<PAGE>   1
                                                                          SVG 13



                                                                    EXHIBIT 13.1


CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
============================================================================================
September 30, (in thousands, except share and per share amounts)          1996         1997

<S>                                                                   <C>         <C>      
ASSETS

Current Assets:
  Cash and equivalents                                                $218,841    $ 129,508
  Temporary investments                                                 43,220       76,972
  Accounts receivable (net of allowance for doubtful accounts of
    $6,003 and $6,605, respectively)                                   151,011      142,200
  Inventories                                                          213,229      227,359
  Prepaid expenses and other assets                                      7,227        7,336
  Deferred taxes                                                         9,295        5,341
--------------------------------------------------------------------------------------------
  Total current assets                                                 642,823      588,716
Property and equipment, net                                             81,577      143,553
Deposits and other assets                                                2,312        5,514
Intangible assets, net                                                   2,665        3,110
--------------------------------------------------------------------------------------------
Total                                                                 $729,377    $ 740,893
--------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
  Accounts payable                                                    $ 35,556    $  43,167
  Accrued liabilities                                                  137,526      125,762
  Current portion of long-term debt and capital leases                     437          659
  Income taxes payable                                                   5,649          514
--------------------------------------------------------------------------------------------
  Total current liabilities                                            179,168      170,102
Long-term debt and capital leases                                          217        5,792
Deferred and other liabilities                                           3,338        2,016
Commitments (See Notes 10, 14 and 15)                                       --           --
Minority interest                                                        4,705           --
Stockholders' equity:
  Convertible Redeemable Preferred Stock -- $0.01 par value,
    shares authorized: 1,000,000; none outstanding                          --           --
  Common Stock -- $0.01 par value, shares authorized: 100,000,000;
    shares outstanding: 1996: 30,175,794; 1997: 31,181,342             378,033      397,820
  Retained earnings                                                    163,916      165,403
  Cumulative translation adjustment                                         --         (240)
--------------------------------------------------------------------------------------------
  Stockholders' equity                                                 541,949      562,983
--------------------------------------------------------------------------------------------
Total                                                                 $729,377    $ 740,893
--------------------------------------------------------------------------------------------
</TABLE>


See Notes to Consolidated Financial Statements.

<PAGE>   2
SVG 14



CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
============================================================================================================
Years Ended September 30, (in thousands, except per share amounts)         1995          1996          1997
<S>                                                                   <C>           <C>           <C>      
Net sales                                                             $ 462,032     $ 639,928     $ 594,957
Cost of sales                                                           278,553       371,636       365,217
------------------------------------------------------------------------------------------------------------
Gross profit                                                            183,479       268,292       229,740
Operating expenses:
  Research, development and related engineering                          40,231        66,974        73,901
  Marketing, general and administrative                                  90,859       115,827       130,788
  Settlement of royalty obligation                                           --            --        32,582
------------------------------------------------------------------------------------------------------------
Operating income (loss)                                                  52,389        85,491        (7,531)
Interest and other income                                                 9,465        13,330        10,633
Interest expense                                                           (620)         (437)         (710)
------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest                         61,234        98,384         2,392
Provision for income taxes                                               22,045        34,437           813
Minority interest                                                           194           726            92
------------------------------------------------------------------------------------------------------------
Net income                                                            $  38,995     $  63,221     $   1,487
------------------------------------------------------------------------------------------------------------
Preferred Stock dividend                                              $     537     $      --     $      --
------------------------------------------------------------------------------------------------------------
Net income per share                                                  $    1.57     $    2.07     $    0.05
------------------------------------------------------------------------------------------------------------
Shares used in per share computations                                    24,850        30,554        31,409
------------------------------------------------------------------------------------------------------------
</TABLE>


See Notes to Consolidated Financial Statements.


<PAGE>   3

                                                                          SVG 15



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



<TABLE>
<CAPTION>
============================================================================================================================
                                                                                                        Cumulative
                                           Preferred Stock               Common Stock         Retained  Translation
(dollars in thousands)                   Shares       Amount         Shares        Amount     Earnings   Adjustment   Total
<S>                                     <C>         <C>            <C>            <C>         <C>         <C>       <C>     
Balances, September 30, 1994             10,000     $  17,000      18,967,276     $105,978    $ 62,237    $  --     $185,215

Sale of Preferred Stock
  net of issuance costs                  14,943        29,800                                                         29,800
Sale of Common Stock,
  net of issuance costs                                             3,192,606       87,636                            87,636
Conversion of Preferred
  Stock to Common Stock                 (24,943)      (46,800)      2,494,300       46,800                                --
Stock options exercised                                               520,256        4,454                             4,454
Employee stock purchase plan                                           31,040          167                               167
Preferred Stock dividend                                               27,692          592        (537)                   55
Tax benefit of stock option
  transactions                                                                       3,925                             3,925
Net income                                                                                      38,995                38,995
-----------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1995                 --            --      25,233,170      249,552     100,695       --      350,247

Sale of Common Stock,
  net of issuance costs                                             4,025,000      126,196                           126,196
Warrants exercised, net                                               701,923                                             --
Stock options exercised                                               103,523          835                               835
Employee stock purchase plan                                          112,178          954                               954
Tax benefit of stock option
  transactions                                                                         496                               496
Net income                                                                                      63,221                63,221
-----------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1996                 --            --      30,175,794      378,033     163,916       --      541,949

Stock issued in settlement
  of royalty obligation                                               489,296        9,994                             9,994
Stock options exercised                                               299,543        3,508                             3,508
Employee stock purchase plan                                          216,709        3,753                             3,753
Tax benefit of stock option
  transactions                                                                       2,532                             2,532
Cumulative translation adjustment                                                                          (240)        (240)
Net income                                                                                       1,487                 1,487
-----------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1997                 --     $      --      31,181,342     $397,820    $165,403    $(240)    $562,983
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


See Notes to Consolidated Financial Statements.
<PAGE>   4

SVG 16



CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
========================================================================================================
Years Ended September 30, (in thousands)                              1995          1996          1997
<S>                                                              <C>           <C>           <C>
Cash Flows from Operating Activities:
  Net income                                                     $  38,995     $  63,221     $   1,487
  Reconciliation to net cash provided by (used for) operating
    activities:
    Depreciation and amortization                                    9,216        13,075        26,762
    Settlement of royalty obligation                                    --            --        27,582
    Amortization of intangibles                                        285           155           555
    Deferred income taxes                                             (831)       (5,562)          948
    Minority interest                                                  194           726            92
   Changes in assets and liabilities:
      Accounts receivable                                          (56,040)      (28,162)      (13,914)
      Inventories                                                  (69,256)      (59,256)      (14,130)
      Prepaid expenses                                              (3,757)          162           (58)
      Deposits and other assets                                       (313)         (215)       (1,136)
      Accounts payable                                              19,965        (4,663)        7,611
      Accrued and deferred liabilities                              45,748        38,199        (9,763)
      Income taxes payable                                          (3,266)        3,968        (2,603)
--------------------------------------------------------------------------------------------------------
  Net cash provided by (used for) operating activities             (19,060)       21,648        23,433
--------------------------------------------------------------------------------------------------------
Cash Flows used for Investing Activities:
  Purchases of temporary investments, held to maturity             (13,733)      (88,647)           --
  Purchases of temporary investments, available for sale                --       (43,220)     (109,872)
  Maturities of temporary investments, held to maturity                 --       102,380            --
  Maturities of temporary investments, available for sale               --            --        76,120
  Purchases of property and equipment                              (21,410)      (67,033)      (87,958)
  Purchase of minority interest in subsidiary                           --            --        (3,000)
--------------------------------------------------------------------------------------------------------
  Net cash used for investing activities                           (35,143)      (96,520)     (124,710)
--------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
  Sale of Common Stock                                              96,182       127,985         6,986
  Sale of Preferred Stock                                           29,800            --            --
  Collection of receivable from sale of Common Stock warrants        8,204            --            --
  Proceeds from borrowing                                               --            --         6,500
  Repayment of debt                                                   (799)         (885)         (703)
--------------------------------------------------------------------------------------------------------
  Net cash provided by financing activities                        133,387       127,100        12,783
--------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash                               (223)         (177)         (839)
--------------------------------------------------------------------------------------------------------
Increase in cash and equivalents                                    78,961        52,051       (89,333)
Cash and equivalents:
  Beginning of year                                                 87,829       166,790       218,841
--------------------------------------------------------------------------------------------------------
  End of year                                                    $ 166,790     $ 218,841     $ 129,508
--------------------------------------------------------------------------------------------------------
Non-Cash Investing and Financing Activities:
  Preferred Stock dividend paid in Common Stock                  $     592     $      --     $      --
--------------------------------------------------------------------------------------------------------
  Preferred Stock Converted to Common Stock                      $  46,800     $      --     $      --
--------------------------------------------------------------------------------------------------------
  Common Stock issued in settlement of royalty obligation        $      --     $      --     $   9,994
--------------------------------------------------------------------------------------------------------
  Tax benefit of stock option transactions                       $   3,925     $     496     $   2,532
--------------------------------------------------------------------------------------------------------
</TABLE>


See Notes to Consolidated Financial Statements.

<PAGE>   5

                                                                          SVG 17



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.
THE COMPANY
AND SIGNIFICANT
ACCOUNTING
POLICIES


LINE OF BUSINESS. The Company designs, manufactures and markets semiconductor
wafer processing equipment used in the fabrication of integrated circuits.

CERTAIN RISKS AND UNCERTAINTIES. The semiconductor industry is highly cyclical
and has, historically, experienced periodic downturns that have had a severe
effect on the industry's demand for semiconductor wafer processing equipment.
Any future such downturns are likely to have an adverse effect on the Company's
results of operations.

The Company relies on a limited number of major customers for a substantial
percentage of its net sales. The loss of or any substantial reduction or
rescheduling of orders by any such customer could adversely affect the Company's
business and results of operations.

CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject the
Company to concentrations of credit risk consist principally of investments and
trade receivables. The company places its cash equivalents and temporary
investments in high-grade instruments which it places for safe keeping with
high-quality financial institutions. Further, by policy, it limits the amount of
credit exposure with any one counterparty and the amount of total investment
through any one financial institution or in any one type of investment.

The Company sells its systems to both domestic and international semiconductor
manufacturers. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
The Company maintains an allowance for uncollectible accounts receivable.

USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION. The Consolidated Financial Statements include the
accounts of the Company and its wholly-owned subsidiaries, after elimination of
intercompany transactions and balances.

The functional currency for all of the Company's subsidiaries is the U.S.
dollar. Foreign exchange gains and losses are included in net income and were
not significant in any of the periods presented. A note receivable from one
subsidiary has been designated as long term and the cumulative translation
adjustments related to this note are presented as a separate component of
stockholders' equity.

CASH AND CASH EQUIVALENTS. Cash and cash equivalents consist of highly liquid
investments with a maturity date at acquisition of three months or less. Cash
and cash equivalents are stated at cost, plus any accrued interest, which
approximates market value.

TEMPORARY INVESTMENTS. Temporary investments in debt and equity securities are
classified as available for sale and measured at fair value. Material unrealized
gains and losses, net of tax, are recorded as a separate 


<PAGE>   6
SVG 18



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


component of stockholders' equity until realized. There were no significant
differences between amortized cost and fair market value for investments,
individually or in the aggregate, at either September 30, 1996 or 1997. Any
gains or losses on sales of investments are computed by specific identification.
No investments were sold in 1995, 1996 or 1997.


INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out)
or market.

PROPERTY AND EQUIPMENT. For financial reporting purposes, depreciation is
computed on the straight-line method over the estimated useful lives of the
assets. Estimated useful lives are as follows:


<TABLE>
<CAPTION>
================================================================================
                                                                     Years
<S>                                                                <C>
Land improvements                                                     15
Buildings and improvements                                            40
Machinery and equipment                                             3 to 10
Furniture and fixtures                                              3 to 10
Leasehold improvements                                            Lease term
--------------------------------------------------------------------------------
</TABLE>

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," effective October 1, 1996. The adoption of SFAS No. 121 did not
have a material effect on the Company's financial statements.

INTANGIBLE ASSETS. Intangible assets are amortized on a straight-line basis over
their estimated lives as follows: goodwill, twenty-five years; purchased
technology, six years.

REVENUE RECOGNITION. Sales are generally recognized upon shipment. Product
warranty costs are accrued in the period that sales are recognized.

RESEARCH, DEVELOPMENT, AND RELATED ENGINEERING. Research, development, and
related engineering costs are expensed as incurred. Funds received under certain
development funding arrangements are recorded as a reduction to such expenses as
earned. The Company's products include certain software applications that are
integral to the operation of the product. The costs to develop such software
have not been capitalized as the Company believes its current software
development process is essentially completed concurrent with the establishment
of technological feasibility of the software and/or development of the related
hardware. (See Note 15).

NET INCOME PER SHARE. Net income per share is computed by dividing net income
attributable to common stockholders by the weighted average number of common and
common equivalent shares outstanding. Common equivalent shares reflect the
dilutive effect of outstanding stock options, common stock warrants, 
<PAGE>   7
                                                                          SVG 19



and convertible Preferred Stock. In March 1995, the Preferred Stock was
converted into Common Stock. There was no Preferred Stock outstanding in 1996 or
1997.

In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings Per Share," which replaces current Earnings Per Share (EPS)
reporting and requires a dual presentation of basic and diluted EPS. Basic EPS
excludes dilution and is computed by dividing net income by the weighted
average of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.

Although the Company is not permitted to adopt SFAS No. 128 until fiscal 1998,
if the Company had adopted this statement for the year ended September 30, 1997
the Company's earnings per share would have been as follows:


<TABLE>
<CAPTION>
==================================================================
Earnings Per Share                      1995      1996      1997
<S>                                    <C>       <C>       <C>  
Basic                                  $1.72     $2.13     $0.05
Diluted                                $1.57     $2.07     $0.05
</TABLE>


EMPLOYEE STOCK PLANS. The Company accounts for its stock option and employee
stock purchase plans in accordance with the provisions of the Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company continues to apply the provisions of APB No. 25 for
purposes of determining net income and has adopted the pro forma disclosure
requirements of SFAS No. 123 effective October 1, 1996.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In June 1997, the FASB issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements; and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes annual and
interim reporting standards for a Company's business segments and related
disclosures about it's products, services, geographic areas and major customers.
Both SFAS No. 130 and SFAS No. 131 are effective for fiscal years beginning
after December 15, 1997. The Company believes that the adoption of the new
standards will not have a material effect on the financial statements.

RECLASSIFICATIONS. Reclassifications have been made to the prior years'
Consolidated Financial Statements to conform to the fiscal 1997 presentation.

FISCAL YEAR. The Company uses a 52-53 week fiscal year ending on the Friday
closest to September 30. The accompanying financial statements have been shown
as ending on September 30. Fiscal years 1995 and 1996 each included 52 weeks.
Fiscal year 1997 included 53 weeks.
<PAGE>   8
SVG 20


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2.
TEMPORARY
INVESTMENTS

<TABLE>
<CAPTION>
================================================================================
September 30, (in thousands)                                     1996       1997
<S>                                                           <C>        <C>    
Temporary investments are comprised of the following:

Municipal bonds                                               $10,272    $74,971
Municipal notes                                                    --      2,001
Commercial paper                                               22,953         --
Certificates of deposit                                         9,995         --
--------------------------------------------------------------------------------
Total                                                         $43,220    $76,972
--------------------------------------------------------------------------------
</TABLE>


Of the Company's temporary investments at September 30, 1997, $52,156,000 mature
within one year and $24,816,000 mature within two years.

NOTE 3.
INVENTORIES

<TABLE>
<CAPTION>
================================================================================
September 30, (in thousands)                             1996               1997
<S>                                                  <C>                <C>     
Inventories consist of:
  Raw materials                                      $103,993           $ 92,939
  Work-in-process                                     101,293            128,038
  Finished goods                                        7,943              6,382
--------------------------------------------------------------------------------
  Total                                              $213,229           $227,359
--------------------------------------------------------------------------------
</TABLE>

NOTE 4.
PROPERTY
AND EQUIPMENT


<TABLE>
<CAPTION>
================================================================================
September 30, (in thousands)                               1996            1997
<S>                                                   <C>             <C>      
Property and equipment consist of:
  Land and improvements                               $   6,348       $  10,349
  Buildings and improvements                             16,561          38,792
  Machinery and equipment                                83,859         134,023
  Furniture and fixtures                                 21,885          28,237
  Leasehold improvements                                 21,477          23,601
--------------------------------------------------------------------------------
  Total                                                 150,130         235,002
  Accumulated depreciation and amortization             (68,553)        (91,449)
--------------------------------------------------------------------------------
  Property and equipment, net                         $  81,577       $ 143,553
--------------------------------------------------------------------------------
</TABLE>



<PAGE>   9
                                                                          SVG 21



NOTE 5.
INTANGIBLE
ASSETS


<TABLE>
<CAPTION>
================================================================================
September 30, (in thousands)                             1996              1997
<S>                                                   <C>               <C>    
Intangible assets consist of:
  Goodwill                                            $ 4,186           $ 4,186
  Purchased technology                                  3,700             1,000
--------------------------------------------------------------------------------
                                                        7,886             5,186
  Accumulated amortization                             (5,221)           (2,076)
--------------------------------------------------------------------------------
  Total                                               $ 2,665           $ 3,110
--------------------------------------------------------------------------------
</TABLE>

NOTE 6.
SVG LITHOGRAPHY
SYSTEMS, INC.


Through March 17, 1997, the Company owned 94% of SVG Lithography Systems, Inc.
(SVGL) and International Business Machines, Inc. (IBM) owned the remaining 6%.
The minority interest reflected on the Consolidated Balance Sheets represented
IBM's interest in the net assets of SVGL. On March 18, 1997, the Company
purchased IBM's 6% interest in SVGL for $3,000,000. As a result, the Company now
accounts for SVGL as a wholly-owned subsidiary.

NOTE 7.
SETTLEMENT
OF ROYALTY
OBLIGATION

Under the terms of a research and development agreement, SVGL owed IBM certain
royalties based on future operating results. On March 18, 1997, the Company
satisfied this royalty obligation to IBM in exchange for $5,000,000 in cash,
489,296 shares of Common Stock valued at approximately $10,000,000 and
$23,000,000 in SVGL product. Of the $38,000,000 total, $32,582,000 related to
products currently under development and was recognized as an expense in the
second quarter of fiscal 1997, and $5,418,000 related to existing products and
was recorded as a prepayment which will be amortized to expense through fiscal
year 2000 in proportion to the related product sales. During fiscal 1995 and
1996 the Company made royalty payments pertaining to this agreement of $354,000
and $2,370,000, respectively.

NOTE 8.
DEBT
ARRANGEMENTS

The Company has an unsecured $75,000,000 bank revolving line of credit agreement
which expires in December 1999. Advances under the line of credit bear interest
at either the U.S. prime rate or the LIBOR rate plus 1%. The agreement includes
covenants regarding working capital, profitability, leverage, coverage of
certain charges, minimum net worth, capital expenditures, and prohibition of
cash dividends.

At September 30, 1997, the Company had capital lease obligations of $201,000
which are due in 1998. The capital lease obligations bear interest at rates
ranging from 7 1/2% to 10% and are secured by equipment with an aggregate cost
and accumulated depreciation of $1,485,000 and $1,466,000, respectively, at
September 30, 1997 ($3,347,000 and $3,231,000, respectively, at September 30,
1996).


<PAGE>   10

SVG 22



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In February 1997, the Company received a $6,500,000 loan from the Connecticut
Development Authority. The loan has a ten year term, bears interest at 8.25%, is
secured by the Company's Wilton, Connecticut facility which houses certain
operations of SVGL and had a remaining principal balance of $6,250,000 at
September 30, 1997.

Interest payments were $439,000 in 1995, $410,000 in 1996, and $341,000 in 1997.

NOTE 9.
ACCRUED LIABILITIES

<TABLE>
<CAPTION>
================================================================================
September 30, (in thousands)                               1996             1997
<S>                                                    <C>              <C>     
Accrued liabilities consist of:
  Compensation                                         $ 23,179         $ 30,347
  Product warranty                                       42,899           43,534
  Customer deposits and advances                         58,020           42,559
  Other                                                  13,428            9,322

--------------------------------------------------------------------------------
  Total                                                $137,526         $125,762
--------------------------------------------------------------------------------
</TABLE>


NOTE 10.
EMPLOYEE
BENEFIT PLANS

The Company's profit-sharing plan provides quarterly distributions to eligible
employees as determined by the Board of Directors. Profit-sharing distributions
were $3,557,000 in 1995, $7,235,000 in 1996, and $1,172,000 in 1997.

Under the Company's Cash or Deferred Profit-Sharing Plan (401[k] Plan), the
Company may make contributions, depending on the amount of the employee's
contribution, up to a maximum of 3% of compensation. The Company's contributions
were $2,059,000 in 1995, $2,999,000 in 1996, and $3,135,000 in 1997.

In February 1997, the Company adopted a non-qualified deferred compensation plan
that allows a select group of management, highly compensated Employees and
Directors to defer a portion of their salary, bonus, fees and other benefits.
The plan is unfunded, and amounts due participants represent general obligations
of the Company. The Company may credit additional amounts to participants
account balances, depending on the amount of the employee's contribution, up to
a maximum of 5% of an employees annual salary and bonus. In addition, interest
is credited to the participants account balances at 120% of the average Moody's
corporate bond rate (9.54% in 1997). Company contributions and related interest
become 100% vested five years after the plan year in which the contribution was
made. During fiscal 1997 the Company had an expense of $609,000 and at September
30, 1997, a liability of $1,561,000 under the deferred compensation plan.

<PAGE>   11
                                                                          SVB 23

At September 30, 1997, four officers of the Company had employment agreements
that provide, in the event of disability, death, or termination meeting certain
criteria, for severance payments based on a multiple of their then-current
compensation. At September 30, 1997, the aggregate potential payments under
these agreements would have been approximately $6,400,000.

NOTE 11.
INCOME TAXES

The provision for income taxes consists of:

<TABLE>
<CAPTION>
================================================================================
Years Ended September 30, (in thousands)          1995         1996        1997
<S>                                           <C>          <C>          <C>     
Current:
  Federal                                     $ 17,857     $ 32,239     $(1,850)
  State                                          3,723        6,039       1,364
  Foreign                                        1,296        1,721         351
--------------------------------------------------------------------------------
Total current                                   22,876       39,999        (135)
--------------------------------------------------------------------------------
Deferred:
  Federal                                         (758)      (4,928)       (293)
  State                                            (73)        (634)      1,241
--------------------------------------------------------------------------------
Total Deferred                                    (831)      (5,562)        948
--------------------------------------------------------------------------------
                                              $ 22,045     $ 34,437     $   813
--------------------------------------------------------------------------------
</TABLE>


Domestic and foreign income before income taxes and minority interest is as
follows:


<TABLE>
<CAPTION>
================================================================================
Years Ended September 30, (in thousands)             1995        1996       1997
<S>                                               <C>         <C>         <C>   
Domestic                                          $53,731     $93,761     $2,092
Foreign                                             7,503       4,623        300

--------------------------------------------------------------------------------
                                                  $61,234     $98,384     $2,392
--------------------------------------------------------------------------------
</TABLE>



<PAGE>   12
SVG 24



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The effective tax rate differs from the Federal statutory rate as follows:


<TABLE>
<CAPTION>
================================================================================
Years Ended September 30, (in thousands)          1995         1996        1997
<S>                                           <C>          <C>          <C>    
Statutory rate                                $ 21,432     $ 34,437     $   837
State taxes, net of Federal effect               1,837        3,246         131
Foreign taxes at differing rates                (1,408)         197         268
FSC commission                                    (919)      (2,164)       (464)
Change in valuation allowance                       --       (2,656)         --
Tax exempt interest                                 --           --      (2,284)
Settlement of royalty obligation                    --           --       1,500
Other                                            1,103        1,377         825
--------------------------------------------------------------------------------
  Total                                       $ 22,045     $ 34,437     $   813
--------------------------------------------------------------------------------
</TABLE>

The items giving rise to deferred taxes were as follows:


<TABLE>
<CAPTION>
==================================================================================
September 30, (in thousands)                                    1996         1997
<S>                                                         <C>          <C>     
Deferred tax assets:
  Reserves not recognized for tax purposes                  $ 15,462     $ 11,508
  Net operating loss carryforwards of acquired companies       3,130        3,130
  Accelerated depreciation                                        --          273
--------------------------------------------------------------------------------
  Total deferred tax assets                                   18,592       14,911
Deferred tax liabilities, accelerated depreciation            (2,733)          --
Valuation allowance                                           (9,297)      (9,297)
--------------------------------------------------------------------------------
Total                                                       $  6,562     $  5,614
--------------------------------------------------------------------------------
</TABLE>

At September 30, 1997, approximately $7,900,000 of Federal loss carryforwards
were available to offset future Federal taxable income generated by SVGL,
through the year 2007, subject to certain limitations. The valuation allowance
relates to the net deferred tax assets of SVGL.

In 1995, 1996 and 1997, the Company made income tax payments of $22,423,000,
$36,059,000, and $2,882,000, respectively.

<PAGE>   13
                                                                          SVG 25



NOTE 12.
STOCKHOLDERS'
EQUITY

SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK. The Series A Convertible
Redeemable Preferred Stock (Series A Preferred), all of which was owned by The
Perkin-Elmer Corporation (Perkin-Elmer), had certain conversion and redemption
provisions and bore mandatory quarterly dividends at a rate of 7% per annum,
payable in either cash or shares of the Company's Common Stock. In satisfaction
of the quarterly dividends, the Company issued 27,692 shares of Common Stock in
fiscal 1995. In March 1995, the Series A Preferred was converted into 1,000,000
shares of the Company's Common Stock.

SERIES B CONVERTIBLE REDEEMABLE PREFERRED STOCK. In February 1995, the Company
entered into a business agreement with Intel Corporation, Motorola Inc., and
Texas Instruments Incorporated (the Investors) related to the Company's
Micrascan photolithography products. As part of this agreement, the Investors
purchased, in equal amounts, an aggregate of approximately $30,000,000 of the
Company's newly issued Series B Convertible Preferred Stock (Series B
Preferred). (See Note 15.) In accordance with the terms of its issuance, the
Series B Preferred automatically converted into 1,494,300 shares of Common Stock
as the result of a registration statement that was effective concurrent with a
public offering of the Company's Common Stock in March 1995.

COMMON STOCK WARRANTS. On September 30, 1994, as part of a series of agreements
with SEMATECH, the Company sold warrants for $8,204,000 under which SEMATECH had
the right to purchase, through September 30, 1998, 1,750,000 shares of Common
Stock at $13.625 per share (see Note 15). The warrants were subject to a net
exercise provision that permitted the holder to make a cashless exercise of the
warrants based on the closing price of the Common Stock. In April 1996, SEMATECH
exercised the warrants through the net issuance provision resulting in the
issuance of 701,923 shares of Common Stock with no cash proceeds to the Company.

COMMON STOCK. In March 1995, the Company sold 3,192,606 shares of its Common
Stock through an underwritten public offering. The net proceeds from the
offering were $87,636,000. In October 1995, the Company sold 4,025,000 shares of
its Common Stock through an underwritten public offering. The net proceeds from
the offering were approximately $126,200,000.

PREFERRED SHARES PURCHASE RIGHTS. In September 1996, the Company's Board of
Directors adopted a plan for the distribution of one Preferred Shares Purchase
Right (the Rights) to the holder of each outstanding share of the Company's
Common Stock. The rights expire in September 2006 and are not exercisable until
a person or group announces the acquisition of 15% or more of the Company's
outstanding Common Stock, or the commencement of a tender or exchange offer for
15% or more of the Company's Common Stock. Each Right entitles its holder to
purchase 1/1000 of one new share of the Company's Series A Participating
Preferred Stock at an exercise price of $125, subject to certain antidilution
adjustments. Additionally, a holder would be entitled, under certain
circumstances, to purchase shares of Common Stock of the Company or, in other
cases, of the acquiring company, having a market value of twice the exercise
price of the Right. Under certain conditions, the Company may redeem the Rights
for a price of $0.01 per Right or exchange each Right not held by the acquirer
for one share of the Company's Common Stock.
<PAGE>   14
SVG 26



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13.
STOCK OPTION AND
PURCHASE PLANS


Under the Company's stock option plans, the Board of Directors may, at its
discretion, grant incentive or nonqualified stock options to employees and
directors, and options are automatically granted annually to directors who are
not employees of the Company. Options may be granted for a period not to exceed
ten years from the date of grant, at prices at least equal to the fair market
value of Common Stock at the grant date, and become exercisable generally over a
period of four to five years.

Activity under the plans is as follows (shares in thousands):


<TABLE>
<CAPTION>
================================================================================
                                                   Shares
                                                    Under   Weighted Average
                                                   Option   Exercise Price
<S>                                                  <C>         <C>  
Balances, September 30, 1994                       1,441     $    8.57
  Granted                                            737         26.47
  Exercised                                         (520)         8.59
  Canceled                                          (126)        12.74
--------------------------------------------------------------------------------
Balances, September 30, 1995                       1,532         16.81
  Granted (weighted average fair value $7.78)      1,520         19.21
  Exercised                                         (104)         8.00
  Canceled                                        (1,043)        26.88
--------------------------------------------------------------------------------
Balances, September 30, 1996                       1,905         13.70
  Granted (weighted average fair value $12.62)       778         25.81
  Exercised                                         (300)        11.69
  Canceled                                          (116)        17.95
--------------------------------------------------------------------------------
Balances, September 30, 1997                       2,267     $   17.90
--------------------------------------------------------------------------------
</TABLE>

The following table summarizes information concerning options outstanding and
exercisable as of September 30, 1997:


<TABLE>
<CAPTION>
=======================================================================================
                                       Options Outstanding        Options Exercisable

                                   Weighted        Weighted                   Weighted
                                    Average         Average                    Average
Range of               Number     Contractual       Exercise      Number       Exercise
Exercise Prices     Outstanding  Life (in yrs.)      Price     Exercisable      Price
<S>                 <C>          <C>               <C>         <C>            <C>   
$ 4.63 - $12.63       542,067        2.50            $ 9.15      387,652        $ 8.95
$16.13                852,393        5.79            $16.13      154,611        $16.13
$16.63 - $23.31       569,017        7.83            $22.06       31,619        $19.45
$23.38 - $32.25       303,900        8.72            $30.71        5,361        $23.38
---------------------------------------------------------------------------------------
Total               2,267,377        5.91            $17.90      579,243        $11.57
---------------------------------------------------------------------------------------
</TABLE>

<PAGE>   15
                                                                          SVG 27



At September 30, 1997, options to purchase 990,956 shares of Common Stock were
available for future grant. There were 335,000 and 428,000 options exercisable
as of September 30, 1995 and 1996, respectively, with a weighted average
exercise price of $8.72 and $9.37, respectively, per share.

In July 1996, the Company repriced 940,114 employee options to purchase shares
with exercise prices between $19.63 and $44.25 to a new exercise price of
$16.13. In September 1996, the Company repriced 30,000 director options to
purchase shares with exercise prices between $19.56 and $44.50 to an exercise
price of $18.06. Vesting periods, for all such options, recommenced at the date
of repricing.

Under the Company's Employee Stock Purchase Plan, 2,200,000 shares of Common
Stock were reserved for issuance of which 1,230,049 had been issued at September
30, 1997. The plan permits virtually all employees to purchase, through payroll
deductions, Common Stock at 85% of the lower of the fair market value of the
Common Stock on the first or last day of the offering period. One plan concluded
its final two-year offering period March 31, 1997. The remaining plan has
offering periods of twelve months, with a new twelve-month period beginning each
April 1 and October 1.

PRO FORMA NET INCOME AND EARNINGS PER SHARE. The Company has elected to follow
APB No. 25, "Accounting for Stock Issued to Employees," in accounting for its
employee stock options. Under APB No. 25, because the exercise price of the
Company's employee options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized in the Company's
financial statements.

Pro forma information regarding net income and earnings per share is required by
SFAS No. 123. This information is required to be determined as if the Company
has accounted for its employee stock options (including shares under the
Employee Stock Purchase Plan) granted subsequent to September 30, 1995 under the
fair value method of that statement.

The fair value of options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for fiscal 1996 and 1997, respectively: risk free rates of 6.3% and
6.4%; a stock price volatility factor of 56%; an expected option life of two
years following vesting for Officer and Directors and nine months for all
others; and no dividends during the expected term. The Company's calculations
are based on a multiple option valuation approach and recognition of forfeitures
as they occur. The fair value of the employee purchase rights under the Employee
Stock Purchase Plan was estimated using the same model, but with the following
weighted average assumptions for fiscal 1996 and 1997, respectively: risk-free
rates of 5.5% and 5.8%, stock price volatility factor of 56%: and expected
option life of one year. The weighted average fair value of purchase rights
granted in fiscal 1996 and 1997 was approximately $9.26 and $7.75 respectively.

<PAGE>   16


SVG 28



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For purposes of pro forma disclosures required by SFAS No. 123, the estimated
fair value of the options is amortized to expense over the options' vesting
period. The Company's pro forma information follows (in thousands except for per
share information):


<TABLE>
<CAPTION>
======================================================================================
                                                                   1996           1997
<S>                                                             <C>            <C>     
Pro forma net income (loss)                                     $60,593        $(5,901)
Pro forma net income (loss) per share                           $  1.98        $ (0.19)
--------------------------------------------------------------------------------------
</TABLE>

Due to compensation expense being recognized over the vesting period of the
option, the initial impact on pro forma income may not be representative of pro
forma compensation expense in future years.

NOTE 14.
COMMITMENTS

<TABLE>
<CAPTION>
================================================================================
September 30, (in thousands)

Future minimum lease payments for operating leases (primarily facilities) are as
follows:
<S>                                                                <C>    
  1998                                                             $ 5,564
  1999                                                               4,497
  2000                                                               2,799
  2001                                                               2,327
  2002                                                               2,298
  Thereafter through 2010                                            5,086

--------------------------------------------------------------------------------
  Total                                                            $22,571
--------------------------------------------------------------------------------
</TABLE>


Rent expense was $7,907,000, $8,801,000, and $6,696,000 in 1995, 1996, and 1997,
respectively.



NOTE 15.
RESEARCH AND
DEVELOPMENT
AGREEMENTS

The Company, primarily through SVGL, has obtained research and development
funding agreements with outside parties under which the Company receives
payments based on meeting specified product development milestones. The Company
does not anticipate that such funding will cover the entire cost of the
development efforts to which it pertains. Therefore, it is recorded as a
reduction of research, development, and related engineering, in amounts
approximating the percentage of costs incurred to date to the total estimated
costs of such development efforts.

The Company incurred costs of $13,877,000 in 1995, $30,288,000 in 1996, and
$40,227,000 in 1997 relating to such product development and recognized
$12,767,000, $4,994,000, and $7,968,000, respectively, in related funding.

On September 30, 1994, SEMATECH entered the first of a series of agreements with
the Company to both assist in funding the Micrascan technology and to increase
SVGL's manufacturing capability and capacity. The agreements with SEMATECH
included the sale of warrants for $8,204,000 to 
<PAGE>   17
                                                                          SVG 29



purchase shares of the Company's Common Stock (see Note 12) and established
certain milestones on which the funding is based. The proceeds from the sale of
the warrants, received in October 1994, were utilized to increase SVGL's
manufacturing capability and capacity to satisfy anticipated demand for the
current and future versions of the Micrascan product. Additionally, over a
three-year period, SEMATECH agreed to fund, upon SVGL's completion of certain
milestones, $17,500,000 for the future development of Micrascan technology and
$4,500,000 to be utilized to increase capacity to build the Micrascan product.
Through September 30, 1997, the Company had recognized all of the funding under
the agreements. Under the agreements the Company was obligated to fund from its
own resources certain amounts to further the development of Micrascan
technology, increase manufacturing capability and capacity for Micrascan
products, and to fund related inventory costs. The Company has fulfilled these
funding obligations.

In February 1995, the Company entered into agreements with Intel Corporation,
Motorola Inc., and Texas Instruments Incorporated (the Investors) related to the
Company's Micrascan photolithography products under which the Investors
purchased an aggregate of approximately $30,000,000 of the Company's newly
issued Series B Preferred (see Note 12) and received certain rights to purchase
future generations of the Company's Micrascan products. In turn, the Company
agreed to utilize the proceeds of the transaction for research and development
related to its Micrascan technology and the expansion of its manufacturing
capacity, as well as working capital for its Micrascan products. The agreement
with the Investors also obligated the Company to fund, at any time over a
five-year period, an amount such that the total it funded under the agreements
with both SEMATECH and the Investors was not less than $25,000,000. The Company
has fulfilled its contractual obligations under such agreements.

As part of the agreement with the Investors, IBM was also granted certain rights
to purchase initial quantities of future generations of the Company's Micrascan
products.

During fiscal 1996, the Company entered into agreements with certain customers
(the Participants) whereby each agreed to assist in funding the Company's
development of an advanced technology 193 nanometer Micrascan system. In
exchange for such funding, the Participants receive the right to purchase one
such system and in addition, receive a right of first refusal (ratable among
such participants) to all such machines manufactured during the first two years
following the initial system shipments. For each initial system ordered, each
Participant agreed to fund $5,000,000 in such development costs. The agreements
call for each Participant to pay $1,000,000 of initial development funding and
four subsequent payments of $1,000,000 upon the completion of certain
development milestones. The participants may withdraw from the development
program without penalty but payments made against complete development
milestones are not refundable and all preferential rights to future equipment
are forfeited. As of September 30, 1997, the Company had received $16,000,000 in
funding from six Participants, of which $8,085,000 had been recognized and
offset against research and development expenditures. In March 1997, one
participant withdrew from the program. The agreements with the Participants
stipulate that if the Company receives funding for the development program in
excess of $25,000,000, it will issue, ratably to the Participants, credits
totaling such excess in the form of a cash discount which can be applied to the
purchase of additional systems by each Participant.


<PAGE>   18
SVG 30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 16.
GEOGRAPHIC
SEGMENTS



The Company's products are manufactured in the United States and are sold
worldwide. The Company markets internationally through both its foreign-based
sales and service operations and through outside distributors and sales
representatives.

One customer accounted for 38% of sales in 1997, 31% of sales in 1996, and 17%
of sales in 1995, a second customer accounted for 22% of sales in 1997, was not
significant in 1996, and 12% of sales in 1995, and a third customer was not
significant in 1997, however accounted for 10% of sales in 1996, and 18% of
sales in 1995.

The following table presents a summary of operations by geographic region.
Inter-region transfers and eliminations represent transfers between domestic
operations and international subsidiaries. Transfers and commission arrangements
between geographic areas are at prices sufficient to recover a reasonable
profit. Research, development and related engineering expenses and general
corporate expenses are included in operating income from North American
operations.


<TABLE>
<CAPTION>
=====================================================================================
Years Ended September 30, (in thousands)           1995          1996          1997
<S>                                           <C>           <C>           <C>      
Net Sales:
North America:
  Unaffiliated customers:
    North America                             $ 312,613     $ 417,021     $ 426,762
    Europe                                       68,536       129,947        84,648
    Far East                                     24,259        49,175        52,342
    Other                                         1,932           132           126
  Inter-region transfers                         35,407        29,004        25,191
Europe                                           41,519        27,629        21,044
Far East                                         13,173        16,024        10,035
Eliminations                                    (35,407)      (29,004)      (25,191)
-------------------------------------------------------------------------------------
      Consolidated net sales                  $ 462,032     $ 639,928     $ 594,957
-------------------------------------------------------------------------------------
Operating Income (Loss):
  North America                               $  45,938     $  81,371     $  (4,522)
  Europe                                          7,027         3,964        (1,718)
  Far East                                          822         1,241           591
  Eliminations                                   (1,398)       (1,085)       (1,882)
-------------------------------------------------------------------------------------
      Consolidated operating income (loss)    $  52,389     $  85,491     $  (7,531)
-------------------------------------------------------------------------------------
</TABLE>



<PAGE>   19
                                                                          SVG 31


<TABLE>
<CAPTION>
=======================================================================
September 30, (in thousands)         1995          1996          1997
<S>                             <C>           <C>           <C>      
Identifiable Assets:
  North America                 $ 469,436     $ 692,143     $ 716,034
  Europe                           31,864        37,934        28,361
  Far East                         10,041         8,351         6,827
  Eliminations                    (10,616)       (9,051)      (10,329)
-----------------------------------------------------------------------
    Consolidated assets         $ 500,725     $ 729,377     $ 740,893
-----------------------------------------------------------------------
</TABLE>


NOTE 17.
UNAUDITED
SUBSEQUENT EVENT

On November 26, 1997, the Company acquired Tinsley Laboratories Inc. (TLI), in a
stock for stock transaction whereby approximately 1,091,000 shares of the
Company's Common Stock were exchanged for all outstanding shares of TLI Common
Stock. TLI designs, manufactures and sells precision optical components,
assemblies and systems to customers in a variety of industries and research
endeavors. The transaction is expected to be accounted for as a pooling of
interests for financial reporting purposes and is intended to qualify as a
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended. TLI's revenue for the 12-month period ended September 30, 1997 was
$20,342,000.


NOTE 18.
SUMMARIZED
QUARTERLY FINANCIAL
INFORMATION
(UNAUDITED)


<TABLE>
<CAPTION>
============================================================================================
                                              First       Second        Third       Fourth
(in thousands, except per share amounts)     Quarter      Quarter      Quarter      Quarter
<S>                                          <C>         <C>           <C>         <C>     
1997
  Net sales                                  $123,684    $ 140,701     $161,138    $169,434
  Gross profit                                 47,485       52,802       60,888      68,565
  Income (loss) before income taxes          
    and minority interest                       5,340      (24,957)       9,441      12,568
  Net income (loss)                             3,331      (16,370)       6,231       8,295
  Net income (loss) per share                    0.11        (0.54)        0.20        0.26
1996                                         
  Net sales                                  $158,280    $ 170,668     $167,858    $143,122
  Gross profit                                 65,401       70,414       71,336      61,141
  Income before income taxes                 
    and minority interest                      25,520       27,356       27,542      17,966
  Net income                                   16,481       17,653       17,596      11,491
  Net income per share                           0.54         0.58         0.58        0.38
--------------------------------------------------------------------------------------------
</TABLE>

<PAGE>   20
SVG 32



INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Silicon Valley Group, Inc.:

We have audited the accompanying consolidated balance sheets of Silicon Valley
Group, Inc. and its subsidiaries (the Company) as of September 30, 1996 and
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended September 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Silicon Valley Group, Inc. and its
subsidiaries at September 30, 1996 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 1997 in conformity with generally accepted accounting principles.


DELOITTE &
TOUCHE LLP

                                                  [DELOITTE &
                                                   TOUCHE LLP LOGO]



San Jose, California
October 27, 1997
<PAGE>   21

                                                                          SVG 33


FINANCIAL INFORMATION



FIVE-YEAR SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
====================================================================================================
Years Ended September 30,
(in thousands, except per share amounts)       1993        1994        1995        1996        1997
<S>                                        <C>         <C>         <C>         <C>         <C>     
Income Statement Data:
  Net sales                                $240,633    $319,922    $462,032    $639,928    $594,957
  Income before income taxes
    and minority interest                     6,920      26,820      61,234      98,384       2,392
  Net income                                  4,485      16,764      38,995      63,221       1,487
  Preferred stock dividend                    1,190       1,190         537          --          --
  Net income per share                         0.22        0.84        1.57        2.07        0.05
  Shares used in per share computations      15,277      18,538      24,850      30,554      31,409

Balance Sheet Data:
  Working capital                          $107,975    $171,191    $325,481    $463,655    $418,614
  Total assets                              212,284     271,674     500,725     729,377     740,893
  Long-term debt and capital leases           2,338       1,510         654         217       5,792
  Stockholders' equity                      126,997     185,215     350,247     541,949     562,983

Other Data:
  Backlog                                   145,824     209,119     391,439     394,589     420,579
  Number of Employees                         1,714       1,907       2,653       3,072       3,389
-----------------------------------------------------------------------------------------------------
</TABLE>

COMMON STOCK PRICES

The Company's Common Stock is traded in the over-the-counter market on the
Nasdaq National Market under the symbol SVGI. The following table sets forth the
range of high and low sales prices of the stock during fiscal 1996 and fiscal
1997 as reported by Nasdaq-NMS.


<TABLE>
<CAPTION>
================================================================================
Fiscal 1996                                        High            Low
<S>                                                <C>             <C>    
First Quarter                                      $38-1/2         $23    
Second Quarter                                      30-5/8          18-1/4 
Third Quarter                                       27              17-7/32
Fourth Quarter                                      19-3/8          15-3/8 
--------------------------------------------------------------------------------
<CAPTION>
Fiscal 1997                                        High            Low
<S>                                                <C>             <C>
First Quarter                                      $19-3/8         $15-3/8
Second Quarter                                      27-1/8          18-5/8 
Third Quarter                                       26-3/8          18-1/2
Fourth Quarter                                      37-3/4          28-1/2 
--------------------------------------------------------------------------------
</TABLE>


To date, the Company has not declared or paid dividends on its Common Stock. The
Board of Directors of the Company presently intends to retain all earnings for
use in the Company's business and therefore does not anticipate declaring or
paying any cash dividends in the foreseeable future. The Company's revolving
credit facility prohibits the payment of cash dividends on Common Stock. As of
November 28, 1997, there were 620 holders of record of the Common Stock.

<PAGE>   22
SVG 34



MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information in this discussion contains forward looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are subject to
certain risks and uncertainties, including those discussed below, that could
cause actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these forward looking statements, which
speak only as of the date hereof. Forward looking statements are indicated by an
asterisk (*) following the sentence in which such statement is made. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.


RESULTS
OF OPERATIONS

The Company designs, markets, and services semiconductor processing equipment
used in the fabrication of integrated circuits. The Company's products are used
in photolithography for exposure and photoresist processing, and in deposition
for oxidation/diffusion and low pressure chemical vapor deposition (LPCVD). The
Company manufactures and markets its photolithography exposure products through
its subsidiary, SVG Lithography Systems, Inc. (SVGL), its photoresist processing
products through its Track Systems Division (Track), and its oxidation/diffusion
and LPCVD products through its Thermco Systems Division (Thermco).

The semiconductor industry into which the Company sells its products is highly
cyclical and has, historically, experienced periodic downturns which have had a
severe effect on the semiconductor industry's demand for semiconductor
processing equipment. During the first quarter of calendar 1996 (the Company's
second fiscal quarter), the growth rate of the worldwide semiconductor industry,
measured in terms of its book-to-bill ratio, declined. During the four fiscal
quarters ended March 1997, the Company's quarterly customer order bookings
("bookings") were substantially below first half fiscal 1996 levels and the
Company experienced customer deferrals of scheduled equipment delivery dates
and, to a lesser extent, customer order cancellations. Notwithstanding a
significant increase in bookings during the third and fourth quarters of fiscal
1997, the Company's fiscal 1997 shipments were below fiscal 1996 levels as a
result of the lower bookings in the preceding fiscal quarters. There can be no
assurance that the Company will not again experience customer delivery
deferrals, order cancellations or a prolonged period of customer orders at
reduced levels, any or a combination of which would have an adverse effect on
its operating results.*

Prior downturns in the worldwide semiconductor industry have resulted in
significant reductions in the Company's net sales, gross margin and net income.
Moreover, the Company expects that its operations as a whole will continue to be
dependent on the capital expenditures of semiconductor manufacturers, which in
turn will be dependent on anticipated demand for integrated circuits and
products utilizing integrated circuits.* Any prolonged weakness in demand
experienced by the semiconductor industry is likely to have an adverse effect on
the Company's business and results of operations.*

A portion of the Company's backlog consists of orders from customers in the
Pacific Rim. In light of the recent economic downturn in certain Asian
countries, there can be no assurance that the Company will be 


<PAGE>   23
                                                                          SVG 35



able to obtain additional orders or that it will not experience cancellations or
deferrals of existing orders from customers in such countries, any of which
would have an adverse effect on the Company's business and results of
operations.

Historically, the Company has relied on a limited number of customers for a
substantial percentage of its net sales. During fiscal 1997, the Company's two
largest customers accounted for 60% of net sales, the largest representing 38%
of the total. The loss of any significant customer, including but not limited to
the two largest customers, delays in shipments due to rescheduling or reductions
in orders by a significant customer, including reductions in orders due to
market, economic or competitive conditions in the semiconductor industry, will
adversely affect the Company's business and results of operations.* The Company
believes that, for the foreseeable future, due in part to its customer base
consisting primarily of manufacturers of logic devices, it will continue to rely
on a limited number of major customers for a substantial percentage of its net
sales.*


FISCAL 1997
COMPARED TO
FISCAL 1996


For fiscal 1997, net sales were $594,957,000, a decrease of 7% from net sales of
$639,928,000 during fiscal 1996. The lower net sales were the result of lower
shipments of Thermco and Track products during fiscal 1997, offset in part by
increased shipments of Micrascan photolithography systems by SVGL, particularly
revenues from shipments of Micrascan III systems which have a higher average
selling price and began shipping in the first quarter of fiscal 1997.

The Company's fiscal 1997 bookings were $620,947,000 (which represented a book
to bill ratio of 1.04 to 1), down from fiscal 1996 bookings of $643,078,000
(which represented a book to bill ratio of 1.00 to 1). At September 30, 1997,
the Company had a backlog of $420,579,000, a 7% increase over the September 30,
1996 backlog of $394,589,000. The Company includes in backlog only those orders
to which a purchase order number has been assigned by the customer, with
substantially all of the terms and conditions agreed upon and for which delivery
has been specified within twelve months. At September 30, 1997, the backlog
included orders for 48 Micrascan photolithography systems. In addition to the
systems included in backlog, SVGL had orders for 27 Micrascan photolithography
systems with scheduled delivery dates outside the twelve month backlog window,
including orders for six advanced technology 193 nanometer systems currently
under development. (See "SVG Lithography Systems, Inc. (SVGL)".)

For fiscal 1997, the Company's gross margin was 39%, significantly below the
fiscal 1996 gross margin of 42%. The decrease was primarily due to costs
associated with Track's most recent generation product, the 200-APS and reduced
shipments and manufacturing volumes in Thermco and Track. Shipments of 200-APS
systems were to commence during the second quarter of fiscal 1997, but have been
delayed by approximately twelve months.* The lower Thermco and Track margins
were offset in part by increased fiscal 1997 SVGL gross margins, primarily due
to the mix of Micrascan photolithography systems shipped and increased
manufacturing volumes and efficiencies related to Micrascan systems.
<PAGE>   24
SVG 36



MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Research, development and related engineering expenses are net of funding
received from outside parties under various development agreements. Such funding
is typically payable upon the attainment of one or more development milestones
which are specified in the agreement. Neither the spending, nor the recognition
of the funding related to the development milestones is ratable over the term of
the agreements. During prior years, the majority of development funding has been
received by SVGL from SEMATECH. In fiscal 1997, the funding was primarily
related to agreements between the Company and certain customers for the
development of a 193 nanometer Micrascan system. (See "SVG Lithography Systems,
Inc. (SVGL)".)

Research, development and related engineering expenses (R&D) were $73,901,000
(12% of net sales) during fiscal 1997, compared to $66,974,000 (11% of net
sales) during fiscal 1996. Such R&D amounts are net of funding recognized under
joint development agreements of $7,968,000 and $4,994,000 during fiscal 1997 and
fiscal 1996, respectively. The increase in fiscal 1997 R&D was primarily due to
multiple lithography development programs, efforts in all of the product groups
to design equipment capable of processing the next generation 300mm wafers and
Track's 200-APS program.

During the second half of calendar 1996, the Company sold approximately
$20,000,000 in product to Submicron Technology PLC ("SMT"), a newly established
semiconductor foundry in Thailand. SMT paid the Company approximately
$14,000,000 before encountering severe financial difficulties. During the third
quarter of fiscal 1997, the Company determined that the remaining receivable
from SMT was uncollectible and recorded a bad debt loss of $6,000,000. In
connection with the sale to SMT, the Company had accrued costs of approximately
$2,000,000 for the installation and warranty of the systems sold to SMT, but had
yet to commence such efforts. These accrued costs were reversed at the time the
bad debt loss was recognized, resulting in a net effect on the Company's fiscal
1997 operating results of approximately $4,000,000 (the "SMT Charge").

During fiscal 1997, marketing, general and administrative expenses (MG&A), which
included the SMT Charge, were $130,788,000 (22% of net sales), significantly
above fiscal 1996 MG&A of $115,827,000 (18% of net sales). In addition to the
SMT Charge, the year to year increase in MG&A was due in part to the expansion
of the Company's sales and marketing functions, increased personnel and
operating expenditures related to SVGL's technical customer training, support
and administrative functions, and the amortization of certain prepaid royalties
related to a transaction with IBM which is discussed below. Additionally,
increases in certain costs related to SVGL's higher fiscal 1997 shipping levels
were offset by year to year reductions in similar costs at Track and Thermco as
a result of lower fiscal 1997 shipments. In comparison to the preceding fiscal
year, MG&A was higher as a percentage of net sales due to the combined effect of
increased expenditures and lower net sales during fiscal 1997.

Under the terms of a research and development agreement, SVGL owed IBM certain
royalties based on future operating results. During the second quarter of fiscal
1997, the Company satisfied its obligation, recognized an expense of
$32,582,000, which represented royalties related to products currently under
development, and recorded a prepayment of $5,418,000, which represented
royalties related to existing products which are being amortized through fiscal
2000, in proportion to the related product sales.
<PAGE>   25
                                                                          SVG 37



For fiscal 1997, the Company had an operating loss of $7,531,000, compared to
operating income of $85,491,000 during fiscal 1996. In comparison to the
preceding year, the fiscal 1997 operating loss was the result of lower gross
margins on lower net sales, higher operating expenses and the royalty settlement
discussed above. Without giving effect to the royalty settlement discussed
above, the Company would have had operating income for fiscal 1997 of
$25,051,000.

Interest and other income was $10,633,000 during fiscal 1997 compared to
$13,330,000 for fiscal 1996. Compared to the preceding fiscal year, the decrease
in fiscal 1997 interest and other income was primarily the result of a
significantly greater percentage of the Company's investment portfolio
consisting of tax-free and tax-advantaged instruments, which have lower pre-tax
yields than taxable instruments, and lower cash balances available for
investment. The Company invests in tax-free and tax-advantaged instruments when
the after-tax yields on such instruments exceed those on taxable instruments.

Interest expense was $710,000 in fiscal 1997, an increase over fiscal 1996
interest expense of $437,000. The increased fiscal 1997 expense was the result
of interest paid on a $6,500,000 loan from the Connecticut Development Authority
in February 1997. (See "Liquidity and Capital Resources".)

The Company recorded a 34% provision for income taxes for fiscal 1997, compared
to a 35% provision for fiscal 1996. Variations in the Company's effective tax
rate relate primarily to changes in the geographic distribution of its pretax
income. (See Note 11 to the Consolidated Financial Statements.)

The minority interest represented that share of SVGL's operating results which
were attributable to its minority stockholder, IBM. In March 1997, the Company
purchased IBM's interest in SVGL for $3,000,000. The Company now accounts for
SVGL as a wholly-owned subsidiary and there is no longer a minority interest. In
fiscal 1997, minority interest was recorded from the beginning of the fiscal
year through the date the Company purchased IBM's interest and represented a
reduction from income of $92,000. For fiscal 1996, minority interest represented
a $726,000 reduction from income.

Net income for fiscal 1997 was $1,487,000 ($0.05 per share), compared to net
income of $63,221,000 ($2.07 per share) for fiscal 1996.

FISCAL 1996
COMPARED TO
FISCAL 1995

During fiscal 1996, the Company's net sales of $639,928,000 were 39% higher than
fiscal 1995 net sales of $462,032,000. Each of the Company's product groups,
SVGL, Track and Thermco, experienced sales increases over the preceding fiscal
year, with the most significant increases resulting from increased shipments of
SVGL's Micrascan photolithography systems and Track's photoresist processing
systems.

During fiscal 1996, the Company had bookings of $643,078,000 (which represented
a book to bill ratio of 1.00 to 1), approximately level with fiscal 1995
bookings of $644,352,000 (which represented a book to bill ratio of 1.39 to 1).
At September 30, 1996 the Company had a backlog of $394,589,000 compared to
$391,439,000 at September 30, 1995. At September 30, 1996, the backlog included
orders for 38 Micrascan photolithography systems. In addition to the systems
included in backlog, SVGL had orders for 

<PAGE>   26
SVG 38



MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


18 Micrascan photolithography systems which had scheduled delivery dates outside
the twelve month backlog window, including orders for seven advanced technology
193 nanometer systems currently under development.

During fiscal 1996, the Company's gross margin was 42%, compared to a gross
margin of 40% in fiscal 1995. The increased gross margin was primarily the
result of increased manufacturing volumes and efficiencies related to SVGL's
Micrascan photolithography systems, and a higher percentage of the Company's
sales consisting of Track systems, which are typically the Company's highest
gross margin products.

Research, development and related engineering (R&D) was $66,974,000 (11% of net
sales) during fiscal 1996, significantly above fiscal 1995 R&D of $40,231,000
(9% of net sales). During fiscal 1996 and fiscal 1995, development funding of
$4,994,000 and $12,767,000, respectively, was recognized and offset against R&D.
The increased fiscal 1996 R&D was primarily the result of new product
development, particularly at SVGL, and additional costs incurred to support the
increased level of shipments. SVGL's development costs increased significantly
as expenditures associated with new Micrascan products increased and less
outside development funding was recognized.

During fiscal 1996, marketing, general and administrative expenses (MG&A) were
$115,827,000 (18% of net sales) versus $90,859,000 (20% of net sales) during
fiscal 1995. The year to year increase was primarily due to costs related to the
higher level of shipments. Compared to the year-earlier period, the decrease in
MG&A as a percentage of sales was due to the significant year to year sales
growth.

Operating income was $85,491,000 during fiscal 1996 compared to operating income
of $52,389,000 during fiscal 1995. The increase in fiscal 1996 operating income
compared to the preceding fiscal year was the result of improved gross margins
on higher sales offset in part by increased operating expenses.

Interest and other income was $13,330,000 during fiscal 1996, significantly
above the fiscal 1995 total of $9,465,000, principally due to interest earned on
higher fiscal 1996 average cash balances, the result of the proceeds from
underwritten public offerings of the Company's Common Stock in October and March
1995 being available for investment during all of fiscal 1996. The increase was
offset in part by a reduction in royalty income from fiscal 1995 to fiscal 1996.

Interest expense was not significant during either fiscal 1996 or fiscal 1995.

During fiscal 1996, the Company recorded a 35% provision for income taxes
compared to a 36% provision for fiscal 1995. Variations in the Company's
effective tax rate relate primarily to changes in the geographic distribution of
its pretax income.

The minority interest represents that share of SVGL's operating results
attributable to IBM, its minority stockholder. During fiscal 1996 and fiscal
1995, the reductions for minority interest were $726,000 and $194,000,
respectively. In comparison to the preceding fiscal year, the increased
reduction for minority interest reflects the year to year improvement in SVGL's
profitability.
<PAGE>   27
                                                                          SVG 39



The Company's fiscal 1996 net income was $63,221,000 ($2.07 per share), compared
to fiscal 1995 net income of $38,995,000 ($1.57 per share). The weighted average
number of common and common equivalent shares outstanding used in the per share
computations for fiscal years 1996 and 1995 were 30,554,000 and 24,850,000,
respectively. The significant increase in the average outstanding shares was
primarily due to the sale of 4,025,000 shares of Common Stock in an underwritten
public offering in October 1995, and the effect of significant Common Stock
issuances during the second quarter of fiscal 1995. (See Note 12 to the
Consolidated Financial Statements.)

RISKS INHERENT IN
THE COMPANY'S
BUSINESS


Fluctuations in Quarterly Results. The Company has, at times during its
existence, experienced quarterly fluctuations in its operating results. Due to
the relatively small number of systems sold during each fiscal quarter and the
relatively high revenue per system, customer order rescheduling or
cancellations, or production or shipping delays can significantly effect
quarterly revenues and profitability. The Company has experienced, and may again
experience, quarters during which a substantial portion of the Company's net
sales are realized near the end of the quarter.* Accordingly, shipments
scheduled near the end of a quarter which are delayed for any reason can cause
quarterly net sales to fall short of anticipated levels. Since most of the
Company's expenses are fixed in the short term, such shortfalls in net sales
could have an adverse effect on the Company's business and results of
operations.* The Company's operating results may also vary from quarter to
quarter based upon numerous factors including the timing of new product
introductions, product mix, level of sales, the relative proportion of domestic
and international sales, activities of competitors, acquisitions, international
events, and difficulties obtaining materials or components on a timely basis.*
In light of these factors, the Company may again experience variability in its
quarterly operating results.*

Rapid Technological Change; Dependence on New Product Development. Semiconductor
manufacturing equipment and processes are subject to rapid technological change.
The Company believes that its future success will depend upon its ability to
continue to enhance its existing products and their process capabilities and to
develop and manufacture new products with improved process capabilities that
enable semiconductor manufacturers to fabricate semiconductors more
efficiently.* The Company is developing products capable of processing 300mm
wafers to enable advanced semiconductor manufacturers to progress from the
current 200mm wafer standard.* Failure to successfully introduce these or any
other new products in a timely manner could result in the loss of competitive
position and could reduce sales of existing products.* In addition, new product
introductions could contribute to quarterly fluctuations in operating results as
orders for new products commence and increase the potential for a decline in
orders of existing products, particularly if new products are delayed.*

From time-to-time, the Company has experienced delays in the introduction of its
products and product enhancements due to technical, manufacturing and other
difficulties and may experience similar delays in the future.* For example,
during fiscal 1996, the Company announced a new Track product, the 200-APS.
Initial shipments of the 200-APS were scheduled to commence during the second
quarter of fiscal 1997, but have been delayed by approximately twelve months.*
There can be no assurance that the Company will not experience manufacturing
problems as a result of instability of the design of either the hardware 


<PAGE>   28
SVG 40


MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


or software elements of the new technology, or be able to efficiently
manufacture the 200-APS or other products.* These issues could result in product
delivery delays and a subsequent loss of future sales.* Semiconductor
manufacturers tend to select either a single supplier or a primary supplier for
a certain type of equipment. The Company believes that prolonged delays in
delivering initial quantities of newly developed products to multiple customers,
whether due to the protracted release of product from engineering into
manufacturing or due to manufacturing difficulties, could result in
semiconductor manufacturers electing to install competitive equipment in their
fabrication facilities and could preclude industry acceptance of the Company's
products.* Therefore, the Company's inability to effect the timely production of
new products or any failure of these products to achieve market acceptance could
have a material adverse effect on the Company's business and results of
operations.*

Historically, the unit cost of the Company's products has been the highest when
they are newly introduced into production and cost reductions have come over
time through engineering improvements, economies of scale and improvements in
the manufacturing process.* As a result, new products have, at times, had an
unfavorable impact on the Company's gross margins and results of operations.
There can be no assurance that the initial shipments of new products will not
have an adverse effect on the Company's profitability or that the Company will
be able to attain design improvements, manufacturing efficiencies or
manufacturing process improvements over time.* Further, the potential
unfavorable effect of newly introduced products on profitability can be
exacerbated when there is intense price competition in the marketplace.*

SVG Lithography Systems, Inc. (SVGL)

SVGL -- Uncertain Market for Micrascan Products. The Company believes that the
photolithography exposure equipment market is one of the largest segments of the
semiconductor processing equipment industry.* To address this market, the
Company has invested and expects to continue to invest substantial resources in
SVGL's Micrascan technology and its family of Micrascan deep ultraviolet ("Deep
UV") step and scan photolithography systems, capable of producing line widths of
 .25 microns and below. The development of a market for the Company's Micrascan
step and scan photolithography products will be highly dependent on the
continued trend towards finer line widths in integrated circuits and the ability
of other lithography manufacturers to keep pace with this trend through either
enhanced technologies or improved processes. Lithography manufacturers have been
successful in extending the capability of I-Line steppers which have been
utilized in the fabrication of complex semiconductor devices with line widths of
less than 0.5 micron, such as 64 megabit DRAMs. The Company believes Deep UV
lithography will be required to fabricate devices with line widths below 0.3
micron.* Semiconductor manufacturers can purchase Deep UV steppers to produce
product at .25 micron line widths. However, the Company believes that as devices
increase in complexity and size and require finer line widths, the technical
advantages of Deep UV step and scan systems as compared to Deep UV steppers will
enable semiconductor manufacturers to achieve finer line widths, improved
dimension control and higher yields of faster devices.* The Company also
believes that the transition to Deep UV step and scan systems will accelerate in
calendar 1998 and that advanced semiconductor manufacturers are beginning to
require volume quantities of production equipment as advanced 

<PAGE>   29
                                                                          SVG 41



as the current and pending versions of Micrascan.* Currently, competitive Deep
UV step and scan equipment capable of producing .25 micron line widths is
available in limited quantities from two competitors, and the Company believes
that at least one other manufacturer of advanced photolithography systems will
begin initial shipments of step and scan machines in the near future.* There can
be no assurance that the Company will be successful in competing with such
systems.* Further, if manufacturers of I-Line or Deep UV steppers are able to
further enhance existing technology to achieve finer line widths sufficiently to
erode the competitive and technological advantages of Deep UV step and scan
systems, demand for the Micrascan technology may not develop as the Company
expects.*

The Company believes that advanced logic devices and DRAMs will require
increasingly finer line widths.* Consequently, SVGL must continue to develop
advanced technology equipment capable of meeting its customers' current and
future requirements while offering those customers a progressively lower cost of
ownership.* In particular, the Company believes that it must continue its
development of future systems capable of printing line widths finer than .25
micron and processing 300mm wafers.*

SVGL -- Need to Increase Manufacturing Capacity and System Output. The Company
believes that its ability to supply systems in volume will be a major factor in
customer decisions to commit to the Micrascan technology.* Based upon its
forecast of continued high growth in demand for photolithography equipment and
potential future demand for advanced lithography products, the Company is
increasing SVGL's production capacity under an extremely aggressive expansion
schedule. In August 1996, as part of this expansion, the Company purchased from
The Perkin-Elmer Corporation a 243,000 square foot facility occupied by SVGL in
Wilton, Connecticut and an additional 201,000 square foot building, which SVGL
now occupies, in Ridgefield, Connecticut. During fiscal 1997, the Company has
invested in significant further capital improvements related to the buildings
purchased and the equipment required to expand the production capabilities of
SVGL.* In addition to the timely construction and equipping of facilities,
successful completion of this expansion will require the recruitment, training
and retention of a high quality workforce, and the achievement of satisfactory
manufacturing results on a scale greater than SVGL has attempted in the past.
There can be no assurance that the Company can manage these efforts
successfully. Any failure to manage such efforts could result in product
delivery delays and a subsequent loss of future revenues. In particular, the
Company believes that protracted delays in delivering quantities of Micrascan
products could result in semiconductor manufacturers electing to install
competitive equipment in their advanced fabrication facilities, which could
impede acceptance of the Micrascan products on an industry-wide basis. In
addition, the Company's operating results could also be adversely affected by
the increase in fixed costs and operating expenses related to increases in
production capacity if net sales do not increase commensurately.

The time required to build a Micrascan system is significant. If SVGL is to be
successful in supplying increased quantities of Micrascan systems, it will not
only need to be able to build more systems, it will need to build them faster.*
SVGL will require additional trained personnel and additional raw materials and
components, as well as improved manufacturing and testing techniques to both
facilitate volume and shorten manufacturing cycle time.* To that end, SVGL is
continuing to develop its vendor supply 

<PAGE>   30
SVG 42


MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


infrastructure, increase its staffing levels and implement manufacturing
improvements to meet anticipated shipment volumes for 1998 and beyond.*
Additionally, the Company must continue increasing its field service and
technical support organization staffing and infrastructure to support the
anticipated customer requirements. There can be no assurance that the Company
will not experience manufacturing difficulties or encounter problems in its
attempt to increase production and upgrade or expand existing operations.

One of the most critical components of the Micrascan systems are the projection
optics, which are primarily manufactured by SVGL. As part of its overall
investment in capacity, the Company is increasing SVGL's optical manufacturing
floorspace, procuring metrology equipment, and in some instances fabricating
test stands. The Company believes that in order for SVGL to attain it goals, it
must successfully reduce the cycle times required to build projection optics and
increase the optical manufacturing output.*

On November 26, 1997, the Company acquired Tinsley Laboratories, Inc. ("TLI").
(See "Liquidity and Capital Resources".) TLI designs, manufactures and sells
precision optical components, assemblies and systems to customers in a variety
of industries and research endeavors. A primary reason for the acquisition was
TLI's technology and expertise relating to aspherical lenses, a key component of
SVGL's photolithography products, and to have TLI commence fabrication of
non-aspherical lenses which are currently produced by SVGL.* There can be no
assurance that such technology is scalable, or that such expertise can be
transferred without substantial time or expense, if at all. The inability of
SVGL to transfer this production technology for use in processes of a
substantially larger scale could have a material adverse effect on the Company's
ability to realize any significant benefits from the acquisition of TLI.

The Company believes that protracted delays in delivering quantities of both
current and future generations of Micrascan products to multiple customers could
result in semiconductor manufacturers electing to install competitive equipment
in their advanced fabrication facilities, and could preclude industry acceptance
of the Micrascan technology and products.* In addition, the Company's operating
results could also be adversely affected by the increase in fixed costs and
operating expenses related to increases in production capacity and field service
and technical support activities if net sales do not increase commensurately.*

SVGL -- Sole Source Materials and Components. The raw material for a proprietary
component of the optical system for the Micrascan is available from only one
supplier and SVGL's projected demand will require that supplier to expand its
capacity. The supplier has committed to expand its capacity to meet SVGL's
projected requirements in exchange for a long-term, non-cancelable supply
agreement. The agreement specifies quantities of material that increase over
time and the supplier is obligated to create and store certain defined
quantities of safety stock. Additionally, a version of the Company's Micrascan
III photolithography system utilizes an Excimer laser manufactured in volume by
only one supplier. There can be no assurance that either supplier will be able
to supply the quantities of material required by SVGL. If either supplier was
unable to meet its commitments, SVGL would be unable to manufacture the quantity
of systems required to meet the anticipated future demand, which would have a
material adverse effect on the Company's business and results of operations.
SVGL is currently working to qualify an additional source of lasers for its
current and future versions of Micrascan systems. There can be no assurance that
these efforts will be successful.
<PAGE>   31
                                                                          SVG 43



SVGL -- Research and Development Funding. Historically, the Company has depended
on external funding to assist in the high cost of development in its
photolithography operation. During fiscal 1996, the Company entered into
agreements with certain customers (the "Participants") whereby each agreed to
assist in funding the Company's development of an advanced technology 193
nanometer Micrascan system. In exchange for such funding, each Participant
received the right to purchase one such system and, in addition, received a
right of first refusal (ratable among such Participants) to all such machines
manufactured during the first two years following the initial system shipments.
For each initial system ordered, each Participant agreed to fund $5,000,000 in
such development costs. The agreements call for each Participant to pay
$1,000,000 of initial development funding and four subsequent payments of
$1,000,000 upon the completion of certain development milestones. The
Participants may withdraw from the development program without penalty, but
payments made against completed development milestones are not refundable and
all preferential rights to future equipment are forfeited. At September 30,
1997, the Company had received $16,000,000 in funding from six Participants, of
which $8,085,000 had been recognized and offset against research and development
expenditures. In March 1997, one participant withdrew from the program. There
can be no assurances that the other Participants will remain in the program.* In
the event that the Company does not receive the funding anticipated under the
agreements, it would be required to replace the shortfall from its own funds or
other sources. If the Company were required to use its own funds, its research
and development expenses would increase and its operating income would be
reduced correspondingly. The agreements with the Participants stipulate that if
the Company receives funding for the development program in excess of
$25,000,000, it will issue, ratably to the Participants, credits totaling such
excess in the form of a cash discount which can be applied to the purchase of
additional systems by each Participant. There is no assurance that the Company
will receive all funding which it currently anticipates or that it will be able
to obtain future outside funding beyond that which it is currently receiving.

SVGL -- Market Penetration. The Company believes that for SVGL to succeed in the
long term, it must sell its Micrascan products on a global basis. The Japanese
market (including fabrication plants operated outside Japan by Japanese
semiconductor manufacturers) and the Korean market represent a substantial
portion of the overall market for photolithography exposure equipment. To date,
the Company has not been successful penetrating either of these markets. Recent
economic downturns in many Asian economies, including Japan and Korea, may also
adversely effect the Company's ability to penetrate such markets.*

SVGL -- Future Profitability. While the recent volume of orders for Micrascan
systems has been encouraging, they are not necessarily indicative of
industry-wide acceptance of the Micrascan technology. If SVGL is to attain its
objective of being a volume supplier of advanced photolithography systems, the
Company believes that it must expand its customer base to include additional
customers from whom it secures and successfully fulfills orders for
production-quantities of Micrascan systems.* Although SVGL is profitable, the
Company believes that as a result of costs associated with the continued
development of the Micrascan technology, the expansion of SVGL's manufacturing
capacity, the related increase in manpower and customer support, and the
potential difficulties inherent in manufacturing initial quantities of the .25
micron and sub-.25 micron Micrascan systems, in particular the projection optics
required for these systems, there can be no assurance that SVGL will be able to
operate profitably in the future.*
<PAGE>   32
SVG 44



MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND
CAPITAL RESOURCES

At September 30, 1997, cash and cash equivalents and temporary investments
totaled $206,480,000, down $55,581,000 from the September 30, 1996 balance of
$262,061,000. This decrease was primarily due to purchases of property and
equipment to facilitate the expansion of SVGL's manufacturing capacity and was
offset in part by cash generated from operations, sales of Common Stock under
employee stock option and stock purchase plans and the proceeds of a loan
discussed below.

On February 28, 1997, the Company received a $6,500,000 loan from the
Connecticut Development Authority. The loan has a ten year term, bears interest
at 8.25% and is secured by the Company's Wilton, Connecticut facility which
houses certain operations of SVGL.

In July 1996, the Board of Directors (the "Board") authorized the Company to
institute a stock repurchase program (the "Program") whereby up to 5,000,000
shares of its Common Stock could have been purchased in the open market. In
September 1997, the Board rescinded the Program. No Common Stock was purchased
under the Program.

On November 26, 1997, the Company acquired Tinsley Laboratories, Inc. ("TLI") in
exchange for approximately 1,091,000 shares of Company Common Stock. TLI
designs, manufactures and sells precision optical components, assemblies and
systems to customers in a variety of industries and research endeavors. The
transaction is being accounted for as a pooling of interests for financial
reporting purposes and is intended to qualify as a reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended.*

The Company has a $75,000,000 unsecured revolving bank credit facility. Advances
under the facility bear interest at either the U.S. prime rate or the LIBOR rate
plus 1%. In December 1997, the term of the credit facility was extended an
additional year to December 2000. At December 29, 1997, there were no borrowings
outstanding under the facility.

The Company believes that it has sufficient working capital and available bank
credit to sustain operations and provide for the expansion of its business for
the foreseeable future.*