Zygo (ZIGO) 10-K/A 2005 FY Annual report (amended)

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

FORM 10-K/A
Amendment No. 2

(Mark One)

x	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the fiscal year ended June 30, 2005
Or
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from _____________________________ to _____________________________

Commission file number 0-12944

ZYGO CORPORATION

(Exact name of registrant as specified in its charter)

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

Laurel Brook Road, Middlefield, Connecticut 06455-1291

(Address of principal executive offices) (Zip Code)

(860) 347-8506

(Registrant’s telephone number, including area code:)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.10 Par Value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule405 of the Securities Act.
	YESx NOo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
	YESo NOx
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                           YESo NOx
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A.                                       x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in rule 12b-2 of the Exchange act. (Check one):

Large accelerated filer  o Accelerated filer  x Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YESo NOx

The aggregate market value of the registrant’s Common Stock held by non-affiliates, based upon the closing price of the Common Stock on December 31, 2004, as reported by the NASDAQ National Market, was approximately $130,085,967. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock, based on filings with the Securities and Exchange Commission, have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

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

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

Documents incorporated by reference: Specified portions of the registrant’s Proxy Statement related to the registrant’s 2005 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 with the Securities and Exchange Commission, are incorporated by reference into Part II (Item 5) and Part III (Items 10-14) of this Annual Report on Form 10-K/A to the extent stated herein.

ZYGO CORPORATION
EXPLANATORY NOTE

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

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

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

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

TABLE OF CONTENTS

		Page
-----	Forward-Looking Statements	1
PART I
Item 1.	Business	2
-----	Executive Officers of the Registrant	7
Item 2.	Properties	9
Item 3.	Legal Proceedings	10
Item 4.	Submission of Matters to a Vote of Security Holders	10
PART II
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters	11
Item 6.	Selected Consolidated Financial Data	12
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 7A.	Quantitative and Qualitative Disclosures about Market Risks	23
Item 8.	Financial Statements and Supplementary Data	24
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	24
Item 9A.	Controls and Procedures	24
Item 9B.	Other Information	26
PART III
Item 10.	Directors and Executive Officers of the Registrant	27
Item 11.	Executive Compensation	27
Item 12.	Security Ownership of Certain Beneficial Owners and Management	27
Item 13.	Certain Relationships and Related Transactions	27
Item 14.	Principal Accounting Fees and Services	27
PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	28
-----	Signatures	31

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

FORWARD-LOOKING STATEMENTS

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

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

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PART I

Item 1. Business

OVERVIEW

Zygo Corporation (“ZYGO,” “we,” “us,” “our,” or “Company”) designs, develops, and manufactures ultra-high precision measurement solutions to improve our customers’ manufacturing yields, and optical components and systems as OEM sub-components and end-user optical systems. ZYGO’s measurement solutions are designed to improve quality, increase productivity and decrease the overall cost of manufacturing and product development for high-technology manufacturing processes. The Company’s optical component and systems products provide high-end solutions for laser fusion research, imaging systems, and measurement system components.

We serve the semiconductor and industrial markets through our three core product lines, metrology, precision positioning systems, and optical systems solutions. Our semiconductor product offerings include OEM solutions and major technology development projects for the semiconductor capital equipment industry and in-line automated yield improvement systems for both flat panel displays and advanced semiconductor packaging manufacturing. Our industrial market products serve the automotive, consumer electronics, defense/aerospace, and all markets other than semiconductor. Industrial market products include optical components, optical systems and measurement-based process control systems for defense and aerospace customers, and measurement-based process control and yield-enhancement systems for automotive and consumer electronics customers.

ZYGO’s solutions are primarily based on optical interferometric technology. ZYGO continues to be a world leader in optical interferometry with a patent portfolio of more than 245 active and 220 pending patents, most of which are related to the broad field of interferometry and its practical application. ZYGO metrology solutions provide process control for surface shape and roughness, which are critical to all of the Company’s markets. Our displacement measurement systems are used extensively in ultra-precise wafer positioning systems for the semiconductor capital equipment industry.

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

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

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

MARKETS, PRODUCTS, AND CUSTOMERS

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

Semiconductor Market

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

Semiconductor Products and Applications

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

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

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

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

Flat Panel Display (FPD): Flat panel displays first were used in laptop computers and have now grown to be the display of choice for most computer monitors. Large screen televisions are now common and many are based on flat panel display technology. ZYGO is enabling this industry’s growth with ultra high precision measurement solutions to improve flat panel display manufacturing yields. The ZYGO fully automated HS Series systems are an inline process control, yield enhancement tool. The FPD HS tool measures the topography of color filter photo components prior to being combined with the thin-film-transistor panel in the “one drop fill” assembly process. This fully automated system incorporates the latest ZYGO Intellisensor™ optical profiler technology, integrated robotics and motion stages, mini-clean environmental enclosure and factory floor command and control software. The system measures the height and width of key optical components, and predicts the fill volume to increase upstream manufacturing yields.

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

Semiconductor Customers include:

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

Industrial Market

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

Industrial Products and Applications

Consumer Electronics

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

GPI™ and VeriFire™ Systems:The development of new optical systems for any application requires very flexible and easy to use test equipment. The ZYGO GPI™ and VeriFire™ systems are the latest products in an over 30 year old product family that revolutionized optical testing and continues to evolve to meet changing requirements. Consumer electronics production

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applications for larger optics, greater than 25 mm diameter, and research and development for any application rely on these products for critical developmental data and process control feedback in production. These products are widely used due to their configuration flexibility in both hardware set ups and ZYGO’s MetroPro™ data analysis software.

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

DVD 400™: BluRay and HD DVD, next generation of systems DVD player and computer memories, use blue light at 405 nm wavelength to increase the amount of data on a DVD disk. ZYGO’s DVD 400™ interferometer is used by the developers of these next generation systems. ZYGO’s DVD 400P™ is our system for the production floor. ZYGO’s 405 nm systems are an enabling technology for the next generation DVD players and computer memories.

Automotive Industry

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

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

Defense/Aerospace

Defense/aerospace companies use optical technology in a broad range of applications. One application is the enhancement of human sight through imaging systems, such as telescopes, that are used in satellite and airborne reconnaissance, fire-control systems, and hand-held viewers. Nuclear research for both weapons maintenance programs and the development of nuclear fusion energy sources also use very large optical lasers at a number of worldwide facilities, including the National Ignition Facility (NIF). In addition, projection systems in computer-based flight and battlefield simulation use sophisticated optical systems. Several of our products support these and other defense/aerospace programs.

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

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

GPI™ and VeriFire™ Systems: Developing state-of-the-art optical designs and manufacturing technology for the defense/aerospace market also requires leading metrology systems for manufacturing process control and development. Our industry standard GPI™ and VeriFire™ optical interferometers test both the optical components and systems for design compliance. This year, we introduced the GPI XP/D™ and GPI FlashPhase™ systems. The GPI FlashPhase™ system operates on the production floor where standard interferometers cannot measure or do not meet the demanding requirements of the defense/aerospace market. With our proprietary data acquisition, GPI FlashPhase™ can measure in the turbulent and vibrating environments that are often found in defense/aerospace applications. ZYGO is also active in designing and manufacturing custom systems for defense/aerospace applications, especially interferometers that operate at infrared wavelengths, which are unique to this market.

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Industrial Customers include:

Bosch	Northrop Grumman
IntraLase	Sandia National Laboratories
Lawrence Livermore National Laboratory	University of Rochester

Competition

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

Research and Development and Engineering Operations

We operate in industries that are subject to rapid technological change and engineering innovation. As such, we dedicate substantial resources to research and development. At June 30, 2005, we employed 120 individuals or approximately 23% of our workforce within our research and development and engineering operations. Our strategy is to form close technical working relationships with customers and OEM suppliers in our markets to ensure that our products are commercially relevant. We also maintain a close working relationship with various research groups and academic institutions in the United States and abroad. We believe that continued enhancement, development, and commercialization of new and existing products and systems are essential to maintaining and improving our leadership position.

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

• R&D 100 Awards in 1978, 1982, 1988 (three awards), 1994, 1996, 1997, 1998, 2002, and 2003;

• Photonics Spectra Circle of Excellence Awards in 1988, 1994, 1996, 1997, 1998, and 2001;

• Laser Focus World Commercial Technology Award in 2001;

• American Machinist Excellence in Manufacturing Technology Achievement Award for Technology & Reliability in 2000

Patents and Other Intellectual Property

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

Since we introduced the first optical interferometer in 1972, we have had approximately 200 United States patents issued, of which approximately 165 are currently active, and approximately 85 foreign patents issued, of which approximately 80 are active, and we have approximately 80 United States and approximately 140 foreign patent applications pending. In addition, we have a number of registered and unregistered trademarks.

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

BACKLOG

Backlog at June 30, 2005 was $66.6 million, an increase of $11.7million, or 21%, as compared with $54.9 million at June 30, 2004. The year-end fiscal 2005 backlog consisted of $28.8 million, or 43%, in the semiconductor segment and $37.8 million, or 57%, in the industrial segment. Orders for the fiscal year ended June 30, 2005 totaled $153.1 million and consisted of $74.6million, or 49%, in the semiconductor segment and $78.5 million, or 51%, in the industrial segment.

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MARKETING AND SALES

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

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

	Fiscal Year Ended June 30,
	2005			2004			2003
	(Restated)			(Restated)			(Restated)
Domestic		34	%		29	%		30	%
Far East:
Japan		43	%		53	%		54	%
Pacific Rim		12	%		11	%		6	%
Total Far East		55	%		64	%		60	%
Europe		11	%		7	%		10	%
Total		100	%		100	%		100	%

Customer service is an essential part of our business since product up time is critical given its effect on our customers’ production efficiency. As of June 30, 2005, our global sales customer support and service organization consisted of over 80 people skilled in sales, marketing, optical and electro component repair, software, application and system integration, diagnostics, and problem-solving capabilities.

MANUFACTURING, RAW MATERIALS, AND SOURCES OF SUPPLY

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

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

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

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

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AVAILABLE INFORMATION

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

EMPLOYEES

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

EXECUTIVE OFFICERS OF THE REGISTRANT

J. Bruce Robinson – age 63 – Chairman, President, and Chief Executive Officer

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

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

Walter A. Shephard – age 51 – Vice President, Finance, Chief Financial Officer, and Treasurer

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

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

William H. Bacon – age 55 – Vice President, Corporate Quality and Support Services

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

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

Douglas J. Eccleston – age 56 – Vice President, Precision Positioning Systems

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

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

Brian J. Monti – age 49 – Vice President, Worldwide Sales and Marketing

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

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

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David J. Person - age 57 - Vice President, Human Resources

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

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

Robert A. Smythe - age 53 - Vice President, Marketing

Mr. Smythe has served as Vice President, Marketing since April 2002. Previously, he served as our Vice President, Engineering from June 1998 to April 2002; Vice President, Sales and Marketing, from January 1996 to June 1998; Director of Sales and Marketing from June 1993 to January 1996; and Manager, Industry from April 1992 to June 1993.

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

Robert J. Stoner – age 42 –Vice President, Metrology and Optical Systems

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

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

Carl A. Zanoni - age 64 - Senior Vice President, Technology

Dr. Zanoni has served as Senior Vice President, Technology since November 2001. Previously, he served as our Vice President, Technology from June 1998 to November 2001, and Vice President, Research, Development and Engineering from April 1992 to June 1998.

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

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

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Item 2. Properties

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

	Square Footage
					Owned / Leased Expiration Date
Operation/Location	Manufacturing		Total
Corporate Headquarters, Eastern Regional Sales Office, and Instrument and Optics Manufacturing
Middlefield, Connecticut		89,000		153,500		Owned
R&D Center
Delray Beach, Florida		4,286		10,323		Leased - 06/30/07
Zygo - Laser Technology (R&D)
Watsonville, California		0		1,452		Leased - 04/14/08
Zygo - Optical Systems
Tucson, Arizona		14,560		22,560		Leased - 08/31/06
Zygo - Optical Systems
Costa Mesa, California		0		13,714		Leased - 10/18/07
Western Regional Sales Office and R&D Center
Sunnyvale, California		0		7,390		Leased - 10/31/08
Office
Franklin, Massachusetts		0		350		Leased - 09/31/05
Zygo PTE Ltd - Sales Office
Singapore		0		1,550		Leased - 12/27/06
Zygo Taiwan
Sales Office		0		3,961		Leased - 12/31/06
Service Office		0		2,772		Leased - 04/30/07
ZygoLOT
Germany		0		3,702		Leased - 10/01/05
Zygo KK
Japan		0		1,775		Leased - 10/31/05
Zygo China
China		0		1,610		Leased - 08/15/06
Zygo Korea
Korea		0		1,507		Leased - 04/12/07
Properties Unoccupied or Leased to Others
Plymouth, Massachusetts		0		6,600		Leased - 05/31/06
Longmont, Colorado		0		28,110		Leased - 05/31/06
Simi Valley, California		0		6,290		Leased - 12/14/05
Total		107,846		267,166

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Item 3. Legal Proceedings

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

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

None.

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PART II

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

Our shares of common stock are traded over-the-counter and are quoted on the NASDAQ/National Market under the symbol “ZIGO.” The following table provides information about the high and low sales prices of the Company’s common stock by quarter for fiscal 2005 and 2004.

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

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

The number of record holders of our common stock at June 30, 2005 was 474. Our closing stock price as of June 30, 2005 was $9.80.

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

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

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Item 6. Selected Consolidated Financial Data

The financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and with our Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-K/A. The following information has been restated to reflect adjustments to the Form 10-K filed on September 9, 2005 and amended on October 18, 2005 that are further discussed in the “Explanatory Note” in the forepart of this Form 10-K/A and in note 2, “Restatement of Financial Statements” to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K/A. The consolidated statement of operations data set forth below for the years ended June 30, 2002 and 2001 and the consolidated balance sheet data as of June 30, 2003, 2002, and 2001, which are not included in the consolidated financial statements included in Part II, Item 8, have also been restated.

(Thousands, except for per share and ratio amounts)

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

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

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

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

CRITICAL ACCOUNTING POLICIES, SIGNIFICANT JUDGMENTS, AND ESTIMATES

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

Revenue Recognition and Allowance for Doubtful Accounts

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

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

Inventory Valuation

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

Warranty Costs

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

13

liability would be required. A one percent change in actual costs would have an impact of approximately $20,000 on our financial condition and results of operations.

Accounting for Income Taxes

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

Valuation of Long-Lived Assets

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

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

Health Insurance

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

Off-Balance Sheet Arrangements

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

RESULTS OF OPERATIONS

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

We also perform several development services, which have produced a significant amount of our revenue over the past three years. In December 2004 and February 2005, we signed development agreement amendments with Canon Inc. (“Canon”) for additional add-on work to our existing development agreement originally executed in fiscal 2003. In February 2005, we also signed a new development agreement with Canon. The development services contracts that were signed in fiscal 2005 are

14

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

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

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

We believe the semiconductor segment contains our best sales growth opportunities in the near future. As such, we are focusing our research and development efforts on specific semiconductor initiatives, most notably in the display and packaging markets.

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

Our backlog at June 30, 2005 was $66.6 million, an increase of $11.7 million from June 30, 2004. Orders were $42.4 million in the fourth quarter as we experienced continued strength across our product lines and regions. Industrial orders represented 52% of our fourth quarter orders, led by a large optics order for $6.0 million, which is expected to be shipped in fiscal 2006. Our semiconductor backlog of $28.8 million includes $9.8 million related to future flat panel shipments. Bookings in the first quarter of our fiscal year tend to be lower than the fourth quarter of the previous year and we expect the first quarter of fiscal 2006 to continue that trend.

We discontinued our telecommunications TeraOptix business unit during fiscal 2003. Accordingly, the results of TeraOptix have been presented as a separate line item on the Consolidated Statements of Operations as “Discontinued TeraOptix operations, net of tax,” for all periods presented. In addition, the “Charges on the disposal of TeraOptix, net of tax”, have been recorded as a separate line item for all periods presented. All continuing operations line items presented exclude TeraOptix results. During fiscal 2004, we recorded impairment charges on our former Westborough telecommunications facility in the second and fourth fiscal quarters. In the second quarter of fiscal 2004, the impairment charge was based on the then current fair value based on an appraisal from an independent third party. During the fourth quarter of fiscal 2004, management changed the marketing of the facility to a general purpose manufacturing facility from clean room space. We received offers on the building during the fourth quarter from two separate independent third parties. Based on the offers, management determined that the fair value of the vacant facility was $2.0 million and an additional impairment charge was recorded. The total impairment charges recorded in fiscal 2004 were $6.4 million, net of tax of $3.4 million. In fiscal 2005, we recorded an additional impairment charge and adjustments of $0.1 million, net of tax of $43,000, to reflect the fair value based on final negotiations of a pending sale. The sale of the facility was completed in March 2005 for $1.9 million, net of selling expenses.

Restatement

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

15

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

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

Fiscal 2005 Compared with Fiscal 2004

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

Net Sales By Segment and Geographic Regions

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

For fiscal 2005, net sales in the semiconductor segment were $79.0 million, or 56% of total net sales, as compared with $66.8 million, or 57%, in the prior year period. The increase in net sales of $12.2 million within the semiconductor segment was primarily due to an increase in net sales to the Pacific Rim of $5.3 million primarily driven by flat panel sales of $3.3 million and increased metrology volume from China and Taiwan. In addition, sales in Europe increased $5.8 million, primarily due to optics sales. Net sales for fiscal 2005 and 2004 included $15.6 million and $16.1 million, respectively, from development services agreements. In fiscal 2005 we signed two development agreement amendments with Canon Inc. for additional add-on work to our existing development agreement originally executed in fiscal 2003. In February 2005, we also signed a new development agreement with Canon Inc. These new contracts totaled approximately $41.0 million of which $14.2 million was recognized as revenue in the current year. It is expected that the remaining revenue will be recognized during fiscal 2006 and the first half of fiscal 2007.

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

Approximately 82% of all fiscal 2005 sales were in U.S. dollars. Significant changes in the values of foreign currencies relative to the value of the U.S. dollar can impact the sales of our products in export markets, as would changes in the general economic conditions in those markets. The impact of changes in foreign currency values on our sales cannot be measured.

16

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

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

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

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

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

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

We recorded net earnings of $9.0 million for fiscal 2005 as compared with a net loss of $3.4 million for fiscal 2004. On a diluted per share basis, the net income was $0.50 per share for fiscal 2005 as compared with a net loss of $0.19 per share for fiscal 2004. The net earnings for fiscal 2005 included losses of $0.3 million, net of tax, related to the operations of our discontinued TeraOptix unit and charges of $0.1 million, net of tax, related to the disposal of our discontinued TeraOptix unit. The charge related to the disposal of our discontinued TeraOptix unit was primarily due to the sale of our vacant facility in Westborough, Massachusetts in the third quarter of fiscal 2005. The net loss for fiscal 2004 included losses of $1.3 million, net of tax, related to the operations of our discontinued TeraOptix unit and charges of $6.4 million, net of tax, related to the disposal of our discontinued TeraOptix unit reflecting changes in the fair value of the Westborough facility. The earnings from continuing operations for fiscal 2005 was $9.4 million, or $0.50 per diluted share, as compared with earnings from continuing operations of $4.2 million, or $0.23 per diluted share, for fiscal 2004.

Backlog at June 30, 2005 totaled $66.6 million, an increase of $11.7 million, or 21%, from $54.9 million at June 30, 2004. The year-end fiscal 2005 backlog consisted of $28.8 million, or 43%, in the semiconductor segment and $37.8 million, or 57%, in the industrial segment. Orders for fiscal 2005 totaled $153.9 million. Orders by segment for fiscal 2005 consisted of $75.4 million, or 49%, in the semiconductor segment and $78.5 million, or 51%, in the industrial segment. The increase in the backlog is primarily related to an increase in domestic region orders. Domestic orders were driven by large custom optics and optical assembly orders, as well as an increase in orders received by our applied optics group.

Fiscal 2004 Compared with Fiscal 2003

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

17

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

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

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

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

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

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

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

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

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

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

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

RELATED PARTY TRANSACTIONS

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

In September 2002, we entered into a contract with Canon Inc. related to the development of certain interferometers. In March 2004, we signed a preliminary agreement to begin further add-on work; the definitive agreement for this additional work was signed in December 2004. In February 2005, we entered into two additional agreements with Canon Inc. related to the development of prototype production tools and accessories. During the twelve months ended June 30, 2005, we recognized revenue of $15.6 million for the original contract and subsequent add–on work compared with $16.1 million for the comparable prior period.

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

CONTRACTUAL OBLIGATIONS

The following table summarizes our significant contractual obligations at June 30, 2005, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

Payments Due By Period
(Dollars in millions)

	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating leases	$	2.2	$	1.5	$	0.7	$	—	$	—
Purchase obligations		7.8		3.3		4.5		—		—
Total	$	10.0	$	4.8	$	5.2	$	—	$	—

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RISK FACTORS THAT MAY IMPACT FUTURE RESULTS

Industry Concentration and Cyclicality

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

Customer Concentration; Relationship with Canon

During fiscal 2005, 2004, and 2003, sales to Canon Inc. and Canon Sales Co., Inc. (collectively, “Canon”), our largest customer in those periods, accounted for 37%, 49%, and 52% of our net sales, respectively. We expect that sales to Canon will continue to represent a significant percentage of our net sales for the foreseeable future. Canon is an original investor in our company, the owner at June 30, 2005 of approximately 7% of our outstanding shares of common stock, and is a distributor of certain of our products in the Japanese market. A reduction or delay in orders from this customer, including reductions or delays due to market, economic, or competitive conditions in the industries in which we serve, could have a material adverse effect upon our results of operations. Our customers, including Canon, generally do not enter into long-term agreements obligating them to purchase our products.

Revenues Derived From International Sales and Foreign Operations

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

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

Our sales and costs are negotiated and paid primarily in U.S. dollars. However, changes in the values of foreign currencies relative to the value of the U.S. dollar can render our products comparatively more expensive to the extent locally produced alternative products are available. Such conditions could negatively impact international sales of our products and foreign operations, as would changes in the general economic conditions in those markets. For our sales which are based in local currency, we are exposed to foreign exchange fluctuations from the time customers are invoiced in local currency until collection occurs. For fiscal 2005, approximately 18% of our sales were denominated in foreign currencies. Management believes the percentage of sales in foreign currencies may increase in the coming year due to an increase in sales to Japanese customers denominated in yen. In the third quarter of fiscal 2005, we began hedging certain intercompany transactions by entering into forward contracts to reduce the impact of adverse fluctuations on earnings associated with foreign currency exchange rate changes. We do not enter into any derivative transactions for speculative purposes. These contracts are entered into for periods consistent with the currency transaction exposures, generally three to six months. Generally, any gains and losses on the fair value of these contracts are expected to be largely offset by gains and losses on the underlying transactions. There can be no assurance that risks inherent in international sales and foreign operations will not have a material adverse effect on our results of operations in the future.

Risks Associated with Acquisitions

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

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

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

Quarterly Fluctuations

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

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

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

Backlog

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

Sales Cycle

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

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

Prediction of Manufacturing Requirements

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

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Possible Volatility of Stock Price

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

Competition

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

Technological Change and New Product Development

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

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

Dependence on Proprietary Technology

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

Dependence on Key Personnel

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

Dependence on Third-Party Suppliers

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

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

Undetected Product Defects

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

Environmental Regulations

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risks

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

Interest Rate Sensitivity

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

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

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

Exchange Rate Sensitivity

Approximately 82% of our fiscal 2005 sales were in U.S. dollars. At June 30, 2005, our backlog included orders in U.S. dollars of $57.3million, or 86%of the total backlog. Substantially all of our costs are negotiated and paid in U.S. dollars. Significant changes in the values of foreign currencies relative to the value of the U.S. dollar can impact sales of our products

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

In the third quarter of fiscal 2005, we began hedging certain intercompany transactions by entering into forward contracts to reduce the impact of adverse fluctuations on earnings associated with foreign currency exchange rate changes. We do not enter into any derivative transactions for speculative purposes. These contracts are entered into for periods consistent with the currency transaction exposures, generally three to six months. Generally, any gains and losses on the fair value of these contracts are expected to be largely offset by gains and losses on the underlying transactions. Management believes the percentage of sales in foreign currencies may increase in the coming year due to an increase in sales denominated in yen to Japanese customers.

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

Item 8. Financial Statements and Supplementary Data

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

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

None.

Item 9A. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As previously disclosed in a Current Report on Form 8-K which we filed on March 29, 2006 and as described in our Explanatory Note to this Form 10-K/A and note 2 to our accompanying consolidated financial statements, in connection with conducting an internal review of our tax return, we determined that inadvertent accounting errors were made in the consolidation of our intercompany revenues from certain of our foreign operations. The errors are the result of our failure to identify and eliminate certain intercompany revenues attributed to our Singapore and Taiwan offices, which resulted in our overstating reported revenues, from fiscal 2001 through the second quarter of fiscal 2006. Based on the impact of the aforementioned accounting errors, we determined to restate our consolidated financial statements as of June 30, 2005 and for the year ended June 30, 2005. The consolidated financial statements for fiscal 2003 and 2004 included in this Form 10-K/A are also being restated. Our restated consolidated financial statements also include disclosure of restated quarterly results for fiscal 2005 and 2004.

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

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

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

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

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

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

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

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

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

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

c) Changes in Internal Control Over Financial Reporting

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

(d) Remediation of Material Weakness

During the period from April to May 2006, we implemented remedial measures to address the identified material weakness. We improved procedures related to the recording and reporting of our inter-company transactions, including dedicating additional resources to our consolidation processes and the procedures and controls surrounding the consolidation process, and increased review and approval controls by senior financial personnel over the personnel that perform the consolidation. These improved procedures included ensuring that the inter-company activity is properly identified and eliminated in consolidation.

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

Item 9B. Other Information

None.

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PART III

Item 10. Directors and Executive Officers of the Registrant

Except for the information concerning executive officers which is set forth in Part I of this Annual Report,information required by this item will be included under the captions “Election of Board of Directors”, “Committees of the Board of Directors”, and “Other Agreements and Other Matters” in our Proxy Statement to be filed pursuant to Regulation 14A for use in connection with our company’s 2005 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 11. Executive Compensation

Information required by this item will be included in our 2005 Proxy Statement under the caption “Executive Compensation” and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information required by this item will be included in our 2005 Proxy Statement under the captions “Election of Board of Directors,” “Equity Compensation Plan Information,” and “Principal Stockholders” and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

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

Item 14. Principal Accounting Fees and Services

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

27

PART IV

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

(a)	The following documents are filed as part of this report:
	1. and 2. Financial Statements and Financial Statement Schedules:
		An index to the financial statements and financial statement schedules filed is located on page F-1.
	3.	EXHIBITS
	3.(i)	Restated Certificate of Incorporation of the Company and amendments thereto (Exhibit 3.(i) to the Company’s Annual Report on Form 10-K for its year ended June 30, 1993)*
	3.(ii)	Certificate of Amendment of Certificate of Incorporation, filed June 3, 1996 (Exhibit 3.(ii) to the Company’s Annual Report on Form 10-K 405 for its year ended June 30, 1996)*
	3.(iii)	By-laws of the Company (Exhibit (3)(b) to Registration No. 2-87253 on Form S-1 hereinafter “Registration No. 2-87253”)*
	10.1	Confidentiality and Non-Competition Agreement dated October 25, 1983, between the Company and Carl A. Zanoni (Exhibit (10)(b) to Registration No. 2-87253)*
	10.2	Agreement dated November 20, 1980, between the Company and Canon Inc. regarding exchange of information (Exhibit (10)(y) to Registration No. 2-87253)*
	10.3	Amended and Restated Zygo Corporation Profit Sharing Plan (Exhibit 10.15 to the Company’s Annual Report on Form 10-K405 for its year ended June 30, 1995)*
	10.4	Canon/ZYGO Confidentiality Agreement dated March 7, 1990, between the Company and Canon Inc. regarding confidential technical information received from each other (Exhibit 10.42 to the Company’s Annual Report on Form 10-K for its year ended June 30, 1991)*
	10.5	Non-Competition Agreement dated August 26, 1993, between the Company and Paul F. Forman (Exhibit 10.27 to the Company’s Annual Report on Form 10-K for its year ended June 30, 1993)*
	10.6	Zygo Corporation Amended and Restated Non-Qualified Stock Option Plan ratified and approved by the Company’s Stockholders on November 19, 1992 (Exhibit 10.30 to the Company’s Annual Report on Form 10-K for its year ended June 30, 1993)*
	10.7	Zygo Corporation Non-Employee Director Stock Option Plan ratified and approved by the Company’s Stockholders on November 17, 1994 (Exhibit 10.30 to the Company’s Annual Report on Form 10-K 405 for its year ended June 30, 1996)*
	10.8	Employment agreement dated January 15, 1999, between Zygo Corporation and J. Bruce Robinson (Exhibit 10.34 to the Company’s Annual Report on Form 10-K 405 for its year ended June 30, 1999)*
	10.9	Zygo Corporation Amended and Restated Non-Employee Director Stock Option Plan ratified and approved by the Company’s Stockholders on November 17, 1999 (Exhibit to the Company’s Definitive Proxy Statement for its year ended June 30, 1999)*
	10.10	Employment agreement dated July 1, 1999, between Zygo Corporation and Brian J. Monti (Exhibit 10.22 to the Company’s Annual Report on Form 10-K 405 for its year ended June 30, 2000)*
	10.11	Acquisition Agreement dated May 5, 2000, by and among Zygo Corporation, Firefly Technologies Inc., and the Shareholders of Firefly Technologies Inc. (Company’s Current Reports on Form 8-K dated May 8, 2000 and on Form 8-KA dated June 30, 2000)*

28

10.12	Employment agreement dated May 5, 2000, between Zygo Corporation and Patrick Tan (Exhibit 10.01(e)(2) to the Company’s Current Reports on Form 8-K dated May 8, 2000 and on Form 8-KA dated June 30, 2000)*
10.13	Promissory Note to the amended and restated credit agreement dated May 14, 2001, between Zygo Corporation and Fleet National Bank (Exhibit 10.26 to the Company’s Annual Report on Form 10K 405 for its year ended June 30, 2001)*
10.14	Amended and restated credit agreement dated May 14, 2001, between Zygo Corporation and Fleet National Bank (Exhibit 10.21 to the Company’s Annual Report on Form 10K for its year ended June 30, 2002)*
10.15	Amended and restated credit agreement dated November 22, 2001 between Zygo Corporation and Fleet National Bank (Exhibit 10.22 to the Company’s Annual Report on Form 10K for its year ended June 30, 2002)*
10.16	Amended and restated credit agreement dated June 26, 2002 between Zygo Corporation and Fleet National Bank (Exhibit 10.23 to the Company’s Annual Report on Form 10K for its year ended June 30, 2002)*
10.17	Subcontract B519044 between The Regents of The University of California Lawrence Livermore National Laboratory and Zygo Corporation dated January14, 2002 (Exhibit 10.25 to the Company’s Annual Report on Form 10K for its year ended June 30, 2002)*
10.18	Development Agreement dated September 11, 2002, between Zygo Corporation and Canon, Inc. (Exhibit 99.2 to the Company’s Current Reports on Form 8-K dated September 17, 2002)*
10.19	Development and Manufacturing Support Services Agreement effective December 1, 2001, between Zygo Corporation and Philips Electronics North America Corporation. (Exhibit 99.1 to the Company’s Current Reports on Form 8-K dated October 22, 2002)*
10.20	Master Reaffirmation and Amendment No. 3 to Loan Documents dated November 21, 2002, between Fleet National Bank and Zygo Corporation. (Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for its quarterly period ended December 27, 2002)*
10.21	Master Reaffirmation and Amendment No. 4 to Loan Documents dated December 18, 2003, between Fleet National Bank and Zygo Corporation. (Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for its quarterly period ended December 26, 2003)*
10.22	Offer Letter dated February 10, 2004 between Zygo Corporation and Walter Shephard. (Exhibit 10.30 to the Company’s Annual Report on Form 10-K for its year ended June 30, 2004)*
10.23	Development Agreement Amendment dated December 20, 2004, between Zygo Corporation and Canon Inc. (Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for its quarterly period ended December 31, 2004)*
10.24	Development Agreement Amendment dated February 26, 2005, between Zygo Corporation and Canon Inc. (Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for its quarterly period ended March 31, 2005)*
10.25	Development Agreement dated February 23, 2005, between Zygo Corporation and Canon Inc. (Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for its quarterly period ended March 31, 2005)*
14.1	Zygo Corporation Code of Ethics (Exhibit 14.1 to the Company’s Quarterly Report on Form 10-Q for its quarterly period ended March 26, 2004)*
21.	Subsidiaries of Registrant
23.	Consent of Independent Registered Public Accounting Firm
24.	Power of Attorney (included in the signature page)
31.1	Certification of Chief Executive Officer under Rule 13a-14(a)

29

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

*Incorporated herein by reference.

30

SIGNATURES

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

ZYGO CORPORATION
Registrant
By	/s/ Walter A. Shephard	Date	June 26, 2006
	Walter A. Shephard
	Vice President, Finance, Chief Financial Officer, and Treasurer

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

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

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

31

ZYGO CORPORATION AND CONSOLIDATED SUBSIDIARIES

Index to Financial Statements and Schedule

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

All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedules or the information required is included in the consolidated financial statements or notes thereto.

F - 1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Zygo Corporation

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

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

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

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

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

/s/ KPMG LLP

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

F - 2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Zygo Corporation

We have audited management’s assessment, included in the accompanying Report of Management on Zygo Corporation’s Internal Control Over Financial Reporting (Restated) under Item 9A(b), that Zygo Corporation did not maintain effective internal control over financial reporting as of June 30, 2005, because of the effect of a material weakness identified in management’s assessment, based on criteria established inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Zygo Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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

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

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

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

F - 3

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

/s/ KPMG LLP

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

F - 4

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

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

See accompanying notes to consolidated financial statements.

F - 5

CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands except per share amounts)

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

See accompanying notes to consolidated financial statements.

F - 6

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Thousands of dollars)

	Total			Comp. Income (Loss)			Retained Earnings (Deficit)			Accum. Other Comp. Income (Loss)			Common Stock		Treasury Stock			Paid-In Capital
Balance at June 30, 2002 (As previously reported)	$	140,005					$	7,981		$	(1,868	)	$	1,789	$	(5,287	)	$	137,390
Restatement adjustment		233						(187	)		420
Balance at June 30, 2002 (As restated, see Note 2)		140,238						7,794			(1,448	)		1,789		(5,287	)		137,390
Comprehensive income (loss):
Net loss (restated)		(10,782	)		(10,782	)		(10,782	)
Other comprehensive income (loss), net of tax
Unrealized gain on marketable securities		120			120
Unrealized loss on swap agreement		(399	)		(399	)
Foreign currency translation effect (restated)		268			268
Other comprehensive loss					(11	)					(11	)
Comprehensive loss (restated)					(10,793	)
Non-cash compensation charges related to stock options		70																	70
Employee stock purchase		731												12					719
Exercise of employee stock options and related tax effect		157												3					154
Balance at June 30, 2003 (Restated, see Note 2)		130,403						(2,988	)		(1,459	)		1,804		(5,287	)		138,333
Comprehensive income (loss):
Net loss (restated)		(3,429	)		(3,429	)		(3,429	)
Other comprehensive income (loss), net of tax
Unrealized loss on marketable securities		(74	)		(74	)
Reclassification adjustment for loss on swap agreement included in net loss		914			914
Foreign currency translation effect (restated)		691			691
Other comprehensive income					1,531						1,531
Comprehensive loss (restated)					(1,898	)
Non-cash compensation charges related to stock options		269																	269
Tax benefit for deductible expenses charged to equity		474																	474
Employee stock purchase		578												9					569
Exercise of employee stock options and related tax effect		1,526												20					1,506
Balance at June 30, 2004 (Restated, see Note 2)		131,352						(6,417	)		72			1,833		(5,287	)		141,151
Comprehensive income (loss):
Net earnings (restated)		8,984			8,984			8,984
Other comprehensive income (loss), net of tax
Unrealized loss on marketable securities		(30	)		(30	)
Foreign currency translation effect (restated)		(122	)		(122	)
Other comprehensive loss					(152	)					(152	)
Comprehensive income (restated)					8,832
Non-cash compensation charges related to stock options		76																	76
Employee stock purchase		667												7					660
Exercise of employee stock options and related tax effect		226												2					224
Balance at June 30, 2005 (Restated, see Note 2)	$	141,153					$	2,567		$	(80	)	$	1,842	$	(5,287	)	$	142,111

See accompanying notes to consolidated financial statements.

F - 7

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)

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

See accompanying notes to consolidated financial statements.

F - 8

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

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Operations and Principles of Consolidation

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

Cash and Cash Equivalents

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

Marketable Securities

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

Inventories

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

Property, Plant, and Equipment

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

Intangible Assets

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

Valuation of Long-Lived Assets

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

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

F - 9

Income Taxes

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

Revenue Recognition

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

Research and Development

Research and development costs are expensed as incurred.

Earnings Per Share

Basic and diluted earnings per share are calculated in accordance with SFAS No. 128,“Earnings Per Share.”

The following table sets forth the reconciliation of weighted average shares outstanding and diluted weighted average shares outstanding:

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

F - 10

Stock Based Compensation

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

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

	June 30,			June 30,			June 30,
	2005			2004			2003
	(Restated)			(Restated)			(Restated)
Net earnings (loss), as reported	$	8,984		$	(3,429	)	$	(10,782	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2,519	)		(5,786	)		(5,209	)
Pro forma net earnings (loss)	$	6,465		$	(9,215	)	$	(15,991	)
Net earnings (loss) per share
Basic - as reported	$	0.50		$	(0.19	)	$	(0.61	)
Basic - pro forma	$	0.36		$	(0.52	)	$	(0.91	)
Diluted - as reported	$	0.50		$	(0.19	)	$	(0.61	)
Diluted - pro forma	$	0.36		$	(0.51	)	$	(0.90	)

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

Fair Value of Financial Instruments

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

Use of Estimates

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

Reclassifications

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

Recently Issued Accounting Pronouncements

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

F - 11

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

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

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

The FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which primarily changes the requirements for the accounting for and reporting of a change in accounting principle for all voluntary changes or when an accounting pronouncement does not include specific transition provisions. This will apply to accounting changes made after July 1, 2006.

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

NOTE 2: RESTATEMENT OF FINANCIAL STATEMENTS

We are restating our consolidated financial statements for fiscal years 2005, 2004, and 2003 in this Form 10-K/A for corrections in the accounting of intercompany transactions from certain of our foreign operations. In addition, certain disclosures in notes 1, 5, 17, and 18 to the consolidated financial statements contained in this report are being restated to reflect the corrections. Our restated consolidated financial statements included in this Form 10-K/A also include disclosure of restated unaudited quarterly results for fiscal 2005 and 2004 in note 21. The corrections are a result of our failure to identify and eliminate certain intercompany revenues attributed to our Singapore and Taiwan offices, which resulted in our overstating reported revenues, from fiscal 2001 through the second quarter of fiscal 2006. The tax effects on the corrections and other minor adjustments have also been reflected in these restatements. The fiscal 2002 and 2001 adjustments were insignificant and were corrected through an adjustment to retained earnings and currency translation effects in the accumulated other comprehensive income balance of the stockholders’ equity section of the balance sheet as of July 1, 2002.

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

F - 12

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

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

F - 13

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

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

F - 14

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

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

F - 15

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

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

F - 16

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

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

F - 17

NOTE 3: DIVESTITURES AND DISCONTINUED OPERATIONS

In September 2002, we committed to a planned disposition of our TeraOptix business unit (“TeraOptix”) which included recording impairment charges for the facility and equipment. During fiscal 2004, we recorded additional impairment charges on the facility in the second and fourth fiscal quarters. In the second quarter of fiscal 2004, the impairment charge was based on the then current fair value based on an appraisal from an independent third party. During the fourth quarter of fiscal 2004, management changed the marketing of the facility to a general purpose manufacturing facility from clean room space. We received offers on the building during the fourth quarter of fiscal 2004 from two separate independent third parties. Based on the offers, management determined that the fair value of the vacant facility was $2,012 and an additional impairment charge was recorded. The total impairment charges recorded in fiscal 2004 were $6,392, net of tax of $3,425. In fiscal 2005, we recorded an additional impairment charge and adjustments of $124, net of tax of $43, to reflect the fair value based on final negotiations of a pending sale. The sale of the facility was completed in March 2005 for $1,918, net of selling expenses.

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

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

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

NOTE 4: MARKETABLE SECURITIES

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

F - 18

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

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

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

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

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

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

NOTE 5: ACCOUNTS RECEIVABLE

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

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

F - 19

NOTE 6: INVENTORIES

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

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

NOTE 7: PROPERTY, PLANT, AND EQUIPMENT

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

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

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

NOTE 8: INTANGIBLE ASSETS

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

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

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

NOTE 9: BANK LINE OF CREDIT

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

F - 20

NOTE 10: WARRANTY

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

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

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

NOTE 11: LONG-TERM DEBT

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

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

NOTE 12: LEASES

We lease certain manufacturing equipment and facilities under operating leases, some of which include cost escalation clauses, expiring on various dates through 2009. Total lease expense, net, charged to operations was $2,270 in fiscal 2005, $1,720 in fiscal 2004, and $1,453 in fiscal 2003. At June 30, 2005, the minimum future lease commitments, including vacant facilities, under noncancellable leases payable over the remaining lives of the leases, net of sublease rentals, are as follows:

Year ending June 30,	Minimum Future Lease Commitments
2006		$	1,493
2007			480
2008			154
After 2008			54
Total minimum lease payments		$	2,181

NOTE 13: PROFIT-SHARING PLAN

We maintain a deferred profit-sharing plan under which substantially all full-time employees are eligible to participate. The profit-sharing plan consists of a cash distribution and a contribution to our 401(k) program. Profit-sharing contributions are determined annually at the discretion of the Board of Directors. We also maintain a 401(k) tax deferred payroll deduction program and an Employee Stock Ownership Program. Under the 401(k) program, employees may contribute a tax-deferred amount of up to 60% of their compensation, as defined. We may contribute to the 401(k) program an amount determined annually at the discretion of the Board of Directors. Under the Employee Stock Ownership Program, we may, at the discretion of the Board of Directors, contribute our own stock or contribute cash to purchase our own stock. The purchased stock’s fair market value can not exceed the maximum amount of employee stock ownership credit as determined under Section 416 of the Internal Revenue Code. Our contribution expenses related to the plans for the years ended June 30, 2005, 2004, and 2003, amounted to $2,070, $1,186, and $359, respectively.

F - 21

NOTE 14: STOCK COMPENSATION PLANS

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

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

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

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

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

NOTE 15: STOCK OPTION PLANS

Employee Stock Option Plan

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

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

Non-Employee Director Stock Option Plan

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

F - 22

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

2002 Equity Incentive Plan

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

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

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

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

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NOTE 16: EMPLOYEE STOCK PURCHASE PLAN

In November 2000, we adopted a non-compensatory Employee Stock Purchase Plan (“ESPP”). Under the ESPP, employees who elect to participate have the ability to purchase common stock at a 5% discount from the market value of such stock (15% discount from the market value for the period from November 2000 until June 30, 2005). The ESPP permits an enrolled employee to make contributions to purchase shares of common stock by having withheld from his or her salary an amount between 1% and 10% of compensation. The total number of shares of common stock that may be issued under the ESPP is 500,000. At June 30, 2005 and 2004, we had withheld $330 and $467, respectively, for the purchases of shares under this plan, and in July 2005 and 2004, we issued shares of common stock of approximately 35,000 in each year.

NOTE 17: INCOME TAXES

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

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

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

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

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

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

F - 24

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

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

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

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of June 30, 2005 and 2004 are presented below:

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

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

F - 25

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

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

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

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

At June 30, 2005, our share of the cumulative undistributed earnings of foreign subsidiaries was $2,369. No provision has been made for U.S. or additional foreign taxes on the undistributed earnings of foreign subsidiaries because we intend to continue to reinvest these earnings. Determination of the amount of unrecognized deferred tax liability associated with these earnings is not practicable.

At June 30, 2005, we have federal, foreign, and state NOL carryforwards of approximately $63,208, $182, and $93,530, respectively, and various state credit carryforwards of $4,397. The federal NOL begins to expire in 2019 through 2025, while the state NOL and credits begin to expire in 2006 through 2025. The foreign NOL is carried forward until utilized. We also have federal general business credit carryforwards of approximately $5,468, which is available to reduce federal income taxes, if any, through 2019 and begin to expire in 2012. In addition, the Company also has alternative minimum tax credit carryforwards of approximately $6, which are available to reduce future federal regular income taxes, if any, over an indefinite period.

NOTE 18: SEGMENT REPORTING

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

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

F - 26

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

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

	Fiscal Year Ended June 30,
	2005		2004		2003
Domestic	$	47,973	$	33,937	$	31,093
Far East:
Japan		61,115		61,067		54,690
Pacific Rim		17,303		12,806		6,134
Total Far East		78,418		73,873		60,824
Europe		14,958		8,466		10,304
Total	$	141,349	$	116,276	$	102,221

NOTE 19: RELATED PARTY TRANSACTIONS

Sales to Canon, Inc., a stockholder representing approximately 7% ownership at June 30, 2005, and Canon Sales Co., Inc., a distributor of certain of our products in Japan and a subsidiary of Canon Inc., amounted to $51,887 (37% of net sales), $57,306 (49% of net sales), and $52,773 (52% of net sales), for the years ended June 30, 2005, 2004, and 2003, respectively. Selling prices of products sold to Canon, Inc. and Canon Sales Co., Inc. are based, generally, on the normal terms given to distributors. Revenues generated from development contracts are recorded on a cost-plus basis.

In September 2002, we entered into a contract with Canon Inc. related to the development of certain interferometers. In March 2004, we signed a preliminary agreement to begin further add-on work; the definitive agreement for this additional work was signed in December 2004. In February 2005, we entered into two additional agreements with Canon Inc. related to the development of prototype production tools and accessories. During fiscal 2005, 2004, and 2003, we recognized revenue in the semiconductor segment of $15,617, $16,057, and $18,779, respectively, for the original contract and subsequent add-on work.

At June 30, 2005 and 2004, there was approximately, in the aggregate, $3,951 and $10,913, respectively, of trade accounts receivable from Canon, Inc. and Canon Sales Co., Inc. In addition, Canon Inc. paid us progress payments in accordance with the terms of the development contract. The total progress payments related to the development contract remaining at June 30, 2005 was $11,287.

NOTE 20: HEDGING ACTIVITIES

During the third quarter of fiscal 2005, we entered into foreign currency forward contracts to reduce the impact of adverse fluctuations on earnings associated with foreign currency exchange rate changes. We do not enter into any derivative transactions for speculative purposes. These contracts are not designated as cash flow, fair value, or net investment hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and therefore, are marked-to-market with changes in fair value recorded to earnings. These contracts are entered into for periods consistent with the currency transaction exposures, generally three to six months. Any gains and losses on the fair value of these contracts would largely offset corresponding losses and gains on the underlying transactions.

As of June 30, 2005, we had three foreign currency forward contracts outstanding. Net gains recognized from foreign currency forward contracts for fiscal 2005 was $75, and are included in other income in the consolidated statements of operations. These gains are substantially offset by foreign exchange losses on intercompany balances recorded by our subsidiaries. We did not enter into any derivative instruments to hedge foreign currency exposure prior to the third quarter of fiscal 2005.

F - 27

NOTE 21: QUARTERLY RESULTS (UNAUDITED)

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

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

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

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

F - 28

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

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

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

F - 29

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE II

The Board of Directors and Stockholders of Zygo Corporation:

Under date of September 7, 2005, except as to note 2 to the consolidated financial statements which is as of June 20, 2006, we reported on the consolidated balance sheets of Zygo Corporation and subsidiaries as of June 30, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended June 30, 2005 as contained in the 2005 Annual Report to stockholders on Form 10-K/A. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule listed in the accompanying index on page F-1. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.

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

KPMG LLP

Stamford, Connecticut
June 20, 2006

S - 1

ZYGO CORPORATION AND CONSOLIDATED SUBSIDIARY

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

Years ended June 30, 2005, 2004, and 2003

(Thousands of dollars)

Description	Balance at Beginning of Period		Provision			Write-Offs		Balance at End of Period
Year Ended June 30, 2005:
Allowance for doubtful accounts	$	707	$	(11	)	$	33	$	663
Valuation allowance on net deferred tax assets	$	3,383	$	—		$	1,372	$	2,011
Year Ended June 30, 2004:
Allowance for doubtful accounts	$	337	$	374		$	4	$	707
Valuation allowance on net deferred tax assets	$	1,820	$	1,563		$	—	$	3,383
Year Ended June 30, 2003:
Allowance for doubtful accounts	$	949	$	270		$	882	$	337
Valuation allowance on net deferred tax assets	$	3,803	$	—		$	1,983	$	1,820

S - 2

EXHIBIT INDEX

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