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Employment Agreement - ZYGO CORP - 9-16-1997

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Employment Agreement - ZYGO CORP - 9-16-1997 Powered By Docstoc
					EMPLOYMENT AGREEMENT AGREEMENT, made as of August 19, 1997, between SIGHT SYSTEMS, INC., a California corporation with an office at 3541 Old Conejo Road, Suite 119, Newbury Park, California 91320-2158 (the "Company" or "SSI"), and DAVID GRANT, residing at 3032 Camino Del Zuro, Thousand Oaks, California 91360 ("Employee"). W I T N E S S E T H: WHEREAS, SSI is engaged in the business of designing and manufacturing high accuracy production vision systems performing numerous alignment and measurement applications; and WHEREAS, the Company, Employee and certain other specified entities and individuals have entered into an Acquisition Agreement (the "Acquisition Agreement"), dated as of August 19, 1997, with Zygo Corporation ("Zygo"), pursuant to which Zygo is acquiring all the outstanding capital stock of the Company for an aggregate of 287,400 shares of Zygo common stock (the "Acquisition"); and WHEREAS, prior to the consummation of the Acquisition Agreement, the Shareholder was an employee and a principal shareholder of SSI and, as such, possesses confidential and proprietary information regarding SSI; and WHEREAS, as a principal stockholder of the Company, Employee will receive a significant number of shares of Zygo common stock upon the consummation of the Acquisition; and WHEREAS, the execution and delivery of this Agreement, including without limitation the provisions of Section 9 hereof, is a condition of Zygo's consummation of the Acquisition and of Employee's agreement to sell his shares of common stock of SSI to Zygo, all pursuant to the Acquisition Agreement; and WHEREAS, the Company desires that Employee be employed by the Company, and Employee desires to be so employed by the Company upon the terms and conditions herein set forth. NOW, THEREFORE, in consideration of the premises and of the mutual promises, representations and covenants herein contained, the parties hereto agree as follows:

1. EMPLOYMENT. The Company hereby employs Employee and Employee hereby accepts such employment, subject to the terms and conditions herein set forth. Employee shall hold the position of President of SSI, a business unit initially being operated in the form of a subsidiary of Zygo Corporation ("Zygo"). Employee will not be required to relocate outside of a 25 mile radius from his current place of employment in order to satisfy the terms and conditions of employment herein set forth. 2. TERM. The initial term of employment under this Agreement shall begin on August 19, 1997 (the "Employment Date") and shall continue for a period of three (3) years from that date, subject to prior termination in accordance with the terms hereof. Thereafter, this Agreement shall automatically be renewed for successive one year terms unless either party shall give the other sixty (60) days' prior written notice of its or his intent not to renew this Agreement. The initial term together with all such additional one-year period(s) of employment, if any, are collectively referred to herein as the "term" of this Agreement. 3. COMPENSATION. As compensation for the employment services to be rendered by Employee hereunder, the Company agrees to pay, or cause to be paid, to Employee, and Employee agrees to accept, an annual salary of $120,000 or such

1. EMPLOYMENT. The Company hereby employs Employee and Employee hereby accepts such employment, subject to the terms and conditions herein set forth. Employee shall hold the position of President of SSI, a business unit initially being operated in the form of a subsidiary of Zygo Corporation ("Zygo"). Employee will not be required to relocate outside of a 25 mile radius from his current place of employment in order to satisfy the terms and conditions of employment herein set forth. 2. TERM. The initial term of employment under this Agreement shall begin on August 19, 1997 (the "Employment Date") and shall continue for a period of three (3) years from that date, subject to prior termination in accordance with the terms hereof. Thereafter, this Agreement shall automatically be renewed for successive one year terms unless either party shall give the other sixty (60) days' prior written notice of its or his intent not to renew this Agreement. The initial term together with all such additional one-year period(s) of employment, if any, are collectively referred to herein as the "term" of this Agreement. 3. COMPENSATION. As compensation for the employment services to be rendered by Employee hereunder, the Company agrees to pay, or cause to be paid, to Employee, and Employee agrees to accept, an annual salary of $120,000 or such higher amount as the President of Zygo may determine from time to time, subject to such payroll deductions as are required by law and deductions for applicable employee contributions to the normal benefit programs of the Company. The annual salary provided for hereunder shall be payable in equal installments commencing at the Employment Date, in accordance with the Company's practice. In addition, Employee shall be entitled to additional incentive compensation from time to time. Such compensation will be based on the Company's overall performance and will be awarded at the discretion of the President of Zygo with the approval of the Board of Directors of the Company or Zygo. On August 19, 1997, Employee shall receive a grant of options to purchase 10,000 shares of Common Stock of Zygo with an exercise price equal to the fair market value on the date of grant, vesting in four equal annual installments and otherwise in accordance with the terms of Zygo's Amended and Restated Non-Qualified Stock Option Plan. 4. EXPENSES. The Company shall pay or reimburse Employee, upon presentment of suitable vouchers, for all reasonable business and travel expenses which may be incurred or paid by Employee in connection with his employment hereunder. Employee shall comply -2-

with restrictions and shall keep records in compliance with the Company's policy and procedure related to travel and entertainment expenses. 5. INSURANCE AND OTHER BENEFITS. (a) Employee shall be entitled to such vacations and to participate in and receive any other health and welfare (including insurance) benefits customarily provided by the Company for its employees generally, all as determined from time to time by the Board of Directors of the Company or Zygo or appropriate committee thereof; provided that the health and welfare benefits in the aggregate, provided to Employee, are at least substantially comparable to the benefits provided by the Company to Employee prior to the date hereof, all of which benefits Employee represents are set forth in Schedule 5(a) attached hereto. The Company currently intends to initially afford Employee the same health and welfare benefits as are set forth in said Schedule 5(a); i.e., those benefits provided by the Company to Employee prior to the date hereof. Unused annual vacations may be carried over to the extent permitted by Company policy.

with restrictions and shall keep records in compliance with the Company's policy and procedure related to travel and entertainment expenses. 5. INSURANCE AND OTHER BENEFITS. (a) Employee shall be entitled to such vacations and to participate in and receive any other health and welfare (including insurance) benefits customarily provided by the Company for its employees generally, all as determined from time to time by the Board of Directors of the Company or Zygo or appropriate committee thereof; provided that the health and welfare benefits in the aggregate, provided to Employee, are at least substantially comparable to the benefits provided by the Company to Employee prior to the date hereof, all of which benefits Employee represents are set forth in Schedule 5(a) attached hereto. The Company currently intends to initially afford Employee the same health and welfare benefits as are set forth in said Schedule 5(a); i.e., those benefits provided by the Company to Employee prior to the date hereof. Unused annual vacations may be carried over to the extent permitted by Company policy. (b) Employee acknowledges and agrees that notwithstanding anything to the contrary contained in any health or welfare benefit plan maintained by Zygo, except as may be otherwise agreed to by Employee and Zygo, Employee shall not be entitled to participate in any of Zygo's employee benefit plans by virtue of his being employed by the Company or by Zygo (if and when applicable). 6. DUTIES. (a) Employee shall perform such duties and functions as the President, Chief Executive Officer or Chief Operating Officer of Zygo and the Board of Directors of the Company or Zygo shall from time to time determine and Employee shall comply in the performance of his duties with the policies of, and be subject to, the direction of such officers and such Boards of Directors. (b) Employee agrees to devote his entire working time, attention and energies to the performance of the business of the Company and of any of its subsidiaries or affiliates by which he may be employed; and Employee shall not, directly or indirectly, alone or as a member of any partnership or other organization, or as an officer, director or employee of any other corporation, partnership or other organization, be actively engaged in or concerned with any other duties or pursuits which interfere with the performance of his duties hereunder, or which, even if noninterfering, may be inimical, or contrary, to the best interests of the Company, except those duties or pursuits specifically authorized by the Board of Directors of the Company or Zygo. -3-

7. TERMINATION OF EMPLOYMENT; EFFECT OF TERMINATION. (a) Employee's employment hereunder may be terminated at any time upon written notice from the Company to Employee, (i) upon the determination by the President, Chief Executive Officer or Chief Operating Officer of Zygo or the Board of Directors of the Company or Zygo that Employee's performance of his duties has not been fully satisfactory for any reason which would not constitute justifiable cause (as hereinafter defined) upon five (5) days' prior written notice to Employee; or (ii) immediately upon determination by the Board of Directors of the Company or Zygo that justifiable cause exists for such termination. (b) Employee's employment shall terminate upon: (i) the death of the Employee; or (ii) the "disability" of Employee (as hereinafter defined pursuant to subsection (d) herein). (c) For the purposes of this Agreement, the term "disability" shall mean the inability of Employee, due to illness,

7. TERMINATION OF EMPLOYMENT; EFFECT OF TERMINATION. (a) Employee's employment hereunder may be terminated at any time upon written notice from the Company to Employee, (i) upon the determination by the President, Chief Executive Officer or Chief Operating Officer of Zygo or the Board of Directors of the Company or Zygo that Employee's performance of his duties has not been fully satisfactory for any reason which would not constitute justifiable cause (as hereinafter defined) upon five (5) days' prior written notice to Employee; or (ii) immediately upon determination by the Board of Directors of the Company or Zygo that justifiable cause exists for such termination. (b) Employee's employment shall terminate upon: (i) the death of the Employee; or (ii) the "disability" of Employee (as hereinafter defined pursuant to subsection (d) herein). (c) For the purposes of this Agreement, the term "disability" shall mean the inability of Employee, due to illness, accident or any other physical or mental incapacity, to perform his duties in a normal manner for a period of three (3) consecutive months or for a total of four (4) months (whether or not consecutive) in any twelve (12) month period during the term of this Agreement. (d) For the purposes hereof, the term "justifiable cause" shall mean and be limited to: any repeated failure or refusal by Employee to perform, or willful neglect by Employee of, any of his duties pursuant to this Agreement; Employee's conviction (which, through lapse of time or otherwise, is not subject to appeal) of any crime or offense involving money or other property of the Company, Zygo or any of their respective subsidiaries or affiliates or which constitutes a felony in the jurisdiction involved; Employee's performance of any act or his failure to act, for which if he were prosecuted and convicted, a crime or offense involving money or property of the Company, Zygo or any of their respective subsidiaries or affiliates, or which constitutes a felony in the jurisdiction involved, would have occurred; any disclosure by Employee to any person, firm or corporation other than the Company, Zygo, any of their respective subsidiaries or affiliates and its and their directors, officers and employees, of any confidential information or trade secret of the Company, Zygo or any of their respective subsidiaries or affiliates or any other breach by Employee of any of the provisions of Section 9, 10 or 11 hereof; any attempt by Employee to secure any personal profit in connection with the business of the Company, Zygo or any of their respective subsidiaries or affiliates; or the engaging by Employee in any business or activities other than the business of the Company, Zygo and their respective -4-

subsidiaries or affiliates which interferes with the performance of his duties hereunder. Upon termination of Employee's employment by the Company for justifiable cause, this Agreement shall terminate immediately and Employee shall not be entitled to any amounts or benefits hereunder other than such portion of Employee's annual salary and reimbursement of expenses pursuant to Section 4 hereof as has been accrued through the date of his termination of employment. (e) If Employee shall die during the term of his employment hereunder, this Agreement shall terminate immediately. In such event, the estate of Employee shall thereupon be entitled to receive such portion of Employee's annual salary and reimbursement of expenses pursuant to Section 4 hereof as has been accrued through the date of his death. (f) Upon Employee's "disability," the Company shall have the right to terminate Employee's employment. Notwithstanding any inability to perform his duties, Employee shall be entitled to receive his compensation as provided herein until the termination of his employment for disability. Any termination pursuant to this subsection (f) shall be effective on the date thirty (30) days after which Employee shall have received written notice of the Company's election to terminate. Notwithstanding anything to the contrary contained herein, during any period

subsidiaries or affiliates which interferes with the performance of his duties hereunder. Upon termination of Employee's employment by the Company for justifiable cause, this Agreement shall terminate immediately and Employee shall not be entitled to any amounts or benefits hereunder other than such portion of Employee's annual salary and reimbursement of expenses pursuant to Section 4 hereof as has been accrued through the date of his termination of employment. (e) If Employee shall die during the term of his employment hereunder, this Agreement shall terminate immediately. In such event, the estate of Employee shall thereupon be entitled to receive such portion of Employee's annual salary and reimbursement of expenses pursuant to Section 4 hereof as has been accrued through the date of his death. (f) Upon Employee's "disability," the Company shall have the right to terminate Employee's employment. Notwithstanding any inability to perform his duties, Employee shall be entitled to receive his compensation as provided herein until the termination of his employment for disability. Any termination pursuant to this subsection (f) shall be effective on the date thirty (30) days after which Employee shall have received written notice of the Company's election to terminate. Notwithstanding anything to the contrary contained herein, during any period that Employee fails to perform his duties hereunder as a result of his disability (but prior to receiving the notice of termination specified in this Section 7(f), (i) Employee shall continue to receive his full salary at the rate then in effect and all benefits provided in Section 5 hereof, provided that payments made to Employee pursuant to this Section 7(f) shall be reduced by the sum of the amounts, if any, payable to Employee at or prior to the time of any such payment under any disability benefit plan or program of, or provided by, the Company or Zygo, and (ii) the Company shall have the right to hire any other individual or individuals to perform such duties and functions as the Company shall desire, including those duties heretofore performed by Employee. (g) Notwithstanding any provision to the contrary contained herein, in the event that Employee's employment is terminated by the Company at any time for any reason other than justifiable cause, disability or death, the parties hereto agree that damages to Employee shall be difficult to ascertain in any such event, but in order to limit the liability of the Company and Zygo in any such event, Employee shall be entitled to receive as liquidated damages and not as a penalty, and the Company shall pay to Employee, Employee's salary (payable in such amount and in such manner as set forth in Section 3 herein) from and after the date of such termination for a period ending six (6) months after the date of termination which amount shall be in lieu of any and all other payments due and owing to Employee under the terms of this Agreement or otherwise. 8. REPRESENTATIONS AND AGREEMENTS OF EMPLOYEE. (a) Employee represents and warrants that he is free to enter into this Agreement and to perform the duties required hereunder, and that there are no -5-

employment contracts or understandings, restrictive covenants or other restrictions, whether written or oral, preventing the performance of his duties hereunder, except for the existing employment agreement between Employee and the Company, which existing agreement is superseded in its entirety by this Agreement. Employee further represents and warrants that he is in full compliance with all existing agreements between himself and the Company or Zygo. (b) Employee agrees to submit to a medical examination and to cooperate and supply such other information and documents as may be required by any insurance company in connection with the Employees' inclusion in any insurance or fringe benefit plan or program as the Company shall determine from time to time to obtain, or in connection with, in the Company's sole discretion, the Company's or Zygo's obtaining life insurance for its benefit on the life of Employee. 9. NON-COMPETITION. (a) Employee agrees that during his employment by the Company (which shall be deemed to include the period in which Employee is receiving any severance payments set forth in Section 7(g) hereto) and for a period of three (3) years after the later to occur of the termination or expiration of Employee's employment with the Company

employment contracts or understandings, restrictive covenants or other restrictions, whether written or oral, preventing the performance of his duties hereunder, except for the existing employment agreement between Employee and the Company, which existing agreement is superseded in its entirety by this Agreement. Employee further represents and warrants that he is in full compliance with all existing agreements between himself and the Company or Zygo. (b) Employee agrees to submit to a medical examination and to cooperate and supply such other information and documents as may be required by any insurance company in connection with the Employees' inclusion in any insurance or fringe benefit plan or program as the Company shall determine from time to time to obtain, or in connection with, in the Company's sole discretion, the Company's or Zygo's obtaining life insurance for its benefit on the life of Employee. 9. NON-COMPETITION. (a) Employee agrees that during his employment by the Company (which shall be deemed to include the period in which Employee is receiving any severance payments set forth in Section 7(g) hereto) and for a period of three (3) years after the later to occur of the termination or expiration of Employee's employment with the Company (or Zygo as the case may be) (the "Non-Competitive Period"), Employee shall not, directly or indirectly, as owner, partner, joint venturer, stockholder, employee, broker, agent, principal, trustee, corporate officer, director, licensor, or in any capacity whatsoever engage in, become financially interested in, be employed by, render any consultation or business advice with respect to, or have any connection with, any business engaged in the research, development, testing, design, manufacture, sale, lease, marketing, utilization or exploitation of any products or services which are designed for the same purpose as, are similar to, or are otherwise competitive with, products or services of the Company, Zygo or any of their respective subsidiaries or affiliates which are being sold or provided or proposed to be provided at the time of termination or expiration of Employee's employment, in any geographic area where, at the time of the termination or expiration of his employment hereunder, the business of the Company, Zygo or any of their respective subsidiaries or affiliates was being conducted or was proposed to be conducted in any manner whatsoever; provided, however, that Employee may own any securities of any corporation which is engaged in such business and is publicly owned and traded but in an amount not to exceed at any one time one percent (1%) of any class of stock or securities of such corporation. In addition, Employee shall not, directly or indirectly, during the Non-Competitive Period, request or cause contracting parties, suppliers or customers with whom the Company, Zygo or any of their respective subsidiaries or affiliates has a business relationship to cancel or terminate any such business relationship with the Company, Zygo or any of their respective subsidiaries or affiliates or solicit, interfere with or entice from the Company, Zygo or any of their respective subsidiaries or affiliates any employee (or former employee) of the Company, Zygo or any of their respective subsidiaries or affiliates. In addition, the Company and Employee hereby agree, acknowledging such agreement to be in their respective best interests, that, at the option of the Company, Employee shall -6-

enter into a consulting agreement following the termination or expiration of his employment with the Company (or Zygo, as the case may be), pursuant to which Employee will devote an equivalent of 33% of his full-time employment hours, at a time and place to be mutually agreed upon by Employee and the Company, to performing consulting services for the Company for a period of up to three (3) years, in consideration for which the Company will pay to Employee 33% of Employee's salary (at the rate then in effect); provided, however, that the foregoing requirement to provide consulting services shall in no way interfere with Employee's ability to accept and perform any employment or services, on a full- or part-time basis, which are not competitive with the business of the Company, Zygo or any of their respective subsidiaries or affiliates as set forth in the first sentence of this Section 9(a). Notwithstanding the foregoing, in the event Employee's employment hereunder is terminated by the Company for justifiable cause pursuant to Section 7(a), the Non-Competitive Period shall continue through the expiration of the scheduled term of this Agreement as provided in Section 2 hereof and for a period of two (2) years thereafter. (b) If any portion of the restrictions set forth in this Section 9 should, for any reason whatsoever, be declared invalid by a court of competent jurisdiction, the validity or enforceability of the remainder of such restrictions shall not thereby be adversely affected.

enter into a consulting agreement following the termination or expiration of his employment with the Company (or Zygo, as the case may be), pursuant to which Employee will devote an equivalent of 33% of his full-time employment hours, at a time and place to be mutually agreed upon by Employee and the Company, to performing consulting services for the Company for a period of up to three (3) years, in consideration for which the Company will pay to Employee 33% of Employee's salary (at the rate then in effect); provided, however, that the foregoing requirement to provide consulting services shall in no way interfere with Employee's ability to accept and perform any employment or services, on a full- or part-time basis, which are not competitive with the business of the Company, Zygo or any of their respective subsidiaries or affiliates as set forth in the first sentence of this Section 9(a). Notwithstanding the foregoing, in the event Employee's employment hereunder is terminated by the Company for justifiable cause pursuant to Section 7(a), the Non-Competitive Period shall continue through the expiration of the scheduled term of this Agreement as provided in Section 2 hereof and for a period of two (2) years thereafter. (b) If any portion of the restrictions set forth in this Section 9 should, for any reason whatsoever, be declared invalid by a court of competent jurisdiction, the validity or enforceability of the remainder of such restrictions shall not thereby be adversely affected. (c) Employee acknowledges that the Company and/or Zygo conducts business on a world-wide basis, that its sales and marketing prospects are for continued expansion into world markets and that, therefore, the territorial and time limitations set forth in this Section 9 are reasonable and properly required for the adequate protection of the business of the Company, Zygo and their respective subsidiaries. In the event any such territorial or time limitation is deemed to be unreasonable by a court of competent jurisdiction, Employee agrees to the reduction of the territorial or time limitation to the area or period which such court deems reasonable. (d) The existence of any claim or cause of action by Employee against the Company, Zygo or any of their respective subsidiaries or affiliates shall not constitute a defense to the enforcement by the Company, Zygo or any such subsidiary or affiliate of the foregoing restrictive covenants, but such claim or cause of action shall be litigated separately. 10. INVENTIONS AND DISCOVERIES. (a) Employee shall promptly and fully disclose to Zygo, and with all necessary detail for a complete understanding of the same, all developments, know-how, discoveries, inventions, improvements, concepts, ideas, writings, formulae, processes and methods (whether copyrightable, patentable or otherwise) made, received, conceived, acquired or written during working hours, or otherwise, by Employee (whether or not at the request or upon the suggestion of Zygo) during the period of his employment with the Company, Zygo or any of their respective subsidiaries or affiliates, solely or jointly with others, in all instances in or relating to any activities of the Company, Zygo -7-

or their respective subsidiaries or affiliates known to him as a consequence of his employment hereunder (collectively the "Subject Matter"). (b) Employee hereby assigns and transfers, and agrees to assign and transfer, to Zygo, all his rights, title and interest in and to the Subject Matter, and Employee further agrees to deliver to Zygo any and all drawings, notes, specifications and data relating to the Subject Matter, and to execute, acknowledge and deliver all such further papers, including applications for copyrights or patents, as may be necessary to obtain copyrights and patents for any thereof in any and all countries and to vest title thereto to Zygo. Employee shall assist Zygo in obtaining such copyrights or patents during the term of this Agreement, and any time thereafter on reasonable notice, and Employee agrees to testify in any prosecution or litigation involving any of the Subject Matter (provided that if such testimony occurs after termination of this Agreement, Employee shall be reasonably compensated for his time and reimbursed for any out-of-pocket expense). 11. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. (a) Employee shall not, during the term of this Agreement or at any time following termination or expiration of this

or their respective subsidiaries or affiliates known to him as a consequence of his employment hereunder (collectively the "Subject Matter"). (b) Employee hereby assigns and transfers, and agrees to assign and transfer, to Zygo, all his rights, title and interest in and to the Subject Matter, and Employee further agrees to deliver to Zygo any and all drawings, notes, specifications and data relating to the Subject Matter, and to execute, acknowledge and deliver all such further papers, including applications for copyrights or patents, as may be necessary to obtain copyrights and patents for any thereof in any and all countries and to vest title thereto to Zygo. Employee shall assist Zygo in obtaining such copyrights or patents during the term of this Agreement, and any time thereafter on reasonable notice, and Employee agrees to testify in any prosecution or litigation involving any of the Subject Matter (provided that if such testimony occurs after termination of this Agreement, Employee shall be reasonably compensated for his time and reimbursed for any out-of-pocket expense). 11. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. (a) Employee shall not, during the term of this Agreement or at any time following termination or expiration of this Agreement, directly or indirectly, disclose or permit to be known (other than as is required in the regular course of his duties or required by law (in which case Employee shall give Zygo prior written notice of such required disclosure) or with the prior written consent of the President of Zygo), to any person, firm or corporation, any confidential information acquired by Employee during the course of, or as an incident to, his employment hereunder, relating to the Company, Zygo or any of their respective subsidiaries or affiliates, the directors of the Company, Zygo or any of their respective subsidiaries or affiliates, any client of the Company, Zygo or any of their respective subsidiaries or affiliates, or any corporation, partnership or other entity owned or controlled, directly or indirectly, by any of the foregoing, or in which any of the foregoing has a beneficial interest, including, but not limited to, the business affairs of each of the foregoing. Such confidential information shall include, but shall not be limited to, proprietary technology, trade secrets, patented processes, research and development data, know-how, market studies and forecasts, competitive analyses, pricing policies, employee lists, personnel policies, the substance of agreements with customers, suppliers and others, marketing or dealership arrangements, servicing and training programs and arrangements, customer lists and any other documents embodying such confidential information. This confidentiality obligation shall not apply to any confidential information which thereafter becomes publicly available other than pursuant to a breach of this Section 11(a), directly or indirectly, by Employee. (b) All information and documents relating to the Company, Zygo and their respective subsidiaries or affiliates as hereinabove described (or other business affairs) shall be the exclusive property of the Company or Zygo, as the case may be, and Employee shall use commercially reasonable best efforts to prevent any publication or disclosure thereof. Upon termination of Employee's employment with the Company, -8-

all documents, records, reports, writings and other similar documents containing confidential information, including copies thereof, then in Employee's possession or control shall be returned and left with the Company. (c) Employee will execute the form of "Sight Systems, Inc. Non-Disclosure and Non-Solicitation Agreement" in the form of Exhibit A hereto, all the terms and provisions of which are incorporated herein as if fully set forth herein. 12. RIGHT TO INJUNCTION. Employee recognizes that the services to be rendered by him hereunder are of a special, unique, unusual, extraordinary and intellectual character involving skill of the highest order and giving them peculiar value the loss of which cannot be adequately compensated for in damages. In the event of a breach of this Agreement by Employee, the Company shall be entitled to injunctive relief or any other legal or equitable remedies. Employee agrees that the Company may recover by appropriate action the amount of the actual damage caused the Company by any failure, refusal or neglect of Employee to perform his agreements, representations and warranties herein contained. The remedies provided in this Agreement shall be deemed cumulative and the exercise of one shall not preclude the exercise of any other remedy at law or in equity for the same event or any

all documents, records, reports, writings and other similar documents containing confidential information, including copies thereof, then in Employee's possession or control shall be returned and left with the Company. (c) Employee will execute the form of "Sight Systems, Inc. Non-Disclosure and Non-Solicitation Agreement" in the form of Exhibit A hereto, all the terms and provisions of which are incorporated herein as if fully set forth herein. 12. RIGHT TO INJUNCTION. Employee recognizes that the services to be rendered by him hereunder are of a special, unique, unusual, extraordinary and intellectual character involving skill of the highest order and giving them peculiar value the loss of which cannot be adequately compensated for in damages. In the event of a breach of this Agreement by Employee, the Company shall be entitled to injunctive relief or any other legal or equitable remedies. Employee agrees that the Company may recover by appropriate action the amount of the actual damage caused the Company by any failure, refusal or neglect of Employee to perform his agreements, representations and warranties herein contained. The remedies provided in this Agreement shall be deemed cumulative and the exercise of one shall not preclude the exercise of any other remedy at law or in equity for the same event or any other event. 13. AMENDMENT OR ALTERATION. No amendment or alteration of the terms of this Agreement shall be valid unless made in writing and signed by both of the parties hereto. 14. GOVERNING LAW. This Agreement shall be governed by the laws of the State of California, applicable to agreements made and to be performed therein. 15. CONSENT TO JURISDICTION. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the courts of the State of Connecticut, including the jurisdiction of the United States District Courts therein, and agrees not to assert by way of motion, as a defense or otherwise, in any such suit, action or proceeding, any claim that he or it is not subject to the jurisdiction of the above-named courts, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement may not be enforced in or by such courts. Employee agrees that all actions and proceedings to be instituted hereunder by Employee or his successors or assigns arising out of or related to this Agreement or the transactions contemplated hereby shall be commenced only in the courts having a situs in Connecticut. -9-

16. SEVERABILITY. The holding of any provision of this Agreement to be invalid or unenforceable by a court of competent jurisdiction shall not affect any other provision of this Agreement, which shall remain in full force and effect. 17. NOTICES. Any notices required or permitted to be given hereunder shall be sufficient if in writing, and if delivered by hand, or sent by certified mail, return receipt requested, to the addresses set forth above or such other address as either party may from time to time designate in writing to the other, and shall be deemed given as of the date of the delivery or mailing. 18. WAIVER OR BREACH. It is agreed that a waiver by either party of a breach of any provision of this Agreement shall not operate, or be

16. SEVERABILITY. The holding of any provision of this Agreement to be invalid or unenforceable by a court of competent jurisdiction shall not affect any other provision of this Agreement, which shall remain in full force and effect. 17. NOTICES. Any notices required or permitted to be given hereunder shall be sufficient if in writing, and if delivered by hand, or sent by certified mail, return receipt requested, to the addresses set forth above or such other address as either party may from time to time designate in writing to the other, and shall be deemed given as of the date of the delivery or mailing. 18. WAIVER OR BREACH. It is agreed that a waiver by either party of a breach of any provision of this Agreement shall not operate, or be construed, as a waiver of any subsequent breach by that same party. 19. ENTIRE AGREEMENT AND BINDING EFFECT. This Agreement, together with the Acquisition Agreement and all agreements and exhibits referred to herein and therein, contains the entire agreement of the parties with respect to the subject matter hereof and shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, heirs, distributors, successors and assigns. Notwithstanding the foregoing, all prior agreements between Employee and the Company relating to the confidentiality of information, trade secrets and patents shall not be affected by this Agreement. 20. SURVIVAL. The termination of Employee's employment hereunder shall not affect the enforceability of Sections 7, 8(a), 9, 10, 11, 12, 14 and 15 hereof. 21. NON-ASSIGNABILITY. This Agreement is entered into in consideration of the personal qualities of Employee and may not be, nor may any right or interest hereunder be, assigned by him without the prior written consent of the Company. It is expressly understood and agreed that this Agreement, and the rights accruing and obligations owed to the Company hereunder, and the obligations to be performed by the Company hereunder, may be assigned by the Company at any time without the consent of Employee to Zygo or any of the Company's successors or assigns. In the event that this Agreement is assigned by the Company to Zygo pursuant to this Section 21, all references in this -10-

Agreement to "Company" shall refer to Zygo except that the references thereto contained in Section 5(a) hereof shall refer to SSI, a business unit of Zygo. 22. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 23. FURTHER ASSURANCES. The parties agree to execute and deliver all such further documents, agreements and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent of this Agreement.

Agreement to "Company" shall refer to Zygo except that the references thereto contained in Section 5(a) hereof shall refer to SSI, a business unit of Zygo. 22. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 23. FURTHER ASSURANCES. The parties agree to execute and deliver all such further documents, agreements and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent of this Agreement. 24. HEADINGS. The Section headings appearing in this Agreement are for the purposes of easy reference and shall not be considered a part of this Agreement or in any way modify, demand or affect its provisions. -11-

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. SIGHT SYSTEMS, INC.
By: /s/ GARY K. WILLIS -----------------------------------Name: Gary K. Willis Title: Chairman of Board

/s/ DAVID GRANT -----------------------------------David Grant

AGREED TO: ZYGO CORPORATION
By: /s/ GARY K. WILLIS -----------------------------------Name: Gary K. Willis Title: President

-12-

EXHIBIT A SIGHT SYSTEMS, INC. NON-DISCLOSURE AND NON-SOLICITATION AGREEMENT AGREEMENT, dated as of August 19, 1997, by and between SIGHT SYSTEMS, INC., a California corporation (the "Company"), and David Grant (the "Employee") W I T N E S S E T H:

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. SIGHT SYSTEMS, INC.
By: /s/ GARY K. WILLIS -----------------------------------Name: Gary K. Willis Title: Chairman of Board

/s/ DAVID GRANT -----------------------------------David Grant

AGREED TO: ZYGO CORPORATION
By: /s/ GARY K. WILLIS -----------------------------------Name: Gary K. Willis Title: President

-12-

EXHIBIT A SIGHT SYSTEMS, INC. NON-DISCLOSURE AND NON-SOLICITATION AGREEMENT AGREEMENT, dated as of August 19, 1997, by and between SIGHT SYSTEMS, INC., a California corporation (the "Company"), and David Grant (the "Employee") W I T N E S S E T H: In consideration of the Company's employment of the Employee and in consideration of the covenants contained herein, the parties hereby agree as follows: 1. The Employee agrees that he will not directly or indirectly disclose or use at any time any knowledge, information or material relating to any, business, customer, machine, design, apparatus or system of the Company, Zygo Corporation, a Delaware corporation and the owner of all the outstanding capital stock of the Company ("Zygo"), or any of their respective subsidiaries or affiliates, or any of the methods of conducting any part of their respective business or the like which may become known to the Employee by reason of his employment or otherwise except as may be reasonably necessary to the performance of his assigned duties as an employee of the Company. 2. The Employee agrees to promptly and completely disclose in writing to such person as the Company may designate all ideas, developments, inventions and improvements heretofore or hereafter made, developed, perfected, devised, conceived or acquired by the Employee either solely or jointly with others during the Employee's employment by the Company and within ninety (90) days after any termination thereof, whether or not during regular working hours, relating in any way to the actual or anticipated business, research, developments or products of the Company; and if so requested by the Company, to assign, transfer and convey to the Company all right, title and interest in and to all such ideas, developments, inventions and improvements. 3. The Employee agrees, at the request and expense of the Company, to make, execute and deliver any and all papers, documents and instruments, including applications for patents in any and all countries and reissues and

EXHIBIT A SIGHT SYSTEMS, INC. NON-DISCLOSURE AND NON-SOLICITATION AGREEMENT AGREEMENT, dated as of August 19, 1997, by and between SIGHT SYSTEMS, INC., a California corporation (the "Company"), and David Grant (the "Employee") W I T N E S S E T H: In consideration of the Company's employment of the Employee and in consideration of the covenants contained herein, the parties hereby agree as follows: 1. The Employee agrees that he will not directly or indirectly disclose or use at any time any knowledge, information or material relating to any, business, customer, machine, design, apparatus or system of the Company, Zygo Corporation, a Delaware corporation and the owner of all the outstanding capital stock of the Company ("Zygo"), or any of their respective subsidiaries or affiliates, or any of the methods of conducting any part of their respective business or the like which may become known to the Employee by reason of his employment or otherwise except as may be reasonably necessary to the performance of his assigned duties as an employee of the Company. 2. The Employee agrees to promptly and completely disclose in writing to such person as the Company may designate all ideas, developments, inventions and improvements heretofore or hereafter made, developed, perfected, devised, conceived or acquired by the Employee either solely or jointly with others during the Employee's employment by the Company and within ninety (90) days after any termination thereof, whether or not during regular working hours, relating in any way to the actual or anticipated business, research, developments or products of the Company; and if so requested by the Company, to assign, transfer and convey to the Company all right, title and interest in and to all such ideas, developments, inventions and improvements. 3. The Employee agrees, at the request and expense of the Company, to make, execute and deliver any and all papers, documents and instruments, including applications for patents in any and all countries and reissues and extensions thereof, and to assist and cooperate (without expense to the Employee) with the Company or its representative in any controversy or legal proceedings relating to said ideas, developments, inventions and improvements, and the patents which may be procured thereon.

4. The Company does not assume any responsibility for the prosecution or defense of any application for patents in any countries arising from ideas, developments, inventions and improvements disclosed to the Company pursuant to this Agreement. 5. The Employee represents and warrants that he/she is free to enter into the employment arrangements and, if applicable, the employment agreement, to be entered into with the Company and to perform the duties required of the Employee in connection with his/her employment by the Company; and that, except as indicated on Exhibit 1 hereto, there are no employment agreements, confidentiality agreements, restrictive covenants or other agreements or restrictions binding on the Employee or to which the Employee is a party which limit, prohibit or prevent the full performance by the Employee of his/her employment duties and arrangements with the Company or which would preclude the Employee from disclosing or otherwise limit the Employee's right to disclose to the Company any ideas, inventions, discoveries or other information. 6. The Employee represents and warrants that he/she has not brought and agrees that he/she will not bring to the Company or use in the performance of his/her employment responsibilities at the Company any materials, documents, trade secrets or confidential information of a former employer or any other person which are of a confidential nature or which are not generally available to the public. The Employee agrees that he/she has not and will not disclose to the Company or seek to induce the Company to use any such confidential information, materials, documents or trade secrets. 7. The Employee agrees that during his/her employment by the Company and following the termination of such

4. The Company does not assume any responsibility for the prosecution or defense of any application for patents in any countries arising from ideas, developments, inventions and improvements disclosed to the Company pursuant to this Agreement. 5. The Employee represents and warrants that he/she is free to enter into the employment arrangements and, if applicable, the employment agreement, to be entered into with the Company and to perform the duties required of the Employee in connection with his/her employment by the Company; and that, except as indicated on Exhibit 1 hereto, there are no employment agreements, confidentiality agreements, restrictive covenants or other agreements or restrictions binding on the Employee or to which the Employee is a party which limit, prohibit or prevent the full performance by the Employee of his/her employment duties and arrangements with the Company or which would preclude the Employee from disclosing or otherwise limit the Employee's right to disclose to the Company any ideas, inventions, discoveries or other information. 6. The Employee represents and warrants that he/she has not brought and agrees that he/she will not bring to the Company or use in the performance of his/her employment responsibilities at the Company any materials, documents, trade secrets or confidential information of a former employer or any other person which are of a confidential nature or which are not generally available to the public. The Employee agrees that he/she has not and will not disclose to the Company or seek to induce the Company to use any such confidential information, materials, documents or trade secrets. 7. The Employee agrees that during his/her employment by the Company and following the termination of such employment, the Employee will not, directly or indirectly, request or cause any suppliers or customers with whom the Company, Zygo or any of their respective subsidiaries or affiliates has a business relationship to cancel or terminate any such business relationship with the Company, Zygo or any of their respective subsidiaries or affiliates or solicit, interfere with or entice from the Company or Zygo any employee or former employee of the Company or Zygo. 8. Neither this Agreement nor any benefits hereunder are assignable by the Employee, but the terms and provisions hereof shall inure to the benefit of the Company's successors and assigns. 9. This Agreement is not a contract of employment; it does not give the Employee any rights to any employment with the Company, and it in no way abridges, alters, amends or modifies any rights the Company may otherwise have to terminate its employment of the Employee. -2-

10. This Agreement, together with the Employment Agreement, dated August 19, 1997, by and between the Employee and the Company and the Stock Purchase Agreement, dated as of August 19, 1997, by and among the Company, Zygo and the shareholders of the Company and all agreements and exhibits referred to therein, contains the entire understanding and agreement of the parties with respect to the matters herein contained, and no waiver or modification hereof shall be binding unless in writing and subscribed by the parties hereto. 11. If any paragraph, clause, or phrase of this Agreement shall, by any federal, state or other law or by any decision of any court, be declared or held illegal, void or unenforceable, the remaining portions of this Agreement shall continue to be valid and in full force and effect. -3-

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. SIGHT SYSTEMS, INC.
By: /s/ GARY K. WILLIS -----------------------------------Name: Gary K. Willis

10. This Agreement, together with the Employment Agreement, dated August 19, 1997, by and between the Employee and the Company and the Stock Purchase Agreement, dated as of August 19, 1997, by and among the Company, Zygo and the shareholders of the Company and all agreements and exhibits referred to therein, contains the entire understanding and agreement of the parties with respect to the matters herein contained, and no waiver or modification hereof shall be binding unless in writing and subscribed by the parties hereto. 11. If any paragraph, clause, or phrase of this Agreement shall, by any federal, state or other law or by any decision of any court, be declared or held illegal, void or unenforceable, the remaining portions of this Agreement shall continue to be valid and in full force and effect. -3-

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. SIGHT SYSTEMS, INC.
By: /s/ GARY K. WILLIS -----------------------------------Name: Gary K. Willis Title: Chairman of Board

EMPLOYEE
/s/ DAVID GRANT -----------------------------------David Grant

AGREED TO: ZYGO CORPORATION
By: /s/ GARY K. WILLIS -----------------------------------Name: Gary K. Willis Title: President

ZYGO [Logo] Zygo Corporation 1997 Annual Report MAKING PRECISION EVEN MORE PRECISE. [Photo]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. SIGHT SYSTEMS, INC.
By: /s/ GARY K. WILLIS -----------------------------------Name: Gary K. Willis Title: Chairman of Board

EMPLOYEE
/s/ DAVID GRANT -----------------------------------David Grant

AGREED TO: ZYGO CORPORATION
By: /s/ GARY K. WILLIS -----------------------------------Name: Gary K. Willis Title: President

ZYGO [Logo] Zygo Corporation 1997 Annual Report MAKING PRECISION EVEN MORE PRECISE. [Photo]

CONSOLIDATED FINANCIAL HIGHLIGHTS (Thousands, except per share amounts) Fiscal Year Ended June 30, --------------------------------1997 1996(1) 1995 ------------------$87,220 $57,374 $32,233 $13,960 $ 7,799 $ 2,749 $ 1.16 $ 2,877 $ 0.24 11,998 $ 0.72 $ 7,799 $ 0.72 10,878 $ 0.32 $ 2,749 $ 0.32 8,484 Perc -------1996 to -------52% 79 61 (63) (67) 10

Net sales .............................................. Earnings before acquisition-related charges (2) ........ Net earnings per common and common equivalent share before acquisition-related charges (2)(3) ...... Net earnings ........................................... Net earnings per common and common equivalent share (3) ................................. Weighted average common shares and common dilutive equivalents outstanding (3) ..........

ZYGO [Logo] Zygo Corporation 1997 Annual Report MAKING PRECISION EVEN MORE PRECISE. [Photo]

CONSOLIDATED FINANCIAL HIGHLIGHTS (Thousands, except per share amounts) Fiscal Year Ended June 30, --------------------------------1997 1996(1) 1995 ------------------$87,220 $57,374 $32,233 $13,960 $ 7,799 $ 2,749 $ 1.16 $ 2,877 $ 0.24 11,998 $ 0.72 $ 7,799 $ 0.72 10,878 $ 0.32 $ 2,749 $ 0.32 8,484 Perc -------1996 to -------52% 79 61 (63) (67) 10 Per -------1996 to -------1% 15

Net sales .............................................. Earnings before acquisition-related charges (2) ........ Net earnings per common and common equivalent share before acquisition-related charges (2)(3) ...... Net earnings ........................................... Net earnings per common and common equivalent share (3) ................................. Weighted average common shares and common dilutive equivalents outstanding (3) ..........

Working capital ........................................ Stockholders' equity ...................................

June 30, --------------------------------1997 1996(1) 1995 ------------------$47,633 $47,148 $17,072 $62,408 $54,087 $22,333

---------(1) Restated to reflect the acquisition of NexStar Automation, Inc. as a pooling-of-interests. Periods p have not been restated due to immateriality. (2) (3) Excludes nonrecurring acquisition-related charges of $11,083,000 incurred in the first quarter of fi Restated to reflect a 2-for-1 stock split effected in the form of a 100% stock dividend declared on and paid on February 27, 1997 to stockholders of record on February 3, 1997.

[GRAPHICAL REPRESENTATION OF DATA OF BAR CHARTS BELOW] NET SALES (in thousands)
1993 1994 1995 1996 1997 ................................. ................................. ................................. ................................. ................................. $22,702 $24,141 $32,233 $57,374 $87,220

EARNINGS BEFORE INCOME TAXES Excluding Acquisition-Related Charges (in thousands)
1993 ................................. 1994 ................................. $ 698 $ 1,328

CONSOLIDATED FINANCIAL HIGHLIGHTS (Thousands, except per share amounts) Fiscal Year Ended June 30, --------------------------------1997 1996(1) 1995 ------------------$87,220 $57,374 $32,233 $13,960 $ 7,799 $ 2,749 $ 1.16 $ 2,877 $ 0.24 11,998 $ 0.72 $ 7,799 $ 0.72 10,878 $ 0.32 $ 2,749 $ 0.32 8,484 Perc -------1996 to -------52% 79 61 (63) (67) 10 Per -------1996 to -------1% 15

Net sales .............................................. Earnings before acquisition-related charges (2) ........ Net earnings per common and common equivalent share before acquisition-related charges (2)(3) ...... Net earnings ........................................... Net earnings per common and common equivalent share (3) ................................. Weighted average common shares and common dilutive equivalents outstanding (3) ..........

Working capital ........................................ Stockholders' equity ...................................

June 30, --------------------------------1997 1996(1) 1995 ------------------$47,633 $47,148 $17,072 $62,408 $54,087 $22,333

---------(1) Restated to reflect the acquisition of NexStar Automation, Inc. as a pooling-of-interests. Periods p have not been restated due to immateriality. (2) (3) Excludes nonrecurring acquisition-related charges of $11,083,000 incurred in the first quarter of fi Restated to reflect a 2-for-1 stock split effected in the form of a 100% stock dividend declared on and paid on February 27, 1997 to stockholders of record on February 3, 1997.

[GRAPHICAL REPRESENTATION OF DATA OF BAR CHARTS BELOW] NET SALES (in thousands)
1993 1994 1995 1996 1997 ................................. ................................. ................................. ................................. ................................. $22,702 $24,141 $32,233 $57,374 $87,220

EARNINGS BEFORE INCOME TAXES Excluding Acquisition-Related Charges (in thousands)
1993 1994 1995 1996 1997 ................................. ................................. ................................. ................................. ................................. $ 698 $ 1,328 $ 3,956 $11,558 $21,121

NUMBER OF EMPLOYEES (Year End)
1993 1994 1995 1996 1997 ................................. ................................. ................................. ................................. ................................. 193 179 210 287 399

SALES PER EMPLOYEE
1993 ................................. 1994 ................................. $113,000 $132,000

1994 1995 1996 1997

................................. ................................. ................................. .................................

$132,000 $173,000 $224,000 $231,000

CORPORATE PROFILE Zygo Corporation is a customer-focused technology leader well known for developing yield-enhancement solutions for precision manufacturing industries. Zygo solutions employ process measuring instruments, automation technology, and precision components to benefit a wide variety of industries, including: semiconductor capital equipment and components, data storage, automotive, optical, and R&D. Some key applications for Zygo solutions include: semiconductor mask defect analysis, characterization of disks and heads used in hard disk drives, ultra-precise measurement of semiconductor stepper stage position, fabrication of optical components for laser fusion research, and automation for disk drive manufacturing processes. Founded in 1970, Zygo is a publicly-owned company with shares traded on the NASDAQ exchange. The Company is headquartered in a 100,000-square-foot (growing to 135,000) facility in Middlefield, Connecticut, with manufacturing, regional sales, service, and technology centers in Connecticut, California, and Colorado, and distributors/agents worldwide providing local customer support. On the cover is a portion of a 3D measurement plot of the surface curvature of an in-process hard disk platter, as measured and analyzed by Zygo instruments and software. The shape of the disk's surface is one of the critical elements manufacturers must control in order to make higher-density drives. 1 TO OUR SHAREOWNERS Your company concluded fiscal 1997 by posting record performance for the third consecutive year. These results also mark the fifth year in a row of improved year over year performance. Net sales of $87 million for fiscal 1997 were up some 52% as compared to fiscal 1996 net sales of $57 million. As was the case in fiscal 1996 and 1995, operating profits, pretax profits, and net earnings per share in fiscal 1997, excluding nonrecurring acquisition-related charges, not only increased over the previous year's level, but attained historical highs for your company. Net earnings in fiscal 1997 of $1.16 per share, excluding one-time acquisition-related charges, increased 61% over the $.72 per share recorded in fiscal 1996. Continued high productivity within our operations and increased revenues in all sectors of our business - systems, components, accessories, and services - drove this strong earnings performance. The demand for our products, systems, and services continued strong throughout fiscal 1997 and not only fueled the significant revenue increases, but also resulted in the establishment of a year-end record backlog of nearly $39 million, up some 77% versus the $22 million backlog at the end of fiscal 1996. As well as posting outstanding operations performance in fiscal 1997, your company also made progress in a number of other significant areas resulting in a strengthened ability to serve our customers and provide increased value to our loyal shareowners. Included in these activities are a 2-for-1 stock split in the third quarter of our fiscal year, the successful integration of our subsidiary companies, Technical Instrument Company and NexStar Automation, Inc., receipt of two prestigious awards for our newly commercialized ZMI 2000 product line, selection by Lawrence Livermore National Laboratory as a primary optics supplier for the National Ignition Facility, receipt of ISO 9001 certification at our Middlefield operations, and as we began fiscal 1998, the announcement of the addition of two new members to our corporate family, Sight Systems, Inc. and Digital Instruments Inc. Let's address each of these areas individually.

[PHOTO] OF GARY K. WILLIS

1 TO OUR SHAREOWNERS Your company concluded fiscal 1997 by posting record performance for the third consecutive year. These results also mark the fifth year in a row of improved year over year performance. Net sales of $87 million for fiscal 1997 were up some 52% as compared to fiscal 1996 net sales of $57 million. As was the case in fiscal 1996 and 1995, operating profits, pretax profits, and net earnings per share in fiscal 1997, excluding nonrecurring acquisition-related charges, not only increased over the previous year's level, but attained historical highs for your company. Net earnings in fiscal 1997 of $1.16 per share, excluding one-time acquisition-related charges, increased 61% over the $.72 per share recorded in fiscal 1996. Continued high productivity within our operations and increased revenues in all sectors of our business - systems, components, accessories, and services - drove this strong earnings performance. The demand for our products, systems, and services continued strong throughout fiscal 1997 and not only fueled the significant revenue increases, but also resulted in the establishment of a year-end record backlog of nearly $39 million, up some 77% versus the $22 million backlog at the end of fiscal 1996. As well as posting outstanding operations performance in fiscal 1997, your company also made progress in a number of other significant areas resulting in a strengthened ability to serve our customers and provide increased value to our loyal shareowners. Included in these activities are a 2-for-1 stock split in the third quarter of our fiscal year, the successful integration of our subsidiary companies, Technical Instrument Company and NexStar Automation, Inc., receipt of two prestigious awards for our newly commercialized ZMI 2000 product line, selection by Lawrence Livermore National Laboratory as a primary optics supplier for the National Ignition Facility, receipt of ISO 9001 certification at our Middlefield operations, and as we began fiscal 1998, the announcement of the addition of two new members to our corporate family, Sight Systems, Inc. and Digital Instruments Inc. Let's address each of these areas individually.

[PHOTO] OF GARY K. WILLIS

STOCK SPLIT: In February of 1997, during the third quarter of our fiscal year, your board of directors had the pleasure of authorizing a 2-for-1 stock split effected in the form of a stock dividend paid on February 27, 1997 to shareowners of record on February 3, 1997. This stock split was our second in as many years, following a 3for-2 split effected on August 21, 1995, during the first quarter of fiscal 1996. The board's action to effect the split responded to the increasing demand for our company's securities and resulted in further increases to the practical float of the Company's shares and should further attract value-oriented institutional investors to your company. INTEGRATION OF ACQUISITIONS: During August and September of 1996, we completed the acquisitions of Technical Instrument Company and NexStar Automation, Inc., respectively. These acquisitions broadened our measurement capability with the addition of confocal microscopy technology and added parts handling and discreet component automation capabilities to our systems offering. Both of these complementary strengths furthered our ability to provide yield improvement solutions to our high technology industry customers. The enhanced value of these solutions became readily apparent to our customers and resulted in accelerated growth rates of our Middlefield, Connecticut, NexStar, and Technical Instrument operations. AWARD WINNING TECHNOLOGY: Once again, during fiscal 1997, your company was recognized for its innovative technology and the creative development of new products. We were honored to receive two most prestigious awards for the introduction of our ZMI 2000 motion measurement and precision positioning systems: the Photonics Circle of Excellence Award given by Photonics Spectra magazine to recognize "the 25 most innovative new products" and the R&D 100 Award selected by R&D magazine as "one of the 100 most significant new technical products of the year." This was the fourth

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2 Circle of Excellence Award and the eighth R&D 100 Award received by your company. We, of course, are honored to receive such recognition. NATIONAL IGNITION FACILITY CONTRACT: At the close of our fiscal year, we received the initial contracts for the creation of a world class optical components manufacturing facility from the Lawrence Livermore National Laboratory. This award selected Zygo as a primary optical components supplier for the National Ignition Facility to be built at Lawrence Livermore National Laboratory in California. The National Ignition Facility is being constructed for, and funded by, the United States Department of Energy for the peaceful pursuit of nuclear fusion technology. This contract will result in the creation of a world class optical manufacturing facility at Zygo Middlefield, Connecticut, headquarters and as the future funding of the program is approved by Congress, a continuing stream of revenue as the optics component production continues beyond the turn of the century. In winning this contract, Zygo has been once again recognized as the premier worldwide supplier of precision flat optical components. ISO 9001 CERTIFICATION: Our Middlefield operation was honored to receive ISO 9001 certification in March of 1997. This culminated a multiyear effort of all of the employees in Middlefield in our total quality management program. A major factor for our improved financial performance and enhanced ability to satisfy customers resulted from our quality teams' efforts identifying areas of our business requiring improvement and installing countermeasures to make such improvements. ISO certification is a valued recognition of the creation of high quality processes, procedures, and practices. ISO 9001 [LOGO] ADDITIONS TO THE CORPORATE FAMILY: As we began fiscal 1998, we had the pleasure of announcing two new additions to the corporate family: Sight Systems, Inc. and Digital Instruments, Inc. The acquisition of Sight Systems, Inc. was completed on August 19, 1997 and further strengthens our ability to provide yield improvement solutions to our customers by broadening our measurement capability through the addition of enhanced application-specific vision metrology systems. The letter of intent announcing our intent to acquire Digital Instruments, Inc. was signed on July 22, 1997 and this acquisition is expected to be completed through the approval of our shareowners before the end of calendar year 1997. Digital Instruments is the worldwide leader in the supplying of scanning probe microscopy and the addition of this technology strengthens our precision measurement capability. With these acquisitions, we have created the world's leading supplier of precision metrology and measurement equipment. Both of these acquisitions will enhance our ability to provide yield improvement solutions to the high technology market, and we look forward with enthusiasm to integrating them into our company during fiscal 1998. OUTLOOK: As we enter fiscal 1998, we are confident in our ability to continue to better serve our customers and further our performance track record. Our strong financial position, our operating productivity improvements, our strengthened competitive product position through new product introductions, and our enhanced ability to provide yield improvement solutions through the addition of our acquired companies, all will allow us to take advantage of the opportunities that present themselves during fiscal 1998. Although no one can predict with certainty the strength of the demand for our goods and services generated by the markets we serve, we are optimistic about the future potential of your company based on our strengthened market position. You, of course, can count on the best efforts of all of us to continue to drive your company forward. Once again, we thank you for your continued interest in, and support of, your company. Sincerely,
/s/ GARY K. WILLIS ----------------------------------------Gary K. Willis President and Chief Executive Officer

September 11, 1997

3 PRECISION IS AT THE HEART OF THE SOLUTION Growing out of the need to remain viable in today's fiercely-competitive business climate, manufacturers all over the world have been fighting a continuous battle to retain their existing customers and win over new ones. The successful ones have realized that the way to do this is simple in concept - give their customers what they want with a cost/performance value better than their competition's. Putting this concept into practice means that manufacturers must continually improve the quality and reliability of their products while simultaneously reducing production costs. In some situations, this means reducing the physical size of the product while increasing it's performance; in other situations, it means making existing products to much tighter specifications to improve performance and reliability. In both cases, it is precision that is at the heart of the solution - precision to produce miniaturized components that do many times the work of their bulky predecessors, and precision to produce components for everyday-use products that outperform, outlast, and represent a greater value than previous models. [PHOTO] Everyday-use products, like contact lenses, are manufactured in mass quantity with greater precision than ever before. Zygo precision helps manufacturers improve their processes to make better products at lower cost. Realizing that precision manufacturing holds the answer to maintaining a competitive edge, manufacturers are facing production challenges unlike any they had faced in the past. As new manufacturing techniques were developed to produce smaller components and improve the precision of existing ones, it quickly became clear that traditional batch sample testing and manual handling of components would no longer be sufficient. To meet the challenges of maintaining product quality, high throughput, and high production yields, new measurement technologies for evaluating the precision of in-process products, and new automation technologies for handling components without causing damage or contamination, would be essential. [PHOTO] Precision manufacturing, once reserved for hi-tech devices like computer hard disk drives and semiconductor chips, is growing rapidly in many other industries. Zygo precision helps a wide variety of manufacturers achieve their quality and production goals. [PHOTO] Zygo Corporation has been monitoring this growing trend in the manufacturing industry and has committed its considerable resources in precision measurement and automation technologies to develop solutions that help precision manufacturers attain their quality and production goals. The next few pages highlight some key industries that have made astounding progress in pushing the envelope of product quality and production yields, and have done so with the help of Zygo's solutions. [PHOTO] Highly-sophisticated electronic circuits, printed on miniature semiconductor chips, make possible extremely compact electronic devices like cellular telephones. Zygo precision helps the semiconductor industry pack more and more circuitry onto microchips.

4

3 PRECISION IS AT THE HEART OF THE SOLUTION Growing out of the need to remain viable in today's fiercely-competitive business climate, manufacturers all over the world have been fighting a continuous battle to retain their existing customers and win over new ones. The successful ones have realized that the way to do this is simple in concept - give their customers what they want with a cost/performance value better than their competition's. Putting this concept into practice means that manufacturers must continually improve the quality and reliability of their products while simultaneously reducing production costs. In some situations, this means reducing the physical size of the product while increasing it's performance; in other situations, it means making existing products to much tighter specifications to improve performance and reliability. In both cases, it is precision that is at the heart of the solution - precision to produce miniaturized components that do many times the work of their bulky predecessors, and precision to produce components for everyday-use products that outperform, outlast, and represent a greater value than previous models. [PHOTO] Everyday-use products, like contact lenses, are manufactured in mass quantity with greater precision than ever before. Zygo precision helps manufacturers improve their processes to make better products at lower cost. Realizing that precision manufacturing holds the answer to maintaining a competitive edge, manufacturers are facing production challenges unlike any they had faced in the past. As new manufacturing techniques were developed to produce smaller components and improve the precision of existing ones, it quickly became clear that traditional batch sample testing and manual handling of components would no longer be sufficient. To meet the challenges of maintaining product quality, high throughput, and high production yields, new measurement technologies for evaluating the precision of in-process products, and new automation technologies for handling components without causing damage or contamination, would be essential. [PHOTO] Precision manufacturing, once reserved for hi-tech devices like computer hard disk drives and semiconductor chips, is growing rapidly in many other industries. Zygo precision helps a wide variety of manufacturers achieve their quality and production goals. [PHOTO] Zygo Corporation has been monitoring this growing trend in the manufacturing industry and has committed its considerable resources in precision measurement and automation technologies to develop solutions that help precision manufacturers attain their quality and production goals. The next few pages highlight some key industries that have made astounding progress in pushing the envelope of product quality and production yields, and have done so with the help of Zygo's solutions. [PHOTO] Highly-sophisticated electronic circuits, printed on miniature semiconductor chips, make possible extremely compact electronic devices like cellular telephones. Zygo precision helps the semiconductor industry pack more and more circuitry onto microchips.

4 DATA STORAGE INDUSTRY The data storage industry, makers of hard disk drive components and assemblies used in all computer systems

4 DATA STORAGE INDUSTRY The data storage industry, makers of hard disk drive components and assemblies used in all computer systems sold in the world today, is an excellent example of how far the precision, performance, value, and manufacturing volume of electromechanical devices has advanced in a relatively short period of time. [GRAPHICAL REPRESENTATION OF BAR CHART] MAGNETIC HEAD SIZE (%) AREA DENSITY
Head Size (percent) --------100% 70% 50% 30% Areal Density (Gigabits per square inch) -------------------------.03 .06 .10 .85

Year ---1982 1987 1992 1997

........... ........... ........... ...........

The physical size of magnetic heads is steadily decreasing, enabling corresponding increases in the areal density of disk drives. The first disk storage system for computers had a capacity of just five megabytes, using a total of 50 rigid disks, each 24-inches in diameter. Because this device could access data at random, it was tremendously faster than the linear tape storage devices in use at the time, and opened up the possibility of using computers for a wide variety of tasks that were previously impractical. Hard disk technology steadily advanced; disk drives got physically smaller, while their storage capacity and reliability continued to rise, and their per-megabyte cost continued to decline. In the early 1980's, Zygo recognized the business potential of the data storage industry and began developing specialized software applications for our precision measuring instruments to satisfy the growing needs of the data storage industry. [PHOTO] Zygo's automated inspection station (above) automatically certifies and sorts in-process disks, and our Pegasus 2000 system (below) accurately measures the flying height of in-process heads. Both systems are used on the production line to remove substandard components from the process. The data storage industry's interest and confidence in Zygo's instruments and automation solutions has grown at an increasing rate over the years. Once used only in new-product development laboratories, Zygo solutions are now an integral part of the manufacturing process. Zygo instruments and systems are installed on production lines measuring hard disk platter flatness, and air-bearing surface geometry, pole tip recession, pole tip dimensions, and flying height of magnetic heads. Our automation systems provide precise, reliable, contamination-free handling of drive components for processing and assembly. [PHOTO] Zygo's AAB System automatically measures critical air bearing surface geometries on over 20,000 heads per day, generating SPC data to help manufacturers improve their processes. Looking ahead to the future, Zygo is committed to working closely with the data storage industry to develop innovative solutions to the new manufacturing challenges that will undoubtedly arise as the demand to pack more information into smaller spaces continues to accelerate.

[PHOTO] Controlling the characteristics of a magnetic head's pole tips (top) is essential for manufacturing high-capacity disk drives. Zygo machine vision metrology systems measure critical x-y dimensions, and our interferometric systems measure the amount of recession. The 3D measurement plot (above) shows the slight curvature of a head's airbearing surfaces, required to maintain proper flying height.

5 SEMICONDUCTOR COMPONENT MANUFACTURING INDUSTRY [PHOTO] A photomask (below) is the "master" used to print one layer of a semiconductor chip. Some chips require as many as 20 photomasks; a small defect in any one of them could result in thousands of unusable chips.

[GRAPHICAL REPRESENTATION OF BAR CHART] [ ] LINE WIDTH (um) AND [ ] CHIP DENSITY
Millions of Bit/Chip (DRAM) Line Widths (micrometers) -------------........... 4.0 ........... 2.0 ........... 1.0 ........... 0.35 Chip Density [Millions of bits/chip (DRAM)] -----------------------------0.256 2 16 256

Year ---1982 1987 1992 1997

The "line widths" of semiconductor chips is steadily decreasing, enabling corresponding increases in density of semiconductor device printed on each chip. [PHOTO] Multiple semiconductor chips are made at the same time on silicon wafers like this one. The wafers are then "diced" and the individual chips are put into "packages", which are then used in a wide variety of products. In today's world, it's difficult not to encounter something that doesn't have a semiconductor chip of some type inside. Everyone knows that computers and calculators rely on these devices, but so do many everyday items like automobiles, televisions, VCRs, telephones, dishwashers, vacuum cleaners, and lawnmowers. The intelligence programmed into these chips doesn't think for us, rather it handles a multitude of tasks to make these appliances more efficient or easier to use. One of the reasons chips have become so commonplace is that manufacturing techniques have been developed to produce them in much greater quantities and at much lower cost. Zygo technology has been, and will continue to be, integral in enabling manufacturers to achieve their ambitious production goals. The density of the circuitry on chips has been steadily increasing over the years, and the growth is accelerating. In the early days of semiconductor manufacturing, Gordon Moore, founder of Intel Corporation, stated that semiconductor chip device density would double every two years. He later revised it to say that the density would double every 18 months. This statement became known as "Moore's Law" and still holds true today.

5 SEMICONDUCTOR COMPONENT MANUFACTURING INDUSTRY [PHOTO] A photomask (below) is the "master" used to print one layer of a semiconductor chip. Some chips require as many as 20 photomasks; a small defect in any one of them could result in thousands of unusable chips.

[GRAPHICAL REPRESENTATION OF BAR CHART] [ ] LINE WIDTH (um) AND [ ] CHIP DENSITY
Millions of Bit/Chip (DRAM) Line Widths (micrometers) -------------........... 4.0 ........... 2.0 ........... 1.0 ........... 0.35 Chip Density [Millions of bits/chip (DRAM)] -----------------------------0.256 2 16 256

Year ---1982 1987 1992 1997

The "line widths" of semiconductor chips is steadily decreasing, enabling corresponding increases in density of semiconductor device printed on each chip. [PHOTO] Multiple semiconductor chips are made at the same time on silicon wafers like this one. The wafers are then "diced" and the individual chips are put into "packages", which are then used in a wide variety of products. In today's world, it's difficult not to encounter something that doesn't have a semiconductor chip of some type inside. Everyone knows that computers and calculators rely on these devices, but so do many everyday items like automobiles, televisions, VCRs, telephones, dishwashers, vacuum cleaners, and lawnmowers. The intelligence programmed into these chips doesn't think for us, rather it handles a multitude of tasks to make these appliances more efficient or easier to use. One of the reasons chips have become so commonplace is that manufacturing techniques have been developed to produce them in much greater quantities and at much lower cost. Zygo technology has been, and will continue to be, integral in enabling manufacturers to achieve their ambitious production goals. The density of the circuitry on chips has been steadily increasing over the years, and the growth is accelerating. In the early days of semiconductor manufacturing, Gordon Moore, founder of Intel Corporation, stated that semiconductor chip device density would double every two years. He later revised it to say that the density would double every 18 months. This statement became known as "Moore's Law" and still holds true today. To pack more circuitry on a chip, the lines that comprise the circuitry have to become thinner. This is known in the semiconductor industry as "line width" and serves as an indicator of the state of semiconductor manufacturing technology. Line widths have been steadily decreasing since the semiconductor chip was invented and, in many of today's chips, the lines are only about 0.35 um (millionths of a meter) wide. With circuitry that small, it doesn't take much of a defect or contaminant to completely ruin the chip, or a whole batch of chips. Zygo manufactures specialized microscopes for measuring line widths and defects on wafers, and on the photomasks containing the circuit patterns printed onto the wafers, to enable manufacturers to better understand, and improve, their manufacturing processes. Other Zygo measurement and automation systems are

used to measure and analyze several critical surfaces on wafers, and provide contamination-free handling and transport during production. [PHOTO] Zygo's confocal microscope systems are used to analyze photomask defects, and manufacturers use the measurement data to improve the process that creates the photomasks. Special measurement analysis software can simulate the characteristics of the finished chip's circuitry (above right) before the photomask is put into actual production.

6 SEMICONDUCTOR CAPITAL EQUIPMENT MANUFACTURING [GRAPHICAL REPRESENTATION OF BAR CHART]
STAGE POSITIONING TOLERANCE (In Nanometers) 1982 ................................... 100 1987 ................................... 67 1992 ................................... 37 1997 ................................... 10

With the demand for increasing chip density and decreasing line widths, the positioning accuracy tolerances for photolithography steppers are steadily becoming more stringent as well. [PHOTO] Zygo's GPI interferometer system (below) is the accepted standard in the optics industry for extremely high precision measurements of optical surfaces and lens systems. These systems are used to verify the precision of the lenses (measurement above) that print the photomask patterns onto the semiconductor wafer. [PHOTO] Few things in the history of mankind have had as significant an impact on people's lives as the development and continuing miniaturization of the semiconductor chip. Central to the manufacture of chips are machines called photolithography steppers which photographically print the minute circuitry for many chips onto a semiconductor wafer. Since the circuitry is applied in layers, the same area on the wafer must be positioned under the stepper's lenses in exactly the same position each time a new layer is printed. In the past, when the chips were not as densely packed with circuitry, the positioning accuracy required was about 50 nanometers (billionths of a meter). The circuitry on today's densely-packed chips is much smaller and requires a positioning accuracy of approximately five nanometers. This is a formidable task for stepper manufacturers. To meet the challenges of this task, Zygo developed a measurement system that reliably measures with the accuracy required for today's, and tomorrow's, steppers. The award-winning ZMI 2000 distance measuring interferometer system accurately measures the relative position of the stage assembly that moves and positions the in-process wafer. The ZMI system continuously sends position information to the motor controllers that move the stage so the wafer can be positioned precisely where it needs to be. The ZMI system does this with unsurpassed reliability and accuracy, on production lines that run 24 hours a day. Another of Zygo's technologies is also an integral part of the accuracy of today's steppers. The lenses that focus the circuitry patterns onto the wafer must have near-perfect optical characteristics. The manufacturers of these lenses rely on the accuracy of Zygo's GPI family of interferometer products to measure and analyze the surface shape and light transmissive qualities of these lenses, and provide documentation of the measurements.

6 SEMICONDUCTOR CAPITAL EQUIPMENT MANUFACTURING [GRAPHICAL REPRESENTATION OF BAR CHART]
STAGE POSITIONING TOLERANCE (In Nanometers) 1982 ................................... 100 1987 ................................... 67 1992 ................................... 37 1997 ................................... 10

With the demand for increasing chip density and decreasing line widths, the positioning accuracy tolerances for photolithography steppers are steadily becoming more stringent as well. [PHOTO] Zygo's GPI interferometer system (below) is the accepted standard in the optics industry for extremely high precision measurements of optical surfaces and lens systems. These systems are used to verify the precision of the lenses (measurement above) that print the photomask patterns onto the semiconductor wafer. [PHOTO] Few things in the history of mankind have had as significant an impact on people's lives as the development and continuing miniaturization of the semiconductor chip. Central to the manufacture of chips are machines called photolithography steppers which photographically print the minute circuitry for many chips onto a semiconductor wafer. Since the circuitry is applied in layers, the same area on the wafer must be positioned under the stepper's lenses in exactly the same position each time a new layer is printed. In the past, when the chips were not as densely packed with circuitry, the positioning accuracy required was about 50 nanometers (billionths of a meter). The circuitry on today's densely-packed chips is much smaller and requires a positioning accuracy of approximately five nanometers. This is a formidable task for stepper manufacturers. To meet the challenges of this task, Zygo developed a measurement system that reliably measures with the accuracy required for today's, and tomorrow's, steppers. The award-winning ZMI 2000 distance measuring interferometer system accurately measures the relative position of the stage assembly that moves and positions the in-process wafer. The ZMI system continuously sends position information to the motor controllers that move the stage so the wafer can be positioned precisely where it needs to be. The ZMI system does this with unsurpassed reliability and accuracy, on production lines that run 24 hours a day. Another of Zygo's technologies is also an integral part of the accuracy of today's steppers. The lenses that focus the circuitry patterns onto the wafer must have near-perfect optical characteristics. The manufacturers of these lenses rely on the accuracy of Zygo's GPI family of interferometer products to measure and analyze the surface shape and light transmissive qualities of these lenses, and provide documentation of the measurements. [PHOTO] Zygo's award-winning ZMI 2000 (below) distance measuring interferometer system is used in many photolithography steppers. Its unrivaled accuracy ensures that each chip on the wafer is in exactly the right position when a new layer is printed. Individual chips (left) are a labyrinth of minute circuitry, imperceptible to the unaided eye.
[PHOTO] Photonics Circle of Excellence Award

R&D 100 Award

[logo] [logo] --------------------------------------------------------------------------------

7 AUTOMOTIVE PRECISION MANUFACTURING INDUSTRIES [GRAPHICAL REPRESENTATION OF BAR CHART] MANUFACTURING TOLERANCE
1982 1987 1992 1997 ................................... ................................... ................................... ................................... 20 10 6 3.5

Mass-produced parts, such as those in automobile engines, are becoming more and more precise as demonstrated by steady tightening of manufacturing tolerances. [PHOTO] Zygo's new MESA system greatly expands the range of surfaces that can be measured with Zygo products. Precision components with a large amount of surface figure, previously unmeasurable with Zygo instruments, can now be measured with the MESA, opening up a great many opportunities for in-process measurements. [PHOTO] One of the most imitated automobile commercials in recent memory shows a luxury sedan with a pyramid of champagne glasses sitting on the hood, unwavering, while the car is run at simulated high speed - or the one where a steel ball rolls around the seams of the car's perfectly uniform door, hood, and trunk seams. These commercials are often imitated by other automobile manufacturers who want to communicate the idea that precision design and manufacturing, once reserved for luxury-class cars, is now being applied to models aimed at the general population. Several years ago, quality and precision in automobile manufacturing was not at the level it is today. Strong competition forced manufacturers to look for ways to improve their products' quality, which meant improving not only the design, but the precision and consistency of the manufacturing process. The aforementioned commercials and their imitators are indicators of where the automotive industry, and manufacturing as a whole, is headed using higher levels of precision to improve performance and reliability of all kinds of commonplace products. Historically, Zygo instruments have been valuable tools in QC labs, used for measuring and analyzing critical surfaces on production samples. The measurement data was used by manufacturing engineers to reduce variability and ensure higher precision. In recent years, a growing number of manufacturers have been making Zygo instruments an integral part of their production line, measuring and analyzing surfaces on 100% of components produced by a variety of processes, including: machining, grinding, molding, extruding, and polishing. Zygo instruments assess the quality level of the parts to determine which are acceptable for further processing and which must be rejected for scrap or rework. They also perform statistical process control analysis on the measurement data, which manufacturers use to refine the manufacturing process so that fewer parts are rejected. As this trend toward increasing precision in commonplace products continues, manufacturers will rely even more heavily on Zygo instruments and technologies to monitor and improve their production processes. [PHOTO] When comparing surface quality of mass-produced machined parts, there is a dramatic difference between

7 AUTOMOTIVE PRECISION MANUFACTURING INDUSTRIES [GRAPHICAL REPRESENTATION OF BAR CHART] MANUFACTURING TOLERANCE
1982 1987 1992 1997 ................................... ................................... ................................... ................................... 20 10 6 3.5

Mass-produced parts, such as those in automobile engines, are becoming more and more precise as demonstrated by steady tightening of manufacturing tolerances. [PHOTO] Zygo's new MESA system greatly expands the range of surfaces that can be measured with Zygo products. Precision components with a large amount of surface figure, previously unmeasurable with Zygo instruments, can now be measured with the MESA, opening up a great many opportunities for in-process measurements. [PHOTO] One of the most imitated automobile commercials in recent memory shows a luxury sedan with a pyramid of champagne glasses sitting on the hood, unwavering, while the car is run at simulated high speed - or the one where a steel ball rolls around the seams of the car's perfectly uniform door, hood, and trunk seams. These commercials are often imitated by other automobile manufacturers who want to communicate the idea that precision design and manufacturing, once reserved for luxury-class cars, is now being applied to models aimed at the general population. Several years ago, quality and precision in automobile manufacturing was not at the level it is today. Strong competition forced manufacturers to look for ways to improve their products' quality, which meant improving not only the design, but the precision and consistency of the manufacturing process. The aforementioned commercials and their imitators are indicators of where the automotive industry, and manufacturing as a whole, is headed using higher levels of precision to improve performance and reliability of all kinds of commonplace products. Historically, Zygo instruments have been valuable tools in QC labs, used for measuring and analyzing critical surfaces on production samples. The measurement data was used by manufacturing engineers to reduce variability and ensure higher precision. In recent years, a growing number of manufacturers have been making Zygo instruments an integral part of their production line, measuring and analyzing surfaces on 100% of components produced by a variety of processes, including: machining, grinding, molding, extruding, and polishing. Zygo instruments assess the quality level of the parts to determine which are acceptable for further processing and which must be rejected for scrap or rework. They also perform statistical process control analysis on the measurement data, which manufacturers use to refine the manufacturing process so that fewer parts are rejected. As this trend toward increasing precision in commonplace products continues, manufacturers will rely even more heavily on Zygo instruments and technologies to monitor and improve their production processes. [PHOTO] When comparing surface quality of mass-produced machined parts, there is a dramatic difference between today's parts (above) and parts produced a few years ago (below). [PHOTO] [PHOTO]

Zygo's NewView 200 microscope system measures and analyzes surface structure on a wide variety of manufactured parts, including honed, ground, cast, turned, milled, and etched parts. [PHOTO]

8 OUTLOOK FOR THE FUTURE So what lies ahead? To understand the challenges that will face precision component manufacturers in the future, we need only to look back a few years to see how much the industry has progressed in such a short time. Extrapolating this development trend shows that future demand for precision in manufactured goods will increase as more and more commonplace products are made with higher levels of precision. Zygo will continue to be an integral part of the progress of precision manufacturing. We will be developing and acquiring new and innovative measurement and automation solutions to help manufacturers produce smaller, faster, more reliable components at a level of precision that wasn't conceivable a few years ago. Traditionally used for applications in the upper reaches of precision manufacturing, Zygo's product line is being expanded to provide yield improvement solutions for components with less stringent production tolerances as well. This approach will greatly expand the number of manufacturing processes for which we can provide solutions, and open up many new opportunities for the future. We are also dedicated to progressing along the growth and development course that we have charted for ourselves. By committing resources, both human and financial, to the task of providing yield-enhancement solutions for precision manufacturing industries, we will be ensuring our own success by ensuring the success of our customers.

FIVE-YEAR SUMMARY (Thousands, except per share amounts)

Zygo Corporation and S

Net sales ................................................ Instruments and Systems sales .......................... Modules and Components sales ........................... Gross profit ............................................. % of sales ............................................. Earnings before taxes and acquisition-related charges (2)............................................. % of sales ........................................... Earnings before acquisition-related charges (2) .......... % of sales ........................................... Net earnings per common and common equivalent share before acquisition-related charges (2)(3) ........ Earnings per share growth rate ....................... Net earnings ............................................. Net earnings per common and common equivalent share (3) ................................... Weighted average common share and common dilutive equivalents outstanding (3) ................... Research and development ................................. Capital expenditures ..................................... Depreciation and amortization ............................

Fiscal Year Ended June 30 -------------------------------------------1997 1996(1) 1995 1994 ----------------------------$ 87,220 $ 57,374 $ 32,233 $ 24,141 75% 65% 62% 54 25% 35% 38% 46 $ 41,825 $ 25,866 $ 14,231 $ 10,616 48% 45% 44% 44 $ 21,121 24% $ 13,960 16% $ $ $ 1.16 62% 2,877 0.24 11,998 7,151 4,723 2,612 $ 11,558 20% $ 7,799 14% $ $ $ 0.72 121% 7,799 0.72 10,878 5,538 2,864 1,477 $ $ 3,956 12% 2,749 9% 0.32 181% 2,749 0.32 8,484 3,967 1,631 1,248 $ $ 1,328 6 918 4 0.12 87 918 0.12 7,974 2,786 1,912 1,348

$ $ $

$ $ $

$ $ $

$ $ $

$ $ $

$ $ $

Working capital .......................................... Current ratio ............................................ Total assets ............................................. Long-term debt (excluding current portion) ............... Stockholders' equity .....................................

June 30, -------------------------------------------1997 1996(1) 1995 1994 ---------------------------$ 47,633 $ 47,148 $ 17,072 $ 14,889 4.6 5.2 3.6 4.8 $ 78,799 $ 65,895 $ 29,666 $ 24,499 ---481 $ 62,408 $ 54,087 $ 22,333 $ 19,274

8 OUTLOOK FOR THE FUTURE So what lies ahead? To understand the challenges that will face precision component manufacturers in the future, we need only to look back a few years to see how much the industry has progressed in such a short time. Extrapolating this development trend shows that future demand for precision in manufactured goods will increase as more and more commonplace products are made with higher levels of precision. Zygo will continue to be an integral part of the progress of precision manufacturing. We will be developing and acquiring new and innovative measurement and automation solutions to help manufacturers produce smaller, faster, more reliable components at a level of precision that wasn't conceivable a few years ago. Traditionally used for applications in the upper reaches of precision manufacturing, Zygo's product line is being expanded to provide yield improvement solutions for components with less stringent production tolerances as well. This approach will greatly expand the number of manufacturing processes for which we can provide solutions, and open up many new opportunities for the future. We are also dedicated to progressing along the growth and development course that we have charted for ourselves. By committing resources, both human and financial, to the task of providing yield-enhancement solutions for precision manufacturing industries, we will be ensuring our own success by ensuring the success of our customers.

FIVE-YEAR SUMMARY (Thousands, except per share amounts)

Zygo Corporation and S

Net sales ................................................ Instruments and Systems sales .......................... Modules and Components sales ........................... Gross profit ............................................. % of sales ............................................. Earnings before taxes and acquisition-related charges (2)............................................. % of sales ........................................... Earnings before acquisition-related charges (2) .......... % of sales ........................................... Net earnings per common and common equivalent share before acquisition-related charges (2)(3) ........ Earnings per share growth rate ....................... Net earnings ............................................. Net earnings per common and common equivalent share (3) ................................... Weighted average common share and common dilutive equivalents outstanding (3) ................... Research and development ................................. Capital expenditures ..................................... Depreciation and amortization ............................

Fiscal Year Ended June 30 -------------------------------------------1997 1996(1) 1995 1994 ----------------------------$ 87,220 $ 57,374 $ 32,233 $ 24,141 75% 65% 62% 54 25% 35% 38% 46 $ 41,825 $ 25,866 $ 14,231 $ 10,616 48% 45% 44% 44 $ 21,121 24% $ 13,960 16% $ $ $ 1.16 62% 2,877 0.24 11,998 7,151 4,723 2,612 $ 11,558 20% $ 7,799 14% $ $ $ 0.72 121% 7,799 0.72 10,878 5,538 2,864 1,477 $ $ 3,956 12% 2,749 9% 0.32 181% 2,749 0.32 8,484 3,967 1,631 1,248 $ $ 1,328 6 918 4 0.12 87 918 0.12 7,974 2,786 1,912 1,348

$ $ $

$ $ $

$ $ $

$ $ $

$ $ $

$ $ $

Working capital .......................................... Current ratio ............................................ Total assets ............................................. Long-term debt (excluding current portion) ............... Stockholders' equity ..................................... Price-earnings ratio (2) ................................. Number of employees at year end .......................... Sales per employee - average ............................. Book value per common share .............................. Market price at year-end .................................

June 30, -------------------------------------------1997 1996(1) 1995 1994 ---------------------------$ 47,633 $ 47,148 $ 17,072 $ 14,889 4.6 5.2 3.6 4.8 $ 78,799 $ 65,895 $ 29,666 $ 24,499 ---481 $ 62,408 $ 54,087 $ 22,333 $ 19,274 26.5 30.4 35.2 18.1 399 287 210 176 $ 231 $ 224 $ 173 $ 132 $ 5.91 $ 5.34 $ 2.84 $ 2.48 $ 30.750 $ 21.875 $ 11.250 $ 2.167

FIVE-YEAR SUMMARY (Thousands, except per share amounts)

Zygo Corporation and S

Net sales ................................................ Instruments and Systems sales .......................... Modules and Components sales ........................... Gross profit ............................................. % of sales ............................................. Earnings before taxes and acquisition-related charges (2)............................................. % of sales ........................................... Earnings before acquisition-related charges (2) .......... % of sales ........................................... Net earnings per common and common equivalent share before acquisition-related charges (2)(3) ........ Earnings per share growth rate ....................... Net earnings ............................................. Net earnings per common and common equivalent share (3) ................................... Weighted average common share and common dilutive equivalents outstanding (3) ................... Research and development ................................. Capital expenditures ..................................... Depreciation and amortization ............................

Fiscal Year Ended June 30 -------------------------------------------1997 1996(1) 1995 1994 ----------------------------$ 87,220 $ 57,374 $ 32,233 $ 24,141 75% 65% 62% 54 25% 35% 38% 46 $ 41,825 $ 25,866 $ 14,231 $ 10,616 48% 45% 44% 44 $ 21,121 24% $ 13,960 16% $ $ $ 1.16 62% 2,877 0.24 11,998 7,151 4,723 2,612 $ 11,558 20% $ 7,799 14% $ $ $ 0.72 121% 7,799 0.72 10,878 5,538 2,864 1,477 $ $ 3,956 12% 2,749 9% 0.32 181% 2,749 0.32 8,484 3,967 1,631 1,248 $ $ 1,328 6 918 4 0.12 87 918 0.12 7,974 2,786 1,912 1,348

$ $ $

$ $ $

$ $ $

$ $ $

$ $ $

$ $ $

Working capital .......................................... Current ratio ............................................ Total assets ............................................. Long-term debt (excluding current portion) ............... Stockholders' equity ..................................... Price-earnings ratio (2) ................................. Number of employees at year end .......................... Sales per employee - average ............................. Book value per common share .............................. Market price at year-end .................................

June 30, -------------------------------------------1997 1996(1) 1995 1994 ---------------------------$ 47,633 $ 47,148 $ 17,072 $ 14,889 4.6 5.2 3.6 4.8 $ 78,799 $ 65,895 $ 29,666 $ 24,499 ---481 $ 62,408 $ 54,087 $ 22,333 $ 19,274 26.5 30.4 35.2 18.1 399 287 210 176 $ 231 $ 224 $ 173 $ 132 $ 5.91 $ 5.34 $ 2.84 $ 2.48 $ 30.750 $ 21.875 $ 11.250 $ 2.167

(1) Restated to reflect the acquisition of NexStar Automation, Inc. as a pooling-of-interests. Periods prior to fiscal 1996 have not been restated due to immateriality. (2) Excludes nonrecurring acquisition-related charges of $11,083,000 incurred in the first quarter of fiscal 1997. (3) Restated to reflect a 2-for-1 stock split effected in the form of a 100% stock dividend declared on January 23, 1997, and paid on February 27, 1997 to stockholders of record on February 3, 1997

10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION NET SALES BY GEOGRAPHIC AREA (Fiscal 1997) [GRAPHICAL REPRESENTATION OF PIE CHART BELOW] [ ] Domestic (54%) .................... $47,695 [ ] Japan (25%) ....................... $21,730

10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION NET SALES BY GEOGRAPHIC AREA (Fiscal 1997) [GRAPHICAL REPRESENTATION OF PIE CHART BELOW] [ ] Domestic (54%) .................... $47,695 [ ] Japan (25%) ....................... $21,730 [ ] Pacific Rim (15%) ................. $12,650 [ ] Europe and Other (6%) ............. $ 5,145

GROSS PROFIT AND GROSS PROFIT AS A PERCENT OF NET SALES (in thousands) [GRAPHICAL REPRESENTATION OF BAR CHART BELOW]
Percent of Sales ------40% 44% 44% 45% 48%

1993 1994 1995 1996 1997

......................... ......................... ......................... ......................... .........................

Gross Profit -----$ 9,049 $10,616 $14,231 $25,866 $41,825

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EARNINGS PER SHARE Excluding Acquisition-Related Charges [GRAPHICAL REPRESENTATION OF BAR CHART BELOW]
1993 1994 1995 1996 1997 ......................... ......................... ......................... ......................... ......................... $0.06 $0.12 $0.32 $0.72 $1.16

RESULTS OF OPERATIONS FISCAL 1997 COMPARED TO FISCAL 1996 Net sales of $87,220,000 for fiscal 1997 increased by $29,846,000 or 52.0% from fiscal 1996 net sales of $57,374,000. This increase was the result of strong demand for all of the Company's instruments, systems, and components, as well as, the addition of Technical Instrument Company ("TIC") from August 8, 1996. Including TIC on a pro forma basis in fiscal 1996, the increase in net sales in fiscal 1997, which already included TIC, amounted to $18,761,000 or 27.4%. Net sales of the Company's instruments and systems, including the impact of TIC, increased by 75.4% to $65,121,000 and net sales of modules and components, also including the impact

of TIC, increased by 75.4% to $65,121,000 and net sales of modules and components, also including the impact of TIC, increased by 9.1% to $22,099,000, in fiscal 1997, each from fiscal 1996. These increases in net sales in fiscal 1997 were principally due to increased market demand from data storage and semiconductor industry customers. The Company's sales outside the United States amounted to $39,525,000 in fiscal 1997, an increase of $12,330,000 or 45.3% from fiscal 1996. Sales in Japan during fiscal 1997 amounted to $21,730,000, an increase of $1,967,000 over fiscal 1996 despite a reduction of sales for the Company's motion control components to Canon Inc. for incorporation into Canon's photolithography "steppers" used in production of semiconductors. Sales to other geographic markets outside the U.S. amounted to $17,795,000 in fiscal 1997, an increase of $10,363,000 or 139.4% from fiscal 1996. This increase was principally the result of increased demand for the Company's instruments and systems by the data storage and semiconductor manufacturing industries in the Pacific Rim, the addition of TIC which has a strong market presence in the Pacific Rim, primarily among the various producers of semiconductor masks, and increased sales of the Company's products in Europe due to improved market conditions. Substantially all of the Company's sales and costs are negotiated and paid in U.S. dollars. Significant changes in the values of foreign currencies relative to the value of the U.S. dollar can impact the sales of the Company's products in its export markets as would changes in the general economic conditions in those markets. The impact of such changes in foreign currency values on the Company's sales cannot be measured. Gross profit in fiscal 1997 amounted to $41,825,000, an increase of $15,959,000 or 61.7% over gross profit of $25,866,000 in fiscal 1996. As a percentage of net sales, gross profit in fiscal 1997 was 48.0%, as compared to 45.1% in fiscal 1996. Gross profit dollars and gross profit as a percent of net sales increased principally due to the effect of product mix as the Company's systems generally sell at higher margins than its OEM metrology components and its optical components as well as the effect of the volume of net sales and certain volume-related manufacturing efficiencies. Selling, general and administrative expenses in fiscal 1997 amounted to $13,830,000 and increased by $4,330,000 or 45.6% from fiscal 1996. The increase was primarily due to the impact of including TIC from August 8, 1996, infrastructure additions, and volume-related expenses, such as commissions paid to the Company's direct sales personnel and external sales agents. As a percentage of net sales, selling, general and administrative expenses declined in fiscal 1997 to 15.9%, as compared to 16.6% in fiscal 1996. Research, development and engineering expenses ("R&D") in fiscal 1997 totaled $7,151,000 and increased by $1,613,000 or 29.1% from fiscal 1996. The increase in R&D expenses was principally due to the impact of including TIC from August 8, 1996 and increased engineering headcount at the Company's Middlefield, Connecticut, facilities, partially offset

Zygo Corporation and Subsidiaries 11 by lower material expenditures. R&D expenses as a percentage of net sales decreased to 8.2% in fiscal 1997 as compared to 9.7% in fiscal 1996. The Company recorded nonrecurring acquisition-related charges in the amount of $11,083,000 in the three months ended September 30, 1996. The nonrecurring charges related to $999,000 of expenses incurred to complete the Company's acquisition of NexStar Automation Inc. ("NexStar") and the write-off of $10,084,000 of in-process research and development costs in conjunction with the Company's acquisition of TIC. Excluding the nonrecurring acquisition-related charges, the Company's operating profit in fiscal 1997 was $20,286,000, an increase of $9,458,000 or 87.3% from operating profit in fiscal 1996. Operating profit in fiscal 1997, including the nonrecurring acquisition-related charges, amounted to $9,203,000 as compared to $10,828,000 in fiscal 1996. Income tax expense in fiscal 1997 totaled $7,161,000 on earnings before income taxes of $10,038,000 as compared to $3,759,000 of income taxes in fiscal 1996 on earnings before income taxes of $11,558,000. The higher tax expense as a percentage of earnings before taxes in fiscal 1997 compared to fiscal 1996 was

Zygo Corporation and Subsidiaries 11 by lower material expenditures. R&D expenses as a percentage of net sales decreased to 8.2% in fiscal 1997 as compared to 9.7% in fiscal 1996. The Company recorded nonrecurring acquisition-related charges in the amount of $11,083,000 in the three months ended September 30, 1996. The nonrecurring charges related to $999,000 of expenses incurred to complete the Company's acquisition of NexStar Automation Inc. ("NexStar") and the write-off of $10,084,000 of in-process research and development costs in conjunction with the Company's acquisition of TIC. Excluding the nonrecurring acquisition-related charges, the Company's operating profit in fiscal 1997 was $20,286,000, an increase of $9,458,000 or 87.3% from operating profit in fiscal 1996. Operating profit in fiscal 1997, including the nonrecurring acquisition-related charges, amounted to $9,203,000 as compared to $10,828,000 in fiscal 1996. Income tax expense in fiscal 1997 totaled $7,161,000 on earnings before income taxes of $10,038,000 as compared to $3,759,000 of income taxes in fiscal 1996 on earnings before income taxes of $11,558,000. The higher tax expense as a percentage of earnings before taxes in fiscal 1997 compared to fiscal 1996 was principally a result of the non-tax deductible nature of the $10,084,000 of in-process research and development charge to earnings in the quarter ended September 30, 1996. Backlog at June 30, 1997, was $38,688,000 compared to $22,397,000 at June 30, 1996, an increase of $16,291,000 or 72.7%. The backlog of the Company's instruments and systems at June 30, 1997, increased by $8,363,000 or 61.3% from that at June 30, 1996, principally as a result of stronger demand from customers in the data storage, semiconductor and other high technology industries for yield enhancement systems. The backlog of the Company's modules and components increased by $7,928,000 or 90.5% from the year earlier primarily as a result of the Company's entering into a contract with the University of California's Lawrence Livermore National Laboratory ("LLNL"), whereby the Company will be a primary supplier of large plano optical components for the National Ignition Facility ("NIF"), a $1.2 billion Department of Energy project at LLNL to produce the world's largest laser for nuclear fusion research. The contract provides for the Company to design, manufacture, and equip a world-class optical fabrication facility at its Middlefield, Connecticut, operations for a fixed price of nearly $10.0 million over an 18-month period, of which slightly in excess of $5.5 million is presently funded, the majority of which was in backlog at June 30, 1997. Net earnings and earnings per share for fiscal 1997 amounted to $2,877,000 and $.24 as compared to $7,799,000 and $.72, respectively, for fiscal 1996, both years restated for the 2-for-1 stock split. Excluding nonrecurring acquisition-related charges, net income for fiscal 1997 totaled $13,960,000, an increase of $6,161,000 or 79.0% from fiscal 1996. Earnings per share adjusted for the 2-for-1 stock split, excluding the nonrecurring charges, were $1.16, up 61.1% from $.72 in fiscal 1996, despite a 10.3% increase in shares outstanding. FISCAL 1996 COMPARED TO FISCAL 1995 Net sales of $57,374,000 for fiscal 1996 increased by $25,141,000 or 78.0% from fiscal 1995 net sales of $32,233,000. The increase in net sales in fiscal 1996 was principally due to increased demand for the Company's instruments and systems from manufacturers of data storage, semiconductor, and other high technology products. The increase in net sales was also partially attributable to the inclusion of NexStar Automation, Inc. ("NexStar"). (See note 2). Net sales of the Company's electro-optical instruments and systems in fiscal 1996, which accounted for 64.7% of total fiscal 1996 net sales, increased by 86.9% from fiscal 1995. Net sales of the Company's various components increased by 63.7% in fiscal 1996 from the prior year. The Company's sales outside the United States amounted to $27,195,000 in fiscal 1996, an increase of $12,214,000 or 81.5% from fiscal 1995. Sales in Japan during fiscal 1996 amounted to $19,763,000, an increase of $10,133,000 over fiscal 1995. The significant increase was due to the improving Japanese economy and the improved demand for the Company's instruments and systems, including its motion control systems which are sold to Canon for incorporation into their step-and-repeat photolithography systems used in semiconductor manufacturing, as well as the Company's other systems which are sold to Canon for resale in the domestic Japanese market or used by Canon in their facilities. Sales to other geographic markets outside the U.S.

amounted to $7,432,000 in fiscal 1996, an increase of $2,081,000 from fiscal 1995. The 38.9% increase was principally the result of a continuation of strong sales of the Company's electro-optical instruments, systems and accessories to the data storage and semiconductor manufacturing industry in the Pacific Rim and increased sales in Europe. Gross profit in fiscal 1996 amounted to $25,866,000, an increase of $11,635,000 or 81.8% over gross profit of $14,231,000 in fiscal 1995. As a percentage of net sales, gross profit in fiscal 1996 was 45.1%, as compared to 44.2% in fiscal 1995. Gross profit dollars and gross profit as a percent of net sales increased principally due to the increased volume of sales from electro-optical instruments and systems, optical components, and services, combined with volume-related manufacturing efficiencies.

12 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) Selling, general and administrative expenses in fiscal 1996 of $9,500,000 increased by $2,963,000 from fiscal 1995. The increase was principally a result of volume-related expenses, such as commissions, allowance for doubtful accounts, and product marketing expenses and necessary infrastructure changes made to support the growth of the business such as additions to sales and marketing personnel. Approximately 40.3% of the $2,963,000 increase was attributable to selling, general and administrative expenses relating to the addition of NexStar. As a percentage of net sales, selling, general and administrative expenses declined in fiscal 1996 to 16.6%, as compared to 20.3% in fiscal 1995, principally due to the 78.0% growth in net sales. Research and development costs in fiscal 1996 totaled $5,538,000 and increased by $1,571,000 or 39.6% from fiscal 1995. The increase in R&D expenses primarily resulted from spending on personnel and materials at both the Company's principal R&D center in Middlefield, Connecticut, and its R&D facility in Simi Valley, California, which was formed during the second half of fiscal 1995. As a percentage of net sales, research and development costs were 9.7% and 12.3% in fiscal 1996 and fiscal 1995, respectively. In fiscal 1996, the Company had operating profit of $10,828,000 as compared to $3,727,000 in fiscal 1995. Operating profit as a percentage of net sales in fiscal 1996 improved to 18.9% from 11.6% in fiscal 1995. Interest income in fiscal 1996 amounted to $946,000 and was $574,000 higher than in fiscal 1995. This increase was primarily due to higher cash balances, principally as a result of the sale by the Company of 845,000 shares of its common stock in a follow-on offering which generated approximately $22.7 million in net proceeds to the Company. Backlog at June 30, 1996, was $22,397,000 compared to $12,993,000 at June 30, 1995. The $9,404,000 or 72.4% increase in backlog was primarily a result of stronger demand for all of the Company's electro-optical instruments and systems and the inclusion of NexStar. The backlog of the Company's instruments and systems at June 30, 1996, increased by $6,688,000 or 96.3% from that at June 30, 1995. The backlog of the Company's modules and components increased by $2,716,000 or 44.9% from the year earlier as a result of improved demand for the Company's motion controllers, used in the semiconductor industry, and its precision optical components. The Company reported net earnings and earnings per common and common equivalent share of $7,799,000 and $.72, respectively, in fiscal 1996 as compared to $2,749,000 and $.32 per share in fiscal 1995. This reflected an increase in net earnings and earnings per share of $5,050,000 (183.7%) and $.40 (125.0%), respectively, over fiscal 1995. Per share figures have been adjusted to reflect the impact of the 2-for-1 stock split effective February 27, 1997 and have been restated to reflect the operations of NexStar for the full fiscal year 1996. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997 working capital was $47,633,000, an increase of $485,000 from the amount at June 30, 1996, and the Company had cash and cash equivalents of $10,981,000 and marketable securities amounting to $12,766,000 for a total of $23,747,000. The $14,737,000 decrease in cash and cash equivalents and marketable securities from the amount at June 30, 1996 was partially due to the cash paid for the acquisition of TIC (See note 2) and the repayment of certain outstanding indebtedness of TIC (See note 10). Trade accounts receivable increased by $10,765,000, principally as a result of the growth in the Company's net sales and the

12 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) Selling, general and administrative expenses in fiscal 1996 of $9,500,000 increased by $2,963,000 from fiscal 1995. The increase was principally a result of volume-related expenses, such as commissions, allowance for doubtful accounts, and product marketing expenses and necessary infrastructure changes made to support the growth of the business such as additions to sales and marketing personnel. Approximately 40.3% of the $2,963,000 increase was attributable to selling, general and administrative expenses relating to the addition of NexStar. As a percentage of net sales, selling, general and administrative expenses declined in fiscal 1996 to 16.6%, as compared to 20.3% in fiscal 1995, principally due to the 78.0% growth in net sales. Research and development costs in fiscal 1996 totaled $5,538,000 and increased by $1,571,000 or 39.6% from fiscal 1995. The increase in R&D expenses primarily resulted from spending on personnel and materials at both the Company's principal R&D center in Middlefield, Connecticut, and its R&D facility in Simi Valley, California, which was formed during the second half of fiscal 1995. As a percentage of net sales, research and development costs were 9.7% and 12.3% in fiscal 1996 and fiscal 1995, respectively. In fiscal 1996, the Company had operating profit of $10,828,000 as compared to $3,727,000 in fiscal 1995. Operating profit as a percentage of net sales in fiscal 1996 improved to 18.9% from 11.6% in fiscal 1995. Interest income in fiscal 1996 amounted to $946,000 and was $574,000 higher than in fiscal 1995. This increase was primarily due to higher cash balances, principally as a result of the sale by the Company of 845,000 shares of its common stock in a follow-on offering which generated approximately $22.7 million in net proceeds to the Company. Backlog at June 30, 1996, was $22,397,000 compared to $12,993,000 at June 30, 1995. The $9,404,000 or 72.4% increase in backlog was primarily a result of stronger demand for all of the Company's electro-optical instruments and systems and the inclusion of NexStar. The backlog of the Company's instruments and systems at June 30, 1996, increased by $6,688,000 or 96.3% from that at June 30, 1995. The backlog of the Company's modules and components increased by $2,716,000 or 44.9% from the year earlier as a result of improved demand for the Company's motion controllers, used in the semiconductor industry, and its precision optical components. The Company reported net earnings and earnings per common and common equivalent share of $7,799,000 and $.72, respectively, in fiscal 1996 as compared to $2,749,000 and $.32 per share in fiscal 1995. This reflected an increase in net earnings and earnings per share of $5,050,000 (183.7%) and $.40 (125.0%), respectively, over fiscal 1995. Per share figures have been adjusted to reflect the impact of the 2-for-1 stock split effective February 27, 1997 and have been restated to reflect the operations of NexStar for the full fiscal year 1996. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997 working capital was $47,633,000, an increase of $485,000 from the amount at June 30, 1996, and the Company had cash and cash equivalents of $10,981,000 and marketable securities amounting to $12,766,000 for a total of $23,747,000. The $14,737,000 decrease in cash and cash equivalents and marketable securities from the amount at June 30, 1996 was partially due to the cash paid for the acquisition of TIC (See note 2) and the repayment of certain outstanding indebtedness of TIC (See note 10). Trade accounts receivable increased by $10,765,000, principally as a result of the growth in the Company's net sales and the timing of shipments in the fourth quarter of fiscal 1997. As a result of the addition of TIC and necessary inventory to support the growth in sales of the Company's electro-optical instruments and systems, inventory increased by $4,494,000 at June 30, 1997 compared to the year earlier. Accounts payable and accrued expenses increased by $3,033,000 in fiscal 1997 to $12,905,000 due to normal business activities. The Company's expenditures for property, plant and equipment totaled $4,723,000 in fiscal 1997 which was $1,859,000 more than the prior fiscal year. Capital expenditures were primarily for capacity additions and productivity improvements in the Company's optical manufacturing facility, construction of a laser manufacturing work cell at the Middlefield, Connecticut location, and necessary productivity-related leasehold improvements made at TIC. The Company expects to complete certain building additions amounting to $4.2 million in fiscal 1998. These expenditures will be funded by operating cash flows. These building additions include the expansion of the Middlefield, Connecticut, site facilities by 35,500 square feet to accommodate the space required for the NIF facility and to provide additional office facilities. As of June 30, 1997, there were no borrowings outstanding under the Company's

$3,000,000 bank line of credit. Unused amounts under the line of credit are available for short-term working capital needs. Stockholders' equity at June 30, 1997, increased by $8,321,000 from the year earlier to $62,408,000 as a result of net income of $2,877,000, and increases in the Company's common stock and paidin capital accounts resulting from the Company's acquisition of TIC and the exercise of employee stock options. Effective June 30, 1997, TIC, a wholly owned subsidiary of the Company, and Syncotec Neue Technologien und Instrumente GmbH ("Syncotec"),

Zygo Corporation and Subsidiaries 13 a German-based company, completed all necessary legal requirements allowing for the appropriate transfer and registration of 50 percent of Syncotec shares to TIC. Effective September 1, 1997, the Company, through TIC, purchased the remaining 50 percent of Syncotec for approximately $2.0 million in a combination of cash and the Company's common stock. Syncotec designs, develops, manufactures, and markets certain products which incorporate TIC's confocal technology for European customers. Syncotec's sales in the year ended December 31, 1996 amounted to $2.9 million (DM4.9 million). The Company announced on July 28, 1997 the signing of a letter of intent providing for the Company's acquisition of Digital Instruments, Inc. ("Digital"), a privately held California based entity that designs, develops, and manufactures high precision measurement products and systems which use scanning probe microscopy imaging and metrology technology. These systems are used in product research and development applications as well as to improve the production efficiency and manufacturing yields within the data storage, semiconductor, and other high technology industries. It is expected that the Company will acquire all the outstanding stock of Digital and an affiliated corporation in exchange for 7,000,000 shares of the Company's common stock. Closing the transaction is subject to various conditions and is expected to be accounted for as a pooling-of-interests. The transaction is subject, among other things, to approval by the stockholders of the Company, and is expected to be completed prior to the end of the calendar year 1997. Digital's revenues for the year ended December 31, 1996 were approximately $50 million. Effective August 19, 1997, the Company acquired Sight Systems, Inc. ("SSI"), a privately held California based business which designs, develops, and manufactures application-specific machine vision metrology systems, for 287,400 shares of the Company's common stock. The transaction will be accounted for as a pooling-of-interests. SSI's revenues for the year ended December 31, 1996 were approximately $3.5 million. FORWARD LOOKING STATEMENTS This report contains forward looking statements which are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These uncertainties include, but are not limited to, general economic conditions, competitive conditions in markets served by the Company, most notably high technology markets such as data storage and semiconductor, and political developments in countries where the Company conducts business.

WORKING CAPITAL (in thousands) [GRAPHICAL REPRESENTATION OF BAR CHART BELOW]
1993 1994 1995 1996 1997 ......................... ......................... ......................... ......................... ......................... $14,648 $14,889 $17,072 $47,148 $47,633

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Zygo Corporation and Subsidiaries 13 a German-based company, completed all necessary legal requirements allowing for the appropriate transfer and registration of 50 percent of Syncotec shares to TIC. Effective September 1, 1997, the Company, through TIC, purchased the remaining 50 percent of Syncotec for approximately $2.0 million in a combination of cash and the Company's common stock. Syncotec designs, develops, manufactures, and markets certain products which incorporate TIC's confocal technology for European customers. Syncotec's sales in the year ended December 31, 1996 amounted to $2.9 million (DM4.9 million). The Company announced on July 28, 1997 the signing of a letter of intent providing for the Company's acquisition of Digital Instruments, Inc. ("Digital"), a privately held California based entity that designs, develops, and manufactures high precision measurement products and systems which use scanning probe microscopy imaging and metrology technology. These systems are used in product research and development applications as well as to improve the production efficiency and manufacturing yields within the data storage, semiconductor, and other high technology industries. It is expected that the Company will acquire all the outstanding stock of Digital and an affiliated corporation in exchange for 7,000,000 shares of the Company's common stock. Closing the transaction is subject to various conditions and is expected to be accounted for as a pooling-of-interests. The transaction is subject, among other things, to approval by the stockholders of the Company, and is expected to be completed prior to the end of the calendar year 1997. Digital's revenues for the year ended December 31, 1996 were approximately $50 million. Effective August 19, 1997, the Company acquired Sight Systems, Inc. ("SSI"), a privately held California based business which designs, develops, and manufactures application-specific machine vision metrology systems, for 287,400 shares of the Company's common stock. The transaction will be accounted for as a pooling-of-interests. SSI's revenues for the year ended December 31, 1996 were approximately $3.5 million. FORWARD LOOKING STATEMENTS This report contains forward looking statements which are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These uncertainties include, but are not limited to, general economic conditions, competitive conditions in markets served by the Company, most notably high technology markets such as data storage and semiconductor, and political developments in countries where the Company conducts business.

WORKING CAPITAL (in thousands) [GRAPHICAL REPRESENTATION OF BAR CHART BELOW]
1993 1994 1995 1996 1997 ......................... ......................... ......................... ......................... ......................... $14,648 $14,889 $17,072 $47,148 $47,633

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CAPITAL EXPENDITURES AND DEPRECIATION AND AMORTIZATION (in thousands) [GRAPHICAL REPRESENTATION OF BAR CHART BELOW]
Depreciation and Amortization ---------------Capital Expenditure -----------

1993 1994 1995 1996 1997

......................... ......................... ......................... ......................... .........................

$1,270 $1,348 $1,248 $1,477 $2,612

$ 910 $1,912 $1,631 $2,864 $4,723

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STOCKHOLDERS' EQUITY (in thousands) [GRAPHICAL REPRESENTATION OF BAR CHART BELOW]
1993 1994 1995 1996 1997 ......................... ......................... ......................... ......................... ......................... $18,416 $19,274 $22,333 $54,087 $62,408

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14 CONSOLIDATED BALANCE SHEETS Zygo Corporation and Subsidiaries (Thousands, except share and per share amounts)

June 30, 1997 ------Assets Current assets: Cash and cash equivalents .................................. Marketable securities (note 3) ............................. Receivables (note 4) ....................................... Inventories (note 5) ....................................... Costs in excess of billings (note 6) ....................... Prepaid expenses and taxes ................................. Deferred income taxes (note 17) ............................ Total current assets ............................... Property, plant and equipment, net (notes 7, 11, and 19) ........... Goodwill and other intangibles, net (note 8) ....................... Other assets ....................................................... Total assets ....................................................... Liabilities and Stockholders' Equity Current liabilities: Accounts payable ........................................... Customer progress payments ................................. Accrued salaries and wages ................................. Other accrued expenses ..................................... Income taxes payable ....................................... Total current liabilities .......................... Deferred income taxes (note 17) .................................... Stockholders' equity (notes 13, 14, 15 and 16): Common stock, $.10 par value per share: 15,000,000 shares authorized; 10,765,940 shares issued (10,337,972 in 1996) ....................... Additional paid-in capital ................................. Retained earnings .......................................... Net unrealized gain (loss) on marketable securities (note 3)

June 30, 1996 -------

$10,981 12,766 20,730 11,656 2,082 590 2,205 ------61,010 ------9,174 7,818 797 ------$78,799 =======

$18,449 20,035 10,627 7,162 252 233 1,506 ------58,264 ------6,512 600 519 ------$65,895 =======

$ 4,659 251 3,581 4,414 472 ------13,377 ------3,014

$ 4,302 176 3,083 2,311 1,244 ------11,116 ------692

Less treasury stock, at cost; 207,600 common shares ........

1,077 40,210 21,405 17 ------62,709 301

517 34,846 19,060 (35) ------54,388 301

14 CONSOLIDATED BALANCE SHEETS Zygo Corporation and Subsidiaries (Thousands, except share and per share amounts)

June 30, 1997 ------Assets Current assets: Cash and cash equivalents .................................. Marketable securities (note 3) ............................. Receivables (note 4) ....................................... Inventories (note 5) ....................................... Costs in excess of billings (note 6) ....................... Prepaid expenses and taxes ................................. Deferred income taxes (note 17) ............................ Total current assets ............................... Property, plant and equipment, net (notes 7, 11, and 19) ........... Goodwill and other intangibles, net (note 8) ....................... Other assets ....................................................... Total assets ....................................................... Liabilities and Stockholders' Equity Current liabilities: Accounts payable ........................................... Customer progress payments ................................. Accrued salaries and wages ................................. Other accrued expenses ..................................... Income taxes payable ....................................... Total current liabilities .......................... Deferred income taxes (note 17) .................................... Stockholders' equity (notes 13, 14, 15 and 16): Common stock, $.10 par value per share: 15,000,000 shares authorized; 10,765,940 shares issued (10,337,972 in 1996) ....................... Additional paid-in capital ................................. Retained earnings .......................................... Net unrealized gain (loss) on marketable securities (note 3)

June 30, 1996 -------

$10,981 12,766 20,730 11,656 2,082 590 2,205 ------61,010 ------9,174 7,818 797 ------$78,799 =======

$18,449 20,035 10,627 7,162 252 233 1,506 ------58,264 ------6,512 600 519 ------$65,895 =======

$ 4,659 251 3,581 4,414 472 ------13,377 ------3,014

$ 4,302 176 3,083 2,311 1,244 ------11,116 ------692

Less treasury stock, at cost; 207,600 common shares ........ Total stockholders' equity ......................... Total liabilities and stockholders' equity .........................

1,077 40,210 21,405 17 ------62,709 301 ------62,408 ------$78,799 =======

517 34,846 19,060 (35) ------54,388 301 ------54,087 ------$65,895 =======

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF EARNINGS Zygo Corporation and Subsidiaries 15 (Thousands, except per share amounts)
Fiscal Year Ended June 30, ------------------------------1997 1996 1995 ------------------$87,220 $57,374 $32,233 45,395 31,508 18,002 ------------------41,825 25,866 14,231 13,830 7,151 9,500 5,538 6,537 3,967

Net sales (notes 18 and 19) ...................... Cost of goods sold ............................... Gross profit ..................... Selling, general and administrative expenses ..... Research and development .........................

CONSOLIDATED STATEMENTS OF EARNINGS Zygo Corporation and Subsidiaries 15 (Thousands, except per share amounts)
Fiscal Year Ended June 30, ------------------------------1997 1996 1995 ------------------$87,220 $57,374 $32,233 45,395 31,508 18,002 ------------------41,825 25,866 14,231 13,830 7,151 11,083 558 ------9,203 ------9,500 5,538 --------10,828 ------6,537 3,967 --------3,727 -------

Net sales (notes 18 and 19) ...................... Cost of goods sold ............................... Gross profit ..................... Selling, general and administrative expenses ..... Research and development ......................... Nonrecurring acquisition-related charges ......... Amortization of goodwill and other intangibles ... Operating profit .................

Other income (expense): Interest income .......................... Interest expense (note 10) ............... Miscellaneous expense, net ............... Total other income ............... Earnings before income taxes ..... Income tax expense (note 17) ..................... Net earnings .....................................

883 -(48) ------835 ------10,038 7,161 ------$ 2,877 =======

946 -(216) ------730 ------11,558 3,759 ------$ 7,799 =======

372 (40) (103) ------229 ------3,956 1,207 ------$ 2,749 =======

Earnings per common and common equivalent share (note 14) ...............

$ 0.24 =======

$ 0.72 =======

$ 0.32 =======

Weighted average common share and common dilutive equivalents outstanding (note 14)

11,998 =======

10,878 =======

8,484 =======

See accompanying notes to consolidated financial statements.

16

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Thousands of dollars)

Zygo Corpo

Balance at June 30, 1994 ............................ Net earnings ................................ Net unrealized gain on marketable securities, net of related tax effect..... Exercise of employee stock options. and related tax effect ................... Stock split (note 14) ....................... Balance at June 30, 1995 ............................ Net earnings ................................ Shares issued for NexStar (note 2) .......... Net unrealized loss on marketable securities, net of related tax effect..... Issuance of common stock (note 14) .......... Exercise of employee stock options and related tax effect ................... Balance at June 30, 1996 ............................

Unrealized Additional Gain (Loss) on Common Paid-In Retained Marketable T Stock Capital Earnings Securities ------------------------------------------------$ 266 $10,484 $ 8,893 $ (68) --2,749 --3 134 -----403 -25 -85 4 -----517 -242 -------10,726 -1,017 -22,607 496 ------34,846 --(134) ------11,508 7,799 (247) ---------19,060 65 ------(3) --(32) ------(35)

16

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Thousands of dollars)

Zygo Corpo

Balance at June 30, 1994 ............................ Net earnings ................................ Net unrealized gain on marketable securities, net of related tax effect..... Exercise of employee stock options. and related tax effect ................... Stock split (note 14) ....................... Balance at June 30, 1995 ............................ Net earnings ................................ Shares issued for NexStar (note 2) .......... Net unrealized loss on marketable securities, net of related tax effect..... Issuance of common stock (note 14) .......... Exercise of employee stock options and related tax effect ................... Balance at June 30, 1996 ............................ Net earnings ................................ Shares issued for TIC (note 2) .............. Net unrealized gain on marketable securities, net of related tax effect..... Exercise of employee stock options and related tax effect ................... Stock split (note 14) ....................... Balance at June 30, 1997 ............................

Unrealized Additional Gain (Loss) on Common Paid-In Retained Marketable T Stock Capital Earnings Securities ------------------------------------------------$ 266 $10,484 $ 8,893 $ (68) --2,749 --3 134 -----403 -25 -85 4 -----517 -10 -18 532 -----$1,077 ====== -242 -------10,726 -1,017 -22,607 496 ------34,846 -2,990 -2,374 -------$40,210 ======= --(134) ------11,508 7,799 (247) ---------19,060 2,877 ---(532) ------$21,405 ======= 65 ------(3) --(32) ------(35) --52 ------$ 17 =====

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS Zygo Corporation and Subsidiaries 17 (Thousands of dollars)
Fiscal Year Ended June 30, ----------------------------1997 1996 1995 --------------------Cash provided by (used for) operating activities: Net earnings .................................................. Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization ......................... Deferred income taxes ................................. Loss on disposal of assets ............................ Nonrecurring acquisition-related IPR&D charges (note 2) Gain on sale of marketable securities ................. Changes in operating accounts: Receivables ................................... Costs in excess of billings ................... Inventories ................................... Prepaid expenses and taxes .................... Accounts payable and accrued expenses ......... Net cash provided by operating activities ............. Cash provided by (used for) investing activities: Additions to property, plant and equipment .................... Investment in marketable securities ........................... Investments in other assets ................................... Acquisition of business ....................................... Proceeds from the sale of marketable securities ............... $ 2,877 $ 7,799 $ 2,749

2,612 (255) 298 10,084 (49) (7,682) (1,830) (764) 20 (1,244) -------4,067 -------(4,723) (3,772) (154) (11,699) 6,098

1,477 (67) 266 -(16) (3,579) (252) (1,519) 350 4,136 -------8,595 -------(2,864) (16,986) (229) -999

1,248 (248) 251 --(2,220) -(2,387) (313) 2,751 ------1,831 ------(1,631) (1,229) (39) (100) --

CONSOLIDATED STATEMENTS OF CASH FLOWS Zygo Corporation and Subsidiaries 17 (Thousands of dollars)
Fiscal Year Ended June 30, ----------------------------1997 1996 1995 --------------------Cash provided by (used for) operating activities: Net earnings .................................................. Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization ......................... Deferred income taxes ................................. Loss on disposal of assets ............................ Nonrecurring acquisition-related IPR&D charges (note 2) Gain on sale of marketable securities ................. Changes in operating accounts: Receivables ................................... Costs in excess of billings ................... Inventories ................................... Prepaid expenses and taxes .................... Accounts payable and accrued expenses ......... Net cash provided by operating activities ............. Cash provided by (used for) investing activities: Additions to property, plant and equipment .................... Investment in marketable securities ........................... Investments in other assets ................................... Acquisition of business ....................................... Proceeds from the sale of marketable securities ............... Proceeds from maturity of marketable securities ............... Proceeds from sale of assets .................................. Net cash used for investing activities ................ Cash provided by (used for) financing activities: Repayments of long-term debt .................................. Net proceeds from issuance of common stock .................... Exercise of employee stock options ............................ Net cash provided by (used for) financing activities .. Net increase (decrease) in cash and cash equivalents .................. Cash and cash equivalents, beginning of year .......................... Cash and cash equivalents, end of year ................................ $ 2,877 $ 7,799 $ 2,749

2,612 (255) 298 10,084 (49) (7,682) (1,830) (764) 20 (1,244) -------4,067 -------(4,723) (3,772) (154) (11,699) 6,098 4,860 18 -------(9,372) -------(2,662) -499 -------(2,163) -------(7,468) 18,449 -------$ 10,981 ========

1,477 (67) 266 -(16) (3,579) (252) (1,519) 350 4,136 -------8,595 -------(2,864) (16,986) (229) -999 3,660 4 -------(15,416) --------22,692 150 -------22,842 -------16,021 2,428 -------$ 18,449 ========

1,248 (248) 251 --(2,220) -(2,387) (313) 2,751 ------1,831 ------(1,631) (1,229) (39) (100) -1,465 12 ------(1,522) ------(656) -245 ------(411) ------(102) 2,530 ------$ 2,428 =======

See accompanying notes to consolidated financial statements.

18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997, 1996, and 1995 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Zygo Corporation and its subsidiaries (the "Company" or "Zygo"). All material transactions and accounts with the subsidiaries have been eliminated from the consolidated financial statements. As discussed in Note 2, all the outstanding shares of NexStar Automation, Inc. ("NexStar") were acquired by the Company on September 12, 1996, in a transaction accounted for as a pooling-of-interests, and, accordingly, the Company's consolidated financial statements for

18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997, 1996, and 1995 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Zygo Corporation and its subsidiaries (the "Company" or "Zygo"). All material transactions and accounts with the subsidiaries have been eliminated from the consolidated financial statements. As discussed in Note 2, all the outstanding shares of NexStar Automation, Inc. ("NexStar") were acquired by the Company on September 12, 1996, in a transaction accounted for as a pooling-of-interests, and, accordingly, the Company's consolidated financial statements for fiscal 1996 have been restated to include the accounts and operations of NexStar. The operating results for NexStar were not material to the combined results of the two companies for all periods prior to fiscal 1996, and therefore, results for those periods have not been restated. CASH AND CASH EQUIVALENTS The Company considers cash and cash investments with maturities at the date of purchase of less than three months to be cash and cash equivalents. MARKETABLE SECURITIES The Company considers investments in securities with maturities at the date of purchase in excess of three months as marketable securities. Marketable securities primarily consist of tax-exempt municipal debt securities. All securities held by the Company at June 30, 1997 and 1996, were classified as available-for-sale and recorded at fair value or held to maturity and recorded at cost. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. INVENTORIES Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. REVENUE RECOGNITION Revenues, other than revenue under the National Ignition Facility ("NIF") contract (note 20) and revenue from certain automation contracts (note 6), are recognized when units are shipped. Revenues related to NIF and automation contracts are recognized under the percentage-of-completion method of accounting. DEPRECIATION Depreciation rates are based on the estimated useful lives of the various classes of assets and are computed using the straight-line method. EARNINGS PER SHARE Earnings per common and common equivalent share amounts represent primary earnings per share and are based upon the weighted average number of common shares outstanding, plus, when their effect is dilutive, the weighted average number of shares issuable upon exercise of outstanding stock options, less the weighted average number of common shares which could have been repurchased with the proceeds available from the assumed exercise of the outstanding options. Fully diluted earnings per share are not significantly different from primary earnings per share. GAIN CONTINGENCY The Company was awarded $2,668,710 plus recovery of certain costs in a judgment rendered by the United

States District Court (District of Arizona) on June 2, 1994. The Court's decision was appealed to the Court of Appeals for the Federal Circuit located in Washington, D.C. by the defendant and oral arguments of the appeal were heard by the Court on March 9, 1995. On April 1, 1996, the United States Court of Appeals for the Federal Circuit rendered an Opinion Announcing Judgment of the Court. The appellate court affirmed-in-part and reversed-in-part the District Court's earlier findings and remanded the case to the District Court for a redetermination of the damage award. The Company has not recorded any gain from the District Court's earlier ruling and will not until a final determination of the award is made. STOCK SPLIT The Board of Directors of the Company declared a 2-for-1 split of the Company's common shares, effected in the form of a 100% stock dividend which was paid on February 27, 1997, to shareholders of record as of the close of business on February 3, 1997. The Board of Directors of the Company also declared a 3-for-2 split of the Company's common shares, effected in the form of a 50% stock dividend paid on August 21, 1995, to shareholders of record as of the close of business on August 1, 1995. All presentations involving numbers of shares and amounts per share in 1996 and prior years have been restated to reflect the stock splits. CAPITAL STOCK The Company follows the practice of recording amounts received upon the exercise of options by crediting common stock and additional capital. No charges are reflected in the consolidated statements of operations as a result of the grant or exercise of stock options which are granted with an exercise price at fair-market value on the date of grant. The Company realizes an income tax benefit from the exercise or early disposition of certain stock options. This benefit results in a decrease in current income taxes payable and an increase in additional capital. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short maturity of these items. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets

Zygo Corporation and Subsidiaries 19 and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of ("Statement 121") was issued in 1995. Statement 121 requires that long-lived assets to be disposed of, certain identifiable intangibles, and goodwill to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Statement 121 was adopted for the Company's fiscal year 1996 and has not had a material impact on its operating results or financial condition. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"), was issued in 1995. Implementation is required in the fiscal year commencing July 1, 1996. Statement 123 established financial accounting and reporting standards for stock-based compensation plans. The Company has adopted the disclosure requirements of Statement 123, effective for the fiscal year ended June 30, 1997. (See note 15). Accordingly, no compensation cost has been recognized for its stock option plans under Statement 123. Statement of Financial Accounting Standards No. 128, Earnings Per Share ("Statement 128"), was issued in

Zygo Corporation and Subsidiaries 19 and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of ("Statement 121") was issued in 1995. Statement 121 requires that long-lived assets to be disposed of, certain identifiable intangibles, and goodwill to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Statement 121 was adopted for the Company's fiscal year 1996 and has not had a material impact on its operating results or financial condition. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"), was issued in 1995. Implementation is required in the fiscal year commencing July 1, 1996. Statement 123 established financial accounting and reporting standards for stock-based compensation plans. The Company has adopted the disclosure requirements of Statement 123, effective for the fiscal year ended June 30, 1997. (See note 15). Accordingly, no compensation cost has been recognized for its stock option plans under Statement 123. Statement of Financial Accounting Standards No. 128, Earnings Per Share ("Statement 128"), was issued in 1997 and is effective for financial statements for both interim and annual periods ending after December 15, 1997. Statement 128 was issued to simplify the computation of EPS and to make the U.S. standard more compatible with the EPS standards of other countries and that of the International Accounting Standards Committee. The Company intends to adopt Statement 128 for its interim period ended December 31, 1997, as early adoption is not permitted. Statement of Financial Accounting Standards No. 129, Disclosure of Information about Capital Structure ("Statement 129"), was issued in 1997 and is effective for financial statements for both interim and annual periods ending after December 15, 1997. Statement 129 was issued to establish standards for disclosing information about an entity's capital structure. The Company is currently compliant with this standard. Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("Statement 130"), was issued in 1997 and is effective for financial statements for both interim and annual periods ending after December 15, 1997. Statement 130 was issued to establish standards for reporting and display of comprehensive income and components in a full set of general purpose financial statements. The Company will adopt this statement no later than the interim period ended December 31, 1997. Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("Statement 131"), was issued in 1997 and is effective for financial statements for both interim and annual periods ending after December 15, 1997. Statement 131 was issued to establish standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company will adopt this statement no later than the interim period ended December 31, 1997. NOTE 2: MERGERS AND ACQUISITIONS On August 8, 1996, the Company acquired and accounted for as a purchase, the proprietary products division of Technical Instrument Company ("TIC"), a privately held California-based entity that designs, manufactures, markets and sells microscope systems and other precision optical instrument systems and components. The Company paid $11,699,000 and issued unregistered shares of its common stock, $.10 par value, valued at $3.0 million in exchange for all the outstanding capital stock of TIC. The net purchase price was allocated to its net assets acquired, less a write-off of $10,084,000 of in-process research and development costs ("IPR&D"), as follows:

(Thousands of dollars) Working capital ....................................... Property, plant and equipment ......................... Other assets .......................................... Goodwill and other intangibles ........................ Debt assumed .......................................... Deferred tax liability, net ...........................

$

867 135 573 7,580 (2,662) (1,878) ------$ 4,615 =======

Results of operations after the acquisition date are included in the 1997 Consolidated Statements of Earnings. Fiscal 1997 sales would have been increased $1,727,000 for the July 1, 1996 to August 8, 1996 time frame with no material impact on earnings. The following unaudited pro forma information for 1996 has been prepared assuming that this acquisition had taken place at the beginning of the period. The pro forma information includes adjustments to record the amortization of intangibles arising from the transaction, to reduce interest income for cash used for the transaction, and to adjust income taxes for the reduction in interest income. The unaudited pro forma financial information is

20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed dates.
Fiscal Year Ended June 30, 1996 (Thousands, except per share amounts) ----------------Pro forma net sales ...................................... $68,459 Pro forma net earnings ................................... $ 7,968 Pro forma net earnings per common share .................. $ 0.72 -----------------

On September 12, 1996, the Company issued 500,000 shares of its common stock, effected for the 2-for-1 stock split, in exchange for all of the outstanding shares of NexStar Automation, Inc. ("NexStar"). The acquisition has been accounted for as a pooling of interests and, accordingly, the Company's consolidated financial statements for fiscal 1996 have been restated to include the accounts and operations of NexStar. The operating results for NexStar were not material to the combined results of the two companies for all periods prior to fiscal 1996, and therefore, results for those periods have not been restated. In connection with the acquisition, $999,000 of acquisition-related costs were incurred and have been charged to nonrecurring acquisition expense in the first quarter of fiscal 1997. The acquisition costs consisted of legal, investment banking, and accounting fees. NOTE 3: MARKETABLE SECURITIES Marketable securities at June 30, 1997, consist primarily of tax-exempt bonds issued by various state and municipal agencies which are reported either at fair value or at cost depending on their classification. The unrealized gain on marketable securities of $28,920 (gross) is shown net of its related tax effect of $11,742 as a separate component of stockholders' equity. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold. The cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for available-for-sale securities at June 30, 1997 and 1996, were as follows:
Gross Unrealized Holding Gains Gross Unrealized Holding Losses

Cost

Fair Value

20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed dates.
Fiscal Year Ended June 30, 1996 (Thousands, except per share amounts) ----------------Pro forma net sales ...................................... $68,459 Pro forma net earnings ................................... $ 7,968 Pro forma net earnings per common share .................. $ 0.72 -----------------

On September 12, 1996, the Company issued 500,000 shares of its common stock, effected for the 2-for-1 stock split, in exchange for all of the outstanding shares of NexStar Automation, Inc. ("NexStar"). The acquisition has been accounted for as a pooling of interests and, accordingly, the Company's consolidated financial statements for fiscal 1996 have been restated to include the accounts and operations of NexStar. The operating results for NexStar were not material to the combined results of the two companies for all periods prior to fiscal 1996, and therefore, results for those periods have not been restated. In connection with the acquisition, $999,000 of acquisition-related costs were incurred and have been charged to nonrecurring acquisition expense in the first quarter of fiscal 1997. The acquisition costs consisted of legal, investment banking, and accounting fees. NOTE 3: MARKETABLE SECURITIES Marketable securities at June 30, 1997, consist primarily of tax-exempt bonds issued by various state and municipal agencies which are reported either at fair value or at cost depending on their classification. The unrealized gain on marketable securities of $28,920 (gross) is shown net of its related tax effect of $11,742 as a separate component of stockholders' equity. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold. The cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for available-for-sale securities at June 30, 1997 and 1996, were as follows:
Gross Unrealized Holding Gains ---------Gross Unrealized Holding Losses ----------

(Thousands of dollars) At June 30, 1997 State and local municipal bonds ......... At June 30, 1996 State and local municipal bonds .........

Cost ----

Fair Value -----

$ 5,536 -------

$29 ---

$----

$ 5,565 -------

$11,098 -------

$----

$59 ---

$11,039 -------

The Company recorded gross realized gains on the maturity of investment securities of $49,228 and $15,611 in 1997 and 1996, respectively. There were no gross realized losses recorded in 1997 or 1996. Maturities of investment securities classified as available-for-sale were as follows at June 30, 1997:
Fair Value ----$ -5,565 ------

(Thousands of dollars) Due within one year ..................................... Due after one year through five years ...................

Cost ---$ -5,536 ------

$5,536 ======

$5,565 ======

Maturities of investment securities classified as held-to-maturity were as follows at June 30, 1997:
Fair Value ----$7,201 ------$7,201 ======

(Thousands of dollars) Due within one year ..................................... Due after one year through five years ...................

Cost ---$7,201 ------$7,201 ======

NOTE 4: ACCOUNTS RECEIVABLE At June 30, 1997 and 1996, accounts receivable, net of allowances, were as follows:
June 30, 1997 (Thousands of dollars) ------Trade (note 19) ...................................... $21,047 Other ................................................ 411 ------21,458 Allowance ............................................ (728) ------$20,730 ======= June 30, 1996 ------$10,282 612 ------10,894 (267) ------$10,627 =======

NOTE 5: INVENTORIES Inventories at June 30, 1997 and 1996 were as follows:
June 30, 1997 (Thousands of dollars) ------Raw materials and manufactured parts ................. $ 7,435 Work in process ...................................... 3,248 Finished goods ....................................... 973 ------$11,656 ======= June 30, 1996 ------$ 3,126 3,558 478 ------$ 7,162 =======

NOTE 6: COSTS IN EXCESS OF BILLINGS Revenues from automation projects are accounted for under the percentage-of-completion method, using total project costs incurred to date in relation to estimated total costs of the contracts to measure the stage of completion. The cumulative effects of revisions of estimated total contract costs and revenues are recorded in the period in which the facts become known. When a loss is anticipated on a contract, the full amount of the loss is provided for currently. The differences between amounts billed and revenue recognized is shown as costs in excess of billings on the accompanying balance sheets. Totals of revenue earned and billings issued on contracts were as follows:
June 30, 1997 (Thousands of dollars) ------Revenue recognized to date ........................... $14,674 Billings to date ..................................... 12,592 ------$ 2,082 June 30, 1996 ------$ 6,303 6,051 ------$ 252

=======

=======

Zygo Corporation and Subsidiaries 21 NOTE 7: PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Costs of replacements and improvements are capitalized and depreciated. Maintenance and repairs are charged to expense as incurred. At June 30, 1997 and 1996, property, plant and equipment, at cost, was as follows:
June 30, 1997 ------$ 650 4,170 15,372 277 1,396 ------21,865 12,691 ------$ 9,174 ======= June 30, 1996 ------$ 650 4,352 12,072 18 896 ------17,988 11,476 ------$ 6,512 =======

(Thousands of dollars) Land (note 19) ....................................... Building ............................................. Machinery, equipment and office furniture ............ Leasehold improvements ............................... Construction in progress .............................

Less accumulated depreciation ........................

NOTE 8: GOODWILL AND OTHER INTANGIBLES The cost of intangible assets is amortized on a straight-line basis which ranges from 4 to 20 years. During fiscal 1997, goodwill and other intangibles increased by $7,799,000 largely due to the Company's acquisition of Technical Instrument Company. (See note 2). This increase was partially offset by current year amortization of $581,000. Management evaluates, on an ongoing basis, the carrying value of its intangible assets and makes adjustments, when impairments are identified. Goodwill and other intangibles, net, at June 30, 1997 and 1996 were as follows:
June 30, 1997 (Thousands of dollars) ------Goodwill and other intangibles ....................... $ 8,594 Accumulated amortization ............................. 776 ------$ 7,818 ======= June 30, 1996 ------$ 795 195 ------$ 600 =======

NOTE 9: BANK LINE OF CREDIT The Company has a $3,000,000 unsecured bank line of credit with interest at LIBOR plus 60 basis points (approximately 6.7% at June 30, 1997). The line of credit is available through November 30, 1997. At June 30, 1997 and 1996, no amounts were outstanding under the bank line of credit. NOTE 10: LONG-TERM DEBT In the quarter ended March 31, 1995, the Company retired its 1977 and 1981 Series Industrial Development Bonds totaling $375,000 and $150,000, respectively, prior to scheduled maturity. This transaction resulted in no extraordinary gain or loss. The funds for these retirements were obtained from internally generated cash flows. As part of the acquisition of TIC, the Company assumed outstanding debt totaling $2,662,000. The Company repaid this debt immediately after the acquisition.

Zygo Corporation and Subsidiaries 21 NOTE 7: PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Costs of replacements and improvements are capitalized and depreciated. Maintenance and repairs are charged to expense as incurred. At June 30, 1997 and 1996, property, plant and equipment, at cost, was as follows:
June 30, 1997 ------$ 650 4,170 15,372 277 1,396 ------21,865 12,691 ------$ 9,174 ======= June 30, 1996 ------$ 650 4,352 12,072 18 896 ------17,988 11,476 ------$ 6,512 =======

(Thousands of dollars) Land (note 19) ....................................... Building ............................................. Machinery, equipment and office furniture ............ Leasehold improvements ............................... Construction in progress .............................

Less accumulated depreciation ........................

NOTE 8: GOODWILL AND OTHER INTANGIBLES The cost of intangible assets is amortized on a straight-line basis which ranges from 4 to 20 years. During fiscal 1997, goodwill and other intangibles increased by $7,799,000 largely due to the Company's acquisition of Technical Instrument Company. (See note 2). This increase was partially offset by current year amortization of $581,000. Management evaluates, on an ongoing basis, the carrying value of its intangible assets and makes adjustments, when impairments are identified. Goodwill and other intangibles, net, at June 30, 1997 and 1996 were as follows:
June 30, 1997 (Thousands of dollars) ------Goodwill and other intangibles ....................... $ 8,594 Accumulated amortization ............................. 776 ------$ 7,818 ======= June 30, 1996 ------$ 795 195 ------$ 600 =======

NOTE 9: BANK LINE OF CREDIT The Company has a $3,000,000 unsecured bank line of credit with interest at LIBOR plus 60 basis points (approximately 6.7% at June 30, 1997). The line of credit is available through November 30, 1997. At June 30, 1997 and 1996, no amounts were outstanding under the bank line of credit. NOTE 10: LONG-TERM DEBT In the quarter ended March 31, 1995, the Company retired its 1977 and 1981 Series Industrial Development Bonds totaling $375,000 and $150,000, respectively, prior to scheduled maturity. This transaction resulted in no extraordinary gain or loss. The funds for these retirements were obtained from internally generated cash flows. As part of the acquisition of TIC, the Company assumed outstanding debt totaling $2,662,000. The Company repaid this debt immediately after the acquisition. Interest payments were $0, $0, and $39,900 in fiscal 1997, 1996, and 1995, respectively. NOTE 11: LEASES

The Company leases certain manufacturing equipment and facilities under operating leases, some of which include cost escalation clauses, expiring on various dates through 2001. Total rental expense charged to operations was $509,000 in 1997, $336,000 in 1996, and $183,000 in 1995. At June 30, 1997, the minimum future rental commitments under noncancellable leases payable over the remaining lives of the leases were:
Minimum Future Rental Commitments ------------$ 517 473 391 101 -----$1,482 ======

(Thousands of dollars) 1998 1999 2000 2001 ..................................................... ..................................................... ..................................................... .....................................................

NOTE 12: PROFIT-SHARING PLAN The Company maintains a deferred profit-sharing plan under which substantially all full-time employees of the Company are eligible to participate. Profit-sharing expense for the years ended June 30, 1997, 1996, and 1995 amounted to $2,007,600, $1,295,600 and $440,000, respectively. Profit-sharing contributions are determined annually at the discretion of the Board of Directors. Effective June 30, 1985, the existing profit-sharing plan was revised and amended to incorporate a 401(k) tax deferred payroll deduction program and an Employee Stock Ownership Program. Under the 401(k) program, employees may contribute a tax deferred amount of up to 15% of their compensation, as defined. The Company may contribute to the 401(k) program, an amount determined annually at the discretion of the Board of Directors. The 401(k) contribution expense for the years ended June 30, 1997, 1996, and 1995 amounted to $468,700, $333,900, and $255,000, respectively. Under the Employee Stock Ownership Program, the Company may, at the discretion of the Board of Directors, contribute its own stock or cash to purchase its own stock. The purchased stock's fair market value shall not exceed the maximum amount of employee stock ownership credit as determined under Section 416 of the Internal Revenue Code. There were no purchases and no contributions made under this program for the years ended June 30, 1997, 1996, and 1995. NOTE 13: STOCKHOLDERS' AGREEMENTS A registration rights agreement was entered into by Canon Inc., Wesleyan University, Paul F. Forman, Carl A. Zanoni, Sol F. Laufer, and the Company in November 1993, granting to each of these stockholders the right, until November 30, 1998, to have his or its shares of Common Stock included in any registered public offering of the Company's securities.

22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14: STOCKHOLDERS' EQUITY On January 23, 1997 the Board of Directors declared a 2-for-1 split effected in the form of a 100% stock dividend payable on February 27, 1997, to shareholders of record on February 3, 1997. This transaction resulted in the issuance of approximately 5,320,000 additional shares of Common Stock. Stockholders' Equity had been adjusted to recognize the effect of the stock split by reclassifying from retained earnings to paid-in capital the par value of the additional shares arising from the split. In addition, all references in the financial statements to numbers of shares, per share amounts, stock option data, and market prices of the Company's Common Stock have been restated to give retroactive recognition to the stock split. On July 20, 1995, the Board of Directors approved an increase in the authorized shares of the Company's

22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14: STOCKHOLDERS' EQUITY On January 23, 1997 the Board of Directors declared a 2-for-1 split effected in the form of a 100% stock dividend payable on February 27, 1997, to shareholders of record on February 3, 1997. This transaction resulted in the issuance of approximately 5,320,000 additional shares of Common Stock. Stockholders' Equity had been adjusted to recognize the effect of the stock split by reclassifying from retained earnings to paid-in capital the par value of the additional shares arising from the split. In addition, all references in the financial statements to numbers of shares, per share amounts, stock option data, and market prices of the Company's Common Stock have been restated to give retroactive recognition to the stock split. On July 20, 1995, the Board of Directors approved an increase in the authorized shares of the Company's Common Stock from 10,000,000 to 15,000,000 which was approved by the Company's stockholders at its annual meeting held on November 16, 1995. On December 13, 1995, the Company commenced a public offering of 1,300,000 shares of Common Stock, of which 845,000 shares were sold by the Company, and 455,000 shares were sold by certain of the Company's stockholders. The Company generated approximately $22.7 million in net proceeds, which is being used for working capital and other general corporate purposes, and for acquisitions. NOTE 15: STOCK COMPENSATION PLANS As of June 30, 1997, Zygo Corporation has two stock based compensation plans, which are described below. (See note 16). The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans. Since all options are granted with an exercise price equal to the fair-market value on the date of the grant, no compensation cost has been recognized for its fixed option plans. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 "Accounting for Stock-Based Compensation", which requires that the information be determined as if the Company has accounted for its stock options granted in fiscal years beginning after December 15, 1994 under the fair value method of the statement. The fair value of options at date of grant was estimated using the Black-Scholes model. The Company's pro forma information follows:
June 30, 1997 ------$ 423 $ .04 June 30, 1996 ------$6,613 $ .61

(In thousands, except per share amounts) Pro forma net income ................................ Pro forma earnings per share ........................

The fair values of these options at the date of grant was estimated with the following weighted average assumptions for 1997 and 1996: risk free interest rate 6.8%, no dividend yield, volatility factor of the expected market price of the Company's common stock of 69% and an expected life of the option of 6.6 years. The above pro forma information is based on historical activity and may not represent future trends. NOTE 16: STOCK OPTION PLANS 1987 STOCK OPTION PLAN AND DATA The Zygo Corporation 1987 Amended and Restated Stock Option Plan permits the granting of non-qualified options to purchase a total of 2,850,000 shares (adjusted for splits) of common stock at prices not less than the fair-market value on the date of grant. Options generally become exercisable at the rate of 25% of the shares each year commencing one year after the date of grant. The Plan, as amended will expire on September 3, 2002.
June 30, 1997 --------------------------Weighted Average Shares Exercise Price ---------------------1,304,674 $ 2.1836

Outstanding at beginning of year .................

Granted .......................................... Exercised ........................................ Expired or canceled .............................. Outstanding at end of year .......................

322,500 (232,950) (900) --------1,393,324 =========

$17.9720 $ 2.1436 $ 1.6650 $ 5.6865

Outstanding at beginning of year ................. Granted .......................................... Exercised ........................................ Expired or canceled .............................. Outstanding at end of year .......................

June 30, 1996 --------------------------Weighted Average Shares Exercise Price ---------------------1,375,574 $ 2.0347 15,500 $14.2426 (86,400) $ 1.7554 0 $ 0.0000 --------1,304,674 $ 2.1982 ========= June 30, 1995 --------------------------Weighted Average Shares Exercise Price ---------------------911,850 $ 1.8393 540,226 $ 2.2436 (76,502) $ 1.6339 0 $ 0.0000 --------1,375,574 $ 2.0347 =========

Outstanding at beginning of year ................. Granted .......................................... Exercised ........................................ Expired or canceled .............................. Outstanding at end of year .......................

Zygo Corporation and Subsidiaries 23 1994 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN AND DATA The Zygo Corporation 1994 Non-Employee Director Stock Option Plan permits the granting of non-qualified options to purchase a total of 620,000 shares (adjusted for splits) of common stock at prices not less than the fair-market value on the date of grant. Options become exercisable at the rate of 20% of the shares each year commencing one year after the date of grant. The Plan, as amended, will expire on August 25, 2004.
June 30, 1997 --------------------------Weighted Average Shares Exercise Price ---------------------450,000 $ 6.2292 0 $ 0.0000 0 $ 0.0000 0 $ 0.0000 ------450,000 $ 6.2292 ======= June 30, 1996 --------------------------Weighted Average Shares Exercise Price ---------------------375,000 $ 2.0000 75,000 $24.2594 0 $ 0.0000 0 $ 0.0000

Outstanding at beginning of year ................. Granted .......................................... Exercised ........................................ Expired or canceled .............................. Outstanding at end of year .......................

Outstanding at beginning of year ................. Granted .......................................... Exercised ........................................ Expired or canceled ..............................

Zygo Corporation and Subsidiaries 23 1994 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN AND DATA The Zygo Corporation 1994 Non-Employee Director Stock Option Plan permits the granting of non-qualified options to purchase a total of 620,000 shares (adjusted for splits) of common stock at prices not less than the fair-market value on the date of grant. Options become exercisable at the rate of 20% of the shares each year commencing one year after the date of grant. The Plan, as amended, will expire on August 25, 2004.
June 30, 1997 --------------------------Weighted Average Shares Exercise Price ---------------------450,000 $ 6.2292 0 $ 0.0000 0 $ 0.0000 0 $ 0.0000 ------450,000 $ 6.2292 ======= June 30, 1996 --------------------------Weighted Average Shares Exercise Price ---------------------375,000 $ 2.0000 75,000 $24.2594 0 $ 0.0000 0 $ 0.0000 ------450,000 $ 6.2292 ======= June 30, 1995 --------------------------Weighted Average Shares Exercise Price ---------------------0 $ 0.0000 375,000 $ 2.0000 0 $ 0.0000 0 $ 0.0000 ------375,000 $ 2.0000 =======

Outstanding at beginning of year ................. Granted .......................................... Exercised ........................................ Expired or canceled .............................. Outstanding at end of year .......................

Outstanding at beginning of year ................. Granted .......................................... Exercised ........................................ Expired or canceled .............................. Outstanding at end of year .......................

Outstanding at beginning of year ................. Granted .......................................... Exercised ........................................ Expired or canceled .............................. Outstanding at end of year .......................

The following table summarizes information about all fixed stock options outstanding at June 30, 1997:
Options Outstanding ------------------------------------------------------------------Number Weighted Average Range of Outstanding Remaining Weighted Exercise as of Contractual Average Prices June 30, 1997 Life Exercise Price ------------------------------------------------------$ 1.25 - $ 1.92 293,950 2.68 $ 1.6287 $ 2.00 - $ 2.00 896,624 6.77 $ 2.0000 $ 2.29 - $14.88 360,750 6.93 $ 6.6211 $15.57 - $22.75 208,500 9.11 $19.1843 $25.75 - $25.75 8,500 9.67 $25.7500 $27.38 - $27.38 75,000 8.92 $27.3750 ------------------------------------------------------$ 1.25 - $27.38 1,843,324 6.52 $ 5.9308 ================= ============= ============== ==============

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

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

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

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

Options Exercisable ------------------------------------------------------------------Range of Number Weighted Exercise Exercisable as of Average Prices June 30, 1997 Exercise Price ---------------------------------------------$ 1.25 - $ 1.92 284,950 $ 1.6276 $ 2.00 - $ 2.00 443,999 $ 2.0000 $ 2.29 - $14.88 119,875 $ 2.6261 $15.57 - $22.75 1,500 $15.6900 $25.75 - $25.75 0 $ 0.0000 $27.38 - $27.38 15,000 $27.3700 ---------------------------------------------$ 1.25 - $27.38 865,324 $ 2.4270 ================= ================= ==============

NOTE 17: INCOME TAXES The components of income tax expense (benefit) for each year are as follows:
Fiscal Year Ended June 30, -------------------------1997 1996 1995 ---------------$5,614 1,494 -----$7,108 ====== 38 15 -----$ 53 ====== $7,161 ====== $ $3,264 910 -----$4,174 ====== $ (319) (96) -----$ (415) ====== $3,759 ====== $1,036 421 -----$1,457 ====== $ (188) (62) -----$ (250) ====== $1,207 ======

(Thousands of dollars) Currently payable: Federal ....................................... State .........................................

Deferred: Federal ....................................... State .........................................

Total income tax expense ........................

Income taxes paid amounted to $6,068,000 (including cash payments of $5,432,500 and $635,500 of prior year overpayments applied to fiscal 1997), $3,403,300 and $793,100 (including additional taxes owed for fiscal 1991), in fiscal 1997, 1996, and 1995, respectively. The total income tax expense differs from the amount computed by applying the applicable U.S. federal income tax rate of 35% in 1997 and 34% in 1996 and 1995 to earnings before income taxes for the following reasons:
Fiscal Year Ended June 30, -------------------------1997 1996 1995 (Thousands of dollars) ---------------Computed "expected" tax expense ................. $3,516 $3,994 $1,345 Increases (reductions) in taxes resulting from: Nondeductible acquisitionrelated charges ........................... 3,634 --State taxes, net of federal income tax benefit ........................ 989 537 237 Tax exempt interest income .................. (170) (245) (108) FSC benefit ................................. (724) (543) (194) Other, net .................................. (84) 16 (73) ---------------$7,161 $3,759 $1,207 ====== ====== ======

24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1997 and 1996, are presented below:
June 30, 1997 ------June 30, 1996 -------

(Thousands of dollars) Deferred tax assets: Accounts receivable, principally due to the allowance for doubtful accounts ............. Warranty costs .................................... Vacation costs .................................... Medical insurance costs ........................... Inventory valuation ............................... Unrealized loss on marketable securities .......... Other .............................................

$

Less valuation allowance .......................... Deferred tax asset ................................ Deferred tax liabilities: Prepaid expenses .................................. Plant and equipment, principally due to differences in depreciation expense .......... Intangibles ....................................... Unrealized gain on marketable securities .......... Other ............................................. Deferred tax liability ............................ Net deferred tax asset (liability) ..................

295 347 104 123 1,386 -28 -----2,283 ------2,283 (67)

$

110 246 30 123 969 24 64 -----1,566 ------1,566 (60)

(555) (2,429) (11) (30) -----(3,092) -----$ (809) ======

(662) --(30) -----(752) -----$ 814 ======

The net current deferred tax assets and net non-current deferred tax liabilities as recorded on the balance sheet as of June 30, 1997 and 1996, are as follows:
June 30, 1997 ------$2,205 (3,014) -----$ (809) ====== June 30, 1996 ------$1,506 (692) -----$ 814 ======

(Thousands of dollars) Net current deferred tax asset ...................... Net noncurrent deferred tax liability ............... Net deferred tax asset (liability) ..................

A valuation allowance has not been recorded because the Company believes that the deferred tax assets will, more likely than not, be realized. This determination is based largely upon the Company's historical earnings trend as well as its ability to carryback reversing items and recover taxes paid in the carryback period. In addition, the Company has the ability to offset deferred tax assets against deferred tax liabilities associated with such items as depreciation and amortization. NOTE 18: PRODUCTS, PRINCIPAL CUSTOMERS, AND OPERATIONS BY GEOGRAPHIC AREA The Company designs, develops, manufactures, and markets precision measurement and automation systems and components used to enhance production in high technology industries. The Company is headquartered in Middlefield, Connecticut, and also has operations in Longmont, Colorado, and in Newbury Park, Simi Valley, and Sunnyvale, California. Sales to Canon Inc. and to Canon Sales Co., Inc., accounted for more than 20% of total Company sales for

24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1997 and 1996, are presented below:
June 30, 1997 ------June 30, 1996 -------

(Thousands of dollars) Deferred tax assets: Accounts receivable, principally due to the allowance for doubtful accounts ............. Warranty costs .................................... Vacation costs .................................... Medical insurance costs ........................... Inventory valuation ............................... Unrealized loss on marketable securities .......... Other .............................................

$

Less valuation allowance .......................... Deferred tax asset ................................ Deferred tax liabilities: Prepaid expenses .................................. Plant and equipment, principally due to differences in depreciation expense .......... Intangibles ....................................... Unrealized gain on marketable securities .......... Other ............................................. Deferred tax liability ............................ Net deferred tax asset (liability) ..................

295 347 104 123 1,386 -28 -----2,283 ------2,283 (67)

$

110 246 30 123 969 24 64 -----1,566 ------1,566 (60)

(555) (2,429) (11) (30) -----(3,092) -----$ (809) ======

(662) --(30) -----(752) -----$ 814 ======

The net current deferred tax assets and net non-current deferred tax liabilities as recorded on the balance sheet as of June 30, 1997 and 1996, are as follows:
June 30, 1997 ------$2,205 (3,014) -----$ (809) ====== June 30, 1996 ------$1,506 (692) -----$ 814 ======

(Thousands of dollars) Net current deferred tax asset ...................... Net noncurrent deferred tax liability ............... Net deferred tax asset (liability) ..................

A valuation allowance has not been recorded because the Company believes that the deferred tax assets will, more likely than not, be realized. This determination is based largely upon the Company's historical earnings trend as well as its ability to carryback reversing items and recover taxes paid in the carryback period. In addition, the Company has the ability to offset deferred tax assets against deferred tax liabilities associated with such items as depreciation and amortization. NOTE 18: PRODUCTS, PRINCIPAL CUSTOMERS, AND OPERATIONS BY GEOGRAPHIC AREA The Company designs, develops, manufactures, and markets precision measurement and automation systems and components used to enhance production in high technology industries. The Company is headquartered in Middlefield, Connecticut, and also has operations in Longmont, Colorado, and in Newbury Park, Simi Valley, and Sunnyvale, California. Sales to Canon Inc. and to Canon Sales Co., Inc., accounted for more than 20% of total Company sales for each of the years ended June 30, 1997, 1996 and 1995. (See note 19.) For the years ended June 30, 1996 and

1995, sales to a major manufacturer of computer disk drives and related hardware and software, accounted for 16% and 17%, respectively, of total Company sales. No other individual customer accounted for more than 10% of total Company sales for any year presented in the accompanying consolidated financial statements. Export sales by geographic area were as follows:
Fiscal Year Ended June 30, -------------------------1997 1996 1995 ---------------$21,730 12,650 ------$34,380 5,145 ------$39,525 ======= $19,763 4,765 ------$24,528 2,667 ------$27,195 ======= $ 9,630 3,279 ------$12,909 2,072 ------$14,981 =======

(Thousands of dollars) Far east: Japan ...................................... Pacific Rim ................................ Total Far East ............................... Europe and other ............................. Total ........................................

NOTE 19: RELATED PARTY TRANSACTIONS Sales to Canon Inc., a stockholder, and to Canon Sales Co., Inc., a distributor for certain of the Company's products in Japan and a subsidiary of Canon Inc., amounted to approximately $17,564,000 (20% of net sales), $19,761,000 (34% of net sales), and $9,553,000 (30% of net sales), for the years ended June 30, 1997, 1996, and 1995, respectively. Selling prices of products sold to Canon Inc. and Canon Sales Co., Inc. are based, generally, on the normal terms given to distributors. At June 30, 1997, 1996, and 1995, there was approximately, in the aggregate, $2,345,500, $3,198,100, and $1,104,700, respectively, of trade accounts receivable from Canon Inc. and Canon Sales Co., Inc. On January 4, 1996, the Company purchased approximately 22 acres of land adjacent to the Company's facility in Middlefield, Connecticut, for a purchase price of $440,000. The land, which was jointly owned by Paul F. Forman, Sol F. Laufer, and Carl A. Zanoni, founders of the Company, is intended to be used to facilitate the expansion of the Company's buildings and/or parking facilities in the future. NOTE 20: MATERIAL CONTRACTS On May 9, 1997, the Company announced it had entered into a contract with the University of California's Lawrence Livermore National Laboratory ("LLNL"), whereby the Company will be a primary supplier of large plano optical components for the National Ignition Facility ("NIF"), a $1.2 billion Department of Energy project at LLNL to produce the world's largest laser for nuclear fusion research. The contract provides for the Company to design, manufacture, and equip a world-class optical fabrication facility at its Middlefield, Connecticut, operations for a fixed price of nearly $10 million over an 18-month time period. The contract is presently funded to slightly in excess of $5.5 million and,

Zygo Corporation and Subsidiaries 25 consistent with similar government contracts, requires additional appropriations from the U.S. Congress prior to the Company's receiving additional funding. Revenues recognized on this contract in fiscal 1997 were immaterial. To accommodate the space required for the NIF facility and provide additional office facilities, the Company has commenced work at its Middlefield, Connecticut, site to expand its facilities by 35,500 square feet. It is expected that the addition will be completed in December 1997. NOTE 21: SUBSEQUENT EVENTS On June 30, 1997, Technical Instrument Company ("TIC"), a wholly owned subsidiary of the Company, and Syncotec Neue Technologien und Instrumente GmbH ("Syncotec"), a German-based company, completed all

Zygo Corporation and Subsidiaries 25 consistent with similar government contracts, requires additional appropriations from the U.S. Congress prior to the Company's receiving additional funding. Revenues recognized on this contract in fiscal 1997 were immaterial. To accommodate the space required for the NIF facility and provide additional office facilities, the Company has commenced work at its Middlefield, Connecticut, site to expand its facilities by 35,500 square feet. It is expected that the addition will be completed in December 1997. NOTE 21: SUBSEQUENT EVENTS On June 30, 1997, Technical Instrument Company ("TIC"), a wholly owned subsidiary of the Company, and Syncotec Neue Technologien und Instrumente GmbH ("Syncotec"), a German-based company, completed all necessary legal requirements allowing for the appropriate transfer and registration of a 50 percent ownership interest in Syncotec. The conclusion of this transaction completed commitments made by the former owners of TIC and enabled the Company to release $440,000 of contingent proceeds recorded as a liability at the time of the TIC acquisition by the Company. The Company, through TIC, is negotiating the purchase of the remaining 50 percent of Syncotec for approximately $2.0 million in a combination of cash and the Company's common stock. Syncotec designs, develops, manufactures, and markets certain products which incorporate TIC's confocal technology for European customers. Syncotec's sales in the year ended December 31, 1996 amounted to $2.9 million (DM4.9 million). The Company announced on July 28, 1997 the signing of a letter of intent providing for the Company's acquisition of Digital Instruments, Inc. ("Digital"), a privately held California-based entity that designs, develops, and manufactures high precision measurement products and systems which use scanning probe microscopy imaging and metrology technology. These systems are used in product research and development applications as well as to improve the production efficiency and manufacturing yields within the data storage, semiconductor, and other high technology industries. It is expected that the Company will acquire all the outstanding stock of Digital and an affiliated corporation in exchange for 7,000,000 shares of the Company's common stock. Closing the transaction is subject to various conditions and is expected to be accounted for as a pooling-of-interests. The transaction is subject, among other things, to approval by the stockholders of the Company, and is expected to be completed prior to the end of the calendar year 1997. Digital's revenues for the year ended December 31, 1996 were approximately $50 million. Additionally, the Company is in the process of acquiring Sight Systems, Inc. ("SSI"), a privately held Californiabased business that designs, develops, and manufactures application-specific vision metrology systems for 287,400 shares of the Company's common stock. The transaction will be accounted for as a pooling-of-interests. SSI's revenues for the year ended December 31, 1996 were approximately $3.5 million.

26 REPORTS OF MANAGEMENT AND INDEPENDENT AUDITORS Zygo Corporation and Subsidiaries REPORT OF MANAGEMENT Management is responsible for preparing the Company's financial statements and related information that appears in this annual report. Management believes that the financial statements fairly reflect the form and substance of transactions and reasonably present the Company's financial condition and results of operations in conformity with generally accepted accounting principles. Management has included in the Company's financial statements amounts that are based on estimates and judgments which it believes are reasonable under the circumstances. The Company maintains a system of internal accounting policies, procedures, and controls intended to provide reasonable assurance, at appropriate cost, that transactions are executed in accordance with Company authorization and are properly recorded and reported in the financial statements, and that assets are adequately safeguarded. KPMG Peat Marwick LLP audits the Company's financial statements in accordance with generally accepted

26 REPORTS OF MANAGEMENT AND INDEPENDENT AUDITORS Zygo Corporation and Subsidiaries REPORT OF MANAGEMENT Management is responsible for preparing the Company's financial statements and related information that appears in this annual report. Management believes that the financial statements fairly reflect the form and substance of transactions and reasonably present the Company's financial condition and results of operations in conformity with generally accepted accounting principles. Management has included in the Company's financial statements amounts that are based on estimates and judgments which it believes are reasonable under the circumstances. The Company maintains a system of internal accounting policies, procedures, and controls intended to provide reasonable assurance, at appropriate cost, that transactions are executed in accordance with Company authorization and are properly recorded and reported in the financial statements, and that assets are adequately safeguarded. KPMG Peat Marwick LLP audits the Company's financial statements in accordance with generally accepted auditing standards and provides an objective, independent review of the fairness of reported financial condition and results of operations. The Board of Directors of the Company has an Audit Committee composed of nonmanagement directors. The Committee meets with financial management and the independent auditors to review internal accounting controls and accounting, auditing, and financial reporting matters.
/s/ MARK J. BONNEY ----------------------------------------Mark J. Bonney Vice President, Finance & Administration, Treasurer, and Chief Financial Officer

REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ZYGO CORPORATION: We have audited the accompanying consolidated balance sheets of Zygo Corporation and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zygo Corporation and subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1997, in conformity with generally accepted accounting principles. [LOGO] KPMG PEAT MARWICK LLP KPMG PEAT MARWICK LLP Hartford, Connecticut August 8, 1997

SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (Thousands, except per share amounts) Zygo Corporation and Subsidiaries 27
For the Fiscal Year Ended June 3 -------------------------------------September 30 December 31 March 3 ---------------------------Net sales .......................................................... $18,443 $20,810 $22,476 Earnings before taxes and acquisitionrelated charges (2) ............................................. $ 4,345 $ 4,873 $ 5,771 Income taxes ....................................................... 1,206 1,774 2,078 ------------------Earnings before acquisition-related charges (2) .................... $ 3,139 $ 3,099 $ 3,693 ======= ======= ======= Net earnings per common and common equivalent share before acquisition-related charges (2)(3)(4) .............. $ 0.26 $ 0.26 $ 0.31 ======= ======= ======= Net earnings (3) ................................................... Net earnings per common and common equivalent share (3)(4) ......................................... $(7,944) ======= $ 3,099 ======= $ 3,693 =======

$ (0.77) $ 0.26 $ 0.31 ======= ======= ======= For the Fiscal Year Ended June 30 -------------------------------------September 30 December 31 March 3 ---------------------------Net sales .......................................................... $11,831 $13,479 $15,231 Earnings before income taxes ....................................... $ 1,549 $ 2,415 $ 3,585 Income taxes ....................................................... 588 876 1,038 ------------------Net earnings ....................................................... $ 961 $ 1,539 $ 2,547 ======= ======= ======= Earnings per common and common equivalent share (3)(4) ......................................... $ 0.10 $ 0.15 $ 0.22 ======= ======= ======= ---------(1) Restated to reflect the acquisition of NexStar Automation, Inc. as a pooling-of-interests. Periods p 1996 have not been restated due to immateriality. Excludes nonrecurring acquisition-related charges of $11,083,000 incurred in the first quarter of fi Restated to reflect a 2-for-1 stock split effected in the form of a 100% stock dividend declared on 1997, and paid on February 27, 1997 to stockholders of record on February 3, 1997. Quarterly per share earnings do not necessarily equal the total per share earnings reported for the result of the dilutive effect of common stock equivalents on the calculation of per share earnings.

(2) (3)

(4)

STOCK DATA NASDAQ Symbol: ZIGO The number of stockholders of record at June 30, 1997, was 514. The Company's common shares are traded over-the-counter and are quoted on the NASDAQ/National Market. Market price data for 1997 and 1996, adjusted for the effect of the 2-for-1 stock split which was effective on February 27, 1997, was as follows:
Fiscal Year Ended June 30, 1997 ------------------------------High Low ------------First quarter .... $21 1/2 $14 Second quarter ... $26 $12 1/4 Third quarter .... $29 7/8 $21 Fourth quarter ... $31 1/2 $21 1/2 Fiscal Year Ended June 30, 1996 ------------------------------High Low --------------$14 5/8 $10 1/3 $17 3/4 $12 $20 1/8 $10 1/4 $31 1/16 $17 11/16

SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (Thousands, except per share amounts) Zygo Corporation and Subsidiaries 27
For the Fiscal Year Ended June 3 -------------------------------------September 30 December 31 March 3 ---------------------------Net sales .......................................................... $18,443 $20,810 $22,476 Earnings before taxes and acquisitionrelated charges (2) ............................................. $ 4,345 $ 4,873 $ 5,771 Income taxes ....................................................... 1,206 1,774 2,078 ------------------Earnings before acquisition-related charges (2) .................... $ 3,139 $ 3,099 $ 3,693 ======= ======= ======= Net earnings per common and common equivalent share before acquisition-related charges (2)(3)(4) .............. $ 0.26 $ 0.26 $ 0.31 ======= ======= ======= Net earnings (3) ................................................... Net earnings per common and common equivalent share (3)(4) ......................................... $(7,944) ======= $ 3,099 ======= $ 3,693 =======

$ (0.77) $ 0.26 $ 0.31 ======= ======= ======= For the Fiscal Year Ended June 30 -------------------------------------September 30 December 31 March 3 ---------------------------Net sales .......................................................... $11,831 $13,479 $15,231 Earnings before income taxes ....................................... $ 1,549 $ 2,415 $ 3,585 Income taxes ....................................................... 588 876 1,038 ------------------Net earnings ....................................................... $ 961 $ 1,539 $ 2,547 ======= ======= ======= Earnings per common and common equivalent share (3)(4) ......................................... $ 0.10 $ 0.15 $ 0.22 ======= ======= ======= ---------(1) Restated to reflect the acquisition of NexStar Automation, Inc. as a pooling-of-interests. Periods p 1996 have not been restated due to immateriality. Excludes nonrecurring acquisition-related charges of $11,083,000 incurred in the first quarter of fi Restated to reflect a 2-for-1 stock split effected in the form of a 100% stock dividend declared on 1997, and paid on February 27, 1997 to stockholders of record on February 3, 1997. Quarterly per share earnings do not necessarily equal the total per share earnings reported for the result of the dilutive effect of common stock equivalents on the calculation of per share earnings.

(2) (3)

(4)

STOCK DATA NASDAQ Symbol: ZIGO The number of stockholders of record at June 30, 1997, was 514. The Company's common shares are traded over-the-counter and are quoted on the NASDAQ/National Market. Market price data for 1997 and 1996, adjusted for the effect of the 2-for-1 stock split which was effective on February 27, 1997, was as follows:
Fiscal Year Ended June 30, 1997 ------------------------------High Low ------------First quarter .... $21 1/2 $14 Second quarter ... $26 $12 1/4 Third quarter .... $29 7/8 $21 Fourth quarter ... $31 1/2 $21 1/2 Fiscal Year Ended June 30, 1996 ------------------------------High Low --------------$14 5/8 $10 1/3 $17 3/4 $12 $20 1/8 $10 1/4 $31 1/16 $17 11/16

----------

Source: National Association of Securities Dealers, Inc.

28 STOCKHOLDER INFORMATION Zygo Corporation and Subsidiaries FORM 10-K405 AVAILABLE Stockholders may obtain from the Company, without charge, a copy of the Annual Report on Form 10-K405 filed with the Securities and Exchange Commission for fiscal 1997. Written requests should be directed to: Sheree F. Denny Director, Corporate Financial Planning and Reporting Zygo Corporation Laurel Brook Road Middlefield, Connecticut 06455 E-mail requests should be directed to: investor@zygo.com ANNUAL MEETING November 13, 1997, at 10 a.m. Hotel Inter / Continental 111 East 48th Street (Lexington and Park) New York, New York 10017 CORPORATE HEADQUARTERS Laurel Brook Road Middlefield, Connecticut 06455 Web Site: www.zygo.com E-mail: inquire@zygo.com NEXSTAR AUTOMATION, INC. 2505-A Trade Centre Avenue Longmont, Colorado 80501 Web Site: www.zygo.com E-mail: inquire@nexstarauto.com SIGHT SYSTEMS, INC. 3541 Old Conejo Road #119 Newbury Park, California 91320 Web Site: www.zygo.com, E-mail: inquire@zygo.com TECHNICAL INSTRUMENT COMPANY

28 STOCKHOLDER INFORMATION Zygo Corporation and Subsidiaries FORM 10-K405 AVAILABLE Stockholders may obtain from the Company, without charge, a copy of the Annual Report on Form 10-K405 filed with the Securities and Exchange Commission for fiscal 1997. Written requests should be directed to: Sheree F. Denny Director, Corporate Financial Planning and Reporting Zygo Corporation Laurel Brook Road Middlefield, Connecticut 06455 E-mail requests should be directed to: investor@zygo.com ANNUAL MEETING November 13, 1997, at 10 a.m. Hotel Inter / Continental 111 East 48th Street (Lexington and Park) New York, New York 10017 CORPORATE HEADQUARTERS Laurel Brook Road Middlefield, Connecticut 06455 Web Site: www.zygo.com E-mail: inquire@zygo.com NEXSTAR AUTOMATION, INC. 2505-A Trade Centre Avenue Longmont, Colorado 80501 Web Site: www.zygo.com E-mail: inquire@nexstarauto.com SIGHT SYSTEMS, INC. 3541 Old Conejo Road #119 Newbury Park, California 91320 Web Site: www.zygo.com, E-mail: inquire@zygo.com TECHNICAL INSTRUMENT COMPANY 650 North Mary Avenue Sunnyvale, California 94086 Web Sites: www.technical.com www.zygo.com E-mail: sales@technical.com

AUDITORS KPMG Peat Marwick LLP City Place II Hartford, Connecticut 06103 LEGAL COUNSEL Fulbright & Jaworski L.L.P. 666 Fifth Avenue New York, New York 10103 TRANSFER AGENT AND REGISTRAR Continental Stock Transfer and Trust Company 2 Broadway New York, New York 10004 DIVIDENDS The Company has not declared or paid cash dividends since becoming a public company. Zygo, the Zygo logo, NexStar, and Sight Systems are registered trademarks of Zygo Corporation.

DIRECTORS AND OFFICERS

[Photo]

Clockwise from upper left: John R. Rockwell, Paul W. Murrill, Michael R. Corboy, Robert G. McKelvey, Seymour E. Liebman, Paul F. Forman, Robert B. Taylor. DIRECTORS MICHAEL R. CORBOY Chairman and President, Corboy Investment Company PAUL F. FORMAN Chairman of the Board Zygo Corporation SEYMOUR E. LIEBMAN Executive Vice President and General Counsel Canon U.S.A., Inc. ROBERT G. MCKELVEY Chairman and President George McKelvey Co., Inc. PAUL W. MURRILL Professional Engineer

DIRECTORS AND OFFICERS

[Photo]

Clockwise from upper left: John R. Rockwell, Paul W. Murrill, Michael R. Corboy, Robert G. McKelvey, Seymour E. Liebman, Paul F. Forman, Robert B. Taylor. DIRECTORS MICHAEL R. CORBOY Chairman and President, Corboy Investment Company PAUL F. FORMAN Chairman of the Board Zygo Corporation SEYMOUR E. LIEBMAN Executive Vice President and General Counsel Canon U.S.A., Inc. ROBERT G. MCKELVEY Chairman and President George McKelvey Co., Inc. PAUL W. MURRILL Professional Engineer JOHN R. ROCKWELL Retired Senior Executive ROBERT B. TAYLOR Vice President and Treasurer Wesleyan University GARY K. WILLIS Zygo Corporation CARL A. ZANONI Zygo Corporation OFFICERS GARY K. WILLIS President and Chief Executive Officer AHMAD AKRAMI Vice President, President NexStar Automation WILLIAM H. BACON Vice President, Director of Corporate Quality

MARK J. BONNEY Vice President, Finance and Administration, Treasurer, and Chief Financial Officer FRANCIS E. LUNDY Vice President, President Technical Instrument Company ROBERT A. SMYTHE Vice President, Director of Sales and Marketing CARL A. ZANONI Vice President, Research, Development and Engineering PAUL JACOBS Secretary

[Photo]

From left to right: Carl A. Zanoni, Paul Jacobs (Partner, Fulbright and Jaworski L.L.P.), Gary K. Willis, Michael Fedoras (Partner, KPMG Peat Marwick LLP), Mark J. Bonney. OPERATING LOCATIONS NexStar Automation AHMAD AKRAMI President Sight Systems DAVID GRANT President Technical Instrument Company FRANCIS E. LUNDY President

ZYGO [LOGO] Zygo Corporation Laurel Brook Road Middlefield, Connecticut 06455 Telephone: 860.347.8506 Facsimile: 860.347.8372 E-mail: inquire@zygo.com Web Site: www.zygo.com

EXHIBIT 21

ZYGO [LOGO] Zygo Corporation Laurel Brook Road Middlefield, Connecticut 06455 Telephone: 860.347.8506 Facsimile: 860.347.8372 E-mail: inquire@zygo.com Web Site: www.zygo.com

EXHIBIT 21 SUBSIDIARIES OF ZYGO CORPORATION (DELAWARE) Zygo Credit Corporation (Delaware) 100% owned by Registrant Zygo International Sales Corporation (U.S. Virgin Islands) 100% owned by Registrant Technical Instrument Company (California) 100% owned by Registrant (effective as of August 8, 1996) Syncotec Neue Technologien und Instrumente GmbH 100% owned by Technical Instrument Company (effective as of September 1, 1997) NexStar Corporation (Colorado) 100% owned by Registrant (effective as of September 12, 1996) TechniStar Corporation (Delaware) 25% owned by NexStar Corporation Sight Systems, Inc. (California) 100% owned by Registrant (effective as of August 19, 1997)

EXHIBIT 23 ACCOUNTANTS' CONSENT The Board of Directors Zygo Corporation: We consent to incorporation by reference in Registration Statements No. 33-62087, No. 33-57060, No. 3320880, and No. 33-34619 on Forms S-8 of Zygo Corporation of our reports dated August 8, 1997, with respect to the consolidated balance sheets of Zygo Corporation and subsidiaries as of June 30, 1997, and 1996 and the related consolidated statements of earnings, stockholders' equity, and cash flows and related schedule for each of the years in the three-year period ended June 30, 1997, which reports appear in or are incorporated by reference into the June 30, 1997 Annual Report on Form 10-K405 of Zygo Corporation. KPMG PEAT MARWICK LLP Hartford, Connecticut September 16, 1997

POWER OF ATTORNEY

EXHIBIT 21 SUBSIDIARIES OF ZYGO CORPORATION (DELAWARE) Zygo Credit Corporation (Delaware) 100% owned by Registrant Zygo International Sales Corporation (U.S. Virgin Islands) 100% owned by Registrant Technical Instrument Company (California) 100% owned by Registrant (effective as of August 8, 1996) Syncotec Neue Technologien und Instrumente GmbH 100% owned by Technical Instrument Company (effective as of September 1, 1997) NexStar Corporation (Colorado) 100% owned by Registrant (effective as of September 12, 1996) TechniStar Corporation (Delaware) 25% owned by NexStar Corporation Sight Systems, Inc. (California) 100% owned by Registrant (effective as of August 19, 1997)

EXHIBIT 23 ACCOUNTANTS' CONSENT The Board of Directors Zygo Corporation: We consent to incorporation by reference in Registration Statements No. 33-62087, No. 33-57060, No. 3320880, and No. 33-34619 on Forms S-8 of Zygo Corporation of our reports dated August 8, 1997, with respect to the consolidated balance sheets of Zygo Corporation and subsidiaries as of June 30, 1997, and 1996 and the related consolidated statements of earnings, stockholders' equity, and cash flows and related schedule for each of the years in the three-year period ended June 30, 1997, which reports appear in or are incorporated by reference into the June 30, 1997 Annual Report on Form 10-K405 of Zygo Corporation. KPMG PEAT MARWICK LLP Hartford, Connecticut September 16, 1997

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to Constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Michael R. Corboy, 8111 Preston Road, Suite 712, Dallas, Texas 75225, do hereby appoint Mark J. Bonney, vice president, finance and administration, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 1997, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in-fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select.

EXHIBIT 23 ACCOUNTANTS' CONSENT The Board of Directors Zygo Corporation: We consent to incorporation by reference in Registration Statements No. 33-62087, No. 33-57060, No. 3320880, and No. 33-34619 on Forms S-8 of Zygo Corporation of our reports dated August 8, 1997, with respect to the consolidated balance sheets of Zygo Corporation and subsidiaries as of June 30, 1997, and 1996 and the related consolidated statements of earnings, stockholders' equity, and cash flows and related schedule for each of the years in the three-year period ended June 30, 1997, which reports appear in or are incorporated by reference into the June 30, 1997 Annual Report on Form 10-K405 of Zygo Corporation. KPMG PEAT MARWICK LLP Hartford, Connecticut September 16, 1997

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to Constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Michael R. Corboy, 8111 Preston Road, Suite 712, Dallas, Texas 75225, do hereby appoint Mark J. Bonney, vice president, finance and administration, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 1997, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in-fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select. This power of attorney shall not be affected by the subsequent disability or incompetence of the principal. To induce any third party to act hereunder, I hereby agree that any third party receiving a duly executed copy or facsimile of the instrument may act hereunder, and that revocation or termination hereof shall be ineffective as to such third party unless and until actual notice or knowledge of such revocation or termination shall have been received by such third party, and I, for myself and for my heirs, executors, legal representatives, and assigns, hereby agree to indemnify and hold harmless any such third party from and against any and all claims that may arise against such third party by reason of such third party having relied on the provisions of this instrument. IN WITNESS WHEREOF, I have hereunto signed my name this 30th day of June 1997.
/s/ MICHAEL R. CORBOY -----------------------------------Michael R. Corboy

STATE OF TEXAS ) ) ss.: COUNTY OF DALLAS ) On the 30th day of June 1997, before me personally came Michael R. Corboy to me known, and to me to be the individual described in, and who executed the foregoing instrument, and he acknowledged to me that he executed the same.

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to Constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Michael R. Corboy, 8111 Preston Road, Suite 712, Dallas, Texas 75225, do hereby appoint Mark J. Bonney, vice president, finance and administration, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 1997, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in-fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select. This power of attorney shall not be affected by the subsequent disability or incompetence of the principal. To induce any third party to act hereunder, I hereby agree that any third party receiving a duly executed copy or facsimile of the instrument may act hereunder, and that revocation or termination hereof shall be ineffective as to such third party unless and until actual notice or knowledge of such revocation or termination shall have been received by such third party, and I, for myself and for my heirs, executors, legal representatives, and assigns, hereby agree to indemnify and hold harmless any such third party from and against any and all claims that may arise against such third party by reason of such third party having relied on the provisions of this instrument. IN WITNESS WHEREOF, I have hereunto signed my name this 30th day of June 1997.
/s/ MICHAEL R. CORBOY -----------------------------------Michael R. Corboy

STATE OF TEXAS ) ) ss.: COUNTY OF DALLAS ) On the 30th day of June 1997, before me personally came Michael R. Corboy to me known, and to me to be the individual described in, and who executed the foregoing instrument, and he acknowledged to me that he executed the same.
/s/ EDITH JONES -----------------------------------Edith Jones Notary Public

[SEAL]

EDITH JONES MY COMMISSION EXPIRES November 30, 2000

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to Constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Paul F. Forman, 15 Flying Point Road, Stony Creek, Connecticut 06405, do hereby appoint Mark J. Bonney, vice president, finance and administration, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 1997, and any amendments thereto, to be filed by Zygo

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to Constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Paul F. Forman, 15 Flying Point Road, Stony Creek, Connecticut 06405, do hereby appoint Mark J. Bonney, vice president, finance and administration, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 1997, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in-fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select. This power of attorney shall not be affected by the subsequent disability or incompetence of the principal. To induce any third party to act hereunder, I hereby agree that any third party receiving a duly executed copy or facsimile of the instrument may act hereunder, and that revocation or termination hereof shall be ineffective as to such third party unless and until annual notice or knowledge of such revocation or termination shall have been received by such third party, and I, for myself and for my heirs, executors, legal representatives, and assigns, hereby agree to indemnify and hold harmless any such third party from and against any and all claims that may arise against such third party by reason of such third party having relied on the provisions of this instrument. IN WITNESS WHEREOF, I have hereunto signed my name this 23rd day of July 1997.
/s/ PAUL F. FORMAN -----------------------------------Paul F. Forman STATE OF CONNECTICUT ) ) ss.: COUNTY OF NEW HAVEN )

On the 23rd day of July 1997, before me personally came Paul F. Forman to me known, and known to me to be the individual described in, and who executed the foregoing instrument, and he acknowledged to me that he executed the same.
/s/ ALICE H. GIRARDI -----------------------------------Notary Public My commission expires 11/30/2001

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Seymour E. Liebman, Canon U.S.A., One Canon Plaza, Lake Success, New York 11042, do hereby appoint Mark J. Bonney, vice president, finance and administration, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 1997, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in-fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select.

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Seymour E. Liebman, Canon U.S.A., One Canon Plaza, Lake Success, New York 11042, do hereby appoint Mark J. Bonney, vice president, finance and administration, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 1997, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in-fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select. This power of attorney shall not be affected by the subsequent disability or incompetence of the principal. To induce any third party to act hereunder, I hereby agree that any third party receiving a duly executed copy or facsimile of the instrument may act hereunder, and that revocation or termination hereof shall be ineffective as to such third party unless and until annual notice or knowledge of such revocation or termination shall have been received by such third party, and I, for myself and for my heirs, executors, legal representatives, and assigns, hereby agree to indemnify and hold harmless any such third party from and against any and all claims that may arise against such third party by reason of such third party having relied on the provisions of this instrument. IN WITNESS WHEREOF, I have hereunto signed my name this 4th day of August 1997.
/s/ SEYMOUR E. LIEBMAN -----------------------------------Seymour E. Liebman

STATE OF NEW YORK ) ) ss.: COUNTY OF NASSAU ) On the 4th day of August 1997, before me personally came Seymour E. Liebman to me known, and known to me to be the individual described in, and who executed the foregoing instrument, and he acknowledged to me that he executed the same.
/s/ RUTH WEINSTEIN -----------------------------------Ruth Weinstein Notary Public

RUTH WEINSTEIN Notary Public, State of New York No. 01WE 4734936 Qualified in Nassau County Commission Expires Jan. 31, 1998

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Robert G. McKelvey, George McKelvey Co., Inc., 529 Washington Boulevard, Sea Girt, New Jersey 08759, do hereby appoint Mark J.

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Robert G. McKelvey, George McKelvey Co., Inc., 529 Washington Boulevard, Sea Girt, New Jersey 08759, do hereby appoint Mark J. Bonney, vice president, finance and administration, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 1997, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in-fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select. This power of attorney shall not be affected by the subsequent disability or incompetence of the principal. To induce any third party to act hereunder, I hereby agree that any third party receiving a duly executed copy or facsimile of the instrument may act hereunder, and that revocation or termination hereof shall be ineffective as to such third party unless and until actual notice or knowledge of such revocation or termination shall have been received by such third party, and I, for myself and for my heirs, executors, legal representatives, and assigns, hereby agree to indemnify and hold harmless any such third party from and against any and all claims that may arise against such third party by reason of such third party having relied on the provisions of this instrument. IN WITNESS WHEREOF, I have hereunto signed my name this 3rd day of July 1997.
/s/ ROBERT G. McKELVEY ------------------------Robert G. McKelvey

STATE OF NEW JERSEY, COUNTY OF MONMOUTH ss.: On the 3rd day of July 1997, before me personally came Robert G. McKelvey to me known, and known to me to be the individual described in, and who executed the foregoing instrument, and he acknowledged to me that he executed the same.
/s/ MARGARET CAMPBELL -------------------------Notary Public Margaret Campbell Notary Public of New Jersey My Commission Expires: March 19, 2001

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Paul W. Murrill, 206 Sunset Boulevard, Baton Rouge, Louisiana 70808, do hereby appoint Mark J. Bonney, vice president, finance and administration, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 1997, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select. This power of attorney shall not be affected by the subsequent disability or incompetence of the principal.

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Paul W. Murrill, 206 Sunset Boulevard, Baton Rouge, Louisiana 70808, do hereby appoint Mark J. Bonney, vice president, finance and administration, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 1997, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select. This power of attorney shall not be affected by the subsequent disability or incompetence of the principal. To induce any third party to act hereunder, I hereby agree that any third party receiving a duly executed copy or facsimile of the instrument may act hereunder, and that revocation or termination hereof shall be ineffective as to such third party unless and until actual notice or knowledge of such revocation or termination shall have been received by such third party, and I, for myself and for my heirs, executors, legal representatives, and assigns, hereby agree to indemnify and hold harmless any such third party from and against any and all claims that may arise against such third party by reason of such third party having relied on the provisions of this instrument. IN WITNESS WHEREOF, I have hereunto signed my name this 1st day of JULY 1997.
/s/ PAUL W. MURRILL -------------------------Paul W. Murrill

STATE OF LOUISIANA, PARISH OF E. BATON ROUGE On the 1st day of July 1997, before me personally came Paul W. Murrill to me known, and known to me to be the individual described in, and who executed the foregoing instrument, and he acknowledged to me that he executed the same.
/s/ SHARON M. TAYLOR -------------------------Notary Public, Sharon M. Taylor

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, John R. Rockwell, Harbour Ridge, 12790 Mariner Court, Palm City, Florida 34990, do hereby appoint Mark J. Bonney, vice president, finance and administration, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 1997, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in-fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select. This power of attorney shall not be affected by the subsequent disability or incompetence of the principal.

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, John R. Rockwell, Harbour Ridge, 12790 Mariner Court, Palm City, Florida 34990, do hereby appoint Mark J. Bonney, vice president, finance and administration, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 1997, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in-fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select. This power of attorney shall not be affected by the subsequent disability or incompetence of the principal. To induce any third party to act hereunder, I hereby agree that any third party receiving a duly executed copy or facsimile of the instrument may act hereunder, and that revocation or termination hereof shall be ineffective as to such third party unless and until actual notice or knowledge of such revocation or termination shall have been received by such third party, and I, for myself and for my heirs, executors, legal representatives, and assigns, hereby agree to indemnify and hold harmless any such third party from and against any and all claims that may arise against such third party by reason of such third party having relied on the provisions of this instrument. IN WITNESS WHEREOF, I have hereunto signed my name this 3rd day of July 1997.
/s/ JOHN R. ROCKWELL --------------------------John R. Rockwell

STATE OF MAINE, COUNTY OF YORK ss.: On the 3rd day of July 1997, before me personally came John R. RockwelI to me known, and known to me to be the individual described in, and who executed the foregoing instrument, and he acknowledged to me that he executed the same.
/s/ MICHELLE A. DOW -------------------------Notary Public

Michelle A. Dow Notary Public of Maine My Commission Expires Feb. 11, 2004

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Robert B. Taylor, North College, Wesleyan University, Middletown, Connecticut 06459, do hereby appoint Mark J. Bonney, vice president, finance and administration, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 1997, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in-fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select.

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, which are intended to constitute a General Power of Attorney pursuant to Article V, Title 15 of the New York General Obligations Law, that I, Robert B. Taylor, North College, Wesleyan University, Middletown, Connecticut 06459, do hereby appoint Mark J. Bonney, vice president, finance and administration, Zygo Corporation, Laurel Brook Road, Middlefield, Connecticut 06455, my attorney-in-fact to act in my name, place, and stead in any way which I myself could do, if I were personally present, with respect to the following matter to the extent that I am permitted by law to act through an agent: the signing of an Annual Report on Form 10-K for the fiscal year ended June 30, 1997, and any amendments thereto, to be filed by Zygo Corporation under Section 13 of the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission and grant full and unqualified authority to my attorney-in-fact to delegate the foregoing power to any person or persons whom my attorney-in-fact shall select. This power of attorney shall not be affected by the subsequent disability or incompetence of the principal. To induce any third party to act hereunder, I hereby agree that any third party receiving a duly executed copy or facsimile of the instrument may act hereunder, and that revocation or termination hereof shall be ineffective as to such third party unless and until actual notice or knowledge of such revocation or termination shall have been received by such third party, and I, for myself and for my heirs, executors, legal representatives, and assigns, hereby agree to indemnify and hold harmless any such third party from and against any and all claims that may arise against such third party by reason of such third party having relied on the provisions of this instrument. IN WITNESS WHEREOF, I have hereunto signed my name this 2nd day of July 1997.
/s/ ROBERT B. TAYLOR --------------------------Robert B. Taylor

STATE OF CONNECTICUT, COUNTY OF MIDDLESEX ss.: On the 2nd day of July 1997, before me personally came Robert B. Taylor to me known, and known to me to be the individual described in, and who executed the foregoing instrument, and he acknowledged to me that he executed the same.
/s/ ROBIN D. OSTRUM -------------------------Notary Public

Robin D. Ostrum Notary Public My Commission Expires Aug. 31, 2001

ARTICLE 5 This schedule contains summary financial information extracted from the consolidated balance sheet and the consolidated statement of earnings and is qualified in its entirety by reference to such financial statements.

PERIOD TYPE FISCAL YEAR END PERIOD END CASH SECURITIES RECEIVABLES ALLOWANCES INVENTORY CURRENT ASSETS PP&E DEPRECIATION TOTAL ASSETS

YEAR JUN 30 1997 JUN 30 1997 10,981 12,766 21,047 728 11,656 61,010 21,865 12,691 78,799

ARTICLE 5 This schedule contains summary financial information extracted from the consolidated balance sheet and the consolidated statement of earnings and is qualified in its entirety by reference to such financial statements.

PERIOD TYPE FISCAL YEAR END PERIOD END CASH SECURITIES RECEIVABLES ALLOWANCES INVENTORY CURRENT ASSETS PP&E DEPRECIATION TOTAL ASSETS CURRENT LIABILITIES BONDS PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITY AND EQUITY SALES TOTAL REVENUES CGS TOTAL COSTS OTHER EXPENSES LOSS PROVISION INTEREST EXPENSE INCOME PRETAX INCOME TAX INCOME CONTINUING DISCONTINUED EXTRAORDINARY CHANGES NET INCOME EPS PRIMARY EPS DILUTED

YEAR JUN 30 1997 JUN 30 1997 10,981 12,766 21,047 728 11,656 61,010 21,865 12,691 78,799 13,377 0 0 0 1,077 61,331 78,799 87,220 87,220 45,395 78,017 302 0 0 10,038 7,161 2,877 0 0 0 2,877 .24 .24