, technology, and customer relationships. The Company recorded
an impairment charge of $2.0 million relating to acquired goodwill in the
period ended March 31, 2010 subsequent to the acquisition date.

Over the last
five fiscal quarters, we have divested ourselves of our Semiconductor and Flat
Panel Display (FPD) product lines and shut down our IC packaging operations
in Singapore in order to concentrate on our core technologies. We continue to
sell Original Equipment Manufacturer (OEM) sensor heads related to
semiconductor and FPD systems manufactured through our Instruments product
line. These changes in our organization reduced our research, development and
engineering (RD&E) spending in fiscal 2010. Our RD&E expenses
included in continuing operations for the twelve months ended June 30, 2010
decreased $9.0 million as compared with the prior year period. To a lesser
extent, our selling, general and administrative expenses decreased with these
changes. The average sales price for the OEM sensors is significantly less than
the average sales price of an in-line semiconductor or FPD system. Therefore,
our total revenues related to these markets will be less than if we remained in
the in-line market.

Our backlog at
June 30, 2010 was $44.9 million, an increase of $6.8 million from June 30,
2009. Gross orders were $32.6 million in the fourth quarter of fiscal 2010. Net
orders for the fourth quarter from the Companys Metrology segment accounted
for 70% of the orders received, with the Optics segment accounting for the
remaining 30%. For fiscal 2010, orders were $108.1 million, an increase of 32%
over fiscal 2009 as a result of increased activity across all product lines.

22

---



RESULTS OF OPERATIONS

Fiscal 2010 Compared with Fiscal 2009

Net Revenues

|                      |  |                |       |            |  |                 |   |               |       |  |  |     |  
|--------------------- |  | -------------- | ----- | ---------- |  | --------------- | - | ------------- | ----- |  |  | --- | -
|                      |  | Year Ended     |      
|                      |  |                |      
|(Dollars in millions) |  | June 30,
 2010 |       | Net Sales% |  | June
 30,
 2009 |   | Net
 Sales
 % |      
|                      |  |                |       |            |  |                 |   |               |      
|Segment               |  |                |       |            |  |                 |   |               |       |  |  |     |  
|Metrology Solutions   |  | $              | 65.8  |            |  | 65              | % | $             | 82.8  |  |  | 72  | %
|Optical Systems       |  |                | 35.5  |            |  | 35              | % |               | 31.9  |  |  | 28  | %
|                      |  |                |       |            |  |                 |   |               |       |  |  |     |  
|Total                 |  | $              | 101.3 |            |  | 100             | % | $             | 114.7 |  |  | 100 | %
|                      |  |                |       |            |  |                 |   |               |       |  |  |     |  

Revenues for
fiscal 2010 decreased 12% as compared with the prior year period, reflecting
decreases in the Metrology Solutions segment revenues of 21%, partially offset
by the Optical Systems segment revenue increase of 11%. The decrease in
Metrology Solutions segment revenues was primarily due to volume decreases in
display solutions of $10.8 million, instruments of $6.8 million, and
lithography of $2.9 million, partially offset by increased revenues in vision
systems of $1.9 million. New business in the Metrology Solutions segment related
to OEM heads increased revenues by $2.4 million. The decrease in display
solution revenues was due to the arrangement entered into with Toho Technology
Corporation (Toho) in October 2009. Future revenue related to display will be
derived from the sale of sensor heads that will be included in the Metrology
Solutions segment related to OEM revenues. These OEM revenues are expected to
be lower than the full display system revenues. The volume decreases in
instruments and lithography revenues, in large measure, were due to a reduction
in bookings that appears to be tied directly to the general global economic
downturn, most notably in the semiconductor industry. A decrease in bookings
from Canon accounted for the majority of the decrease in lithography revenues.
The increase in the Optical Systems segment revenues was primarily due to
increases in optical component revenues of $2.0 million.

Approximately
76% of all fiscal 2010 net revenues were denominated in U.S. dollars, as
compared with 77% in fiscal 2009. Significant changes in the values of foreign
currencies relative to the value of the U.S. dollar can influence the revenues
of our products in export markets, as would changes in the general economic
conditions in those markets.

Gross Margin

|                       |  |                |      |            |  |                 |   |               |      |  |  |    |  
|---------------------- |  | -------------- | ---- | ---------- |  | --------------- | - | ------------- | ---- |  |  | -- | -
|                       |  | Year Ended     |     
|                       |  |                |     
|(Dollars
 in millions) |  | June 30,
 2010 |      | Net Sales% |  | June
 30,
 2009 |   | Net
 Sales
 % |     
|                       |  |                |      |            |  |                 |   |               |     
|Segment                |  |                |      |            |  |                 |   |               |      |  |  |    |  
|Metrology Solutions    |  | $              | 33.7 |            |  | 51              | % | $             | 28.4 |  |  | 34 | %
|Optical Systems        |  |                | 8.3  |            |  | 23              | % |               | 4.0  |  |  | 13 | %
|                       |  |                |      |            |  |                 |   |               |      |  |  |    |  
|Total                  |  | $              | 42.0 |            |  | 41              | % | $             | 32.4 |  |  | 28 | %
|                       |  |                |      |            |  |                 |   |               |      |  |  |    |  

Gross margin
as a percentage of revenues for fiscal 2010 was 41%, which represents an
increase of thirteen percentage points from the comparable prior year period
which included charges for severance, inventory adjustments and impairment
charges totaling $11.1 million. Excluding these charges, the gross margin as a
percentage of revenue in the prior year period would have been 38%. Within the
Metrology Solutions segment, gross margin increased as a percentage of revenues
to 51% for the twelve months ended June 30, 2010 as compared with the prior
year comparable period of 34%. The comparable prior year period included $9.1
million of the charges referred to above. Excluding those charges the fiscal
2009 metrology gross margin would have been 45%. The increase to 51% gross
margin in the current year period in the Metrology segment was primarily due to
improved factory costs and a decrease in low margin display revenues. Within
the Optical Systems segment, the gross margin increased as a percentage of
revenues to 23% for the twelve months ended June 30, 2010 as compared with 13%
in the comparable prior year period. The Optical Systems segment gross margin
for the twelve months ended June 30, 2010 was negatively impacted by production
issues experienced in the first quarter of fiscal 2010 related to certain
optics, resulting in negative gross margins.

23

---



Selling, General, and Administrative Expenses
(SG&A)

|                       |  |                |      |            |  |                 |   |               |      |  |  |    |  
|---------------------- |  | -------------- | ---- | ---------- |  | --------------- | - | ------------- | ---- |  |  | -- | -
|                       |  | Year Ended     |     
|                       |  |                |     
|(Dollars
 in millions) |  | June 30,
 2010 |      | Net Sales% |  | June
 30,
 2009 |   | Net
 Sales
 % |     
|                       |  |                |      |            |  |                 |   |               |     
|                       |  | $              | 29.5 |            |  | 29              | % | $             | 49.2 |  |  | 43 | %
|                       |  |                |      |            |  |                 |   |               |      |  |  |    |  

SG&A in fiscal 2010 as compared with fiscal 2009
decreased $19.7 million. SG&A in fiscal 2010 and 2009 included
significant charges of $2.6 million and $14.0 million, respectively. Excluding
these charges, total SG&A costs would have been $26.9 million and $35.2
million for fiscal 2010 and 2009, respectively. The decrease to $26.9 million
from $35.2 million is primarily related to costs eliminated with the sale of
our semiconductor and display product lines, as well as employee headcount and
salary reductions. The large significant charges for fiscal 2010 included $1.4
million in costs related to the II-VI unsolicited offer, $0.9 million in CEO
search and retirement costs, $0.5 million of Zemetrics acquisition expenses,
and $0.5 million in severance expense partially offset by $0.7 million reversal in a
provision for bad debt reserve. The large significant charges for fiscal 2009
included $8.3 million in terminated merger-related expenses, $2.9 million in
bad debt reserves, $1.3 million in legal accruals, $0.5 million in intangible asset
impairment charges related to the vision systems business and $1.0 million in
severance.

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

|                       |  |                |      |            |  |                 |   |               |      |  |  |    |  
|---------------------- |  | -------------- | ---- | ---------- |  | --------------- | - | ------------- | ---- |  |  | -- | -
|                       |  | Year Ended     |     
|                       |  |                |     
|(Dollars
 in millions) |  | June 30,
 2010 |      | Net Sales% |  | June
 30,
 2009 |   | Net
 Sales
 % |     
|                       |  |                |      |            |  |                 |   |               |     
|                       |  | $              | 14.3 |            |  | 14              | % | $             | 23.2 |  |  | 20 | %
|                       |  |                |      |            |  |                 |   |               |      |  |  |    |  

RD&E costs
decreased $8.9 million in fiscal 2010 as compared with the prior year period.
Fiscal 2010 included charges related to severance costs of $0.4 million. Fiscal
2009 included charges related to intangible asset and fixed asset impairment
charges of $2.2 million and severance costs of $0.2 million. Excluding these
charges, RD&E for fiscal 2010 and 2009 would have been $13.9 million and
$20.8 million, respectively. The decrease in RD&E was primarily due to the
elimination of costs related to the semiconductor and display product lines in
June and October 2009, respectively.

Impairment of Goodwill

|                       |  |                |     |            |  |                 |   |               |   |  |  |   |  
|---------------------- |  | -------------- | --- | ---------- |  | --------------- | - | ------------- | - |  |  | - | -
|                       |  | Year Ended     |    
|                       |  |                |    
|(Dollars
 in millions) |  | June 30,
 2010 |     | Net Sales% |  | June
 30,
 2009 |   | Net
 Sales
 % |  
|                       |  |                |     |            |  |                 |   |               |  
|                       |  | $              | 2.0 |            |  | 2               | % | $             |  |  |  | 0 | %
|                       |  |                |     |            |  |                 |   |               |   |  |  |   |  

The Company
recorded an impairment charge of $2.0 million during the
three months ended March 31, 2010 relating to acquired goodwill in connection
with its acquisition of Zemetrics. The Zemetrics reporting unit had minimal
sales history and cumulative losses since inception. In addition, the fair
value of common stock issued as consideration on the closing date was $10.80
per share, which was in excess of the implied value per share in the formula
used in the purchase agreement to determine the number of common shares issued
as consideration (which was based on the market price per share during the
40-day period prior to closing). In consideration of these factors, management
determined the carrying value of the reporting unit exceeded its fair value,
and that the implied fair value of goodwill was zero at March 31, 2010.

Other Income

|                       |  |                |     |            |  |                 |  |               |     |  |  |   |  
|---------------------- |  | -------------- | --- | ---------- |  | --------------- |  | ------------- | --- |  |  | - | -
|                       |  | Year Ended     |    
|                       |  |                |    
|(Dollars
 in millions) |  | June 30,
 2010 |     | Net Sales% |  | June
 30,
 2009 |  | Net
 Sales
 % |    
|                       |  |                |     |            |  |                 |  |               |    
|                       |  | $              | 0.1 |            |  |                |  | $             | 1.0 |  |  | 1 | %
|                       |  |                |     |            |  |                 |  |               |     |  |  |   |  

Other income
for fiscal 2010 decreased by $0.9 million, as compared with the prior year
period, primarily due to a decrease in investment income. We changed our
investment portfolio and have a low risk government security portfolio, which
carries a significantly lower interest rate than corporate bonds, and a greater
percentage of cash is invested money market accounts.

24

---



Income Tax (Benefit) Expense

|                       |  |                |      |           |  |                 |   |              |      |  |  |    |  
|---------------------- |  | -------------- | ---- | --------- |  | --------------- | - | ------------ | ---- |  |  | -- | -
|                       |  | Year Ended     |     
|                       |  |                |     
|(Dollars
 in millions) |  | June 30,
 2010 |      | Tax Rate% |  | June
 30,
 2009 |   | Tax
 Rate
 % |     
|                       |  |                |      |           |  |                 |   |              |     
|                       |  | $              | (1.0 | )         |  | 17              | % | $            | 22.2 |  |  | 57 | %
|                       |  |                |      |           |  |                 |   |              |      |  |  |    |  

Income tax
expense in fiscal 2009 included an increase in the valuation allowance of $36.9
    million against net deferred tax assets. The valuation allowance increased
    in 2010 to recognize changes in deferred assets for the 2010 fiscal year.
    These changes in gross deferred assets would otherwise have increased tax
    expense. Fiscal 2010 does not include any tax benefit associated with the
    net operating loss for the fiscal years or tax credits earned in the fiscal
    year. Management continues to believe that, based upon the uncertain and
    volatile market conditions and the fact that Zygo remains in a cumulative
    pre-tax accounting loss position over a three year period, it is not more
    likely than not that the current net deferred tax assets will be realized.
    In future periods, the valuation allowance could be reduced based on sufficient
    evidence indicating that it is more likely than not that a portion of the
    deferred tax assets will be realized.

During fiscal
2010, the company was able to realize an income tax benefit for refund claims
associated with net operating loss carryforwards and research and development
credits due to changes in the United States tax regulations. In addition, we
realized a benefit from the reversal of liabilities related to uncertain tax
positions as such positions were settled in fiscal 2010. These income tax
benefits were partially offset by income tax expense in foreign jurisdictions
and state income taxes in the United States. The income tax benefits are not
anticipated to occur again in the future.

Net Earnings (Loss) from Continuing
Operations Attributable To Zygo Corporation

|                       |  |                |      |          |  |                 |   |          |       |   |  |     |  
|---------------------- |  | -------------- | ---- | -------- |  | --------------- | - | -------- | ----- | - |  | --- | -
|                       |  | Year Ended     |     
|                       |  |                |     
|(Dollars
 in millions) |  | June 30,
 2010 |      | Sales
 % |  | June
 30,
 2009 |   | Sales
 % |      
|                       |  |                |      |          |  |                 |   |          |      
|                       |  | $              | (3.6 | )        |  | -4              | % | $        | (62.0 | ) |  | -54 | %
|                       |  |                |      |          |  |                 |   |          |       |   |  |     |  

Net loss from
continuing operations attributable to Zygo Corporation in fiscal 2010 was $3.6
million compared with a net loss from continuing operations attributable to
Zygo Corporation of $62.0 million in the prior year. Net loss from continuing
operations attributable to Zygo Corporation per diluted share was $0.21 for
fiscal 2010, as compared with a net loss from continuing operations
attributable to Zygo Corporation of $3.68 per diluted share for fiscal 2009.
The net loss in fiscal 2010 included $5.6 million in significant charges, net
of taxes, which included asset impairment charges, and reserves on various
other balance sheet items. The net loss in fiscal 2009 included $49.8 million
in significant charges, net of taxes, which included asset impairment charges,
write-downs and reserves on various other balance sheet items, and a valuation
allowance on our deferred tax assets. These charges were incurred primarily as
a result of the economic downturn and recent changes in our business strategy
and operations resulting in re-evaluation of certain of our assets.

Discontinued Operations

|                       |  |                |      |          |  |                 |   |          |      |   |  |    |  
|---------------------- |  | -------------- | ---- | -------- |  | --------------- | - | -------- | ---- | - |  | -- | -
|                       |  | Year Ended     |     
|                       |  |                |     
|(Dollars
 in millions) |  | June 30,
 2010 |      | Sales
 % |  | June
 30,
 2009 |   | Sales
 % |     
|                       |  |                |      |          |  |                 |   |          |     
|                       |  | $              | (2.7 | )        |  | -3              | % | $        | (4.1 | ) |  | -4 | %
|                       |  |                |      |          |  |                 |   |          |      |   |  |    |  

The net loss
from discontinued operations resulted from the closure of our Singapore IC
packaging metrology operations in fiscal 2010. Net loss from discontinued
operations in fiscal 2010 was $2.7 million as compared with a net loss from
discontinued operations of $4.1 million in the prior year. Net loss from
discontinued operations per diluted share was $0.16 per diluted share for
fiscal 2010 as compared with $0.24 per diluted share in fiscal 2009. The fiscal
2010 net loss from discontinued operations of $2.7 million included $0.8
million of severance, and related termination expense and $0.7 million of
inventory reserves. The fiscal 2009 net loss from discontinued operations of
$4.1 million included $1.4 million of inventory reserves and $1.1 million of asset
impairment charges.

Backlog

Backlog at
June 30, 2010 totaled $44.9 million, an increase of $6.8 million from June 30,
2009. The year-end fiscal 2010 backlog consisted of $21.4 million, or 48%, in
the Metrology Solutions segment and $23.5 million, or 52%, in the Optical
Systems segment. Orders for fiscal 2010 totaled $108.1 million. Orders by
segment for fiscal 2010 consisted of $68.7 million, or 64%, in the Metrology
Solutions segment and $39.4 million, or 36%, in the Optical Systems segment.

25

---



TRANSACTIONS WITH STOCKHOLDER

Sales to
Canon, a stockholder, customer, and distributor of certain of our products in
Japan, amounted to $8.8 million (9% of net revenues), $16.2 million (14% of net
revenues), and $30.7 million (19% of net revenues) for the years ended June 30,
2010, 2009, and 2008 respectively. Selling prices of products sold to Canon are
based, generally, on the normal terms customarily given to distributors. At
June 30, 2010 and 2009, there was in the aggregate $0.7 million and $0.6
million, respectively, of trade accounts receivable from Canon.

26

---



Fiscal 2009 Compared with Fiscal 2008

Net Revenues

|                       |  |   |                |  |            |   |                 |       |               |     |   | 
|---------------------- |  | - | -------------- |  | ---------- | - | --------------- | ----- | ------------- | --- | - | 
|                       |  |   | Year Ended     | 
|                       |  |   |                | 
|(Dollars
 in millions) |  |   | June 30,
 2009 |  | Net Sales% |   | June
 30,
 2008 |       | Net
 Sales
 % |    
|                       |  |   |                |  |            |   |                 |       |               |    
|Segment                |  |   |                |  |            |   |                 |       |               |     |  
|Metrology Solutions    |  | $ | 82.8           |  | 72         | % | $               | 105.2 |               | 66  | %
|Optical Systems        |  |   | 31.9           |  | 28         | % |                 | 53.3  |               | 34  | %
|                       |  |   |                |  |            |   |                 |       |               |     |  
|Total                  |  | $ | 114.7          |  | 100        | % | $               | 158.5 |               | 100 | %
|                       |  |   |                |  |            |   |                 |       |               |     |  

Net revenues
in the Metrology Solutions segment decreased 21% in fiscal 2009 as compared
with the prior year. The decrease in net revenues of $22.4 million within the
Metrology Solutions segment was primarily due to revenue volume decreases in
lithography of $14.8 million, instrument revenues of $13.4 million, and
semiconductor revenues of $0.7 million, partially offset by an increase in display
revenues of $6.8 million. The general economic recession has led to low revenue
volume.

Net revenues
in the Optical Systems segment decreased 40% in fiscal 2009 as compared with
the prior year. The decrease in net revenues of $21.4 million within the
Optical Systems segment was due to a decrease in volume of contract
manufacturing of $11.1 million and laser and precision optics of $10.3 million.
The decrease in all optics areas generally is related to a decline in the
orders from existing customers due primarily to the economic recession.

Approximately
77% of all fiscal 2009 net revenues were denominated in U.S. dollars, similar
to the percentage of revenues we experienced in fiscal 2008. Significant
changes in the values of foreign currencies relative to the value of the U.S.
dollar can influence the revenues of our products in export markets, as would
changes in the general economic conditions in those markets.

Gross Margin

|                       |  |   |                |  |            |   |                 |      |               |    |   | 
|---------------------- |  | - | -------------- |  | ---------- | - | --------------- | ---- | ------------- | -- | - | 
|                       |  |   | Year
 Ended    | 
|                       |  |   |                | 
|(Dollars
 in millions) |  |   | June 30,
 2009 |  | Net Sales% |   | June
 30,
 2008 |      | Net
 Sales
 % |   
|                       |  |   |                |  |            |   |                 |      |               |   
|Segment                |  |   |                |  |            |   |                 |      |               |    |  
|Metrology Solutions    |  | $ | 28.4           |  | 34         | % | $               | 50.4 |               | 48 | %
|Optical Systems        |  |   | 4.0            |  | 13         | % |                 | 14.3 |               | 27 | %
|                       |  |   |                |  |            |   |                 |      |               |    |  
|Total                  |  | $ | 32.4           |  | 28         | % | $               | 64.7 |               | 41 | %
|                       |  |   |                |  |            |   |                 |      |               |    |  

In fiscal
2009, gross margin as a percentage of net revenues in the Metrology Solutions
segment decreased fourteen percentage points as compared with the prior year.
This decrease was due primarily to intangible and fixed asset impairments of
$5.6 million and inventory reserves of $3.5 million. Excluding these charges,
our gross margin as a percentage of revenues for the Metrology Solutions
segment would have been 45%. The decrease from 48% in fiscal 2008 to 45% in
fiscal 2009 (excluding $9.1 million of referenced charges) is due to lower
revenue volume. Gross margin as a percentage of revenues in the Optical Systems
segment decreased by fourteen percentage points for fiscal 2009 as compared
with the prior year. This decrease included charges of $1.6 million for fixed
asset impairments, restructuring, and severance, which account for five
percentage points of the change year over year. The remainder of the change is
primarily related to underutilization of the factory based on low revenue
volume. Optics components rely upon a capital intensive production facility and
certain expenditures, such as depreciation, cannot be reduced as readily as a
labor intensive environment.

27

---



Selling, General, and Administrative Expenses
(SG&A)

|                       |  |  |                |      |              |  |                 |   |               |      |  |  |    |  
|---------------------- |  |  | -------------- | ---- | ------------ |  | --------------- | - | ------------- | ---- |  |  | -- | -
|                       |  |  | Year Ended     |     
|                       |  |  |                |     
|(Dollars
 in millions) |  |  | June 30,
 2009 |      | Net Sales
 % |  | June
 30,
 2008 |   | Net
 Sales
 % |     
|                       |  |  |                |      |              |  |                 |   |               |     
|                       |  |  | $              | 49.2 |              |  | 43              | % | $             | 37.8 |  |  | 24 | %
|                       |  |  |                |      |              |  |                 |   |               |      |  |  |    |  

SG&A in
fiscal 2009 as compared with fiscal 2008 increased $11.4 million primarily due
to increases in general and administration costs of $11.8 million, partially
offset by a decrease in selling and marketing activities of $0.4 million. The
increase in general and administrative costs included $8.3 million in
merger-related expenses, $2.9 million in bad debt reserves, $1.3 million in
legal accruals, and $0.4 million in severance. Sales and marketing expenses for
fiscal 2009 also included charges of $0.5 million in intangible asset
impairment charges related to the vision systems business and $0.6 million in
severance. Excluding these charges, SG&A costs would have been $35.2
million for fiscal 2009, a 7% decrease over fiscal 2008. The inclusion of
vision systems for the entire fiscal year 2009 increased SG&A by $1.5
million over the prior fiscal year. This increase was partially offset by cost
cutting measures implemented during fiscal 2009, which decreased salaries and
wages by $1.3 million.

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

|                       |  |  |                |      |              |  |                 |   |               |      |  |  |    |  
|---------------------- |  |  | -------------- | ---- | ------------ |  | --------------- | - | ------------- | ---- |  |  | -- | -
|                       |  |  | Year Ended     |     
|                       |  |  |                |     
|(Dollars
 in millions) |  |  | June 30,
 2009 |      | Net Sales
 % |  | June
 30,
 2008 |   | Net
 Sales
 % |     
|                       |  |  |                |      |              |  |                 |   |               |     
|                       |  |  | $              | 23.2 |              |  | 20              | % | $             | 24.0 |  |  | 15 | %
|                       |  |  |                |      |              |  |                 |   |               |      |  |  |    |  

The decrease
in RD&E costs of $0.8 million in fiscal 2009 included charges related to
intangible asset and fixed asset impairment charges ($2.3 million) and
severance costs ($0.2 million). Excluding these charges, RD&E for fiscal
2009 would have decreased to $20.7 million. The decrease in RD&E from $24.0
million in fiscal 2008 to $20.7 million (excluding $2.5 million in referenced
charges) in fiscal 2009 is primarily due to decreases in our stage metrology
($1.2 million) and semiconductor ($1.2 million) RD&E spending. Stage
metrology spending was reduced in response to the lack of customer demand related
to the slowdown in the semiconductor market and the general economic recession.
Semiconductor RD&E spending decreased as several large RD&E projects
related to new product development were completed or are nearing completion.
Fiscal 2009 spending on these projects was less than in fiscal 2008.

Income Tax Expense

|                       |  |  |                |      |             |  |                 |   |              |     |  |  |    |  
|---------------------- |  |  | -------------- | ---- | ----------- |  | --------------- | - | ------------ | --- |  |  | -- | -
|                       |  |  | Year Ended     |     
|                       |  |  |                |     
|(Dollars
 in millions) |  |  | June 30,
 2009 |      | Tax Rate
 % |  | June
 30,
 2008 |   | Tax
 Rate
 % |    
|                       |  |  |                |      |             |  |                 |   |              |    
|                       |  |  | $              | 22.2 |             |  | 57              | % | $            | 1.7 |  |  | 34 | %
|                       |  |  |                |      |             |  |                 |   |              |     |  |  |    |  

Income tax
expense in fiscal 2009 included an increase in the valuation allowance of $36.9 million against
all net deferred tax assets. Fiscal 2009 also does not include any tax benefit
associated with the net operating loss for the fiscal year or tax credits
earned in the fiscal year. Management believes, based upon the uncertain and
volatile market conditions and the fact that Zygo is now in a cumulative
pre-tax accounting loss position over a three year period, it is no longer more
likely than not that the current net deferred tax assets will be realized. In
future periods, the valuation allowance could be reduced based on sufficient
evidence indicating that it is more likely than not that a portion of the
deferred tax assets will be realized.

28

---



Net Earnings (Loss) from Continuing
Operations Attributable To Zygo Corporation

|                       |  |  |                |       |          |  |                 |   |          |     |  |  |   |  
|---------------------- |  |  | -------------- | ----- | -------- |  | --------------- | - | -------- | --- |  |  | - | -
|                       |  |  | Year Ended     |      
|                       |  |  |                |      
|(Dollars
 in millions) |  |  | June 30,
 2009 |       | Sales
 % |  | June
 30,
 2008 |   | Sales
 % |    
|                       |  |  |                |       |          |  |                 |   |          |    
|                       |  |  | $              | (62.0 | )        |  | -54             | % | $        | 1.9 |  |  | 1 | %
|                       |  |  |                |       |          |  |                 |   |          |     |  |  |   |  

Net loss from
continuing operations attributable to Zygo Corporation in fiscal 2009 was $62.0
million compared with net earnings from continuing operations attributable to
Zygo Corporation of $1.9 million in the prior year. Net loss from continuing
operations attributable to Zygo Corporation per diluted share was $3.68 for
fiscal 2009, as compared with net earnings from continuing operations
attributable to Zygo Corporation of $0.11 per diluted share for fiscal 2008.
The net loss in fiscal 2009 included $49.8 million in significant charges, net
of taxes, which included asset impairment charges, write-downs and reserves on
various other balance sheet items, and a valuation allowance on our deferred
tax assets. These charges were incurred primarily as a result of the economic
downturn and recent changes in our business strategy and operations resulting
in a re-evaluation of certain of our assets.

Net Loss from Discontinued Operations

|                       |  |  |                |      |          |  |                 |   |          |      |   |  |   |  
|---------------------- |  |  | -------------- | ---- | -------- |  | --------------- | - | -------- | ---- | - |  | - | -
|                       |  |  | Year Ended     |     
|                       |  |  |                |     
|(Dollars
 in millions) |  |  | June 30,
 2009 |      | Sales
 % |  | June
 30,
 2008 |   | Sales
 % |     
|                       |  |  |                |      |          |  |                 |   |          |     
|                       |  |  | $              | (4.1 | )        |  | -4              | % | $        | (0.7 | ) |  | 0 | %
|                       |  |  |                |      |          |  |                 |   |          |      |   |  |   |  

The net loss
from discontinued operations resulted from the closure of our Singapore IC
packaging metrology operations. Net loss from discontinued operations in fiscal
2009 was $4.1 million as compared with a net loss from discontinued operations
of $0.7 million in the prior year. Net loss from discontinued operations per
diluted share was $0.24 per diluted share for fiscal 2009 as compared with
$0.04 per diluted share in fiscal 2008. The fiscal 2009 net loss from
discontinued operations of $4.1 million included $1.1 million of asset
impairment charges and $1.4 million of inventory reserves. The fiscal 2008 net loss
from discontinued operations included the results from the date of our
Singapore IC packaging acquisition (February 28, 2008) to the end of the fiscal
year.

Backlog

Backlog at
June 30, 2009 totaled $38.1 million, a decrease of $33.0 million from June 30,
2008. The year-end fiscal 2009 backlog consisted of $18.4 million, or 48%, in
the Metrology Solutions segment and $19.7 million, or 52%, in the Optical
Systems segment. Orders for fiscal 2009 totaled $81.7 million. Orders by
segment for fiscal 2009 consisted of $57.5 million, or 70%, in the Metrology
Solutions segment and $24.2 million, or 30%, in the Optical Systems segment.

29

---



LIQUIDITY AND CAPITAL RESOURCES
Fiscal 2010 Compared with Fiscal 2009

We assess our
liquidity in terms of our ability to generate cash to fund our operating,
investing, and financing activities. Our principal source of liquidity is
operating cash flows. In addition to operating cash flows, other significant
factors that affect our overall management of liquidity include: capital
expenditures, customer credit requirements, investments in businesses, and the
adequacy of available bank lines of credit.

At June 30,
2010, cash, cash equivalents, and marketable securities were $47.5 million, an
increase of $10.8 million from $36.7 million at June 30, 2009. Our marketable
security consists of $1.0 million in a United States Treasury Bill as security
for bank guarantees and standby letters of credit. These letters of credit are
used primarily overseas to cover certain warranty periods and are valued at 10%
of the associated contract value. As of June 30, 2010, $0.1 million in standby
letters of credit are outstanding and are expected to expire at varying dates
through July 2011. The cash equivalents balance in our money market account,
which is invested primarily in U.S. government securities, is $22.1 million as
of June 30, 2010. We do not believe there is any risk to liquidity in the money
market account, nor are there currently any limits on redemptions.

At June 30,
2010 we had $2.6 million of gross accounts receivable related to our display
customers which were overdue. Of this amount, $1.1 million has been reserved
based on a customer by customer analysis of the likelihood of recovery. We have
not experienced significant delays in payments from non-display customers. We
currently have no debt or outstanding lines of credit at June 30, 2010 and
2009. In the future, if the need for debt or credit lines arose there is no
assurance that we would be able to secure such financing due to the lack of
credit availability in the financial markets or our own financial position.

We believe we
have sufficient operating flexibility and cash reserves to maintain adequate
amounts of liquidity and to meet our future liquidity requirements for at least
the next twelve months.

Cash Flow from Operating Activities

|                                                                                       |  |                      |      |      |   |      |  
|-------------------------------------------------------------------------------------- |  | -------------------- | ---- | ---- | - | ---- | -
|                                                                                       |  | Year
 Ended June 30, |     
|                                                                                       |  |                      |     
|                                                                                       |  | 2010                 |      | 2009 |  
|                                                                                       |  |                      |      |      |  
|Net cash flows provided by
 (used for) operating activities from continuing operations |  | $                    | 15.1 |      | $ | (4.4 | )
|Net cash flows used for
 operating activities from discontinued operations             |  | $                    | (1.5 | )    | $ | (2.0 | )

Cash flows
provided by operating activities from continuing operations were $15.1 million
for fiscal 2010 as compared with cash flows used for operating activities from
continuing operations of $4.4 million in fiscal 2009. Operating cash flows in
fiscal 2010 were impacted primarily by decreases in our net loss and a
reduction of inventories.

Cash Flow from Investing Activities

|                                                 |  |                      |     |      |   |      | 
|------------------------------------------------ |  | -------------------- | --- | ---- | - | ---- | 
|                                                 |  | Year
 Ended June 30, |    
|                                                 |  |                      |    
|                                                 |  | 2010                 |     | 2009 |  
|                                                 |  |                      |     |      |  
|Net cash flows provided by
 investing activities |  | $                    | 1.1 |      | $ | 14.4 | 

Cash flows
provided by investing activities for fiscal 2010 decreased by $13.3 million as
compared with the prior year period. This decrease was primarily related to a
net decrease in proceeds and purchases of marketable securities of $16.9
million, partially offset by a decrease in fixed asset and intangible additions
of $3.2 million.

Cash Flow from Financing Activities

|                                                            |  |                      |     |      |   |      |  
|----------------------------------------------------------- |  | -------------------- | --- | ---- | - | ---- | -
|                                                            |  | Year
 Ended June 30, |    
|                                                            |  |                      |    
|                                                            |  | 2010                 |     | 2009 |  
|                                                            |  |                      |     |      |  
|Net cash flows provided by
 (used for) financing activities |  | $                    | 0.1 |      | $ | (1.2 | )

Cash flows
used for financing activities in the year ended June 30, 2010 decreased by $1.3
million as compared with the prior year period. In fiscal 2009, there was a
dividend payment of $1.3 million to a minority interest partner. A dividend was
not paid in fiscal 2010 but was declared after June 30, 2010. The amount of
such dividend payment will be approximately $721.

30

---



LIQUIDITY AND CAPITAL RESOURCES
Fiscal 2009 Compared with Fiscal 2008

At June 30,
2009, cash and marketable securities was $36.7 million, a decrease of $14.3
million from $51.0 million at June 30, 2008. The decrease in cash was primarily
attributable to merger-related costs of $8.3 million (which includes a merger
termination fee of $5.4 million) and, among other factors, $1.7 million of
severance costs.

Cash flows
from continuing operations used for operating activities were $4.4 million for
fiscal 2009 as compared with cash flows provided by operating activities of
$15.9 million in fiscal 2008. Operating cash flows in fiscal 2009 were impacted
primarily by the net loss offset by a decrease in receivables.

Cash flows
provided by investing activities from continuing operations for fiscal 2009
were $14.4 million as compared with $14.7 million in fiscal 2008. Purchases and
proceeds of marketable securities activities were $8.2 million and $27.8
million, respectively, in fiscal 2009 and $20.9 million and $48.4 million,
respectively, in fiscal 2008. In fiscal 2009, we decreased our capital spending
by $2.3 million. In fiscal 2008, we acquired certain assets of Solvision,
including the shares of its Singapore subsidiary, for $5.1 million in cash (net
of cash received).

Cash flows
used for financing activities from continuing operations for fiscal 2009 were
$1.2 million as compared with $19.9 million in fiscal 2008. In August 2007, our
Board of Directors approved a stock repurchase program of up to $25.0 million.
We repurchased $20.0 million of stock in fiscal 2008. There were no repurchases
in fiscal 2009.

The
composition of our marketable securities by industry sector was as follows:
22.5% Finance; 22.1% Utilities; 22.0% Real Estate, and 33.4% other. We held
five corporate bonds at June 30, 2009, with the largest individual bond having
a value at maturity of $1.0 million.

CONTRACTUAL OBLIGATIONS

The following
table summarizes our significant contractual obligations at June 30, 2010, 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                                  |  | $                                             | 1.4 |                    | $ | 0.7        |  | $          | 0.7 |                     | $ |    |  | $ |  | 
|                                                  |  |                                               |     |                    |   |            |  |            |     |                     |   |     |  |   |   | 
|Deferred compensation and
 non-compete agreements |  |                                               | 1.2 |                    |   | 0.3        |  |            | 0.6 |                     |   | 0.3 |  |   |  | 
|                                                  |  |                                               |     |                    |   |            |  |            |     |                     |   |     |  |   |   | 
|Consulting agreement                              |  |                                               | 0.4 |                    |   | 0.1        |  |            | 0.3 |                     |   |     |  |   |   | 
|                                                  |  |                                               |     |                    |   |            |  |            |     |                     |   |     |  |   |   | 
|Total                                             |  | $                                             | 3.0 |                    | $ | 1.1        |  | $          | 1.6 |                     | $ | 0.3 |  | $ |  | 
|                                                  |  |                                               |     |                    |   |            |  |            |     |                     |   |     |  |   |   | 

At June 30,
2010, we do not have any liability for uncertain tax benefits in accordance
with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes.

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 in our financial statements. We have
not guaranteed any obligations of a third party.

31

---



Item 7A.
Quantitative and Qualitative Disclosures about Market Risk

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

Interest Rate SensitivityWe currently
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), 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. We have only $1.0
million invested in a marketable security and $22.1 million in a low risk money
market accounts. There is little downward exposure on our interest income. To
the extent interest rates increase or we change our investment strategy, we
could see an increase in investment income. 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, 2010 maturing in:
(Dollars in millions)

|                               |  |      |     |      |   |            |   |   |     |  
|------------------------------ |  | ---- | --- | ---- | - | ---------- | - | - | --- | -
|                               |  | 2010 |     | 2011 |   | Thereafter |  
|                               |  |      |     |      |   |            |  
|Marketable
 securities         |  |      |     |      |   |            |   |   |     |  
|Fixed rate investments         |  | $    | 1.0 |      | $ |           |   | $ |    |  
|Weighted average interest rate |  |      | 0.0 | %    |   | 0.0        | % |   | 0.0 | %

On June 30,
2010, the Company had variable interest rate money market accounts valued at
$22.1 million.

Marketable Securities Fair Market Value
SensitivityWe have
reviewed, along with our investment advisor, current investment ratings, company
specific events, and general economic conditions in determining whether there
is a significant decline in fair value that is other than temporary.

Exchange Rate SensitivityApproximately
76% of our fiscal 2010 net sales were denominated in U.S. dollars. At June 30,
2010, our backlog included orders in U.S. dollars of $38.5 million, 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 in export
markets as would changes in the general economic conditions in those markets.
For our sales that are based in local currency, we are exposed to foreign
exchange fluctuations from the time customers are invoiced in local currency
until collection occurs.

We enter into
forward contracts to reduce the impact of adverse fluctuations on earnings
associated with foreign currency exchange rate changes. We do not enter into
any derivative transactions for speculative purposes. These forward contracts
are entered into for periods consistent with the currency transaction
exposures, generally three to nine months. Any gains and losses on the fair
value of these contracts would largely offset corresponding losses and gains on
the underlying transactions. The majority of our foreign currency transactions
and foreign operations are denominated in the Japanese yen. In the absence of a
substantial increase in sales orders in currencies other than U.S. dollars, we
believe a 5% appreciation or depreciation of the U.S. dollar against the euro
and yen would have an immaterial impact on our consolidated financial position
and results of operations.

Item 8. Financial
Statements and Supplementary Data

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

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

None.

32

---



Item
9A. Controls and Procedures

Our management, with the
participation of our Chief Executive Officer and Corporate Controller acting as
the Principal Financial Officer, carried out an evaluation, as of the end of
the period covered by this report, of the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act). Based upon their evaluation, the Chief
Executive Officer and Corporate Controller acting as the Principal Financial Officer
concluded that, as of the end of such period, our disclosure controls and
procedures were not effective in recording, processing, summarizing and
reporting on a timely basis information required to be disclosed by us in the
reports that we file or submit under the Exchange Act and not effective at the
reasonable assurance level because of the identification of a material weakness
in our internal control over financial reporting, which we view as an integral
part of our disclosure controls and procedures.

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

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

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

Under the supervision and with the
participation of management, including our principal executive and financial
officers, we assessed the Companys internal control over financial reporting
as of June 30, 2010, based on criteria for effective internal control over
financial reporting established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, we concluded, as a result of the material weakness
described in the following paragraph, that the Companys disclosure controls
and procedures were not effective as of such date.

The material weakness was
identified on May 10, 2010 and related to inadequate controls related to
accounting for unusual or complex transactions. Specifically, in this instance,
errors were detected in the allocation of cash flows from operating activities
between continuing operations and discontinued operations. Based on the impact
of these accounting errors, we restated our condensed consolidated interim
financial statements as of and for the periods ended September 30, 2009 and
2008 and December 31, 2009 and 2008.

Based on our assessment, and
because of the material weakness previously discussed, we have concluded that
our internal control over financial reporting was not effective at June 30,
2010.

Except as described in the
preceding paragraph, there have been no changes in the Companys internal
control over financial reporting during the fourth quarter of fiscal 2010 that
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.

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

33

---



|                   |  |     |                                                     | 
|------------------ |  | --- | --------------------------------------------------- | 
|                   |  |     | Zygo Corporation                                    | 
|                   |  |     |                                                     | 
|September 13, 2010 |  | By: | /s/ Chris L. Koliopoulos                           
|                   |  |     |                                                     | 
|                   |  |     | Chris L. Koliopoulos                                | 
|                   |  |     | Chairman, President, and Chief Executive Officer   
|                   |  |     |                                                     | 
|September 13, 2010 |  | By: | /s/ Michael M. Vehlies                              | 
|                   |  |     |                                                     | 
|                   |  |     | Michael M. Vehlies                                  | 
|                   |  |     | Corporate Controller (principal financial
 officer)

Item
9B. Other Information

Managements Remediation Plans
for Material Weakness in Internal ControlWe began the process of implementing additional controls in our financial
reporting process in the fourth quarter of fiscal 2010. We have begun
implementing control processes to aid in identifying transactions which might
have unusual or complex accounting issues, a process to enhance our analysis of
accounting for unusual or complex transactions as they arise in accordance with
accounting principles generally accepted in the United States of America, and
have added external accounting resources to review our accounting for unusual
or complex transactions. However, certain controls designed and implemented to
address the identified material weakness in the period-end financial reporting
process have not had a sufficient period of time to operate for our management
to conclude that they are operating effectively, and certain controls have not
been fully implemented at June 30, 2010.

PART III

Item
10. Directors, Executive Officers and Corporate Governance

Except for the information
concerning executive officers which is set forth in Part I of this Annual
Report on Form 10-K, information required by this item will be included under
the captions Election of Board of Directors and Corporate Governance in our
Proxy Statement to be filed pursuant to Regulation 14A for use in connection
with our companys 2010 Annual Meeting of Stockholders (referred to below as
our 2010 Proxy Statement)and is incorporated herein by reference.

Item
11. Executive Compensation

Information required by this item
will be included in our 2010 Proxy Statement under the captions Compensation
of Executive Officers and Corporate Governance and is incorporated herein by
reference.

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

Information required by this item
will be included in our 2010 Proxy Statement under the captions Equity
Compensation Plan Information, and Security Ownership of Certain Beneficial
Owners and is incorporated herein by reference.

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

Information
required by this item will be included in our 2010 Proxy Statement under the
captions Certain Relationships and Related Transactions, Election of Board
of Directors, and Corporate Governance and is incorporated herein by
reference.

Item 14. Principal Accountant Fees and
Services

Information
required by this item will be included in our 2010 Proxy Statement under the
caption Relationship with Independent Public Accountants and is incorporated
herein by reference.

34

---



PART IV

Item
15. Exhibits, Financial Statement Schedules

|    |                                                                                |                                                                                                                                                                                                                                                                    
|--- | ------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The following documents are filed as part of this report:                     
|    |                                                                               
|    | 1. and 2. Consolidated Financial Statements and Financial
 Statement Schedule:
|    |                                                                                |                                                                                                                                                                                                                                                                    
|    |                                                                                | An index to the consolidated financial statements and
 financial statement schedule filed is located on page F-1.                                                                                                                                                  
|    |                                                                                |                                                                                                                                                                                                                                                                    
|    | 3.                                                                             | EXHIBITS                                                                                                                                                                                                                                                           
|    |                                                                                |                                                                                                                                                                                                                                                                    
|    | 3.(i)                                                                          | Restated Certificate of Incorporation of the Company and
 amendments thereto (Exhibit 3.(i) to the Companys Annual Report on Form 10-K
 for its year ended June 30, 1993)*                                                                                        
|    |                                                                                |                                                                                                                                                                                                                                                                    
|    | 3.(ii)                                                                         | Certificate of Amendment of Certificate of Incorporation,
 filed June 3, 1996 (Exhibit 3.(ii) to the Companys Annual Report on Form
 10-K 405 for its year ended June 30, 1996)*                                                                                  
|    |                                                                                |                                                                                                                                                                                                                                                                    
|    | 3.(iii)                                                                        | By-laws of the Company (Exhibit (3)(b) to Registration No.
 2-87253 on Form S-1 hereinafter Registration No. 2-87253)*                                                                                                                                           
|    |                                                                                |                                                                                                                                                                                                                                                                    
|    | 10.1                                                                           | Confidentiality and Non-Competition Agreement dated
 October 25, 1983, between the Company and Carl A. Zanoni (Exhibit
 (10)(b) to Registration No. 2-87253)*                                                                                                      
|    |                                                                                |                                                                                                                                                                                                                                                                    
|    | 10.2                                                                           | Agreement dated November 20, 1980, between the
 Company and Canon Inc. regarding exchange of information (Exhibit (10)(y) to
 Registration No. 2-87253)*                                                                                                           
|    |                                                                                |                                                                                                                                                                                                                                                                    
|    | 10.3                                                                           | Amended and Restated Zygo Corporation Profit Sharing Plan
 (Exhibit 10.15 to the Companys Annual Report on Form 10-K 405 for its year
 ended June 30, 1995)*                                                                                                      
|    |                                                                                |                                                                                                                                                                                                                                                                    
|    | 10.4                                                                           | Canon/Zygo Confidentiality Agreement dated March 7,
 1990, between the Company and Canon Inc. regarding confidential technical
 information received from each other (Exhibit 10.42 to the Companys Annual
 Report on Form 10-K for its year ended June 30, 1991)*
|    |                                                                                |                                                                                                                                                                                                                                                                    
|    | 10.5                                                                           | 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)*                    
|    |                                                                                |                                                                                                                                                                                                                                                                    
|    | 10.6                                                                           | 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)*                             
|    |                                                                                |                                                                                                                                                                                                                                                                    
|    | 10.7                                                                           | 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)*                                                                    
|    |                                                                                |                                                                                                                                                                                                                                                                    
|    | 10.8                                                                           | 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)*                  
|    |                                                                                |                                                                                                                                                                                                                                                                    
|    | 10.9                                                                           | Subcontract B519044 between The Regents of The University
 of California Lawrence Livermore National Laboratory and Zygo Corporation
 dated January 14, 2002 (Exhibit 10.25 to the Companys Annual Report on Form
 10-K for its year ended June 30, 2002)*        
|    |                                                                                |                                                                                                                                                                                                                                                                    
|    | 10.10                                                                          | Zygo Corporation 2002 Equity Incentive Plan Restricted
 Stock Agreement. (Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q
 for its quarterly period ended September 30, 2005)*                                                                         

35

---



| |       |                                                                                                                                                                                                                                                                 
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.11 | Zygo Corporation 2002 Equity Incentive Plan Stock Option
 Agreement. (Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for
 its quarterly period ended September 30, 2005)*                                                                          
| |       |                                                                                                                                                                                                                                                                 
| | 10.12 | Employment contract dated November 20, 2006 between Zygo
 Corporation and John Stack. (Exhibit 10.2 to the Companys Quarterly Report
 on Form 10-Q for its quarterly period ended December 31, 2006)*                                                          
| |       |                                                                                                                                                                                                                                                                 
| | 10.13 | Agreement dated February 8, 2007 between Zygo Corporation
 and Carl A. Zanoni. (Exhibit 10.1 to the Companys Quarterly Report on Form
 10-Q for its quarterly period ended March 31, 2007)*                                                                    
| |       |                                                                                                                                                                                                                                                                 
| | 10.14 | Employment contract dated June 15, 2007 between Zygo
 Corporation and Walter A. Shephard. (Exhibit 10.23 to the Companys Annual
 Report on Form 10-K for its year ended June 31, 2007)*                                                                        
| |       |                                                                                                                                                                                                                                                                 
| | 10.15 | Employment Agreement dated November 19, 2007 between Zygo
 Corporation and Mr. Douglas J. Eccleston (Exhibit 99.1 to the Companys
 Current report on Form 8-K dated November 20, 2007)*                                                                        
| |       |                                                                                                                                                                                                                                                                 
| | 10.16 | Restricted Stock Unit Agreement dated January 31, 2008
 between Zygo Corporation and J. Bruce Robinson (Exhibit 10.1 to the Companys
 Quarterly Report on Form 10-Q for its quarterly period ended March 31, 2008)*                                            
| |       |                                                                                                                                                                                                                                                                 
| | 10.17 | Agreement and Plan of Merger and
 Reorganization between by and among Electro Scientific Industries, Inc., Zirkon Merger Sub, LLC, and Zygo Corporation
(Exhibit 2.1 to the Companys Current Reports on Form 8-K
 dated October 21, 2008)*                     
| |       |                                                                                                                                                                                                                                                                 
| | 10.18 | Employment agreement amendments between Zygo Corporation
 and J. Bruce Robinson, and John M. Stack, dated October 21, 2008 (Exhibit
 10.1 and 10.3, respectively, to the Companys Current Reports on Form 8-K
 dated October 21, 2008)*                        
| |       |                                                                                                                                                                                                                                                                 
| | 10.19 | Settlement Agreement and Mutual Release, dated as of April
 2, 2009, by and among Electro Scientific Industries, Inc., Zirkon Merger Sub,
 LLC, and Zygo Corporation (Exhibit 2.1 to the Companys Current Report
 on Form 8-K dated April 3, 2009)*            
| |       |                                                                                                                                                                                                                                                                 
| | 10.20 | Asset Transfer Agreement, dated as of June 17, 2009, by
 and between Zygo Corporation and Nanometrics Corporation. (Exhibit 10.30 to
 the Companys Annual Report on Form 10-K/A, Amendment No. 2 dated December
 23, 2009 for its year ended June 30, 2009)* **
| |       |                                                                                                                                                                                                                                                                 
| | 10.21 | Supply Agreement, dated as of June 17, 2009, by and
 between Zygo Corporation and Nanometrics Corporation. (Exhibit 10.31 to the
 Companys Annual Report on Form 10-K/A,Amendment No. 2, dated December
 23, 2009 for its year ended June 30, 2009)* **        
| |       |                                                                                                                                                                                                                                                                 
| | 10.22 | Employment contract dated November 16, 2007 between Zygo
 Corporation and David Person. (Exhibit 10.32
 to the Companys Annual Report on Form 10-K, for its year ended June 30,
 2009)*                                                                        
| |       |                                                                                                                                                                                                                                                                 
| | 10.23 | Employment agreement amendments between Zygo Corporation
 and John M. Stack, dated September 1, 2009 (Exhibit 99.1 to the Companys
 Current Report on Form 8-K dated September 4, 2009)*                                                                       
| |       |                                                                                                                                                                                                                                                                 
| | 10.24 | Employment agreement amendments between Zygo Corporation
 and John M. Stack, dated September 8, 2009 (Exhibit 99.1 to the Companys
 Current Report on Form 8-K dated September 11, 2009)*                                                                      
| |       |                                                                                                                                                                                                                                                                 
| | 10.25 | Employment agreement amendments (transition plan) between
 Zygo Corporation and J. Bruce Robinson, dated October 21, 2009 (Exhibit 99.1
 to the Companys Current Report on Form 8-K dated October 27, 2009)*                                                   
| |       |                                                                                                                                                                                                                                                                 
| | 10.26 | Employment and Stock Option Agreement between Zygo
 Corporation and Dr. Chris L. Koliopoulos, dated January 18, 2010 (Exhibit
 10.1 and 10.3 to the Companys Current Report on Form 8-K dated January 22,
 2010)*                                              

36

---



| |       |                                                                                                                                                                                                                                                           
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.27 | Zemetrics, Inc. acquisition agreement between ZMI
 Acquisition Corporation, a wholly-owned subsidiary of Zygo Corporation, and
 Zemetrics, Inc, dated January 18, 2010 (Exhibit 10.2 to the Companys Current
 Report on Form 8-K dated January 22, 2010)*
| |       |                                                                                                                                                                                                                                                           
| | 14.   | Zygo Corporation Code of Ethics (Exhibit 14.1
         to the Companys Quarterly Report on Form 10-Q for its quarterly
         period ended March 26, 2004)*                                                                                            
| |       |                                                                                                                                                                                                                                                           
| | 21.   | Subsidiaries of Registrant                                                                                                                                                                                                                                
| |       |                                                                                                                                                                                                                                                           
| | 23.1  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                  
| |       |                                                                                                                                                                                                                                                           
| | 24.   | Power of Attorney (included in the signature page)                                                                                                                                                                                                        
| |       |                                                                                                                                                                                                                                                           
| | 31.1  | Certification Pursuant to Rule 13A-14(a) or 15D-14(a) of
 the Securities Exchange Act of 1934, as adopted pursuant to Section 302
 of the Sarbanes-Oxley Act of 2002                                                                                      
| |       |                                                                                                                                                                                                                                                           
| | 31.2  | Certification Pursuant to Rule 13A-14(a) or 15D-14(a) of
 the Securities Exchange Act of 1934, as adopted pursuant to Section 302
 of the Sarbanes-Oxley Act of 2002                                                                                      
| |       |                                                                                                                                                                                                                                                           
| | 32.1  | Certification Pursuant to 18 U.S.C. Section 1350, as
 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                   
| |       |                                                                                                                                                                                                                                                           
| | 32.2  | Certification Pursuant to 18 U.S.C. Section 1350, as
 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                   

| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Exhibit numbers 10.3, 10.5, 10.6, 10.7, 10.8, 10.10,
 10.11, 10.12, 10.14, 10.15, 10.16, 10.18, 10.22, 10.23, 10.24, 10.25 and
 10.26 are management contracts, compensatory plans or compensatory
 arrangements.

*Incorporated herein by reference.

** Confidential treatment has been
requested for portions of this exhibit. Omitted portions have been filed
separately with the Securities Exchange Commission pursuant to Rule 24b-2 of
the Securities Exchange Act of 1934, as amended.

37

---



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/ Michael M. Vehlies                            |  | Date | September 13, 2010
|                 |                                                   |  |     
|                 | Michael M. Vehlies                                |  |      |                   
|                 | Corporate Controller (principalfinancial officer) |  |      |                   

Know all persons by these presents,
that each person whose signature appears below constitutes and appoints Chris
L. Koliopoulos and Michael M. Vehlies, 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/ Chris L. Koliopoulos |  | Chief Executive Officer (principal
 executive officer) and Director |  | September 13, 2010
|                         |  |                                                                     | 
|Chris L.
 Koliopoulos    |  |                                                                     | 
|                         |  |                                                                     |  |                   
|                         |  |                                                                     |  |                   
|/s/ Michael M. Vehlies   |  | Corporate Controller
 (principal financial officer)                 |  | September 13, 2010
|                         |  |                                                                     | 
|Michael M. Vehlies       |  |                                                                     | 
|                         |  |                                                                     |  |                   
|/s/ Stephen D. Fantone   |  | Director                                                            |  | September 13, 2010
|                         |  |                                                                     |  |                   
|Stephen D. Fantone       |  |                                                                     |  |                   
|                         |  |                                                                     |  |                   
|/s/ Samuel H. Fuller     |  | Director                                                            |  | September 13, 2010
|                         |  |                                                                     |  |                   
|Samuel H. Fuller         |  |                                                                     |  |                   
|                         |  |                                                                     |  |                   
|/s/ Seymour E. Liebman   |  | Director                                                            |  | September 13, 2010
|                         |  |                                                                     |  |                   
|Seymour E. Liebman       |  |                                                                     |  |                   
|                         |  |                                                                     |  |                   
|/s/ Robert B. Taylor     |  | Director                                                            |  | September 13, 2010
|                         |  |                                                                     |  |                   
|Robert B. Taylor         |  |                                                                     |  |                   
|                         |  |                                                                     |  |                   
|/s/ Carol P. Wallace     |  | Director                                                            |  | September 13, 2010
|                         |  |                                                                     |  |                   
|Carol P. Wallace         |  |                                                                     |  |                   
|                         |  |                                                                     |  |                   
|/s/ Gary K. Willis       |  | Director                                                            |  | September 13, 2010
|                         |  |                                                                     |  |                   
|Gary K. Willis           |  |                                                                     |  |                   

38

---



ZYGO CORPORATION AND CONSOLIDATED
SUBSIDIARIES

Index to Consolidated Financial Statements
and Schedule

|            |  |                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------
|Page        |  |                                                                                                   
|            |  |                                                                                                   
|            |  |                                                                                                   
|F-2 to F-3  |  | Report of Independent Registered Public Accounting Firm                                           
|            |  |                                                                                                   
|F-4         |  | Consolidated balance sheets at June 30, 2010 and 2009                                             
|            |  |                                                                                                   
|F-5         |  | Consolidated statements of operations for the years ended June 30,
 2010, 2009, and 2008          
|            |  |                                                                                                   
|F-6         |  | Consolidated statements of stockholders equity for the years ended
 June 30, 2010, 2009, and 2008
|            |  |                                                                                                   
|F-7         |  | Consolidated statements of cash flows for the years ended June 30,
 2010, 2009, and 2008          
|            |  |                                                                                                   
|F-8 to F-29 |  | Notes to consolidated financial statements                                                        
|            |  |                                                                                                   
|            |  | Supplemental
 Schedules                                                                           
|            |  |                                                                                                   
|S-1         |  | Report of Independent Registered Public Accounting Firm                                           
|            |  |                                                                                                   
|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

Board of
Directors and Stockholders 
Zygo Corporation 
Middlefield, Connecticut

We have
audited the accompanying consolidated balance sheets of Zygo Corporation and
subsidiaries (the Company) as of June 30, 2010 and 2009 and the related
consolidated statements of operations, stockholders equity, and cash flows for
each of the three years in the period ended June 30, 2010. We also have audited
the Companys internal control over financial reporting as of June 30, 2010,
based on the criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
The Companys management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Report of Management on Zygo Corporations
Internal Control Over Financial Reporting (Item 9A). Our responsibility is to
express an opinion on these financial statements and an opinion on the
Companys internal control over financial reporting based on our audits.

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

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

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

A material
weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a
material misstatement of the companys annual or interim financial statements
will not be prevented or detected on a timely basis. The following material
weakness has been identified and included in managements assessment: the
Company has not maintained effective internal controls relating to the
accounting for unusual or complex transactions. This material weakness was
considered in determining the nature, timing, and extent of audit tests applied
in our audit of the consolidated financial statements as of and for the year
ended June 30, 2010 of the Company and this report does not affect our report
on such financial statements.

In our
opinion, because of the effect of the material weakness identified above on the
achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of June 30, 2010,
based on the criteria established in the Internal Control  Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.

F - 2

---



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, 2010 and 2009 and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2010, in conformity with accounting principles generally accepted in
the United States of America.

/s/ Deloitte
& Touche LLPHartford, Connecticut 
September 13, 2010

F - 3

---



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

|                                                                                                         |  |               |         |                |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | -------------- | - | ------- | -
|                                                                                                         |  | June 30, 2010 |         | June
 30, 2009 |  
|                                                                                                         |  |               |         |                |  
|Assets                                                                                                   |  |               |         |                |   |         |  
|Current assets:                                                                                          |  |               |         |                |   |         |  
|Cash and cash equivalents                                                                                |  | $             | 46,536  |                | $ | 32,723  |  
|Marketable securities (note 4)                                                                           |  |               | 1,000   |                |   | 4,015   |  
|Receivables, net of allowance for doubtful accounts of $1,975 and
 $2,550, respectively (notes 6 and 17) |  |               | 19,948  |                |   | 20,874  |  
|Inventories (notes 2 and 7)                                                                              |  |               | 25,220  |                |   | 30,452  |  
|Prepaid expenses and other current assets                                                                |  |               | 1,643   |                |   | 1,527   |  
|Income tax receivable (note 15)                                                                          |  |               | 1,050   |                |   | 1,022   |  
|Current assets of discontinued operations (note 20)                                                      |  |               | 17      |                |   | 294     |  
|                                                                                                         |  |               |         |                |   |         |  
|Total current assets                                                                                     |  |               | 95,414  |                |   | 90,907  |  
|Marketable securities (note 4)                                                                           |  |               | 922     |                |   | 499     |  
|Property, plant, and equipment, net (notes 2 and 8)                                                      |  |               | 23,029  |                |   | 27,325  |  
|Intangible assets, net (notes 2 and 9)                                                                   |  |               | 5,387   |                |   | 4,211   |  
|Other assets                                                                                             |  |               | 413     |                |   | 1,013   |  
|Non-current assets of discontinued operations (note 20)                                                  |  |               |        |                |   | 144     |  
|                                                                                                         |  |               |         |                |   |         |  
|Total assets                                                                                             |  | $             | 125,165 |                | $ | 124,099 |  
|                                                                                                         |  |               |         |                |   |         |  
|Liabilities and Stockholders Equity                                                                     |  |               |         |                |   |         |  
|Current liabilities:                                                                                     |  |               |         |                |   |         |  
|Accounts payable                                                                                         |  | $             | 8,426   |                | $ | 5,089   |  
|Accrued progress payments and deferred revenue                                                           |  |               | 5,700   |                |   | 5,924   |  
|Accrued salaries and wages                                                                               |  |               | 3,173   |                |   | 3,508   |  
|Other accrued expenses (note 10)                                                                         |  |               | 5,191   |                |   | 6,313   |  
|Income taxes payable                                                                                     |  |               | 152     |                |   |        |  
|Current liabilities of discontinued operations (note 20)                                                 |  |               | 287     |                |   | 331     |  
|                                                                                                         |  |               |         |                |   |         |  
|Total current liabilities                                                                                |  |               | 22,929  |                |   | 21,165  |  
|                                                                                                         |  |               |         |                |   |         |  
|Long-term income tax payable                                                                             |  |               |        |                |   | 1,826   |  
|Other long-term liabilities                                                                              |  |               | 1,359   |                |   | 1,081   |  
|Long-term liabilities of discontinued operations (note 20)                                               |  |               | 281     |                |   |        |  
|                                                                                                         |  |               |         |                |   |         |  
|Commitments and contingencies (note 11)                                                                  |  |               |         |                |   |         |  
|                                                                                                         |  |               |         |                |   |         |  
|Stockholders equity (notes 12, 13, and 14):                                                             |  |               |         |                |   |         |  
|Common stock, $.10 par value per share:                                                                  |  |               |         |                |   |         |  
|40,000,000 shares authorized;                                                                            |  |               |         |                |   |         |  
|19,663,414 shares issued (19,044,331 in 2009);                                                           |  |               |         |                |   |         |  
|17,480,219 shares outstanding (16,914,978 in 2009)                                                       |  |               | 1,966   |                |   | 1,904   |  
|Additional paid-in capital                                                                               |  |               | 163,052 |                |   | 156,176 |  
|Accumulated deficit                                                                                      |  |               | (39,844 | )              |   | (33,550 | )
|Accumulated other comprehensive loss:                                                                    |  |               |         |                |   |         |  
|Currency translation effects                                                                             |  |               | (728    | )              |   | (306    | )
|                                                                                                         |  |               |         |                |   |         |  
|                                                                                                         |  |               | 124,446 |                |   | 124,224 |  
|Less treasury stock, at cost; 2,183,195 common shares (2,129,353 in
 2009)                               |  |               | 26,043  |                |   | 25,641  |  
|                                                                                                         |  |               |         |                |   |         |  
|Total stockholders equity - Zygo Corporation                                                            |  |               | 98,403  |                |   | 98,583  |  
|Noncontrolling interest                                                                                  |  |               | 2,193   |                |   | 1,444   |  
|                                                                                                         |  |               |         |                |   |         |  
|Total stockholders equity                                                                               |  |               | 100,596 |                |   | 100,027 |  
|                                                                                                         |  |               |         |                |   |         |  
|Total liabilities and stockholders equity                                                               |  | $             | 125,165 |                | $ | 124,099 |  
|                                                                                                         |  |               |         |                |   |         |  

See accompanying notes to
consolidated financial statements.

F - 4

---



CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands except per share amounts)

|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                                         |  | Fiscal
 Year Ended June 30, |        
|                                                                                                         |  |                             |        
|                                                                                                         |  | 2010                        |         | 2009 |   | 2008    |  
|                                                                                                         |  |                             |         |      |   |         |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Net revenues                                                                                             |  | $                           | 101,330 |      | $ | 114,734 |   | $ | 158,463 |  
|Cost of goods sold                                                                                       |  |                             | 59,361  |      |   | 82,301  |   |   | 93,782  |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Gross margin                                                                                             |  |                             | 41,969  |      |   | 32,433  |   |   | 64,681  |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Selling, general, and administrative expenses                                                            |  |                             | 29,520  |      |   | 49,243  |   |   | 37,812  |  
|Research, development, and engineering expenses                                                          |  |                             | 14,284  |      |   | 23,234  |   |   | 23,971  |  
|Impairment of goodwill                                                                                   |  |                             | 2,003   |      |   |        |   |   |        |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Operating profit (loss)                                                                                  |  |                             | (3,838  | )    |   | (40,044 | ) |   | 2,898   |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Other income:                                                                                            |  |                             |         |      |   |         |   |   |         |  
|Interest income                                                                                          |  |                             | 87      |      |   | 885     |   |   | 2,367   |  
|Miscellaneous income (expense), net                                                                      |  |                             | 51      |      |   | 142     |   |   | (234    | )
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Total other income                                                                                       |  |                             | 138     |      |   | 1,027   |   |   | 2,133   |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Earnings (loss) from continuing operations before income tax expense,
 including noncontrolling interest |  |                             | (3,700  | )    |   | (39,017 | ) |   | 5,031   |  
|Income tax benefit (expense) (note 15)                                                                   |  |                             | 1,032   |      |   | (22,193 | ) |   | (1,694  | )
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Net earnings (loss) from continuing operations                                                           |  |                             | (2,668  | )    |   | (61,210 | ) |   | 3,337   |  
|Loss from discontinued operations, net of tax (note 20)                                                  |  |                             | (2,669  | )    |   | (4,059  | ) |   | (700    | )
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Net earnings (loss) including noncontrolling interest                                                    |  |                             | (5,337  | )    |   | (65,269 | ) |   | 2,637   |  
|Less: Net earnings attributable to noncontrolling interest                                               |  |                             | 957     |      |   | 795     |   |   | 1,398   |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Net earnings (loss) attributable to Zygo Corporation                                                     |  | $                           | (6,294  | )    | $ | (66,064 | ) | $ | 1,239   |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Basic - Earnings (loss) per share attributable to Zygo Corporation:                                      |  |                             |         |      |   |         |   |   |         |  
|Continuing operations                                                                                    |  | $                           | (0.21   | )    | $ | (3.68   | ) | $ | 0.11    |  
|Discontinued operations                                                                                  |  |                             | (0.16   | )    |   | (0.24   | ) |   | (0.04   | )
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Net earnings (loss) per share                                                                            |  | $                           | (0.37   | )    | $ | (3.92   | ) | $ | 0.07    |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Diluted - Earnings (loss) per share attributable to Zygo Corporation:                                    |  |                             |         |      |   |         |   |   |         |  
|Continuing operations                                                                                    |  | $                           | (0.21   | )    | $ | (3.68   | ) | $ | 0.11    |  
|Discontinued operations                                                                                  |  |                             | (0.16   | )    |   | (0.24   | ) |   | (0.04   | )
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Net earnings (loss) per share                                                                            |  | $                           | (0.37   | )    | $ | (3.92   | ) | $ | 0.07    |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Weighted average number of shares:                                                                       |  |                             |         |      |   |         |   |   |         |  
|Basic                                                                                                    |  |                             | 17,183  |      |   | 16,843  |   |   | 17,295  |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Diluted                                                                                                  |  |                             | 17,183  |      |   | 16,843  |   |   | 17,648  |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Amounts Attributable to Zygo Corporation                                                                 |  |                             |         |      |   |         |   |   |         |  
|Net earnings (loss) from continuing operations attributable to Zygo
 Corporation                         |  | $                           | (3,625  | )    | $ | (62,005 | ) | $ | 1,939   |  
|Discontinued operations, net of tax (note 20)                                                            |  |                             | (2,669  | )    |   | (4,059  | ) |   | (700    | )
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  
|Net earnings (loss) attributable to Zygo Corporation                                                     |  | $                           | (6,294  | )    | $ | (66,064 | ) | $ | 1,239   |  
|                                                                                                         |  |                             |         |      |   |         |   |   |         |  

See
accompanying notes to consolidated financial statements.

F - 5

---



CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY(Dollars and Shares in Thousands)

|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   |   |         |  
|--------------------------------------------------------- |  | ------------- | ------ | ---------------------------- | - | --------------- | ------ | ------------------------------------------ | ------- | ------------------------------------------------ |  | ----------------- |  | --------------------------- | ------- | ------------- | - | ------- | - | - | ------ | --------------------------------------------------------- | - | ------- | - | - | ------ | - | - | ------- | - | - | ------- | -
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        | Comprehensive
 Income (Loss)
 Attributable
 to Zygo Corp. |  
|                                                          |  | Common
 Stock |        | Additional
 Paid-In
 Capital |   | Treasury
 Stock |        | Retained
 Earnings
 (Accumulated
 Deficit) |         | Accumulated
 Other
 Comprehensive
 Income (Loss) |  | Total
 Zygo Corp. |  | Non-
 Controlling
 Interest |         | Total
 Equity |   |        
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                  
|                                                          |  | Shares        |        | Amount                       |   |                 | Shares |                                            | Amount  |                                                  |  |                   |  |                             |         |              
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |  
|Balance at July 1, 2007                                   |  |               | 18,242 |                              | $ | 1,869           |        | $                                          | 148,844 |                                                  |  | 450               |  | $                           | (5,335  | )             | $ | 32,194  |   | $ | 22     |                                                           | $ | 177,594 |   | $ | 1,159  |   | $ | 178,753 |   |   |         |  
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   |   |         |  
|Comprehensive income:                                     |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   |   |         |  
|Net earnings                                              |  |               |       |                              |   |                |        |                                            |        |                                                  |  |                  |  |                             |        |               |   | 1,239   |   |   |       |                                                           |   | 1,239   |   |   | 1,398  |   |   | 2,637   |   | $ | 1,239   |  
|Unrealized loss on marketable securities                  |  |               |       |                              |   |                |        |                                            |        |                                                  |  |                  |  |                             |        |               |   |        |   |   | (39    | )                                                         |   | (39     | ) |   |       |   |   | (39     | ) |   | (39     | )
|Foreign currency translation effect                       |  |               |       |                              |   |                |        |                                            |        |                                                  |  |                  |  |                             |        |               |   |        |   |   | 872    |                                                           |   | 872     |   |   | 460    |   |   | 1,332   |   |   | 872     |  
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   |   |         |  
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   | $ | 2,072   |  
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   |   |         |  
|Non-cash compensation charges related to stock options    |  |               |       |                              |   |                |        |                                            | 2,921   |                                                  |  |                  |  |                             |        |               |   |        |   |   |       |                                                           |   | 2,921   |   |   |       |   |   | 2,921   |   |   |         |  
|Employee stock purchase                                   |  |               | 21     |                              |   | 2               |        |                                            | 265     |                                                  |  |                  |  |                             |        |               |   |        |   |   |       |                                                           |   | 267     |   |   |       |   |   | 267     |   |   |         |  
|Repurchase of company stock                               |  |               | (1,641 | )                            |   |                |        |                                            |        |                                                  |  | 1,641             |  |                             | (20,049 | )             |   |        |   |   |       |                                                           |   | (20,049 | ) |   |       |   |   | (20,049 | ) |   |         |  
|Restricted stock vesting and related tax effect           |  |               | 43     |                              |   | 4               |        |                                            | (86     | )                                                |  | 1                 |  |                             | (6      | )             |   |        |   |   |       |                                                           |   | (88     | ) |   |       |   |   | (88     | ) |   |         |  
|Exercise of employee stock options and related tax effect |  |               | 67     |                              |   | 7               |        |                                            | 719     |                                                  |  |                  |  |                             |        |               |   |        |   |   |       |                                                           |   | 726     |   |   |       |   |   | 726     |   |   |         |  
|Dividend paid                                             |  |               |       |                              |   |                |        |                                            |        |                                                  |  |                  |  |                             |        |               |   |        |   |   |       |                                                           |   |        |   |   | (751   | ) |   | (751    | ) |   |         |  
|Fin 48 adjustment                                         |  |               |       |                              |   |                |        |                                            |        |                                                  |  |                  |  |                             |        |               |   | (919    | ) |   |       |                                                           |   | (919    | ) |   |       |   |   | (919    | ) |   |         |  
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   |   |         |  
|Balance at June 30, 2008                                  |  |               | 16,732 |                              | $ | 1,882           |        | $                                          | 152,663 |                                                  |  | 2,092             |  | $                           | (25,390 | )             | $ | 32,514  |   | $ | 855    |                                                           | $ | 162,524 |   | $ | 2,266  |   | $ | 164,790 |   |   |         |  
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   |   |         |  
|Comprehensive income (loss):                              |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   |   |         |  
|Net earnings (loss)                                       |  |               |       |                              |   |                |        |                                            |        |                                                  |  |                  |  |                             |        |               |   | (66,064 | ) |   |       |                                                           |   | (66,064 | ) |   | 795    |   |   | (65,269 | ) | $ | (66,064 | )
|Unrealized gain on marketable securities                  |  |               |       |                              |   |                |        |                                            |        |                                                  |  |                  |  |                             |        |               |   |        |   |   | 39     |                                                           |   | 39      |   |   |       |   |   | 39      |   |   | 39      |  
|Foreign currency translation effect                       |  |               |       |                              |   |                |        |                                            |        |                                                  |  |                  |  |                             |        |               |   |        |   |   | (1,200 | )                                                         |   | (1,200  | ) |   | (315   | ) |   | (1,515  | ) |   | (1,200  | )
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   |   |         |  
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   | $ | (67,225 | )
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   |   |         |  
|Non-cash compensation charges related to stock options    |  |               |       |                              |   |                |        |                                            | 2,924   |                                                  |  |                  |  |                             |        |               |   |        |   |   |       |                                                           |   | 2,924   |   |   |       |   |   | 2,924   |   |   |         |  
|Employee stock purchase                                   |  |               | 26     |                              |   | 3               |        |                                            | 204     |                                                  |  |                  |  |                             |        |               |   |        |   |   |       |                                                           |   | 207     |   |   |       |   |   | 207     |   |   |         |  
|Restricted stock vesting and related tax effect           |  |               | 136    |                              |   | 17              |        |                                            | (17     | )                                                |  | 37                |  |                             | (251    | )             |   |        |   |   |       |                                                           |   | (251    | ) |   |       |   |   | (251    | ) |   |         |  
|Exercise of employee stock options and related tax effect |  |               | 21     |                              |   | 2               |        |                                            | 402     |                                                  |  |                  |  |                             |        |               |   |        |   |   |       |                                                           |   | 404     |   |   |       |   |   | 404     |   |   |         |  
|Dividend paid                                             |  |               |       |                              |   |                |        |                                            |        |                                                  |  |                  |  |                             |        |               |   |        |   |   |       |                                                           |   |        |   |   | (1,302 | ) |   | (1,302  | ) |   |         |  
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   |   |        
|Balance at June 30, 2009                                  |  |               | 16,915 |                              | $ | 1,904           |        | $                                          | 156,176 |                                                  |  | 2,129             |  | $                           | (25,641 | )             | $ | (33,550 | ) | $ | (306   | )                                                         | $ | 98,583  |   | $ | 1,444  |   | $ | 100,027 |   |   |         |  
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   |   |        
|Comprehensive income (loss):                              |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   |   |         |  
|Net earnings (loss)                                       |  |               |       |                              |   |                |        |                                            |        |                                                  |  |                  |  |                             |        |               |   | (6,294  | ) |   |       |                                                           |   | (6,294  | ) |   | 957    |   |   | (5,337  | ) | $ | (6,294  | )
|Foreign currency translation effect                       |  |               |       |                              |   |                |        |                                            |        |                                                  |  |                  |  |                             |        |               |   |        |   |   | (422   | )                                                         |   | (422    | ) |   | (208   | ) |   | (630    | ) |   | (422    | )
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   |   |         |  
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   | $ | (6,716  | )
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   |   |         |  
|Non-cash compensation charges related to stock awards     |  |               |       |                              |   |                |        |                                            | 2,556   |                                                  |  |                  |  |                             |        |               |   |        |   |   |       |                                                           |   | 2,556   |   |   |       |   |   | 2,556   |   |   |         |  
|Issuance - acquisition                                    |  |               | 361    |                              |   | 36              |        |                                            | 3,865   |                                                  |  |                  |  |                             |        |               |   |        |   |   |       |                                                           |   | 3,901   |   |   |       |   |   | 3,901   |   |   |         |  
|Restricted stock vesting and related tax effect           |  |               | 147    |                              |   | 22              |        |                                            | (22     | )                                                |  | 54                |  |                             | (407    | )             |   |        |   |   |       |                                                           |   | (407    | ) |   |       |   |   | (407    | ) |   |         |  
|Exercise of employee stock options and related tax effect |  |               | 57     |                              |   | 4               |        |                                            | 477     |                                                  |  |                  |  |                             | 5       |               |   |        |   |   |       |                                                           |   | 486     |   |   |       |   |   | 486     |   |   |         |  
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   |   |         |  
|Balance at June 30, 2010                                  |  |               | 17,480 |                              | $ | 1,966           |        | $                                          | 163,052 |                                                  |  | 2,183             |  | $                           | (26,043 | )             | $ | (39,844 | ) | $ | (728   | )                                                         | $ | 98,403  |   | $ | 2,193  |   | $ | 100,596 |   |   |         |  
|                                                          |  |               |        |                              |   |                 |        |                                            |         |                                                  |  |                   |  |                             |         |               |   |         |   |   |        |                                                           |   |         |   |   |        |   |   |         |   |   |         |  

See
accompanying notes to consolidated financial statements.

F - 6

---



CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)

|                                                                                                   |  |                             |        |      |   |         |   |   |         |  
|-------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------- | - | - | ------- | -
|                                                                                                   |  | Fiscal
 Year Ended June 30, |       
|                                                                                                   |  |                             |       
|                                                                                                   |  | 2010                        |        | 2009 |   | 2008    |  
|                                                                                                   |  |                             |        |      |   |         |  
|Cash provided by (used for) operating activities:                                                  |  |                             |        |      |   |         |   |   |         |  
|Net earnings (loss) including noncontrolling interest                                              |  | $                           | (5,337 | )    | $ | (65,269 | ) | $ | 2,637   |  
|Adjustments to reconcile net earnings (loss) to cash provided by (used
 for) operating activities: |  |                             |        |      |   |         |   |   |         |  
|Loss from discontinued operations                                                                  |  |                             | 2,669  |      |   | 4,059   |   |   | 700     |  
|Depreciation and amortization                                                                      |  |                             | 6,125  |      |   | 7,960   |   |   | 7,352   |  
|Loss on disposal of assets                                                                         |  |                             | 67     |      |   | 196     |   |   | 70      |  
|Deferred income taxes                                                                              |  |                             | (789   | )    |   | 20,990  |   |   | (227    | )
|Impairment of marketable securities                                                                |  |                             |       |      |   | 309     |   |   | 291     |  
|Impairment of property, plant, and equipment                                                       |  |                             |       |      |   | 4,460   |   |   |        |  
|Impairment of intangible assets                                                                    |  |                             | 2,003  |      |   | 3,983   |   |   |        |  
|Restructuring charges                                                                              |  |                             |       |      |   | 452     |   |   |        |  
|Inventory valuation adjustment                                                                     |  |                             | 543    |      |   | 3,567   |   |   | 239     |  
|Provision for doubtful accounts                                                                    |  |                             | (586   | )    |   | 3,157   |   |   | 566     |  
|Compensation cost related to share-based payment arrangements                                      |  |                             | 2,492  |      |   | 2,885   |   |   | 2,914   |  
|Excess tax benefits from share-based payment arrangements                                          |  |                             | (33    | )    |   | (9      | ) |   | (42     | )
|Other                                                                                              |  |                             | (379   | )    |   | (392    | ) |   | 198     |  
|Changes in operating accounts, excluding the effect of acquisition:                                |  |                             |        |      |   |         |   |   |         |  
|Receivables                                                                                        |  |                             | 1,446  |      |   | 10,661  |   |   | 3,727   |  
|Inventories                                                                                        |  |                             | 5,314  |      |   | (208    | ) |   | 8,872   |  
|Prepaid expenses and other current assets                                                          |  |                             | 1,247  |      |   | (86     | ) |   | (138    | )
|Accounts payable, accrued expenses, and taxes payable                                              |  |                             | 270    |      |   | (1,111  | ) |   | (11,224 | )
|                                                                                                   |  |                             |        |      |   |         |   |   |         |  
|Net cash provided by (used for) operating activities from continuing
 operations                   |  |                             | 15,052 |      |   | (4,396  | ) |   | 15,935  |  
|                                                                                                   |  |                             |        |      |   |         |   |   |         |  
|Net cash used for operating activities from discontinued operations                                |  |                             | (1,542 | )    |   | (2,034  | ) |   | (1,358  | )
|                                                                                                   |  |                             |        |      |   |         |   |   |         |  
|Cash provided by (used for) investing activities:                                                  |  |                             |        |      |   |         |   |   |         |  
|Additions to property, plant, and equipment                                                        |  |                             | (1,441 | )    |   | (4,255  | ) |   | (6,580  | )
|Purchase of marketable securities                                                                  |  |                             | (2,288 | )    |   | (8,174  | ) |   | (20,934 | )
|Additions to intangibles and other assets                                                          |  |                             | (505   | )    |   | (950    | ) |   | (716    | )
|Issuance of note receivable                                                                        |  |                             |       |      |   |        |   |   | (559    | )
|Investments and acquisitions, excluding cash acquired                                              |  |                             | 11     |      |   |        |   |   | (5,079  | )
|Proceeds from the sale and maturity of marketable securities                                       |  |                             | 5,000  |      |   | 27,812  |   |   | 48,388  |  
|Proceeds from the sale of other assets and the formation of the joint
 venture                     |  |                             | 291    |      |   | 11      |   |   | 222     |  
|                                                                                                   |  |                             |        |      |   |         |   |   |         |  
|Net cash provided by investing activities                                                          |  |                             | 1,068  |      |   | 14,444  |   |   | 14,742  |  
|                                                                                                   |  |                             |        |      |   |         |   |   |         |  
|Cash provided by (used for) financing activities:                                                  |  |                             |        |      |   |         |   |   |         |  
|Dividend payments to noncontrolling interest                                                       |  |                             |       |      |   | (1,301  | ) |   | (751    | )
|Employee stock purchase                                                                            |  |                             |       |      |   | 207     |   |   | 267     |  
|Excess tax benefits from share-based payment arrangements                                          |  |                             | 33     |      |   | 9       |   |   | 43      |  
|Repurchase of company stock                                                                        |  |                             |       |      |   |        |   |   | (20,049 | )
|Restricted stock vesting and related tax benefits                                                  |  |                             | (407   | )    |   | (251    | ) |   | (88     | )
|Exercise of employee stock options                                                                 |  |                             | 486    |      |   | 185     |   |   | 726     |  
|                                                                                                   |  |                             |        |      |   |         |   |   |         |  
|Net cash provided by (used for) financing activities                                               |  |                             | 112    |      |   | (1,151  | ) |   | (19,852 | )
|                                                                                                   |  |                             |        |      |   |         |   |   |         |  
|Effect of exchange rate changes on cash and cash equivalents                                       |  |                             | (877   | )    |   | (561    | ) |   | (872    | )
|                                                                                                   |  |                             |        |      |   |         |   |   |         |  
|Net increase in cash and cash equivalents                                                          |  |                             | 13,813 |      |   | 6,302   |   |   | 8,595   |  
|Cash and cash equivalents, beginning of year                                                       |  |                             | 32,723 |      |   | 26,421  |   |   | 17,826  |  
|                                                                                                   |  |                             |        |      |   |         |   |   |         |  
|Cash and cash equivalents, end of year                                                             |  | $                           | 46,536 |      | $ | 32,723  |   | $ | 26,421  |  
|                                                                                                   |  |                             |        |      |   |         |   |   |         |  

Supplemental
Cash flow information:
Cash paid (refunded) for income taxes were $281, ($2,340), and $1,375, in
fiscal 2010, 2009, and 2008, respectively.

See
accompanying notes to consolidated financial statements.

F - 7

---



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Years Ended
 June 30, 2010, 2009, and 2008                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(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 electro-optical design and manufacturing services, serving
 customers in the semiconductor capital equipment and industrial markets. The
 accompanying consolidated financial statements are prepared in conformity
 with accounting principles generally accepted in the United States of America
 (U.S. GAAP) and include the accounts of Zygo Corporation and its
 subsidiaries (Zygo, we, us, our or Company). All transactions and
 accounts with the subsidiaries have been eliminated from the consolidated
 financial statements. Noncontrolling interest related to our ownership
 interests of less than 100% is reported as noncontrolling interest in
 subsidiaries in the consolidated balance sheets. The noncontrolling interest
 of our earnings, net of tax, is reported as noncontrolling interest in the
 consolidated statements of operations. We have adopted authoritative guidance
 related to Subsequent Events and have evaluated for disclosure subsequent
 events that have occurred after June 30, 2010.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Discontinued Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|The Company
 classifies operations as discontinued when the operations have either ceased,
 or are expected to be disposed of in a sale transaction in the near term, and
 the operations and cash flows of all discontinued operations have been
 eliminated or will be eliminated upon the ceasing of operations or the
 consummation of an expected sale transaction, and the Company will not have
 any significant continuing involvement in the discontinued operations.
 Authoritative guidance related to the impairment or disposal of long-lived
 assets requires the calculation of estimated fair value less cost to sell of
 long-lived assets for assets held for sale. The calculation of estimated fair
 value less cost to sell includes significant estimates and assumptions,
 including, but not limited to: operating projections; excess working capital
 levels; property values; and the anticipated costs involved in the selling
 process.                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|As more
 fully described in Note 20, Discontinued Operations, we have discontinued
 the Singapore Integrated Circuit packaging metrology operations of our Vision
 Systems product line, which was included in our Metrology Solutions segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Certain
 amounts have been reclassified to conform to current-year presentations
 related to discontinued operations and non-controlling interests.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Translation of Foreign Currency Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Zygos
 reporting currency is the U.S. dollar. The functional currency of the
 majority of our foreign subsidiaries is their local currency and, as such,
 amounts included in the consolidated statements of operations are translated
 at the weighted-average exchange rates for the period. Assets and liabilities
 are translated at period-end exchange rates and resulting foreign exchange
 translation adjustments are recorded in the consolidated balance sheets as a
 component of accumulated other comprehensive income (loss).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Foreign Currency Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Monetary
 assets and liabilities denominated in currencies other than the functional
 currency are remeasured into their respective functional currencies at
 exchange rates in effect at the balance sheet date. The resulting exchange
 gain or loss is included in our consolidated statements of operations as
 miscellaneous income (expense), net.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|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 of
 corporate securities. Securities held by us at June 30, 2010 and 2009 were
 classified as held-to-maturity, available-for-sale, and trading. The
 held-to-maturity investments are recorded at amortized cost. The
 available-for-sale investment is recorded at fair value and adjusted through
 stockholders equity. Trading investments are recorded at fair value and
 adjusted through the statement of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F - 8

---



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Inventories
 are stated at the lower of cost (determined on a first-in, first-out basis)
 or market. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|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, license agreements, acquired technology
 and customer lists. The cost of intangible assets is amortized on a
 straight-line basis, over estimated useful lives ranging from 5-17 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Valuation of Long-Lived Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|In accordance
 with authoritative guidance issued by the Financial Accounting Standards
 Board (FASB), related to accounting for the impairment or disposal of
 long-lived assets, the carrying value of intangible assets and other
 long-lived assets is reviewed on a regular basis for the existence of facts
 or circumstances, both internally and externally, that may suggest
 impairment. Some factors considered important, which could trigger an
 impairment review, include a significant decrease in the market value of an asset,
 a significant change in the extent or manner in which an asset is used, a
 significant adverse change in the business climate that could affect the
 value of an asset, an accumulation of costs for an asset in excess of the
 amount originally expected, a current period operating loss or cash flow
 decline combined with a history of operating losses or cash flow uses or a
 projection that demonstrates continuing losses, and a current expectation
 that, it is more likely than not, a long-lived asset will be disposed of at a
 loss before the end of its estimated useful life.                                                                                          
|If any such
 facts or circumstances exist, the carrying value of long-lived assets are
 evaluated to determine if impairment exists based upon estimated undiscounted
 future cash flows over the remaining useful life of the assets and comparing
 that value to the carrying value of the assets. If the carrying value of the
 assets is greater than the estimated future cash flows, the assets are
 written down to the estimated fair value. The estimated fair value of the
 assets is based on a current market value of the assets. If a current market
 value is not readily available, a projected discounted cash flow method is
 applied using a discount rate determined by management to be commensurate
 with the risk inherent in the current business model. Our cash flow estimates
 contain managements best estimates, using appropriate and customary
 assumptions and projections at the time. During fiscal 2010, we recorded an
 impairment charge on goodwill assets. During the year ended June 30, 2010, we
 believe that there has been no other indicator of impairment. During fiscal
 2009, we recorded impairment charges on property, plant, and equipment,
 intangible assets, and marketable securities.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|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. Deferred
 tax assets are reduced by valuation allowances if it is determined that it is
 more likely than not that the deferred tax asset will not be realized. 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.                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|On July 1,
 2008, Zygo adopted authoritative guidance for accounting for uncertainty in
 income taxes. We apply a more likely than not threshold to the recognition
 and de-recognition of tax benefits. The calculation of the tax liabilities
 involves dealing with uncertainties in the application of complex tax
 regulations in a multitude of jurisdictions across our global operations. We
 also recognize potential liabilities for anticipated tax audit issues in the
 U.S. and other tax jurisdictions based on an estimate of whether it is more
 likely than not additional taxes will be due.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|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 authoritative guidance pertaining to 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 for defective products that we account for as a warranty provision
 under authoritative guidance related to                                                                                          

F - 9

---



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Certain
 customer transactions include payment terms whereby we receive a partial
 payment of the total order amount prior to the related sale being recognized
 in our financial statements. These advance payments are included in accrued
 progress payments and deferred revenue in the consolidated balance sheet.
 Generally, these progress payments relate to orders for custom equipment that
 require a lengthy build cycle and, in some cases, acceptance by the customer.
 We may negotiate payment terms with these customers on these particular
 orders and secure certain payments prior to or on shipment of the equipment.
 These payments remain in accrued progress payments and deferred revenue until
 our applicable revenue recognition criteria have been met.                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Research and Development                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Research and
 development costs are expensed as incurred. For fiscal 2010, 2009, and 2008,
 we expensed $8,566, $14,385 and $20,350 of research and development expense.
 Reimbursements from customers for research and development costs are recorded
 as offsets to the expenses. There was reimbursed research and development
 costs in fiscal 2010 of $33 and none in fiscal 2009 and 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Earnings Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Basic and
 diluted earnings per share are calculated in accordance with authoritative
 guidance. The following table sets forth the reconciliation of weighted
 average shares outstanding and diluted weighted average shares outstanding:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                                       |  |               |            |               |  |               |  |  |            | 
|------------------------------------------------------ |  | ------------- | ---------- | ------------- |  | ------------- |  |  | ---------- | 
|                                                       |  | June 30, 2010 |            | June 30, 2009 |  | June 30, 2008 | 
|                                                       |  |               |            |               |  |               | 
|                                                       |  |               |            |               |  |               |  |  |            | 
|Weighted
 average shares outstanding                   |  |               | 17,183,224 |               |  | 16,843,186    |  |  | 17,294,973 | 
|Dilutive
 effect of stock options and restricted stock |  |               |           |               |  |              |  |  | 353,090    | 
|                                                       |  |               |            |               |  |               |  |  |            | 
|Diluted
 weighted average shares outstanding           |  |               | 17,183,224 |               |  | 16,843,186    |  |  | 17,648,063 | 
|                                                       |  |               |            |               |  |               |  |  |            | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|For fiscal
 2010, 2009, and 2008, 2,036,759, 2,170,002 and 1,165,069, respectively, of
 the Companys outstanding stock options and restricted stock awards were
 excluded from the calculation of diluted earnings per share because they were
 antidilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Share-Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|We have two
 share-based compensation plans, which are described in Note 13. We account
 for share-based compensation in accordance authoritative guidance related to
 Share-Based Payment. This authoritative guidance eliminates the alternative
 to use the intrinsic value method of accounting that was provided in the
 authoritative guidance, which generally resulted in no compensation expense
 recorded in the financial statements related to the issuance of equity awards
 to employees and directors to the extent issued at fair market value. The
 authoritative guidance requires that the cost resulting from all share-based
 payment transactions be recognized in the financial statements. The
 authoritative guidance establishes fair value as the measurement objective in
 accounting for share-based payment arrangements and requires all companies to
 apply a fair-value-based measurement method in accounting generally for all share-based
 payment transactions with employees. Share based payment authoritative
 guidance does not require the recording of compensation expense in periods
 prior to the date of adoption.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Share-based
 compensation expense for the fiscal year ended June 30, 2010 was $2,492, with
 a related tax benefit of $897. This increased cost of sales by $316, selling,
 general, and administration by $1,770, and research, development, and
 engineering by $406. Share-based compensation expense for the fiscal year
 ended June 30, 2009 was $2,885, with a related tax benefit of $1,039. This
 increased cost of sales by $346, selling, general, and administration by
 $2,161, and research, development, and engineering by $378. Share-based
 compensation expense for the fiscal year ended June 30, 2008 was $2,914, with
 a related tax benefit of $1,049. This increased cost of sales by $238,
 selling, general, and administration by $2,337, and research, development,
 and engineering by $339.                                                                                                                                                                                                                                                                                                                                            

F - 10

---



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Fair Value of Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Authoritative
 guidance issued by the FASB pertaining to 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 U.S. GAAP. On an ongoing basis, management evaluates its
 estimates and judgments, including those related to allowances for bad debts,
 reserves for excess and obsolete inventories, impairments and recoverability
 of long-lived assets, share-based compensation, income taxes, and warranty
 obligations. Actual results could differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Adoption of New Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|In January
 2010, the FASB issued guidance to amend the disclosure requirements related
 to recurring and nonrecurring fair value measurements. The guidance requires
 new disclosures on the transfers of assets and liabilities between Level 1
 (quoted prices in active market for identical assets or liabilities) and
 Level 2 (significant other observable inputs) of the fair value measurement
 hierarchy, including the reasons and the timing of the transfers. Additionally,
 the guidance requires a roll forward of activities on purchases, sales,
 issuance, and settlements of the assets and liabilities measured using
 significant unobservable inputs (Level 3 fair value measurements). The
 guidance became effective for us with the reporting period beginning January
 1, 2010, except for the disclosure on the roll forward activities for Level 3
 fair value measurements, which will become effective for us with the
 reporting period beginning July 1, 2011. Other than requiring additional
 disclosures, adoption of this new guidance did not have a material impact on
 our financial statements. See Note 5  Fair Value Measurements.                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|On July 1,
 2009, we adopted authoritative guidance issued by the FASB on changes to the
 accounting and reporting of non-controlling interests. This guidance requires that ownership interests in
 subsidiaries held by parties other than the parent be clearly identified,
 labeled, and presented in the consolidated balance sheets within equity, but
 separate from the parents equity. Furthermore, the amount of consolidated
 net income (loss) attributable to the parent and to the noncontrolling
 interest must be clearly identified and presented on the face of the
 consolidated statement of operations. The new guidance is reflected in the
 consolidated financial statements for all periods presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|On July 1,
 2009, we adopted authoritative guidance issued by the FASB on business
 combinations. The guidance
 provides specific guidance on how the acquirer recognizes and measures in its
 financial statements the identifiable assets acquired, the liabilities
 assumed, any noncontrolling interest in the acquirer, and goodwill acquired
 or any bargain purchase gains. The adoption of the new guidance was applied
 to the acquisition described in Note 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Recent Accounting Guidance Not Yet Adopted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|In October
 2009, the FASB issued authoritative guidance on revenue recognition that will
 become effective for us beginning on July 1, 2010. Under the new guidance on
 arrangements that include software elements, tangible products that have
 software components that are essential to the functionality of the tangible
 product will no longer be within the scope of the software revenue
 recognition guidance, and software-enabled products will now be subject to
 other relevant revenue recognition guidance. Additionally, the FASB issued
 authoritative guidance on revenue arrangements with multiple deliverables
 that are outside the scope of the software revenue recognition guidance.
 Under the new guidance, when vendor specific objective evidence or third
 party evidence for deliverables in an arrangement cannot be determined, a
 best estimate of the selling price is required to separate deliverables and
 allocate arrangement consideration using the relative selling price method.
 The new guidance includes new disclosure requirements on how the application
 of the relative selling price method affects the timing and amount of revenue
 recognition. We believe adoption of this new guidance will not have a material
 impact on our financial statements.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|In June
 2009, the FASB issued authoritative guidance on the consolidation of variable
 interest entities, which is effective for us beginning on July 1, 2010. The
 new guidance requires revised evaluations of whether entities represent
 variable interest entities, ongoing assessments of power over such entities,
 and additional disclosures for variable interests. We believe adoption of
 this new guidance will not have a material impact on our financial
 statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F - 11

---



NOTE 2: ACQUISITIONS

In January
2010, the Company entered into an agreement to purchase all of the outstanding
stock and to retire the outstanding shareholder notes of Zemetrics, Inc., an
Arizona corporation (Zemetrics), in exchange for 361,217 shares of the
Companys common stock. The value of the common stock issued was $3,901, based
on the fair value of the common stock on the closing date of $10.80. In
accordance with the purchase agreement, the number of shares delivered was
calculated by taking the sum of $1,941 and the outstanding shareholder notes
(including accrued interest) of $856 divided by the average of the closing
prices of the Companys common stock reported by the NASDAQ Stock Market during
the forty trading days ended two days prior to the closing date of January 22,
2010 of $7.74 (the Average Trading Price).

Dr. Chris L.
Koliopoulos, Zygos new President and CEO, was a major shareholder of Zemetrics
stock as well as being the major holder of Zemetrics outstanding shareholder
notes. Dr. Koliopoulos received a total of 195,790 shares of Company common
stock consisting of 106,233 shares of Company common stock as consideration for
the purchase of his shares of Zemetrics stock and 89,557 shares of Company
common stock in payment of $680 principal amount of outstanding shareholder
notes (plus accrued interest thereon) issued by Zemetrics to Dr. Koliopoulos.

Acquisition
costs for the twelve months ended June 30, 2010 were $457, and are included in
selling, general & administrative expenses. An escrow account with 38,743
shares (including 16,421 shares issued to Dr. Koliopoulos) of Company common
stock was established to secure potential indemnification claims until the date
that is fifteen days after completion of the audit of the Companys financial
statements for the first fiscal year ending after the closing.

The following
is the final purchase price allocation based on the estimated fair values of
the assets acquired and liabilities assumed as of the date of acquisition on
January 22, 2010:

|                          |  |   |       | 
|------------------------- |  | - | ----- | 
|Cash                      |  | $ | 11    | 
|Inventories               |  |   | 403   | 
|Prepaid expenses          |  |   | 18    | 
|Property and equipment    |  |   | 15    | 
|Customer relationships    |  |   | 112   | 
|Technology                |  |   | 1,428 | 
|Goodwill                  |  |   | 2,003 | 
|                          |  |   |       | 
|Total assets              |  |   | 3,990 | 
|Less: Liabilities assumed |  |   | 89    | 
|                          |  |   |       | 
|Total                     |  | $ | 3,901 | 
|                          |  |   |       | 

In addition,
net deferred tax assets of $360 were recorded in the opening balance sheet at
zero value, net of a full valuation allowance. Based on the Companys
expectations of future U.S. taxable income, the Company believes it is more
likely than not that such net deferred tax assets could not be realized.

The purchase
price was allocated to the underlying assets acquired and liabilities assumed
based on their fair values. Analyses supporting the purchase price allocation
include a valuation of assets and liabilities as of the closing date, an
analysis of intangible assets and a detailed review of the opening balance
sheet to determine other significant adjustments required to recognize assets
and liabilities at fair value. Intangible assets of technology and customer
relationships were valued on an income approach based on future earnings
projections.

The following
disclosure presents certain information regarding the Companys acquired
intangible assets as of June 30, 2010. All acquired intangible assets were
valued by the income approach and are being amortized over their initial
estimated useful lives of three years for customer relationships and seven
years for technology with no estimated residual values. We review our
intangible assets for impairment annually.

F - 12

---



|                            |  |                         |     |            |   |       |   |   |       |  
|--------------------------- |  | ----------------------- | --- | ---------- | - | ----- | - | - | ----- | -
|                            |  | Customer
 Relationships |     | Technology |   | Total |  
|                            |  |                         |     |            |   |       |  
|                            |  |                         |     |            |   |       |  
|Balance at January 22, 2010 |  | $                       | 112 |            | $ | 1,428 |   | $ | 1,540 |  
|                            |  |                         |     |            |   |       |   |   |       |  
|Amortization expense        |  |                         | (16 | )          |   | (85   | ) |   | (101  | )
|                            |  |                         |     |            |   |       |   |   |       |  
|                            |  |                         |     |            |   |       |   |   |       |  
|Balance at June 30, 2010    |  | $                       | 96  |            | $ | 1,343 |   | $ | 1,439 |  
|                            |  |                         |     |            |   |       |   |   |       |  

The Company
recorded an impairment charge of $2,003 relating to acquired goodwill in the
quarter ended March 31, 2010 subsequent to the acquisition date. The Zemetrics
reporting unit had minimal sales history and cumulative losses since inception.
In addition, the fair value of common stock issued as consideration on the
closing date was $10.80 per share, which was significantly in excess of the
implied value per share in the formula used in the purchase agreement to
determine the number of common shares issued as consideration (which was based
on the market price per share during the 40-day period prior to closing). In
consideration of these factors, management determined the carrying value of the
reporting unit exceeded its fair value, and that the implied fair value of
goodwill was zero at March 31, 2010.

From the date
of acquisition, the Zemetrics reporting unit had revenues of $103 and an
operating loss of $2,658 (including the aforementioned $2,003 goodwill impairment
    charge), which are included in the consolidated financial statements. The
    following unaudited proforma condensed financial information shows the results
    of operations for the years ended June 30, 2010 and 2009 as though the acquisition
    of Zemetrics had occurred at the beginning of each respective fiscal year.
    The proforma information is presented for informational purposes only and
    is not necessarily indicative of the results of operations that actually
    would have been achieved had the acquisition been consummated as of that
    time:

|                                           |  |                      |         |      |   |         |  
|------------------------------------------ |  | -------------------- | ------- | ---- | - | ------- | -
|                                           |  | Year
 ended June 30, |        
|                                           |  |                      |        
|                                           |  | 2010                 |         | 2009 |  
|                                           |  |                      |         |      |  
|                                           |  |                      |         |      |  
|Net sales                                  |  | $                    | 101,330 |      | $ | 114,734 |  
|Net loss attributable to
 Zygo Corporation |  | $                    | (3,565  | )    | $ | (63,169 | )
|                                           |  |                      |         |      |   |         |  
|Loss per share amounts:                    |  |                      |         |      |   |         |  
|Basic and Diluted - Loss per share         |  | $                    | (0.21   | )    | $ | (3.75   | )
|Diluted - Loss per share                   |  | $                    | (0.21   | )    | $ | (3.75   | )

On February
28, 2008, we acquired certain assets of Solvision, Inc. (Solvision),
a Canadian-based company, including the shares of its Singapore subsidiary for
$4,155, net of cash received, under the purchase method of accounting with the
purchase price allocation being finalized in fiscal 2009. This final amount
represents $4,240 of cash and $17 representing the value of assets received for
the forgiveness of a $1,500 note extended to Solvision. In fiscal 2009 (as part
of the final purchase price allocation) and 2008, $924 and $559, respectively,
of the note was charged to bad debt expense. Included in the acquisition is the
patented Fast Moiré
Interferometer (FMI) technology for rapid 3D inspection. This acquisition was
integrated into the Metrology segment. The results of operations of this
acquisition have been included in the consolidated statement of operations
commencing on February 28, 2008.

During the
quarter ended September 30, 2009, we determined to sell or otherwise close down
the Singapore IC packaging metrology operations of our Vision Systems product
line, included in our Metrology Solutions segment. As of September 30, 2009,
operations had ceased at this location. In accordance with authoritative
guidance, the results of operations for the aforementioned operations are
presented in the Companys Condensed Consolidated Financial Statements as
discontinued operations. Per authoritative guidance, we have restated the
financial presentation and related footnotes for fiscal 2009 to show the
effects of the discontinued operations.

During our
fiscal 2009 annual review of intangible assets, we determined, based on the
downturn in the business climate for this product line and the level of its then
    operating losses, that all of the acquired intangible assets resulting from
    the acquisition of Solvision in the prior year were impaired. Of the $2,149
    of impairment charges in fiscal 2009, $1,048 was related to continuing operations
    and $1,101 related to discontinued operations.

F - 13

---



On October 16,
2008, we and Electro Scientific Industries, Inc. (ESI) jointly announced the
execution of a definitive agreement, providing for the two companies to merge
in an all stock transaction, subject to the prior satisfaction of certain
enumerated conditions precedent. On January 20, 2009, Zygo announced that it
notified ESI of Zygos Board of Directors withdrawal of its recommendation in
favor of the previously announced merger agreement with ESI. On April 2, 2009,
ESI and Zygo agreed to terminate their previously executed merger agreement.
Pursuant to the terms of the settlement agreement, Zygo paid ESI a break-up fee
of $5.4 million, and was liable for an additional $1.2 million in the event
that on or before November 2, 2009, Zygos Board of directors approves an
alternate transaction proposal for the merger or sale of the company. During
fiscal 2009, we paid an additional $2.9 million related to the merger in legal
and various other related expenses. The break-up fee, legal and other expenses
are included in selling, general, and administrative expenses in fiscal 2009.

NOTE 3: RESTRUCTURING AND RELATED COSTS

During fiscal
2009, we initiated restructuring actions related to ongoing cost reduction
efforts comprised of workforce reductions and the consolidation of
manufacturing operations in Tucson, Arizona. In fiscal 2010 and 2009, we
recorded restructuring and related charges totaling $661 ($383 in selling,
general and administration, and $278 in research, development and engineering)
and $2,158, ($955 in cost of sales, $1,013 in selling, general, and
administration, and $190 in research, development, and engineering),
respectively. The severance related costs are part of the Metrology Solutions
segment and the facility consolidation costs are related to the Optical Systems
segment

The following
table summarizes the accrual balances and utilization by cost type for the
fiscal 2010 and 2009 restructuring actions:

|                         |  |           |        |                                                |   |       |   |   |        |  
|------------------------ |  | --------- | ------ | ---------------------------------------------- | - | ----- | - | - | ------ | -
|                         |  | Severance |        | June
30, 2010
Facility
Consolidation
Costs     |   | Total |  
|                         |  |           |        |                                                |   |       |  
|Balance at June 30, 2009 |  | $         | 262    |                                                | $ | 452   |   | $ | 714    |  
|Restructuring charges    |  |           | 661    |                                                |   |      |   |   | 661    |  
|Payments                 |  |           | (633   | )                                              |   | (225  | ) |   | (858   | )
|                         |  |           |        |                                                |   |       |   |   |        |  
|Balance at June 30, 2010 |  | $         | 290    |                                                | $ | 227   |   | $ | 517    |  
|                         |  |           |        |                                                |   |       |   |   |        |  
|                         |  |           |        |                                                |   |       |   |   |        |  
|                         |  | Severance |        | June
 30, 2009
 Facility
 Consolidation
 Costs |   | Total |  
|                         |  |           |        |                                                |   |       |  
|Balance at June 30, 2008 |  | $         | 226    |                                                | $ |      |   | $ | 226    |  
|Restructuring charges    |  |           | 1,706  |                                                |   | 452   |   |   | 2,158  |  
|Payments                 |  |           | (1,670 | )                                              |   |      |   |   | (1,670 | )
|                         |  |           |        |                                                |   |       |   |   |        |  
|Balance at June 30, 2009 |  | $         | 262    |                                                | $ | 452   |   | $ | 714    |  
|                         |  |           |        |                                                |   |       |   |   |        |  

We expect the
restructuring liabilities to be paid within twelve months.

F - 14

---



NOTE 4: MARKETABLE SECURITIES

Marketable
securities consisted primarily of corporate and government agency securities
for fiscal 2010 and 2009. The Company classifies these securities as
held-to-maturity, trading, or available-for-sale. Dividend and interest income
is recognized when earned. Straight-line amortization related to discounts and
premiums on the purchase of marketable securities is recorded in interest
income. Realized gains and losses are included in earnings and are derived
using the specific identification method for determining the cost of securities
sold.

The amortized
cost, gross unrealized gains and losses, and fair value of held-to-maturity
securities at June 30, 2010 and 2009 were as follows:

|                         |  |                 |       |                          |   |                           |  |             |   |  |   |       | 
|------------------------ |  | --------------- | ----- | ------------------------ | - | ------------------------- |  | ----------- | - |  | - | ----- | 
|                         |  | Amortized
 Cost |       | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Fair
 Value |  
|                         |  |                 |       |                          |   |                           |  |             |  
|At June 30, 2010         |  |                 |       |                          |   |                           |  |             |   |  |   |       | 
|Government treasury bill |  | $               | 1,000 |                          | $ |                          |  | $           |  |  | $ | 1,000 | 
|                         |  |                 |       |                          |   |                           |  |             |   |  |   |       | 
|                         |  |                 |       |                          |   |                           |  |             |   |  |   |       | 
|At June 30,
 2009        |  |                 |       |                          |   |                           |  |             |   |  |   |       | 
|Corporate
 bonds         |  | $               | 4,015 |                          | $ | 35                        |  | $           |  |  | $ | 4,050 | 
|                         |  |                 |       |                          |   |                           |  |             |   |  |   |       | 

At June 30,
2010, the held-to maturity security consisted of a government treasury bill. At
June 30, 2009, all held-to-maturity securities consisted of corporate bonds in
the following sectors: 22.5% in finance, 22.1% in utilities, 22.0% in real
estate, and 33.4% in other. We have both the intent and the ability to hold the
government treasury bill to maturity.

The cost,
gross unrealized gains and losses, and fair value of available-for-sale
securities, consisting of auction rate securities, at June 30, 2009 were as
follows:

|                                     |  |      |     |                          |   |                           |  |             |      |   |   |   | 
|------------------------------------ |  | ---- | --- | ------------------------ | - | ------------------------- |  | ----------- | ---- | - | - | - | 
|                                     |  | Cost |     | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Fair
 Value |     
|                                     |  |      |     |                          |   |                           |  |             |     
|At June 30, 2010                     |  |      |     |                          |   |                           |  |             |      |   |   |   | 
|Available-for-sale securities        |  | $    |    |                          | $ |                          |  | $           |     |   | $ |  | 
|                                     |  |      |     |                          |   |                           |  |             |      |   |   |   | 
|                                     |  |      |     |                          |   |                           |  |             |      |   |   |   | 
|At June 30,
 2009                    |  |      |     |                          |   |                           |  |             |      |   |   |   | 
|Corporate
 and local municipal bonds |  | $    | 600 |                          | $ |                          |  | $           | (600 | ) | $ |  | 
|                                     |  |      |     |                          |   |                           |  |             |      |   |   |   | 

Trading
securities consist of a mutual fund investment corresponding to elections made
in our deferred compensation program. The cost, gross unrealized gains and
losses, and fair value of trading securities at June 30, 2010 and 2009 were as
follows:

|                  |  |      |     |                          |   |                           |  |             |    |  |   |     | 
|----------------- |  | ---- | --- | ------------------------ | - | ------------------------- |  | ----------- | -- |  | - | --- | 
|                  |  | Cost |     | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Fair
 Value |   
|                  |  |      |     |                          |   |                           |  |             |   
|At June 30, 2010  |  |      |     |                          |   |                           |  |             |    |  |   |     | 
|Mutual fund       |  | $    | 789 |                          | $ | 200                       |  | $           | 67 |  | $ | 922 | 
|                  |  |      |     |                          |   |                           |  |             |    |  |   |     | 
|                  |  |      |     |                          |   |                           |  |             |    |  |   |     | 
|At June 30,
 2009 |  |      |     |                          |   |                           |  |             |    |  |   |     | 
|Mutual Fund       |  | $    | 499 |                          | $ |                          |  | $           |   |  | $ | 499 | 
|                  |  |      |     |                          |   |                           |  |             |    |  |   |     | 

Maturities of
investment securities classified as held-to-maturity at June 30, 2010 and 2009
were as follows:

|                                       |  |                 |       |               |   |                 |  |             |       |  |   |       | 
|-------------------------------------- |  | --------------- | ----- | ------------- | - | --------------- |  | ----------- | ----- |  | - | ----- | 
|                                       |  | June 30, 2010   |       | June 30, 2009 |  
|                                       |  |                 |       |               |  
|                                       |  | Amortized
 Cost |       | Fair
 Value   |   | Amortized
 Cost |  | Fair
 Value |      
|                                       |  |                 |       |               |   |                 |  |             |      
|Due within
 one year                   |  | $               | 1,000 |               | $ | 1,000           |  | $           | 4,015 |  | $ | 4,050 | 
|Due after
 one year through five years |  |                 |      |               |   |                |  |             |      |  |   |      | 
|                                       |  |                 |       |               |   |                 |  |             |       |  |   |       | 
|                                       |  | $               | 1,000 |               | $ | 1,000           |  | $           | 4,015 |  | $ | 4,050 | 
|                                       |  |                 |       |               |   |                 |  |             |       |  |   |       | 

F - 15

---



There were no
maturities of investment securities classified as available for sale at June
30, 2010. In fiscal 2010, the auction rate security, that was fully reserved,
was settled for $210 resulting in a realized gain of $210. At June 30, 2009 the
cost of our investment security classified as available for sale was $600 with
no fair value. There were no securities in a continuous unrealized loss
position at June 30, 2010 and 2009.

In determining
whether investment holdings are other than temporarily impaired, we consider
the nature, cause, severity, and duration of the impairment. We and our
investment advisors use analyst reports, credit ratings and other items as part
of our review. We recognized other-than-temporary impairment on one
available-for-sale auction rate security during fiscal 2009 resulting in a loss
of $309, which was recorded in the statements of operations as part of miscellaneous
income (expense).

NOTE 5: FAIR VALUE
MEASUREMENTS

The Company
adopted authoritative guidance issued by the FASB pertaining to fair value
measurements that was effective July 1, 2008. The authoritative guidance
defines fair value, establishes a framework for measuring fair value and
expands the related disclosure requirements. The statement indicates, among
other things, that a fair value measurement assumes that the transaction to
sell an asset or transfer a liability occurs in the principal market for the
asset or liability or, in the absence of a principal market, the most
advantageous market for the asset or liability. This authoritative guidance
defines fair value based upon an exit price model.

The
authoritative guidance establishes a valuation hierarchy for disclosure of the
inputs to valuation used to measure fair value. This hierarchy prioritizes the
inputs into three broad levels as follows. Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities. Level
2 inputs are quoted prices for similar assets and liabilities in active markets
or inputs that are observable for the asset or liability, either directly or
indirectly through market corroboration, for substantially the full term of the
financial instrument. Level 3 inputs are unobservable inputs based on the
managements assumptions used to measure assets and liabilities at fair value.
A financial asset or liabilitys classification within the hierarchy is
determined based on the lowest level input that is significant to the fair
value measurement.

The following
table provides the assets and liabilities carried at fair value measured on a
recurring basis as of June 30, 2010:

|                                |  |                                         |     |                                              |                                          |                                                   |  |                                              |     |   |   |   | 
|------------------------------- |  | --------------------------------------- | --- | -------------------------------------------- | ---------------------------------------- | ------------------------------------------------- |  | -------------------------------------------- | --- | - | - | - | 
|Assets
 Measured at Fair Value: |  |                                         |     |                                              |                                          |                                                   |  |                                              |     |   |   |   | 
|                               
|                                |  |                                         |     |                                              | Fair value measurements at June 30, 2010 |                                                  
|                                |  |                                         |     |                                              |                                          |                                                  
|                                |  | Total carrying
 value at
 June 30, 2010 |     | Quoted prices
 in active
 markets
 (Level 1) |                                          | Significant
 other
 observable
 inputs
 (Level 2) |  | Significant
 unobservable
 inputs
 (Level 3) |    
|                                |  |                                         |     |                                              |                                          |                                                   |  |                                              |    
|Trading securities              |  | $                                       | 922 |                                              | $                                        | 922                                               |  | $                                            |    |   | $ |  | 
|Foreign currency hedge          |  |                                         | (70 | )                                            |                                          |                                                  |  |                                              | (70 | ) |   |  | 
|                                |  |                                         |     |                                              |                                          |                                                   |  |                                              |     |   |   |   | 
|Total                           |  | $                                       | 852 |                                              | $                                        | 922                                               |  | $                                            | (70 | ) | $ |  | 
|                                |  |                                         |     |                                              |                                          |                                                   |  |                                              |     |   |   |   | 

Assets
Measured at Fair Value on a Nonrecurring Basis:

|             |  |                                         |   |                                              |   |                                                   |  |                                              |   |                       |   |   |  |   |        |  
|------------ |  | --------------------------------------- | - | -------------------------------------------- | - | ------------------------------------------------- |  | -------------------------------------------- | - | --------------------- | - | - |  | - | ------ | -
|             |  | Total carrying
 value at
 June 30, 2010 |   | Quoted prices
 in active
 markets
 (Level 1) |   | Significant
 other
 observable
 inputs
 (Level 2) |  | Significant
 unobservable
 inputs
 (Level 3) |   | Total Gains
 (Losses) |  
|             |  |                                         |   |                                              |   |                                                   |  |                                              |   |                       |  
|Goodwill (1) |  |                                         |  |                                              |   |                                                  |  |                                              |  |                       |   |  |  |   | (2,003 | )
|             |  |                                         |   |                                              |   |                                                   |  |                                              |   |                       |   |   |  |   |        |  
|Total        |  | $                                       |  |                                              | $ |                                                  |  | $                                            |  |                       | $ |  |  | $ | (2,003 | )
|             |  |                                         |   |                                              |   |                                                   |  |                                              |   |                       |   |   |  |   |        |  

(1) See Note 2: Acquisitions

F - 16

---



The following
table provides the assets and liabilities carried at fair value measured on a
recurring basis as of June 30, 2009:

|                                                       |  |                                         |     |                                              |                                          |                                                   |  |                                              |     |   |   |   | 
|------------------------------------------------------ |  | --------------------------------------- | --- | -------------------------------------------- | ---------------------------------------- | ------------------------------------------------- |  | -------------------------------------------- | --- | - | - | - | 
|Assets Measured
 at Fair Value:(Dollars in
 thousands) |  |                                         |     |                                              |                                          |                                                   |  |                                              |     |   |   |   | 
|                                                      
|                                                       |  |                                         |     |                                              | Fair value measurements at June 30, 2009 |                                                  
|                                                       |  |                                         |     |                                              |                                          |                                                  
|                                                       |  | Total carrying
 value at
 June 30, 2009 |     | Quoted prices
 in active
 markets
 (Level 1) |                                          | Significant
 other
 observable
 inputs
 (Level 2) |  | Significant
 unobservable
 inputs
 (Level 3) |    
|                                                       |  |                                         |     |                                              |                                          |                                                   |  |                                              |    
|Trading securities                                     |  | $                                       | 499 |                                              | $                                        | 499                                               |  | $                                            |    |   | $ |  | 
|Foreign currency hedge                                 |  |                                         | (14 | )                                            |                                          |                                                  |  |                                              | (14 | ) |   |  | 
|                                                       |  |                                         |     |                                              |                                          |                                                   |  |                                              |     |   |   |   | 
|Total                                                  |  | $                                       | 485 |                                              | $                                        | 499                                               |  | $                                            | (14 | ) | $ |  | 
|                                                       |  |                                         |     |                                              |                                          |                                                   |  |                                              |     |   |   |   | 

|                                                                               |                                          |                                         |       |                                              |   |                                                   |  |                                              |   |                       |   |       |  |   |        |  
|------------------------------------------------------------------------------ | ---------------------------------------- | --------------------------------------- | ----- | -------------------------------------------- | - | ------------------------------------------------- |  | -------------------------------------------- | - | --------------------- | - | ----- |  | - | ------ | -
|Assets
 Measured at Fair Value on a Nonrecurring Basis:(Dollars in
 thousands) | Fair value measurements at June 30, 2009 |                                         |       |                                              |  
|                                                                               |                                          |                                         |       |                                              |   |                                                   |  |                                              |  
|                                                                               |                                          | Total carrying
 value at
 June 30, 2009 |       | Quoted prices
 in active
 markets
 (Level 1) |   | Significant
 other
 observable
 inputs
 (Level 2) |  | Significant
 unobservable
 inputs
 (Level 3) |   | Total Gains
 (Losses) |  
|                                                                               |                                          |                                         |       |                                              |   |                                                   |  |                                              |   |                       |  
|Property, plant, and
 equipment (1)                                            |                                          | $                                       | 1,237 |                                              | $ |                                                  |  | $                                            |  |                       | $ | 1,237 |  | $ | (4,460 | )
|Intangible assets (2)                                                          |                                          |                                         | 649   |                                              |   |                                                  |  |                                              |  |                       |   | 649   |  |   | (5,084 | )
|                                                                               |                                          |                                         |       |                                              |   |                                                   |  |                                              |   |                       |   |       |  |   |        |  
|Total                                                                          |                                          | $                                       | 1,886 |                                              | $ |                                                  |  | $                                            |  |                       | $ | 1,886 |  | $ | (9,544 | )
|                                                                               |                                          |                                         |       |                                              |   |                                                   |  |                                              |   |                       |   |       |  |   |        |  

(1) See Note 8: Property
Plant and Equipment(2) See Note 9: Intangible
Assets

When
available, the Company uses quoted market prices to determine the fair value of
its marketable securities included in Level 1. When quoted market prices are
unobservable, the Company uses quotes from independent pricing vendors based on
recent trading activity and other relevant information.

The carrying
value of other financial instruments, including cash, accounts receivable,
accounts payable, and accrued liabilities approximate fair value due to their
short maturities. The remainder of our marketable securities at June 30, 2010
are accounted for as held-to-maturity investments and are recorded at amortized
cost of $1,000.

F - 17

---



NOTE 6: RECEIVABLES

At June 30,
2010 and 2009, receivables were as follows:

|                                                        |  |               |        |               |   |        |  
|------------------------------------------------------- |  | ------------- | ------ | ------------- | - | ------ | -
|                                                        |  | June 30, 2010 |        | June 30, 2009 |  
|                                                        |  |               |        |               |  
|Trade                                                   |  | $             | 21,314 |               | $ | 19,601 |  
|Receivable
 from Nanometrics for sale of certain assets |  |               |       |               |   | 3,392  |  
|Other                                                   |  |               | 609    |               |   | 431    |  
|                                                        |  |               |        |               |   |        |  
|                                                        |  |               | 21,923 |               |   | 23,424 |  
|Allowance
 for doubtful accounts                        |  |               | (1,975 | )             |   | (2,550 | )
|                                                        |  |               |        |               |   |        |  
|                                                        |  | $             | 19,948 |               | $ | 20,874 |  
|                                                        |  |               |        |               |   |        |  

In June 2009,
we and Nanometrics Incorporated (Nanometrics) announced that Nanometrics has
purchased inventory and certain other assets relating to Zygos Semiconductor
Solutions business for approximately $3,392 and that the two companies have
entered into a supply agreement. Under an exclusive OEM supply agreement, Zygo
will provide interferometer sensors to Nanometrics for incorporation into the
Unifire line of products as well as Nanometrics family of automated metrology
systems. The arrangement was structured as an asset purchase and exclusive OEM
supply agreement aimed at wafer-based markets. Nanometrics assumed all inventory,
backlog and customer revenues and support responsibilities and Zygo will
provide measurement sensors for integration by Nanometrics. Such receivable was
paid in fiscal 2010.

NOTE 7: INVENTORIES

At June 30,
2010 and 2009, inventories were as follows:

|                                      |  |               |        |                |   |        | 
|------------------------------------- |  | ------------- | ------ | -------------- | - | ------ | 
|                                      |  | June 30, 2010 |        | June
 30, 2009 |  
|                                      |  |               |        |                |  
|Raw materials and
 manufactured parts |  | $             | 12,682 |                | $ | 15,214 | 
|Work in process                       |  |               | 9,322  |                |   | 11,313 | 
|Finished goods                        |  |               | 3,216  |                |   | 3,925  | 
|                                      |  |               |        |                |   |        | 
|                                      |  | $             | 25,220 |                | $ | 30,452 | 
|                                      |  |               |        |                |   |        | 

NOTE 8: PROPERTY, PLANT, AND EQUIPMENT

At June 30,
2010 and 2009, property, plant, and equipment, at cost, were as follows:

|                                           |  |               |         |               |   |                                 |   |       | 
|------------------------------------------ |  | ------------- | ------- | ------------- | - | ------------------------------- | - | ----- | 
|                                           |  | June 30, 2010 |         | June 30, 2009 |   | Estimated
 Useful Life
 (Years) |  
|                                           |  |               |         |               |   |                                 |  
|Land                                       |  | $             | 615     |               | $ | 615                             |   |      | 
|Building and improvements                  |  |               | 17,390  |               |   | 17,390                          |   | 15-40 | 
|Machinery, equipment, and office furniture |  |               | 56,136  |               |   | 55,946                          |   | 3-8   | 
|Leasehold improvements                     |  |               | 1,002   |               |   | 908                             |   | 1-5   | 
|Construction in progress                   |  |               | 332     |               |   | 570                             |   |      | 
|                                           |  |               |         |               |   |                                 |   |       | 
|                                           |  |               | 75,475  |               |   | 75,429                          |   |       | 
|Less accumulated depreciation              |  |               | (52,446 | )             |   | (48,104                         | ) |       | 
|                                           |  |               |         |               |   |                                 |   |       | 
|                                           |  | $             | 23,029  |               | $ | 27,325                          |   |       | 
|                                           |  |               |         |               |   |                                 |   |       | 

Depreciation
expense for the fiscal years ended June 30, 2010, 2009, and 2008 was $5,318,
$7,245 and $6,964, respectively. In fiscal 2009, we recorded impairment charges
on our plant, property, and equipment of $4,460 including $4,004 related to our
precision positioning systems product line in our metrology segment as result
of our review of our business operations in the economic downturn. We utilized
a future discounted cash flow model over five years to assess the net
realizable value of our property, plant, and equipment in our precision
positioning systems product line. These charges were included in cost of sales
($2,911), SG&A ($82) and RD&E ($1,467) on the consolidated statement of
operations for fiscal 2009.

F - 18

---



NOTE 9: INTANGIBLE ASSETS

Intangible
assets, at cost, at June 30, 2010 and 2009 were as follows:

|                                       |  |               |        |                |   |                                 |   |      | 
|-------------------------------------- |  | ------------- | ------ | -------------- | - | ------------------------------- | - | ---- | 
|                                       |  | June 30, 2010 |        | June
 30, 2009 |   | Estimated
 Useful
 Life (Years) |  
|                                       |  |               |        |                |   |                                 |  
|                                      
|Patents and trademarks                 |  | $             | 5,882  |                | $ | 5,586                           |   | 5-17 | 
|Covenant not-to-compete                |  |               | 851    |                |   | 851                             |   | 4    | 
|Customer relationships and
 technology |  |               | 1,540  |                |   |                                |   | 3-7  | 
|                                       |  |               |        |                |   |                                 |   |      | 
|                                       |  |               | 8,273  |                |   | 6,437                           |   |      | 
|Accumulated amortization               |  |               | (2,886 | )              |   | (2,226                          | ) |      | 
|                                       |  |               |        |                |   |                                 |   |      | 
|Total                                  |  | $             | 5,387  |                | $ | 4,211                           |   |      | 
|                                       |  |               |        |                |   |                                 |   |      | 

A non-compete
agreement went into effect with the retirement of the former chief technology
officer of the company in February 2009. This agreement requires payments
totaling $878 over four years, including imputed interest of $27.

Intangible
amortization expense for the fiscal years ended June 30, 2010, 2009 and 2008
was $793, $687 and $488, respectively. Intangible amortization expense is
estimated to be approximately $876 in fiscal 2011 and approximately $805, $790,
$796, and $970 annually in fiscal 2012-2015, respectively. Amortization expense
related to patents and trademarks is included in cost of goods sold in the
consolidated statements of operations. Amortization expense related to customer
relationships is included in selling, general, and administrative expense in
the consolidated statements of operations.

In fiscal
2009, we recorded an impairment charge of $2,935 on our patents related to our
precision positioning systems product line in our metrology segment that was
included in cost of sales on the consolidated statement of operations as result
of our review of our business operations in the current economic downturn. We
utilized a future discounted cash flow model over five years to assess the net
realizable value of our patents in our precision positioning systems product
line.

In addition,
in fiscal 2009, we recorded an impairment charge of $1,048 on our customer
relationships and technology related to our vision systems product line in our
metrology segment that was included in selling, general and administrative
expenses and research, development and engineering expenses on the consolidated
statement of operations, as noted in Note 2.

NOTE 10: WARRANTY LIABILITY

A limited
warranty is provided on our products for periods typically ranging from 3 to 24
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.

As part of the
asset purchase by Nanometrics, all related semiconductor systems are being
warranted by us through June 2011. Nanometrics will provide warranty service
and invoice us for incurred expenses. As of June 30, 2010 and 2009, $77 and
$162, respectively, of our warranty liability relates to these semiconductor
systems.

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, 2010 |       | June
 30, 2009 |  
|                                                                       |  |               |       |                |  
|Beginning balance                                                      |  | $             | 1,614 |                | $ | 1,263  |  
|Reductions for payments made                                           |  |               | (881  | )              |   | (1,067 | )
|Changes in accruals related to warranties issued in the current period |  |               | 1,236 |                |   | 2,273  |  
|Changes in accrual related to pre-existing warranties                  |  |               | (609  | )              |   | (855   | )
|                                                                       |  |               |       |                |   |        |  
|Ending balance                                                         |  | $             | 1,360 |                | $ | 1,614  |  
|                                                                       |  |               |       |                |   |        |  

F - 19

---



NOTE 11: COMMITMENTS AND CONTINGENCIES

From time to
time, we are subject to certain legal proceedings and claims that arise in the
normal course of our business. At June 30, 2010, we have a reserve of $1,360
for a potential royalty claim. In the opinion of management, any excess
settlement of the royalty claims above the amount recorded is not expected to
have an adverse effect on our financial condition, results of operations, or
liquidity. We are aware of certain levels of contamination on our property in
Connecticut which are below reportable levels. In addition, we are aware of
certain contamination on an adjacent property that we formerly owned. The
future effect of environmental matters, including potential liabilities, is
often difficult to estimate. Presently testing of both properties has not shown
contaminants above reportable levels. We are unable to determine or reasonably
estimate the amount of costs, if any, that we might incur or for which we may
ultimately become responsible. We will record an environmental reserve when it
is both probable that a liability has been incurred and the amount of any
liability can be reasonably estimated, whether a claim has been asserted or
unasserted.In the opinion of management, we are not party to any litigation
that we believe could have a material adverse effect on our financial
condition, results of operation or liquidity except as noted above.

We lease
certain manufacturing equipment and facilities under operating leases, some of
which include cost escalation clauses, expiring on various dates through fiscal
2015. Total lease expense, net, charged to operations was $1,295, $2,340
(including $452 attributable to restructuring expenses related to the Tucson manufacturing
facility as described in Note 3), and $1,816, in fiscal 2010, 2009 and 2008,
respectively. At June 30, 2010, the minimum future lease commitments under
noncancellable leases payable over the remaining lives of the leases are as
follows:

|                              |  |                                          |       | 
|----------------------------- |  | ---------------------------------------- | ----- | 
|Year ending
 June 30,         |  | Minimum
 Future Gross Lease
 Commitments |      
|                              |  |                                          |      
|2011                          |  | $                                        | 724   | 
|2012                          |  |                                          | 377   | 
|2013                          |  |                                          | 220   | 
|2014                          |  |                                          | 48    | 
|2015                          |  |                                          | 20    | 
|                              |  |                                          |       | 
|Total
 minimum lease payments |  | $                                        | 1,389 | 
|                              |  |                                          |       | 

Nanometrics,
as part of the asset sale, has agreed to sublease our Oregon facility for
approximately $90 per year through March 2013.

NOTE 12: PROFIT-SHARING PLAN

We maintain a
deferred profit-sharing plan under which substantially all full-time employees
are eligible to participate. The profit-sharing plan consists of a cash
distribution and a 401(k) program. Profit-sharing cash distributions are
determined annually at the discretion of the Board of Directors. There have
been no profit sharing cash distributions for fiscal 2009 or fiscal 2010. 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
contribute to the 401(k) program based on matching up to 4% of an employees
contributions. The 401(k) match has been suspended as of April, 1, 2009 as part
of our cost-savings measures. 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 cannot 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, 2009 and 2008,
amounted to $967 and $1,035, respectively. There has been no contribution for
the fiscal year ended June 30, 2010.

F - 20

---



NOTE 13: SHARE-BASED COMPENSATION PLANS

Share-Based
Compensation PlansThe Zygo Corporation 2002 Equity Incentive Plan
(2002 Plan) permits the granting of stock options to purchase shares of
common stock and the granting of restricted stock up to a total of 3,300,000
shares. The exercise price per share of common stock covered by an option may
not be less than the par value per share on the date of grant, and in the case
of an incentive stock option, the exercise price may not be less than the
market value per share on the date of grant. These options generally vest over
a four year period at a rate of 25% each year. Generally, restricted stock
awards have 50% of their restrictions lapse after three years and the remaining
50% lapse after four years. The 2002 Plan will expire on August 27, 2012.
Pursuant to the terms of the 2002 Plan, the Board of Directors may also amend
the 2002 Plan to authorize the grant of other types of equity-based awards,
without further action by our stockholders. Options issued to non-employee
directors are now issued under this plan. As part of a directors compensation
for services to our company, non-employee directors are granted 5,000
restricted shares, and a non-employee chairman of the board is granted 7,500
restricted shares, which vest after one year, on an annual basis and each new
non-employee director will be granted options to purchase 16,000 shares of
common stock on his or her first day of service, at the market value per share
on the date of grant. These options will vest over a four year period at a rate
of 25% each year.

The Zygo
Corporation Amended and Restated Non-Employee Director Stock Option Plan
(Director Plan), which expired on November 17, 2009, permitted the granting
of non-qualified options to purchase a total of 620,000 shares (adjusted for
stock splits) of common stock at prices not less than the market value of the
stock on the date of grant. Under the terms of the Director Plan, as amended on
September 24, 1999, each new non-employee director (other than a person who was
previously an employee of Zygo or any of our subsidiaries) was granted an
option to purchase 8,000 shares of common stock, generally, on his or her first
day of service as a non-employee director; and each other non-employee director
was granted an option to purchase 3,000 shares of common stock on an annual
basis. All options were fully exercisable on the date of grant and had a
10-year term.

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 provided
assistance to us in connection with certain research and development
activities. The warrant has an exercise price of $18.64 per share, the closing
price of the common stock on the date of the grant, and vested in equal annual
increments over the four-year period following the date of grant. The warrant
will expire in fiscal 2011.

We use the
Black-Scholes option-pricing model to calculate the fair value of stock option
awards. The key assumptions for this valuation method include the expected term
of the option, stock price volatility, risk-free interest rate, dividend yield,
exercise price, and forfeiture rate. Under the assumptions indicated below, the
weighted-average fair value of stock option grants for fiscal 2010, 2009 and
2008 were $4.45, $3.77 and $4.99, respectively. The table below indicates the
key assumptions used in the option valuation calculations for options granted
in fiscal 2010, 2009, and 2008, and a discussion of our methodology for
developing each of the assumptions used in the valuation model:

|                         |  |                            |               |      |  |             |   |  |           |  
|------------------------ |  | -------------------------- | ------------- | ---- |  | ----------- | - |  | --------- | -
|                         |  | Fiscal Year Ended June 30, |              
|                         |  |                            |              
|                         |  | 2010                       |               | 2009 |  | 2008        |  
|                         |  |                            |               |      |  |             |  
|Term                     |  |                            | 4.1-5.1 Years |      |  | 4-4.6 Years |   |  | 4.0 Years |  
|Volatility               |  |                            | 45.7 - 60.9   | %    |  | 45.5        | % |  | 45.7      | %
|Dividend
 yield          |  |                            | 0.0           | %    |  | 0.0         | % |  | 0.0       | %
|Risk-free
 interest rate |  |                            | 2.0-2.5       | %    |  | 0.5-2.9     | % |  | 2.5-4.2   | %
|Forfeiture
 rate         |  |                            | 0-10.8        | %    |  | 9.5         | % |  | 11.0      | %

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

Volatility  This is
a measure of the amount by which a price has fluctuated or is expected to
fluctuate. Volatilities are based on implied volatilities from traded options
of Zygos shares and historical volatility of Zygos shares. An increase in the
expected volatility will increase compensation expense.

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

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

F - 21

---



Forfeiture Rate 
This is the estimated percentage of options granted that are expected to be
forfeited or canceled before becoming fully vested. An increase in the
forfeiture rate will decrease compensation expense. The zero forfeiture rate in
fiscal 2010 relates to the options granted to the new Chief Executive Officer.

Stock Options

The following
table summarizes information about our stock options granted under our
share-based compensation plans for fiscal 2010, 2009, and 2008. Included in the
information below are outstanding options from the Zygo Corporation Amended and
Restated Non-Qualified Stock Option Plan which expired in fiscal 2003, to the
extent the options remain exercisable.

|                                    |  |               |   |                                    |       |               |           |                                    |   |        |  |                                    |   |   |       | 
|----------------------------------- |  | ------------- | - | ---------------------------------- | ----- | ------------- | --------- | ---------------------------------- | - | ------ |  | ---------------------------------- | - | - | ----- | 
|                                    |  | June 30, 2010 |   | June 30, 2009                      |       | June 30, 2008 |          
|                                    |  |               |   |                                    |       |               |          
|                                    |  | Shares        |   | Weighted
 Average
 Exercise
 Price |       | Shares        |           | Weighted
 Average
 Exercise
 Price |   | Shares |  | Weighted
 Average
 Exercise
 Price |  
|                                    |  |               |   |                                    |       |               |           |                                    |   |        |  |                                    |  
|                                    |  |               |   |                                    |       |               |           |                                    |   |        |  |                                    |  
|Outstanding
 at beginning of year   |  | 1,908,572     |   | $                                  | 22.72 |               | 2,058,639 |                                    | $ | 25.33  |  | 2,057,766                          |   | $ | 25.80 | 
|Granted                             |  | 515,000       |   | $                                  | 9.75  |               | 169,000   |                                    | $ | 9.61   |  | 125,900                            |   | $ | 12.30 | 
|Exercised                           |  | (57,300       | ) | $                                  | 8.39  |               | (21,125   | )                                  | $ | 8.65   |  | (69,848                            | ) | $ | 8.44  | 
|Expired or
 cancelled               |  | (389,380      | ) | $                                  | 29.60 |               | (297,942  | )                                  | $ | 37.01  |  | (55,179                            | ) | $ | 34.05 | 
|                                    |  |               |   |                                    |       |               |           |                                    |   |        |  |                                    |   |   |       | 
|Options -
 Outstanding-end of year  |  | 1,976,892     |   | $                                  | 20.14 |               | 1,908,572 |                                    | $ | 22.72  |  | 2,058,639                          |   | $ | 25.33 | 
|                                    |  |               |   |                                    |       |               |           |                                    |   |        |  |                                    |   |   |       | 
|Options
 vested or expected to vest |  | 1,878,816     |   | $                                  | 20.68 |               | 1,846,583 |                                    | $ | 23.10  |  | 2,004,989                          |   | $ | 25.68 | 
|                                    |  |               |   |                                    |       |               |           |                                    |   |        |  |                                    |   |   |       | 
|Options -
 Exercisable-end of year  |  | 1,297,492     |   | $                                  | 25.46 |               | 1,573,272 |                                    | $ | 25.19  |  | 1,718,789                          |   | $ | 27.95 | 
|                                    |  |               |   |                                    |       |               |           |                                    |   |        |  |                                    |   |   |       | 

At June 30,
2010, outstanding options at the end of the year had an intrinsic value of $504
with a weighted average remaining contractual life of 4.8 years. In addition,
exercisable options at the end of the year had an intrinsic value of $262 with
a weighted average remaining contractual life of 2.9 years.

The following
table summarizes information about our stock options granted under our
share-based compensation plans as of June 30, 2010.

|                           |  |  |                                           |  |                                                 |                     |                                   |   |       |                                          |  |                                   |  |   |       | 
|-------------------------- |  |  | ----------------------------------------- |  | ----------------------------------------------- | ------------------- | --------------------------------- | - | ----- | ---------------------------------------- |  | --------------------------------- |  | - | ----- | 
|                           |  |  | Options Outstanding                       |  |                                                 | Options Exercisable |                                  
|                           |  |  |                                           |  |                                                 |                     |                                  
|Range of
 Exercise
 Prices |  |  | Number
 Outstanding
 as of
 June 30, 2010 |  | Weighted
 Average
 Remaining
 Contractual
 Life |                     | Weighted
 Average
 Exercise Price |   |       | Number
 Exercisable as of
 June 30, 2010 |  | Weighted
 Average
 Exercise Price | 
|                           |  |  |                                           |  |                                                 |                     |                                   |   |       |                                          |  |                                   | 
|$5.09 -
 $7.67             |  |  | 315,613                                   |  |                                                 | 6.0                 |                                   | $ | 6.51  |                                          |  | 151,613                           |  | $ | 6.38  | 
|$7.90 -
 $12.29            |  |  | 901,850                                   |  |                                                 | 6.8                 |                                   | $ | 10.37 |                                          |  | 446,600                           |  | $ | 9.95  | 
|$12.33 -
 $18.64           |  |  | 507,365                                   |  |                                                 | 3.7                 |                                   | $ | 14.61 |                                          |  | 447,215                           |  | $ | 14.83 | 
|$18.74 -
 $32.09           |  |  | 4,100                                     |  |                                                 | 2.1                 |                                   | $ | 22.83 |                                          |  | 4,100                             |  | $ | 22.83 | 
|$35.85 -
 $70.00           |  |  | 9,200                                     |  |                                                 | .4                  |                                   | $ | 43.87 |                                          |  | 9,200                             |  | $ | 43.87 | 
|$76.50 -
 $87.00           |  |  | 238,764                                   |  |                                                 | .2                  |                                   | $ | 85.81 |                                          |  | 238,764                           |  | $ | 85.81 | 
|                           |  |  |                                           |  |                                                 |                     |                                   |   |       |                                          |  |                                   |  |   |       | 
|$5.09 -
 $87.00            |  |  | 1,976,892                                 |  |                                                 | 5.0                 |                                   | $ | 20.14 |                                          |  | 1,297,492                         |  | $ | 25.46 | 
|                           |  |  |                                           |  |                                                 |                     |                                   |   |       |                                          |  |                                   |  |   |       | 

As of June 30,
2010, there was $2,273 of total unrecognized compensation cost related to stock
options. These costs are expected to be recognized over a weighted average
period of 3.15 years.

The total
intrinsic value of stock options exercised was $109, $56 and $280 and the total
fair value of stock awards vested was $478, $754 and $1,005, during the fiscal
year ended June 30, 2010, 2009 and 2008, respectively.

Cash received
from stock option exercises and the associated tax benefit for the fiscal year
ended June 30, 2010 was $520.

F - 22

---



Restricted StockThe following table summarizes information about
restricted stock awards granted under share-based compensation plans for the
fiscal years ended June 30, 2010, 2009, and 2008:

|                                        |  |               |          |                               |   |                |  |                               |          |        |   |                               |  |  |         |   |   |       | 
|--------------------------------------- |  | ------------- | -------- | ----------------------------- | - | -------------- |  | ----------------------------- | -------- | ------ | - | ----------------------------- |  |  | ------- | - | - | ----- | 
|                                        |  | June 30, 2010 |          | June
 30, 2009                |   | June
 30, 2008 | 
|                                        |  |               |          |                               |   |                | 
|                                        |  | Shares        |          | Weighted
 Average
 Fair Value |   | Shares         |  | Weighted
 Average
 Fair Value |          | Shares |   | Weighted
 Average
 Fair Value | 
|                                        |  |               |          |                               |   |                |  |                               |          |        |   |                               | 
|                                       
|Non vested balance at beginning of year |  |               | 551,650  |                               | $ | 11.46          |  |                               | 635,147  |        | $ | 12.23                         |  |  | 368,176 |   | $ | 12.90 | 
|Granted                                 |  |               | 309,000  |                               | $ | 6.06           |  |                               | 189,200  |        | $ | 9.72                          |  |  | 327,050 |   | $ | 12.00 | 
|Vested                                  |  |               | (205,194 | )                             | $ | 11.28          |  |                               | (213,060 | )      | $ | 11.63                         |  |  | (43,858 | ) | $ | 16.46 | 
|Forfeited                               |  |               | (67,363  | )                             | $ | 8.71           |  |                               | (59,637  | )      | $ | 11.87                         |  |  | (16,221 | ) | $ | 11.86 | 
|                                        |  |               |          |                               |   |                |  |                               |          |        |   |                               |  |  |         |   |   |       | 
|Non vested balance at end of year       |  |               | 588,093  |                               | $ | 9.04           |  |                               | 551,650  |        | $ | 11.46                         |  |  | 635,147 |   | $ | 12.23 | 
|                                        |  |               |          |                               |   |                |  |                               |          |        |   |                               |  |  |         |   |   |       | 

As of June 30,
2010, there was $2,773 of total unrecognized compensation costs related to
restricted stock awards. These costs are expected to be recognized over a
weighted average period of 2.0 years.

At June 30,
2010, an aggregate of 791,354 shares remained available for future grants under
our share-based compensation plans, which cover stock awards and stock options.
We issue shares to satisfy stock option exercises and restricted stock awards,
as applicable.

NOTE 14: EMPLOYEE STOCK PURCHASE PLAN

Zygo cancelled
its non-compensatory Employee Stock Purchase Plan (ESPP) during fiscal 2009.
Under the ESPP, employees who elected to participate had the ability to
purchase common stock at a 5% discount from the market value of such stock. The
ESPP permitted 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 available under
the ESPP was 500,000. At June 30, 2008, we had withheld from employees $144,
for the purchases of shares under this plan, and in July 2008, we issued
approximately 13,072 shares of common stock. In January 2009, we issued 12,897
shares of common stock under the plan.

NOTE 15: INCOME TAXES

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

|                                         |  |                            |        |      |   |        |  |   |       |  
|---------------------------------------- |  | -------------------------- | ------ | ---- | - | ------ |  | - | ----- | -
|                                         |  | Fiscal Year Ended June 30, |       
|                                         |  |                            |       
|                                         |  | 2010                       |        | 2009 |   | 2008   | 
|                                         |  |                            |        |      |   |        | 
|Earnings
 (loss) from operations         |  | $                          | (1,032 | )    | $ | 22,193 |  | $ | 1,694 |  
|Amounts
 charged to stockholders equity |  |                            |       |      |   | 279    |  |   | (56   | )
|                                         |  |                            |        |      |   |        |  |   |       |  
|                                         |  | $                          | (1,032 | )    | $ | 22,472 |  | $ | 1,638 |  
|                                         |  |                            |        |      |   |        |  |   |       |  

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

|                                  |  |                            |        |      |   |         |   |   |       |  
|--------------------------------- |  | -------------------------- | ------ | ---- | - | ------- | - | - | ----- | -
|                                  |  | Fiscal Year Ended June 30, |       
|                                  |  |                            |       
|                                  |  | 2010                       |        | 2009 |   | 2008    |  
|                                  |  |                            |        |      |   |         |  
|Loss from
 operations - U.S.      |  | $                          | (7,883 | )    | $ | (39,402 | ) | $ | (953  | )
|Earnings
 from foreign operations |  |                            | 4,183  |      |   | 385     |   |   | 5,984 |  
|                                  |  |                            |        |      |   |         |   |   |       |  
|                                  |  | $                          | (3,700 | )    | $ | (39,017 | ) | $ | 5,031 |  
|                                  |  |                            |        |      |   |         |   |   |       |  

F - 23

---



The provision
(benefit) for income taxes consists of the following:

|          |  |                            |        |      |   |        |   |   |       |  
|--------- |  | -------------------------- | ------ | ---- | - | ------ | - | - | ----- | -
|          |  | Fiscal Year Ended June 30, |       
|          |  |                            |       
|          |  | 2010                       |        | 2009 |   | 2008   |  
|          |  |                            |        |      |   |        |  
|Current:  |  |                            |        |      |   |        |   |   |       |  
|Federal   |  | $                          | (1,917 | )    | $ | (20    | ) | $ | 44    |  
|State     |  |                            | 130    |      |   | 185    |   |   | (201  | )
|Foreign   |  |                            | 1,544  |      |   | 1,038  |   |   | 2,078 |  
|          |  |                            |        |      |   |        |   |   |       |  
|          |  |                            | (243   | )    |   | 1,203  |   |   | 1,921 |  
|          |  |                            |        |      |   |        |   |   |       |  
|Deferred: |  |                            |        |      |   |        |   |   |       |  
|Federal   |  |                            | (789   | )    |   | 18,277 |   |   | (246  | )
|State     |  |                            |       |      |   | 2,567  |   |   | 221   |  
|Foreign   |  |                            |       |      |   | 146    |   |   | (202  | )
|          |  |                            |        |      |   |        |   |   |       |  
|          |  |                            | (789   | )    |   | 20,990 |   |   | (227  | )
|          |  |                            |        |      |   |        |   |   |       |  
|          |  |                            |        |      |   |        |   |   |       |  
|Total     |  | $                          | (1,032 | )    | $ | 22,193 |   | $ | 1,694 |  
|          |  |                            |        |      |   |        |   |   |       |  

The total
income tax expense differs from the amount computed by applying the applicable
U.S. federal income tax rate of 35% in fiscal 2010, 2009, and 2008 to earnings
from continuing operations before income taxes for the following reasons:

|                                                                                              |  |                            |        |      |   |         |   |   |       |  
|--------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | ---- | - | ------- | - | - | ----- | -
|                                                                                              |  | Fiscal Year Ended June 30, |       
|                                                                                              |  |                            |       
|                                                                                              |  | 2010                       |        | 2009 |   | 2008    |  
|                                                                                              |  |                            |        |      |   |         |  
|                                                                                             
|Computed expected tax expense (benefit)                                                     |  | $                          | (1,295 | )    | $ | (13,656 | ) | $ | 1,761 |  
|Increases (reductions) in taxes resulting
 from:                                              |  |                            |        |      |   |         |   |   |       |  
|State taxes, net of federal income tax
 benefit                                               |  |                            | 85     |      |   | 1,789   |   |   | 13    |  
|Reversal of allowance for uncertain tax
 positions                                            |  |                            | (1,209 | )    |   |        |   |   |      |  
|Refund claims relating to net operating
 loss carrybacks and research and development credits |  |                            | (1,374 | )    |   |        |   |   |      |  
|Permanent items                                                                               |  |                            | 727    |      |   | 83      |   |   |      |  
|Foreign tax differential                                                                      |  |                            | (88    | )    |   | (935    | ) |   | (175  | )
|Deferred tax asset valuation allowance and
 related adjustments                               |  |                            | 2,217  |      |   | 36,037  |   |   |      |  
|Other, net                                                                                    |  |                            | (95    | )    |   | (1,125  | ) |   | 95    |  
|                                                                                              |  |                            |        |      |   |         |   |   |       |  
|                                                                                              |  | $                          | (1,032 | )    | $ | 22,193  |   | $ | 1,694 |  
|                                                                                              |  |                            |        |      |   |         |   |   |       |  

F - 24

---



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, 2010 and 2009
are presented below:

|                                                                          |  |               |         |                |   |         |  
|------------------------------------------------------------------------- |  | ------------- | ------- | -------------- | - | ------- | -
|                                                                          |  | June 30, 2010 |         | June
 30, 2009 |  
|                                                                          |  |               |         |                |  
|Deferred tax assets:                                                      |  |               |         |                |   |         |  
|Accounts receivable                                                       |  | $             | 703     |                | $ | 321     |  
|Accrued liabilities and other                                             |  |               | 3,692   |                |   | 6,297   |  
|Inventory valuation                                                       |  |               | 4,918   |                |   | 1,349   |  
|Stock award compensation                                                  |  |               | 1,977   |                |   | 2,486   |  
|Intangible assets                                                         |  |               | 12      |                |   | 11      |  
|Federal, foreign, and state net operating loss carryforwards and
 credits |  |               | 32,753  |                |   | 29,421  |  
|Contributions                                                             |  |               | 81      |                |   | 73      |  
|                                                                          |  |               |         |                |   |         |  
|Deferred tax assets                                                       |  |               | 44,136  |                |   | 39,958  |  
|                                                                          |  |               |         |                |   |         |  
|Deferred tax liabilities:                                                 |  |               |         |                |   |         |  
|Prepaid expenses                                                          |  |               | (276    | )              |   | (152    | )
|Property, plant, and equipment                                            |  |               | (927    | )              |   | (791    | )
|                                                                          |  |               |         |                |   |         |  
|Deferred tax liability                                                    |  |               | (1,203  | )              |   | (943    | )
|                                                                          |  |               |         |                |   |         |  
|                                                                          |  |               |         |                |   |         |  
|Net deferred tax assets before valuation allowance                        |  |               | 42,933  |                |   | 39,015  |  
|Valuation allowance                                                       |  |               | (42,933 | )              |   | (39,015 | )
|                                                                          |  |               |         |                |   |         |  
|Net deferred tax asset                                                    |  | $             |        |                | $ |        |  
|                                                                          |  |               |         |                |   |         |  

The deferred
tax provision for fiscal 2009 does not reflect $279 of tax expense, resulting
from amounts charged to other comprehensive income and paid in capital from the
exercise of employee stock options. In fiscal 2010, stock option and restricted
stock activity resulted in no amounts charged to other comprehensive income and
paid in capital.

Management
believes, based upon the uncertain and volatile market conditions and the fact
that the Company is in a cumulative pre tax accounting loss position, over the
evaluation period it is not more likely than not that the deferred tax assets,
net of deferred tax liabilities, of $42,933 as of June 30, 2010 will be
realized. The evaluation period used by the Company is three years. In future
periods, the allowance could be reduced based on future positive evidence
indicating that it is more likely than not that a portion of the deferred tax
assets will be realized.

At June 30,
2010, our share of the cumulative undistributed earnings of foreign
subsidiaries was $5,014. 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,
2010, we have federal, state, and foreign net operating loss (NOL) carry
forwards of approximately $60,104, $9,642, and $969, respectively, and various
state and foreign credit carry forwards of $1,674 and $484. The federal NOL
will expire from fiscal 2022 through fiscal 2030, while the state NOL and
credits will expire from fiscal 2013 through fiscal 2030. The foreign NOL will
begin to expire in 2028. We also have federal general business credit carry
forwards of approximately $5,799, which are available to reduce federal income
taxes, if any, through 2029 and begin to expire in 2013. All deferred assets
relating to the NOLs and credits have been fully reserved in the valuation
allowance since June 30, 2009.

We adopted
authoritative guidance for uncertain income tax positions on July 1, 2007. As a
result of this adoption, we recognized a liability for unrecognized income tax
benefits of $1,535, an increase in income tax receivables of $616, and a net
charge of approximately $919 to the July 1, 2007 retained earnings balance. As
of the adoption date, we had gross tax-affected unrecognized tax benefits of
$1,784, of which $1,168, if recognized, would affect the effective tax rate.
Due to our net operating loss carry forwards, we have accrued no interest or
penalties for the unrecognized tax benefits; however, our accounting policy is
to recognize interest related to unrecognized tax benefits in interest expense.
Penalties, if incurred, would be recognized as a component of income tax
expense. In the normal course of business, we provide for uncertain tax
positions and adjust our unrecognized tax benefits accordingly. For the year
ended June 30, 2008, we recognized an additional liability of $88 for uncertain
tax positions and for the year ended June 30, 2009, we released a reserve for
$46. The total liability for unrecognized tax benefits was $1,826 at June 30,
2009.

F - 25

---



During fiscal
2010, all remaining uncertain tax positions were settled and, as such, we
reversed the liability and offsetting receivable that had been previously recorded
for such positions. This resulted in a net income tax benefit of $1.2 million
in fiscal 2010 and no liability for unrecognized tax benefits as of June 30,
    2010. The total liability for unrecognized tax benefits was $1,826 at June
    30, 2009.

The following
table is a reconciliation of the beginning and ending balances of unrecognized
tax benefits:

|                                                          |  |   |        |  
|--------------------------------------------------------- |  | - | ------ | -
|Unrecognized tax benefit, July 1, 2007                    |  | $ | 1,784  |  
|Additons based upon positions related to the current year |  |   | 88     |  
|                                                          |  |   |        |  
|Unrecognized tax benefit, June 30, 2008                   |  |   | 1,872  |  
|Reductions of tax positions of prior years                |  |   | (46    | )
|                                                          |  |   |        |  
|Unrecognized tax benefit, June 30, 2009                   |  |   | 1,826  |  
|Reductions of tax positions of prior years                |  |   | (1,826 | )
|                                                          |  |   |        |  
|Unrecognized tax benefit, June 30, 2010                   |  | $ |       |  
|                                                          |  |   |        |  

We are subject
to U.S. federal income tax as well as income tax in multiple state and foreign
jurisdictions. We are no longer subject to U.S. federal income tax audit or tax
adjustments for years prior to June 30, 2006. We are no longer subject to state
and foreign income tax audit or tax adjustments for years prior to June 30,
2006.

NOTE 16: SEGMENT REPORTING

Our business
is organized into two operating divisions  Metrology Solutions (Metrology
segment) and Optical Systems (Optics segment). Consistent with our business
structure, we reported our segments as Metrology and Optics. The Metrology
segment consists of OEM and in-line products primarily for the semiconductor
and industrial markets. The Optics segment consists of components and
opto-mechanical assemblies primarily for the medical, defense, and aerospace
industries, which are included in the industrial market. The chief operating
decision-maker uses this information to allocate resources.

|                             |  |                             |         |      |   |         |   |   |         |  
|---------------------------- |  | --------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                             |  | Fiscal
 Year Ended June 30, |        
|                             |  |                             |        
|                             |  | 2010                        |         | 2009 |   | 2008    |  
|                             |  |                             |         |      |   |         |  
|Metrology                    |  |                             |         |      |   |         |   |   |         |  
|Sales                        |  | $                           | 65,841  |      | $ | 82,766  |   | $ | 105,127 |  
|Gross margin                 |  |                             | 33,652  |      |   | 28,427  |   |   | 50,387  |  
|Gross margin as a % of sales |  |                             | 51      | %    |   | 34      | % |   | 48      | %
|                             |  |                             |         |      |   |         |   |   |         |  
|Optics                       |  |                             |         |      |   |         |   |   |         |  
|Sales                        |  | $                           | 35,489  |      | $ | 31,968  |   | $ | 53,336  |  
|Gross margin                 |  |                             | 8,317   |      |   | 4,006   |   |   | 14,294  |  
|Gross margin as a % of sales |  |                             | 23      | %    |   | 13      | % |   | 27      | %
|                             |  |                             |         |      |   |         |   |   |         |  
|Total                        |  |                             |         |      |   |         |   |   |         |  
|Sales                        |  | $                           | 101,330 |      | $ | 114,734 |   | $ | 158,463 |  
|Gross margin                 |  |                             | 41,969  |      |   | 32,433  |   |   | 64,681  |  
|Gross margin as a % of sales |  |                             | 41      | %    |   | 28      | % |   | 41      | %

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.

F - 26

---



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

|               |  |                             |         |      |   |         |  |   |         | 
|-------------- |  | --------------------------- | ------- | ---- | - | ------- |  | - | ------- | 
|               |  | Fiscal
 Year Ended June 30, |        
|               |  |                             |        
|               |  | 2010                        |         | 2009 |   | 2008    | 
|               |  |                             |         |      |   |         | 
|               |  |                             |         |      |   |         |  |   |         | 
|Americas:      |  | $                           | 54,066  |      | $ | 55,456  |  | $ | 77,147  | 
|Far East:      |  |                             |         |      |   |         |  |   |         | 
|Japan          |  |                             | 18,280  |      |   | 26,352  |  |   | 44,354  | 
|Pacific Rim    |  |                             | 15,376  |      |   | 19,415  |  |   | 14,629  | 
|               |  |                             |         |      |   |         |  |   |         | 
|Total Far East |  |                             | 33,656  |      |   | 45,767  |  |   | 58,983  | 
|               |  |                             |         |      |   |         |  |   |         | 
|Europe         |  |                             | 13,608  |      |   | 13,511  |  |   | 22,333  | 
|               |  |                             |         |      |   |         |  |   |         | 
|Total          |  | $                           | 101,330 |      | $ | 114,734 |  | $ | 158,463 | 
|               |  |                             |         |      |   |         |  |   |         | 

NOTE 17: TRANSACTIONS WITH STOCKHOLDER

Sales to
Canon, Inc., a stockholder representing approximately 7% ownership at June 30,
2010, and Canon Sales Co., Inc., a distributor of certain of our products in
Japan and a subsidiary of Canon Inc. (collectively Canon), amounted to $8,809
(9% of net revenues), $16,229 (14% of net revenues) and $30,711 (19% of net
revenues), for the years ended June 30, 2010, 2009, and 2008, respectively.
Substantially all of these revenues occurred in the Metrology segment. Selling
prices of products sold to Canon are based, generally, on the normal terms
given to distributors. Revenues generated from development contracts were
recorded on a cost-plus basis.

At June 30,
2010 and 2009, there were, in the aggregate, $667 and $592, respectively, of
trade accounts receivable from Canon.

NOTE 18: HEDGING ACTIVITIES

We enter into
foreign currency forward contracts to reduce the impact of adverse fluctuations
on earnings associated with foreign currency exchange rate changes. We do not
enter into any derivative transactions for speculative purposes. These
contracts are not designated as cash flow, fair value, or net investment hedges
as referred to in authoritative literature 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,
2010, we had four foreign currency forward contracts outstanding with notional
amounts aggregating to $1,700. Net unrealized losses recognized from foreign
currency forward contracts for fiscal 2010, 2009 and 2008 was $64, $49, and
$161, respectively, and are included in other income in the consolidated
statements of operations. These losses are substantially offset by foreign
exchange gains on intercompany balances recorded by our subsidiaries.

F - 27

---



NOTE 19: QUARTERLY RESULTS (UNAUDITED)

The following
table sets forth certain unaudited quarterly financial data:

|                                                                                |  |                                          |        |               |   |            |   |               |         |   |   |         |  
|------------------------------------------------------------------------------- |  | ---------------------------------------- | ------ | ------------- | - | ---------- | - | ------------- | ------- | - | - | ------- | -
|                                                                                |  | For the Fiscal Year Ended June 30, 2010  |       
|                                                                                |  |                                          |       
|                                                                                |  | September 30,                            |        | December 31,  |   | March 31,  |   | June 30,      |        
|                                                                                |  |                                          |        |               |   |            |   |               |        
|                                                                                |  |                                          |        |               |   |            |   |               |        
|Net revenues                                                                    |  | $                                        | 21,325 |               | $ | 26,081     |   | $             | 25,439  |   | $ | 28,485  |  
|                                                                                |  |                                          |        |               |   |            |   |               |         |   |   |         |  
|Gross margin                                                                    |  | $                                        | 7,174  |               | $ | 10,953     |   | $             | 11,477  |   | $ | 12,365  |  
|                                                                                |  |                                          |        |               |   |            |   |               |         |   |   |         |  
|Net earnings (loss)                                                             |  | $                                        | (5,655 | )             | $ | (1,592     | ) | $             | (2,464  | ) | $ | 4,374   |  
|                                                                                |  |                                          |        |               |   |            |   |               |         |   |   |         |  
|Net earnings(loss) from continuing operations
 attributable to Zygo Corporation |  | $                                        | (3,952 | )             | $ | (1,266     | ) | $             | (2,503  | ) | $ | 4,096   |  
|                                                                                |  |                                          |        |               |   |            |   |               |         |   |   |         |  
|Net earnings (loss) attributable to Zygo Corporation                            |  | $                                        | (5,787 | )             | $ | (1,905     | ) | $             | (2,696  | ) | $ | 4,094   |  
|                                                                                |  |                                          |        |               |   |            |   |               |         |   |   |         |  
|Net earnings (loss) attributable to Zygo Corporation
 per basic common share    |  | $                                        | (0.34  | )             | $ | (0.11      | ) | $             | (0.16   | ) | $ | 0.23    |  
|                                                                                |  |                                          |        |               |   |            |   |               |         |   |   |         |  
|Net earnings (loss) attributable to Zygo Corporation
 per diluted common share  |  | $                                        | (0.34  | )             | $ | (0.11      | ) | $             | (0.16   | ) | $ | 0.23    |  
|                                                                                |  |                                          |        |               |   |            |   |               |         |   |   |         |  
|                                                                                |  |                                          |        |               |   |            |   |               |         |   |   |         |  
|                                                                                |  | For
 the Fiscal Year Ended June 30, 2009 |       
|                                                                                |  |                                          |       
|                                                                                |  | September
 30,                           |        | December
 31, |   | March
 31, |   | June
 30, (a) |        
|                                                                                |  |                                          |        |               |   |            |   |               |        
|Net revenues                                                                    |  | $                                        | 37,493 |               | $ | 33,400     |   | $             | 20,020  |   | $ | 23,821  |  
|                                                                                |  |                                          |        |               |   |            |   |               |         |   |   |         |  
|Gross margin                                                                    |  | $                                        | 16,487 |               | $ | 12,256     |   | $             | 4,709   |   | $ | (1,019  | )
|                                                                                |  |                                          |        |               |   |            |   |               |         |   |   |         |  
|Net earnings (loss)                                                             |  | $                                        | 779    |               | $ | (3,669     | ) | $             | (14,998 | ) | $ | (47,381 | )
|                                                                                |  |                                          |        |               |   |            |   |               |         |   |   |         |  
|Net earnings(loss) from continuing operations attributable to Zygo
 Corporation |  | $                                        | 832    |               | $ | (3,827     | ) | $             | (11,709 | ) | $ | (47,301 | )
|                                                                                |  |                                          |        |               |   |            |   |               |         |   |   |         |  
|Net earnings (loss) attributable to Zygo Corporation                            |  | $                                        | 503    |               | $ | (4,041     | ) | $             | (15,101 | ) | $ | (47,425 | )
|                                                                                |  |                                          |        |               |   |            |   |               |         |   |   |         |  
|Net earnings (loss) attributable to Zygo Corporation per basic common
 share    |  | $                                        | 0.03   |               | $ | (0.24      | ) | $             | (0.90   | ) | $ | (2.81   | )
|                                                                                |  |                                          |        |               |   |            |   |               |         |   |   |         |  
|Net earnings (loss) attributable to Zygo Corporation per diluted
 common share  |  | $                                        | 0.03   |               | $ | (0.24      | ) | $             | (0.90   | ) | $ | (2.81   | )
|                                                                                |  |                                          |        |               |   |            |   |               |         |   |   |         |  

(a) Significant fourth
quarter fiscal 2009 charges consisted of a valuation allowance on deferred tax
assets of $35,805, asset impairment charges of $7,498, provision for doubtful
accounts of $1,961, and severance and restucturing charges of $1,290.

F - 28

---



Note 20: Discontinued Operations

During the
quarter ended September 30, 2009, we determined to sell or otherwise close down
the Singapore IC packaging metrology operations of our Vision Systems product
line, included in our Metrology Solutions segment. As of September 30, 2009,
operations had ceased at this location. In accordance with authoritative
guidance, the results of operations for the aforementioned operations are
presented in the Companys Condensed Consolidated Financial Statements as
discontinued operations. Per authoritative guidance, we have restated the
financial presentation and related footnotes for fiscal 2009 and 2008 to show
the comparable effects of the discontinued operations.

The following
table summarizes the operating results of our discontinued operations for the
fiscal years ended June 30, 2010, 2009 and 2008:

|                                              |  |                             |        |      |   |        |   |   |      |  
|--------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------ | - | - | ---- | -
|                                              |  | Fiscal
 Year Ended June 30, |       
|                                              |  |                             |       
|                                              |  | 2010                        |        | 2009 |   | 2008   |  
|                                              |  |                             |        |      |   |        |  
|Net revenues                                  |  | $                           | 665    |      | $ | 1,306  |   | $ | 573  |  
|Cost of goods sold                            |  |                             | 268    |      |   | 2,271  |   |   | 431  |  
|                                              |  |                             |        |      |   |        |   |   |      |  
|Gross profit (loss)                           |  |                             | 397    |      |   | (965   | ) |   | 142  |  
|Operating expenses, and other                 |  |                             | 3,066  |      |   | 459    |   |   | 994  |  
|Asset impairment                              |  |                             |       |      |   | 2,483  |   |   |     |  
|                                              |  |                             |        |      |   |        |   |   |      |  
|Loss before income taxes                      |  |                             | (2,669 | )    |   | (3,907 | ) |   | (852 | )
|Income tax (expense) benefit                  |  |                             |       |      |   | (152   | ) |   | 152  |  
|                                              |  |                             |        |      |   |        |   |   |      |  
|Loss from discontinued operations, net of tax |  | $                           | (2,669 | )    | $ | (4,059 | ) | $ | (700 | )
|                                              |  |                             |        |      |   |        |   |   |      |  

The following
table sets forth the assets and liabilities of our discontinued operations
included in the Condensed Consolidated Balance Sheets of the Company as of June
30, 2010 and 2009:

|                                                  |  |                |     |                 |   |     | 
|------------------------------------------------- |  | -------------- | --- | --------------- | - | --- | 
|                                                  |  | June 30,
 2010 |     | June
 30,
 2009 |  
|                                                  |  |                |     |                 |  
|Receivables                                       |  | $              |    |                 | $ | 269 | 
|Other assets                                      |  |                | 17  |                 |   | 25  | 
|                                                  |  |                |     |                 |   |     | 
|Current
 assets of discontinued operations        |  | $              | 17  |                 | $ | 294 | 
|                                                  |  |                |     |                 |   |     | 
|                                                  |  |                |     |                 |   |     | 
|Property, plant, and
 equipment                   |  | $              |    |                 | $ | 144 | 
|                                                  |  |                |     |                 |   |     | 
|Non-current
 assets of discontinued operations    |  | $              |    |                 | $ | 144 | 
|                                                  |  |                |     |                 |   |     | 
|                                                  |  |                |     |                 |   |     | 
|Accounts payable                                  |  | $              |    |                 | $ | 102 | 
|Accrued expenses and other
 current liabilities   |  |                | 287 |                 |   | 229 | 
|                                                  |  |                |     |                 |   |     | 
|Current
 liabilities of discontinued operations   |  | $              | 287 |                 | $ | 331 | 
|                                                  |  |                |     |                 |   |     | 
|                                                  |  |                |     |                 |   |     | 
|Other long-term
 liabilities                      |  |                |     |                 |   |     | 
|                                                  |  | $              | 281 |                 | $ |    | 
|                                                  |  |                |     |                 |   |     | 
|Long-term
 liabilities of discontinued operations |  | $              | 281 |                 | $ |    | 
|                                                  |  |                |     |                 |   |     | 

Liabilities remaining as of
June 30, 2010 include remaining amounts due on severance and non-compete
agreements that will be paid through fiscal 2011 and 2013, respectively.

*     *     *     *     *

F - 29

---



REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board
of Directors and Stockholders of
Zygo Corporation
Middlefield, Connecticut

We have
audited the consolidated financial statements of Zygo Corporation and
subsidiaries (the Company) as of June 30, 2010 and 2009, and for each of the
three years in the period ended June 30, 2010, and the Companys internal
control over financial reporting as of June 30, 2010, and have issued our
report thereon dated September 13, 2010 (which report expresses (1) an
unqualified opinion on the consolidated financial statements and (2) an adverse
opinion on the effectiveness of the Companys internal control over financial
reporting because of a material weakness); such consolidated financial
statements and report is included elsewhere in this Annual Report on Form 10-K.
Our audits also included the consolidated financial statement schedule of the
Company listed on page F-1 of this Annual Report on Form 10-K. This
consolidated financial statement schedule is the responsibility of the
Companys management. Our responsibility is to express an opinion based on our
audits. In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.

/s/ Deloitte
& Touche LLP

Hartford,
Connecticut
September 13, 2010

S - 1

---



ZYGO CORPORATION AND CONSOLIDATED SUBSIDIARY

SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS

Years ended June 30, 2010, 2009, and 2008

(Thousands of
dollars)

|                                               |  |                                 |        |           |   |                      |   |                        |         |   |   |        | 
|---------------------------------------------- |  | ------------------------------- | ------ | --------- | - | -------------------- | - | ---------------------- | ------- | - | - | ------ | 
|Description                                    |  | Balance
 at
 Beginning of
 Year |        | Provision |   | Write-Offs
 andOther |   | Balance
 at Endof Year |        
|                                               |  |                                 |        |           |   |                      |   |                        |        
|                                               |  |                                 |        |           |   |                      |   |                        |         |   |   |        | 
|Year Ended
 June 30, 2010                      |  |                                 |        |           |   |                      |   |                        |         |   |   |        | 
|Allowance for doubtful accounts                |  | $                               | 2,550  |           | $ | (586                 | ) | $                      | (11     | ) | $ | 1,975  | 
|                                               |  |                                 |        |           |   |                      |   |                        |         |   |   |        | 
|Valuation allowance on net deferred tax assets |  | $                               | 39,015 |           | $ | (789                 | ) | $                      | (4,707  | ) | $ | 42,933 | 
|                                               |  |                                 |        |           |   |                      |   |                        |         |   |   |        | 
|Year Ended
 June 30, 2009                      |  |                                 |        |           |   |                      |   |                        |         |   |   |        | 
|Allowance for doubtful accounts                |  | $                               | 349    |           | $ | 3,157                |   | $                      | 956     |   | $ | 2,550  | 
|                                               |  |                                 |        |           |   |                      |   |                        |         |   |   |        | 
|Valuation allowance on net deferred tax assets |  | $                               | 2,105  |           | $ | 20,990               |   | $                      | (15,920 | ) | $ | 39,015 | 
|                                               |  |                                 |        |           |   |                      |   |                        |         |   |   |        | 
|Year Ended
 June 30, 2008                      |  |                                 |        |           |   |                      |   |                        |         |   |   |        | 
|Allowance for doubtful accounts                |  | $                               | 333    |           | $ | 566                  |   | $                      | 550     |   | $ | 349    | 
|                                               |  |                                 |        |           |   |                      |   |                        |         |   |   |        | 
|Valuation allowance on net deferred tax assets |  | $                               | 2,170  |           | $ | (65                  | ) | $                      |        |   | $ | 2,105  | 

S - 2

---



EXHIBIT INDEX

|                       |      |  |                                                                                                                                                                      
|---------------------- | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT
 TABLE
 NUMBER |      | 
|                       |      | 
|                       |      | 
|                       | 21   |  | Subsidiaries
 of Registrant                                                                                                                                          
|                       |      |  |                                                                                                                                                                      
|                       | 23.1 |  | Consent of
 Independent Registered Public Accounting Firm                                                                                                            
|                       |      |  |                                                                                                                                                                      
|                       | 31.1 |  | Certification
 Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of
 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
 2002
|                       |      |  |                                                                                                                                                                      
|                       | 31.2 |  | Certification
 Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of
 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
 2002
|                       |      |  |                                                                                                                                                                      
|                       | 32.1 |  | Certification
 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
 Sarbanes-Oxley Act of 2002                                             
|                       |      |  |                                                                                                                                                                      
|                       | 32.2 |  | Certification
 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
 Sarbanes-Oxley Act of 2002                                             

---