<PAGE>   1


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

                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

        For the Fiscal Year Ended               Commission File Number:
            December 31, 1999                           0-21626

                                ELECTROGLAS, INC.
             (Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S>                                                      <C>
                     Delaware                                         77-0336101
            (State of Incorporation)                     (I.R.S. Employer Identification No.)

6024 Silver Creek Valley Road, San Jose, California                 (408) 528-3000
                      95138
    (Address of Principal Executive Offices)                (Registrant's Telephone Number
                   (Zip Code)                                    Including Area Code)
</TABLE>

        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $0.01 par value
                                (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X ]

As of January 31, 2000, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $595,030,000, based on the
closing sale price as reported on the Nasdaq National Market on such date. This
calculation does not reflect a determination that certain persons are affiliates
of the Registrant for any other purposes.

As of January 31, 2000 the Registrant had outstanding 20,213,000 of Common
Stock.

The Index to Exhibits is located beginning on Page 48.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement in connection with its 1999 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form
10-K Report.
<PAGE>   2


PART I: ITEM 1. BUSINESS


OVERVIEW


Electroglas, Inc. ("Electroglas" or "the Company") is a world-leading supplier
of process management tools to the global semiconductor industry. Semiconductor
manufacturers depend on the Company's wafer probers, inspection systems and
software to improve their productivity and control their processes, optimizing
manufacturing efficiency. Historically, the Company's primary product has been
automatic wafer probing equipment. Electroglas believes it is one of the largest
suppliers of wafer probers worldwide. The Company has sold over 10,000 wafer
probers from among its current product offerings and believes it supplies more
than half of the probers used in the United States and European market segments.
The Company's primary prober product offerings are its Horizon 4000 Series wafer
probers and its 2000 Series wafer probers. All of the Company's wafer probers
feature the Company's linear motor technology and offer advanced vision
processing, sophisticated system software and high throughput.

  Today, the Company is also involved in the development, manufacture,
marketing, and servicing of semiconductor wafer inspection products and yield
enhancement software as part of its strategy to move from a supplier of wafer
probers to a process management tool provider. The move began with two
acquisitions completed in 1997. In May 1997, Electroglas acquired Sunnyvale,
California-based Knights Technology, Inc. ("Knights"). In December 1997,
Electroglas acquired Albany, Oregon-based Techne Systems, Inc. (doing business
as "Electroglas Inspection Products"). Knights' primary product offerings are
their open architecture Merlin's Framework CAD Navigation software and
YieldManager yield management system and their respective modules. Electroglas
Inspection Products' primary product offering is the QuickSilver line of
automated wafer inspection systems.

  Electroglas was formed on April 1, 1993 to succeed to the wafer prober
business conducted by the Electroglas division of General Signal Corporation
(former "Parent"). Immediately prior to the closing of the initial public
offering of its Common Stock ("the IPO") on July 1, 1993, the Company assumed
the assets and liabilities of the Electroglas division in the asset transfer
and, following the IPO, the Company commenced operations as an independent
corporation. The Company, through its predecessors, has been in the wafer prober
business for more than 40 years.


INDUSTRY BACKGROUND


Semiconductor devices are fabricated by repeating a complex series of process
steps on a wafer substrate, which is usually made of silicon and measures three
to eight inches in diameter. Wafers are typically sent through a series of 100
to 300 process steps. A finished wafer consists of many integrated circuits
(each referred to as a "device" or "die"), the number depending on the area of
the circuits and the size of the wafer. Manufacturers have increasingly utilized
larger diameter wafers to achieve more cost-effective production. The move to
larger 300 mm (12 inch) wafers began in 1999.

  The management of these fabrication steps is Electroglas' latest focus. The
Company's wafer probers and inspection products collect data that is easily
accessed with its networking software and managed and analyzed by its yield
enhancement software products - providing a way to manage the fabrication
process.


                                       2
<PAGE>   3

Wafer Probing

A wafer prober successively positions each integrated circuit on a wafer so that
the electrical contact points (or "pads") on the die align under and make
contact with the probe pins, which are located on a probe card mounted on the
wafer prober. The probe card, which is generally custom made by other suppliers
for the specific integrated circuit being tested, is connected to a test system,
also supplied by other suppliers, which performs the required parametric or
functional test. Parametric testing is performed during the wafer fabrication
process ("in-line testing") and at the completion of the wafer fabrication
process ("end-of-line testing") to measure electrical parameters which verify
the reliability of the wafer fabrication process. Functional testing is also
performed after the completion of wafer fabrication to identify devices which do
not conform to particular electrical specifications. This process is typically
called "wafer sort." Wafers sometimes go through several functional testing
steps.


Post-fab Wafer Inspection

Before wafers are sent from the sort floor to final assembly, they typically
undergo an optical inspection step performed by human operators. This identifies
die with physical defects that have passed electrical test, but are at risk of
failure after the devices have been packaged. Sorting die both optically and
electrically improves product reliability while avoiding the cost of packaging
marginal die. Optical inspection on the sort floor is also used after wafer
probe to determine whether the probe tips caused bond-pad damage. Wafer
inspection tools automate this process of defect identification, defect
classification, and feedback control processes. The tools analyze each
individual die on each wafer for defects and process excursions, identify the
type of defect or pattern anomaly, measure the defect or anomaly, and pass the
quantitative results to both upstream and downstream production machines.


Yield Management Software

Yield enhancement software tools bring together fab data, inspection results,
electrical test data, and product test data to help determine which process
zones or tools are most significantly contributing to yield loss. They provide a
common location and format for presenting this data and doing cross-correlation
between data types for the purpose of yield enhancement analysis in the wafer
fab.


CAD Navigation Software

CAD Navigation software provides computerized interfaces and navigation
capabilities for IC design, failure analysis (FA), defect review and debugging
by cross-mapping information from different design representations of specific
devices so that exact locations can be viewed in all three domains - layout,
netlist, and schematic - simultaneously.


Wafer Prober Market

The automatic wafer probing market can be divided into the United States,
European and Asian market segments, into which the Company sells substantially
all of its products. Semiconductor manufacturers use automatic wafer probers
primarily during wafer sort, which occurs before the separation and packaging of
each individual device. Wafer probers have been increasingly used during in-line
and end-of-line testing and are also used for research and development, and
quality and process control applications. In-line testing requires special
equipment features such as cleanroom compatibility, as tests are carried out
during the manufacturing process. This testing is done to verify the
manufacturing process while wafers are in an unfinished state where corrective
action can occur. The Company estimates, based upon its experience, that wafer
sort applications represent approximately 80% of the market for automatic wafer
probers. The remaining 20% is divided between in-line and end-of-line testing
and laboratory applications.


                                       3
<PAGE>   4

A semiconductor manufacturer typically purchases wafer probers when outfitting a
new wafer fabrication facility or expanding an existing facility. Wafer probers
are also purchased to replace equipment in response to major changes in
technology, such as larger wafer sizes and greater device complexity. A
semiconductor fabrication facility typically requires 20 to 80 probers to meet
testing requirements on a timely basis. The purchase of semiconductor
manufacturing equipment and spare parts, the integration of such equipment into
production lines and the training of employees on a particular supplier's
equipment require significant expenditures by semiconductor manufacturers. To
maximize the benefits of their investment in machinery, parts, production line
integration and training, semiconductor manufacturers generally are reluctant to
replace existing equipment with equipment from another supplier.


Wafer Inspection Market

The strong demand for lightweight, portable electronic devices is driving the
growth of new flip chip packaging technologies. Unlike conventional packaging
that uses fine gold wires to electrically connect the semiconductor chip to its
package, flip chips utilize gold or solder bumps that are deposited onto bonding
pads on the chip surface. The chips are then flipped into chip scale packages
(packages that are only slightly larger then the actual chip) or directly onto
printed circuit boards. Flip chips take up much less space than conventional
chips and, due to the elimination of the gold wires, flip chips can also operate
at higher speeds. The use of flip chip packaging is expected to grow rapidly as
memory, ASIC, and other device types are required to operate at high speed and
in tight spaces.

  Wafer bumping is an expensive process, and the cost of flip chip packaging can
be very high. Bumps that are deformed, missing, and over or under sized will
cause the failure of flip chip devices. To avoid the cost of packaging defective
chips, semiconductor manufacturers are turning to automated wafer inspection
systems. Electroglas inspection systems are designed to inspect every bump on
every wafer providing the tools necessary for semiconductor manufacturers to
control their wafer bumping processes and to screen out defective chips prior to
probing and packaging.


Yield Enhancement Market

Yield, or the percentage of good die that can be realized from a wafer, is a
critical factor in determining the profitability of a production line, and often
the semiconductor company as a whole. Therefore, efforts to maximize the yield
of each product line have become a key engineering priority at these companies.
This has led to a growing need for tools that monitor and analyze defects and
cause yield loss. Also, as defect problems are brought under control, there has
been an increased emphasis on finding and solving non-defect related problems.

  Historically, much of the software used in this market was developed in-house
by the engineer, or through a dedicated development group. This created some
highly customized, but also inflexible and expensive to maintain, solutions to
problems related to data storage and analysis. However, many organizations are
now looking to out-source this work in an effort to lower their support costs,
maximize their engineers' productivity and increase the overall functionality of
their analysis tools.


CAD Navigation Market

CAD Navigation software is typically used in design debug, low yield analysis
and failure analysis. Engineers use CAD NAV software to move their probing,
measurement, or diagnostic equipment to a chip's internal locations, or to
locate on screen the faults on a chip. In recent years, new technologies have
made design debug and failure analysis increasingly difficult. For example, the
decreasing feature sizes make visualization difficult; rising device count makes
data handling difficult; multiple interconnect layers make device access
difficult; flip chip technology makes both device access and visualization
difficult. CAD Navigation software helps engineers simplify the process.


                                       4
<PAGE>   5

In the US market, most major semiconductor manufacturers use multiple copies of
CAD NAV software in their failure analysis labs. The software helps integrate
their debug and FA functions. In the European market, a few leading major
manufacturers have started using CAD NAV software in the past three years. Also
single license installations have been reaching most of the major manufacturers.
In the Japanese market, the economy is slower, but manufacturers are still using
CAD Navigation software.


Company Strategy

Electroglas has become a leader in the wafer probing market through a
combination of strengths, including advanced technical capabilities, close
relationships with the leading manufacturers of integrated circuits, a broad
line of high quality products and a well established, highly qualified
distribution organization. Building on these strengths, Electroglas' strategy is
comprised of the following key elements:

o  Focus on Technological Innovation. The Company has invested heavily in
   research and development to add features and functionality to its products.
   The Company was the first to introduce automatic wafer probers using a linear
   motor positioning system for precise motion control and digital pattern
   recognition processors for automatic alignment and was the first to introduce
   automatic wafer probers for use with eight-inch wafers. The Company expects
   to continue its emphasis on research and development in an effort to
   anticipate and address technological advances in semiconductor processing.

o  Maintain Strong Customer Relationships. The Company has long-standing
   relationships with its customers. The Company's development of products and
   product enhancements is market driven. Engineering, sales and management
   personnel collaborate with customer counterparts to determine customers'
   needs and specifications. The Company intends to continue to strengthen its
   existing customer relationships by continuing to provide high levels of
   service and support.

o  Emphasize Quality Products. The Company believes it has developed a
   reputation as a leader in providing high quality products. The Company was
   chosen as one of the "10 Best" test and measurement equipment manufacturers
   for eight years in a row in an annual customer survey conducted by VLSI
   Research, Inc. The Company has received quality awards from its customers and
   the SEMATECH Partnering for Total Quality award. The Company has a
   company-wide quality program and received ISO 9002 Certification in 1997. The
   Company's quality training program emphasizes continuous improvement, data
   driven decisions and close collaboration among the Company's employees,
   customers and suppliers. The Company trains all of its employees in basic
   quality skills. The Company also regularly participates in quality sharing
   meetings with other equipment manufacturers and customer quality audits of
   procedures and personnel.

o  Expand Product Lines and Applications. The Company intends to capitalize on
   its market position and technical skills to further broaden existing product
   lines through internally developed products and from time to time through
   strategic alliances and acquisitions, such as the Knights and Techne
   acquisitions of 1997.



                                       5
<PAGE>   6

PRODUCTS


Wafer Probers

Horizon 4000 Series: The Horizon 4090, and the Horizon 4090(Greek mu) (micro)
are the Company's primary offerings in the Horizon 4000 Series of wafer probers.
This product line is positioned to satisfy high volume semiconductor
manufacturing applications. The Horizon 4000 Series provides many advanced
automation capabilities including automatic probe-to-pad-alignment, in-process
inspection and optical character recognition (OCR). Optional for Horizon Series
probers is a temperature controlled chuck top, providing the ability to maintain
precisely a customer-selected wafer temperature during testing. The Horizon
4090(Greek mu) prober also offers an integrated mini-environment and clean air
system to provide a class 1 probing environment. The Horizon 4090, and Horizon
4090(Greek mu) utilize the Company's EGCommander system software. This software
was developed by the Company and allows significant application and customer
driven customization of the wafer prober and compatibility with the standard
MS-DOS operating system. The user interface features color graphics, touch
screen programming, probing recipes, control maps and real-time maps. The
Horizon 4000 Series probers feature a distributed multiple processor
architecture to maximize productivity and expandability.

   The Company recently introduced thin wafer capabilities to its Horizon
4090(Greek mu) prober. The enhanced 4090(Greek mu) prober utilizes Electroglas'
patented Smart Mapping wafer map system. Smart Mapping uses fiber optic
through-beam sensing to detect and compensate for thin wafer irregularities such
as bowing, warping, and sagging. The system dynamically adjusts wafer transfer
arm entry and exit points on the cassette based on wafer position. The Horizon
4090(Greek mu) prober also incorporates Electroglas' High Force Z stage and
advanced alignment algorithms. The complete system handles both thin and
standard wafers automatically and allows customers to use standard wafer
carriers, eliminating the need for special cassettes or extra transfer steps.


Network Products

Electroglas' SORTnet solution is a system of software products that allows the
integration of the Company's prober products into standard local area networks
found in semiconductor manufacturing operations. The network products help allow
manufacturers to monitor the entire probing operation, collect test data on a
real-time basis, centrally control prober setup and facilitate key manufacturing
advancements, including offline inking and inkless probing, in order to improve
overall productivity.


Yield Management

YieldManager, introduced in 1994, is an integrated enterprise, client-server
yield enhancement system for sub-micron semiconductor fabrication facilities.
YieldManager takes the output from testers, probers and inspection equipment
used at various points in the semiconductor fabrication process, correlates it
and manages it in a manner that enables the operator of the fab to maximize its
manufacturing yield. YieldManager provides an encompassing and integrated
approach to yield management and automates processes previously managed
separately and often manually.



                                       6
<PAGE>   7

CAD Navigation

Merlin's Framework(TM) is Knights' principal CAD navigation product that uses
semiconductor CAD data to locate physical attributes of the semiconductor
itself. Merlin's Framework provides visual representations of circuits that can
be manipulated, rotated, exploded, searched, and linked with ease. With the
application tools, features, and options available through Merlin's Framework,
users can convert layout, netlist, and schematic data and establish
cross-mapping links between these data - with a single tool in just a few steps.
A complete Merlin's Framework system speeds problem solving by providing
cross-mapping between design representations of specific device nodes so that
those exact locations can be viewed in all three domains simultaneously.
Merlin's Framework has been used in the semiconductor industry for failure
analysis and process diagnostics and is a leading CAD navigation product.

  LabManager(TM), the latest feature of Merlin's Framework, was recently
introduced as a tool that enables automated transfer of information between
failure analysis and reliability labs.


Wafer Inspection Products

The QuickSilver series of products feature sophisticated technologies, such as
Time Delay Integration (TDI) for high speed acquisition of complex images. There
are four products distinguished by their software packages. The QuickSilver 100
is primarily for microstructure inspection applications, the QuickSilver 200
focuses on defect inspection and the QuickSilver 300 and 330 are targeted at
bump inspection applications.


ENGINEERING, RESEARCH AND DEVELOPMENT


The market for wafer probing equipment is characterized by continuous
technological development and product innovation. The Company believes that
continued and timely development of new products and enhancements to existing
products is necessary to maintain its competitive position. Accordingly, the
Company devotes a significant portion of its personnel and financial resources
to engineering, research and development programs. The Company uses its close
relationships with key customers to make improvements on its products, which
respond to such customers' needs.

  The Company's ongoing engineering, research and development efforts generally
can be classified into three categories: feature enhancements, such as features
to improve accuracy, speed or automation; new products; and customer driven
product enhancements. Engineering, research and development expenses were $26.9
million, $30.5 million and $21.9 million in 1999, 1998 and 1997, respectively,
or 21.2%, 30.1% and 14.6% of net sales, respectively. Engineering, research and
development expenses consist primarily of salaries, project materials and other
costs associated with the Company's ongoing efforts.


MARKETING, SALES AND SERVICE


The Company primarily sells its products directly to end-users. The Company
believes that using a direct sales force provides it with a significant
competitive advantage in communicating with customers and responding to market
demands.

  The Company generally sells products on net 30-day terms to most customers.
Other, primarily foreign, customers are required to deliver a letter of credit
typically payable upon product delivery. The Company generally warrants its
products for a period of up to 12 months from shipment for material and labor to
repair the product. Installation is customarily included in the price of the
product. The Company's field engineers provide customers with call out repair
and maintenance services for a fee. Customers may enter into repair and
maintenance service contracts covering the Company's products. The Company
trains customer employees to perform routine service for a fee and provides
telephone consultation services generally free of charge.


                                       7

<PAGE>   8

In the United States, Electroglas maintains sales and service offices in
Arizona, California, Oregon, Massachusetts and Texas. In Europe, the Company
maintains sales and service locations in France, Germany and the United Kingdom.
In Asia, the Company maintains direct sales and service locations in Japan, Hong
Kong, Korea, People's Republic of China, Singapore and Taiwan. As of December
31, 1999, the Company employed approximately 183 people worldwide in sales,
service, applications, logistics, technical support and customer service.


CUSTOMERS


Electroglas sells its products to leading semiconductor manufacturers throughout
the world. In 1999, STMicroelectronics and IBM accounted for 19% and 14% of net
sales, respectively. No single customer accounted for more than 10% of net sales
in 1998 and 1997.

  International sales represented 38%, 43% and 43% of the Company's net sales in
1999, 1998 and 1997, respectively. These sales represent the combined total of
export sales made by United States operations and all sales made by foreign
operations.


MANUFACTURING AND SUPPLIERS


The Company's assembly equipment manufacturing activities consist primarily of
integrating components and subassemblies to create finished prober systems,
spares and upgrades configured to customer specifications.

  In the third quarter of 1999, the Company outsourced its sub-assembly and
machine shop operations to Sanmina Corporation, a contract manufacturer. The
Company believes that this outsourcing will enable the Company to conserve
working capital that would be required to purchase inventory, will allow the
Company to better adjust manufacturing volumes to meet changes in demand, and
will better enable the Company to reduce total manufacturing cycle time. The
Company schedules production based upon firm customer commitments and
anticipated orders during the planning cycle.

  Quality control is maintained through the assembly and test process with
documented instructions and test procedures and final inspection for all
manufactured equipment prior to shipment. The Company trains all of its
employees in basic quality skills and regularly participates in quality sharing
meetings with other equipment manufacturers and customer quality audits of
procedures and personnel. The Company is ISO 9002 Certified.


BACKLOG


At December 31, 1999, the Company's backlog was approximately $32.7 million as
compared to approximately $10.2 million at December 31, 1998. The Company
generally ships orders within 10 weeks after receipt of a customer's purchase
order. Due to possible changes in product delivery schedules and cancellation of
product orders and because the Company's sales will often reflect orders shipped
in the same quarter as received, the Company's backlog at any particular date is
not necessarily indicative of actual sales for any succeeding period.


                                       8
<PAGE>   9

COMPETITION


The semiconductor equipment industry is highly competitive. The principal
competitive factors in the industry are product performance, reliability,
service and technical support, product improvements, price, established
relationships with customers and product familiarity. The Company believes that
its products compete favorably with respect to each of these factors in the
non-Japanese market segment. The Company's major competitors are Tokyo Electron
Limited ("TEL") and Tokyo Seimitsu ("TSK"). Some of the Company's competitors
have greater financial, engineering and manufacturing resources than the Company
and larger service organizations and long-standing customer relationships. There
can be no assurance that levels of competition in the Company's particular
product market will not intensify or that the Company's technological advantages
may not be reduced or lost as a result of technological advances by competitors
or changes in semiconductor processing technology. See "Factors that May Affect
Results and Financial Condition - Highly Competitive Industry, and Japanese
Market Segment and Japanese Competition."


PATENTS, TRADEMARKS, COPYRIGHTS AND OTHER INTELLECTUAL PROPERTY


The Company believes that the success of its business depends more on the
technical competence, creativity and marketing abilities of its employees,
rather than on patents, trademarks and copyrights. Nevertheless, the Company has
a policy of seeking patents when appropriate on inventions concerning new
products and improvements as part of its ongoing research, development and
manufacturing activities. The Company owns various patents and has applied for
additional patent protection in the United States and abroad for the technology
in its products. The Company also has several registered United States and
international trademarks. The Company maintains unregistered copyrights on its
software and typically maintains the source code for its products as trade
secrets.

  The Company also relies upon trade secret protection for its confidential and
proprietary information. The Company routinely enters into confidentiality
agreements with its employees. There can be no assurance, however, that others
will not independently gain information and techniques or otherwise gain access
to the Company's trade secrets or that the Company can meaningfully protect its
trade secrets. See "Factors that May Affect Results and Financial Condition -
Patents and Other Intellectual Property."


EMPLOYEES


As of December 31, 1999, the Company employed approximately 578 persons. Many of
the Company's employees are highly skilled, and the Company's success will
depend in part upon its ability to attract and retain such employees, who are in
great demand. The Company has never had a work stoppage or strike and no
employees are represented by a labor union or covered by a collective bargaining
agreement. The Company considers its employee relations to be good.


                                       9
<PAGE>   10

ITEM 2. PROPERTIES


The Company's executive office and manufacturing, engineering, research and
development operations were located primarily in four buildings in Santa Clara,
California totaling approximately 150,000 square feet, occupied under leases
expiring in March 2000. The Company owns substantially all of the machinery and
equipment used in its facilities. The Knights Division was headquartered in a
21,410 square foot leased facility in Sunnyvale, California and also leases
office space in Mumbai, India where it maintains an engineering and quality
assurance operation.

  In the first quarter of 2000, the Company consolidated its executive office,
manufacturing, engineering, research and development operations, and Knights
headquarters into an approximately 260,000 square foot facility located in San
Jose, California. This space is under a lease expiring in 2003 with monthly rent
payments based on the London Interbank Offering Rate (LIBOR). At current
interest rates and based on the lease amount of $37.9 million at December 31,
1999, the annual lease payments currently represent approximately $2.3 million,
which will increase as the construction funding increases to an estimated total
of $55.0 million in the second quarter of 2000.

  The Techne subsidiary's manufacturing, engineering and administrative
operations are located in a leased 34,600 square foot facility in Corvallis,
Oregon.

  The Company also leases sales and service offices in Arizona, California,
Oregon, Massachusetts and Texas. In Europe, the Company leases sales and service
locations in France, Germany and the United Kingdom. In Asia, the Company leases
direct sales and service locations in Japan, Hong Kong, Korea, People's Republic
of China, Singapore and Taiwan.

  Management considers the above facilities suitable and adequate to meet the
Company's requirements for the next twelve months and that suitable additional
or substitute space will be available as needed.


ITEM 3. LEGAL PROCEEDINGS


The Company is not currently involved in any legal actions that it believes are
material. From time to time, however, the Company may be subject to various
claims and lawsuits by customers, competitors and employees arising in the
normal course of business, including suits charging infringement or violations
of antitrust laws. Such suits may seek substantial damages and, in certain
instances, any damages awarded would be trebled.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


No matters were submitted to a vote of the security holders of the Company
during the fourth quarter ended December 31, 1999.


                                       10
<PAGE>   11

PART II: ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS


MARKET PRICES FOR COMMON STOCK


The Company's common stock is traded on the Nasdaq National Market System under
the symbol "EGLS." The following table sets forth for the periods indicated the
actual high and low sales prices per share of common stock as reported on the
Nasdaq National Market System:


<TABLE>
<CAPTION>
Fiscal Year                                1999                           1998
                                   High            Low             High           Low
---------------------------------------------------------------------------------------
<S>                              <C>             <C>             <C>             <C>
1st Quarter                      16 3/4          11 27/32        19 5/8          12 5/8

2nd Quarter                      20              12              17 13/16        12 1/4

3rd Quarter                      24 3/4          18 1/8          13 7/16          8 1/8

4th Quarter                      28 15/16        20 9/16         16 3/8           7 3/4
</TABLE>

The Company has never declared or paid cash dividends on the shares of common
stock and does not anticipate paying any cash dividends on the shares of common
stock in the foreseeable future. The Company currently intends to retain future
earnings to fund the development and growth of its business. As of January 31,
2000, the Company had approximately 8,000 shareholders of record.



ITEM 6. SELECTED FINANCIAL DATA



SELECTED CONSOLIDATED FINANCIAL DATA


<TABLE>
<CAPTION>
In thousands, except per share data
Year ended December 31,                            1999           1998            1997            1996           1995
-----------------------------------------------------------------------------------------------------------------------
<S>                                             <C>            <C>             <C>             <C>            <C>
Net sales                                       $ 126,695      $ 101,599       $ 150,035       $ 151,950      $ 169,240
                                                -----------------------------------------------------------------------
Gross profit                                       57,795         33,724          63,626          72,284         92,634
Engineering, research and development              26,865         30,538          21,897          18,672         13,560
Selling, general and administrative                29,667         33,334          32,532          24,758         25,771
In-process research and development                    --             --          27,029              --             --
Impairment of long-lived assets                        --          9,578              --              --             --

                                                -----------------------------------------------------------------------
Operating income (loss)                             1,263        (39,726)        (17,832)         28,854         53,303
Interest and other income, net                      6,171          5,527           4,844           4,847          4,211
                                                -----------------------------------------------------------------------
Income (loss) before income taxes                   7,434        (34,199)        (12,988)         33,701         57,514
Provision (benefit) for income taxes                1,858         (2,614)          2,949           9,242         20,417
                                                -----------------------------------------------------------------------
Net income (loss) (1)(2)                        $   5,576      $ (31,585)      $ (15,937)      $  24,459      $  37,097
                                                =======================================================================
Basic net income (loss) per share (1)(2)        $    0.28      $   (1.62)      $   (0.86)      $    1.38      $    2.09
Diluted net income (loss) per share (1)(2)      $    0.27      $   (1.62)      $   (0.86)      $    1.36      $    2.05
                                                =======================================================================
Working capital                                 $ 165,731      $ 136,643       $ 172,423       $ 159,376      $ 146,849

Total assets                                      202,191        184,241         228,919         197,866        191,741

Short-term borrowings                               1,624            566           1,160           1,790          1,952

Total equity                                      177,338        167,667         199,734         173,651        157,394
</TABLE>


                                       11
<PAGE>   12

UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA


<TABLE>
<CAPTION>
In thousands, except per share data
Quarter                                    First         Second         Third          Fourth
----------------------------------------------------------------------------------------------
<S>                                      <C>            <C>            <C>            <C>
1999:
Net sales                                $ 17,332       $ 29,757       $ 34,710       $ 44,896
Gross profit                                6,290         12,955         16,859         21,691
Net income (loss)                          (5,856)         1,093          3,609          6,730
Basic net income (loss) per share           (0.30)          0.06           0.18           0.34
Diluted net income (loss) per share         (0.30)          0.05           0.18           0.33

Quarter                                    First         Second         Third          Fourth
----------------------------------------------------------------------------------------------
1998:
Net sales                                $ 36,865       $ 27,538       $ 22,497       $ 14,699
Gross profit                               15,687          6,886          7,341          3,810
Net loss (2)                                 (416)        (5,147)        (5,746)       (20,276)
Basic net loss per share (2)                (0.02)         (0.26)         (0.30)         (1.04)
Diluted net loss per share (2)              (0.02)         (0.26)         (0.30)         (1.04)
</TABLE>


(1) Net loss for 1997 includes pretax in-process research and development
    charges of $23.5 million and $3.5 million resulting from the acquisitions of
    Knights Technology, Inc. and Techne Systems, Inc., respectively. In
    addition, the Company incurred a $1.6 million pretax charge in 1997 for
    environmental remediation costs.

(2) Net loss for the fourth quarter of 1998 includes a $9.6 million pretax
    charge for impaired technology and intangibles related to previous
    acquisitions, and an $8.1 million charge related to the revaluation of the
    Company's deferred tax assets.



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The components of the Company's statements of operations, expressed as a
percentage of net sales, are as follows:

<TABLE>
<CAPTION>
Year ended December 31,                           1999          1998          1997
-----------------------------------------------------------------------------------
<S>                                              <C>           <C>           <C>
Net sales                                        100.0%        100.0%        100.0%
Cost of sales                                     54.4          66.8          57.6
                                                 ----------------------------------
Gross profit                                      45.6          33.2          42.4
                                                 ----------------------------------
Operating expenses:
   Engineering, research and development          21.2          30.1          14.6
   Selling, general and administrative            23.4          32.8          21.7
   In-process research and development              --            --          18.0
   Impairment of long-lived assets                  --           9.4            --
                                                 ----------------------------------
Total operating expenses                          44.6          72.3          54.3
                                                 ----------------------------------
Operating income (loss)                            1.0         (39.1)        (11.9)
Interest income                                    5.0           5.5           3.5
Other income (expense), net                       (0.1)         (0.1)         (0.3)
                                                 ----------------------------------
Income (loss) before income taxes                  5.9         (33.7)         (8.7)
Provision (benefit) for income taxes               1.5          (2.6)          1.9
                                                 ----------------------------------
Net income (loss)                                  4.4%        (31.1)%       (10.6)%
                                                 ==================================
</TABLE>


                                       12
<PAGE>   13

RESULTS OF OPERATIONS
Years ended December 31, 1999, 1998 and 1997


NET SALES


Net sales were $126.7 million in 1999, up 24.7% from $101.6 million in 1998.
During 1998, the semiconductor equipment market experienced a downturn brought
on in large part by depressed DRAM pricing, production over capacity and the
difficulties in the Asian financial markets. During 1999, the Company showed
strong quarterly sales growth, reflecting the recovery in the semiconductor
equipment industry in 1999. The increase in 1999 revenue was due primarily to
higher prober unit and aftermarket sales, partially offset by lower Knights and
Inspection Product sales.

  Net sales were $101.6 million in 1998, as compared to $150.0 million in 1997,
a decrease of 32.3%. The decrease was due to lower prober unit sales resulting
from the industry downturn that affected the Company's sales throughout 1998.

  Net sales were comprised of prober systems ($94.5 million, $71.3 million and
$123.2 million for 1999, 1998 and 1997, respectively), aftermarket sales,
consisting primarily of service, spare parts and upgrades in support of the
prober business ($21.4 million, $18.0 million, and $22.8 million, for 1999, 1998
and 1997, respectively) and Knights software and Inspection Products ($10.8
million, $12.3 million and $4.0 million, for 1999, 1998 and 1997, respectively).

  International sales represented 38%, 43% and 43% of net sales for the years
1999, 1998 and 1997, respectively. The Company anticipates that international
sales will continue to account for a significant portion of net sales in 2000.


GROSS PROFIT


Gross profit was 45.6%, 33.2% and 42.4% in 1999, 1998 and 1997, respectively.
The increase in gross profit in 1999 compared to 1998 was due primarily to
manufacturing efficiencies from larger production volume in 1999. In addition,
1998 gross profit was negatively impacted by the disposal of obsolete and excess
inventories in the prober business, and the expensing of capitalized profit in
inventory resulting from the Techne acquisition.

  The decrease in gross profit in 1998 as compared to 1997 primarily reflects
the impact of the Company's under-absorbed manufacturing overhead resulting from
lower net sales. Additionally, gross profit in 1998 was negatively impacted by
approximately $3.9 million of charges to write-down manufacturing inventory
resulting from rapid product transition from the older Horizon 4000 models to
the newer 4090. Furthermore, gross profit was impacted by lower gross margins on
inspection systems as a result of $1.2 million of capitalized profit in
inventory arising from the acquisition of Techne that was recorded in cost of
sales in the second quarter of 1998 when the systems were shipped.

  The Company believes that its gross profit will continue to be affected by a
number of factors, including competitive pressures, changes in demand for
semiconductors, changes in product mix, level of software sales, and excess
manufacturing capacity costs.


                                       13
<PAGE>   14

ENGINEERING, RESEARCH AND DEVELOPMENT


Engineering, research and development expenses were 21.2%, 30.1% and 14.6% as a
percentage of sales for 1999, 1998 and 1997, respectively. In 1999, these
expenses were $26.9 million, down 12.0% from $30.5 million in 1998. The
decrease, in absolute dollars and as a percentage of sales, was primarily a
result of savings from 1998 cost reduction measures and lower development
expenses in the current period compared to the accelerated spending on the 300mm
and the 4090u (micro) programs in 1998.

  The increase in 1998 over 1997, in absolute dollars and as a percentage of
sales, was due mainly to accelerated spending on the Horizon 4090u (micro) and
300mm programs, and incremental research and development costs related to the
yield management software and inspection products businesses acquired in 1997.
The Company believes that in order to remain competitive it must continue to
invest substantially in research and development through the downturns.

  The Company's research and development expenses consist primarily of salaries,
project materials, consultant fees and other costs associated with the Company's
research and development efforts.


SELLING, GENERAL AND ADMINISTRATIVE


Selling, general and administrative (SG&A) expenses were 23.4%, 32.8% and 21.7%
as a percentage of sales in 1999, 1998 and 1997, respectively. In 1999, SG&A
expenses were $29.7 million, down 11.0% from $33.3 million in 1998. The decrease
in absolute dollars was primarily due to workforce reductions from prior year
levels and spending reduction programs initiated during the industry downturn in
1998. In addition, 1999 benefited from a reduction of accrued environmental
remediation expenses of $0.7 million that were no longer required based on the
Company's reassessment of the on-going remediation efforts, and a settlement of
$0.4 million for a purchase price contingency related to a past acquisition.

  The increase in 1998 compared to 1997, was due primarily to higher incremental
operational expenses and goodwill amortization related to the software and
inspection products businesses acquired in 1997. In addition, $0.6 million of
costs associated with severance compensation and facilities consolidation were
expensed during 1998.


INTEREST INCOME


Interest income was $6.3 million, $5.6 million and $5.2 million in 1999, 1998
and 1997, respectively. The increase in interest income in each year was
principally the result of increasing average cash balances and a shift to higher
yielding taxable instruments during 1998 through 1999.


IN-PROCESS RESEARCH AND DEVELOPMENT


In connection with the 1997 acquisitions of Knights Technology, Inc., and Techne
Systems, Inc., the Company wrote-off in-process research and development
totaling $23.5 million and $3.5 million, respectively. See Note 2 under "Notes
to Consolidated Financial Statements." These amounts were expensed on the
acquisition dates because the acquired technology had not yet reached
technological feasibility and had no alternative future uses. The Company is
using the in-process research and development to create new process management
tools.


                                       14
<PAGE>   15

Knights

At the date of acquisition, Knights in-process research and development related
to two primary research and development programs that were expected to reach
completion between late 1997 and 2002. These projects related to various stages
of development of Knights' Yield Management and CAD Navigation Software. At the
acquisition date, total estimated cost to complete was approximately $6.0
million. At December 31, 1999, the Company estimates that it has spent $6.8
million on projects that are now considered to be complete, or have been
discontinued, or are being developed using a different architecture. To date,
the Company has not had the expected success in commercializing the in-process
research and development and has significantly revised downwards its forecasts
since the acquisition date.


Techne

At the date of acquisition, Techne in-process research and development related
to two primary research and development programs that were expected to reach
completion between late 1998 and 2000. These projects related to various stages
of development of Techne's microstructure, bump and sort wafer inspection tools.
At the acquisition date, total estimated cost to complete was approximately $3.2
million. At December 31, 1999, the Company estimates that it has spent $4.0 on
projects that are now considered to be complete or have been discontinued. To
date, the Company has not had the expected success in commercializing the
in-process research and development and has significantly revised downwards its
forecasts since the acquisition date.


IMPAIRMENT OF LONG-LIVED ASSETS


In the fourth quarter of 1998, the Company recorded asset impairment charges of
$9.6 million. The charges principally related to long-lived assets, including
goodwill acquired in connection with the 1997 acquisitions of Techne Systems,
Inc. and Knights Technology, Inc. The charges were recorded in accordance with
Statement of Financial Accounting Standards 121, "Accounting for the Impairment
of Long Lived Assets." Standard 121 requires that the Company analyze whether
the cash flows attributable to an asset support the value assigned to that asset
in the financial statements. Where estimated cash flow is not sufficient to
recover the asset's net carrying value, a fair value approach is taken towards
reassigning a carrying value to the asset.

  During the second half of 1998, the Company did not receive any orders for a
new Techne inspection product being developed. Consequently, there were no
inspection products in backlog at the end of the year and there was significant
uncertainty as to future orders. In light of this, the Company re-evaluated its
forecast for such products. The Company expected that it would not be able to
recover the carrying value of the long-lived assets related to Techne, and
recorded an impairment loss in the fourth quarter of 1998.

  In addition, the Company experienced lower than expected sales of Knights'
products, which resulted in an operating loss for Knights in 1998. In light of
this, the Company reevaluated its forecast for Knights products. The Company
expected that it would not be able to recover the carrying value of the
long-lived assets related to Knights, and recorded an impairment loss in the
fourth quarter of 1998.


                                       15
<PAGE>   16

INCOME TAXES


The income tax rate as a percentage of income was 25.0% in 1999. In 1998 and
1997, the income tax rate (benefit) as a percentage of income before income
taxes, exclusive of the 1997 charge for non-deductible in-process research and
development, was (7.6%) and 21.0%, respectively. The increase in the 1999 income
tax provision compared to 1998 reflects the partial release of the valuation
allowance recorded against the 1998 net deferred tax assets offset by the
valuation allowance recorded against federal and state tax credits generated in
1999. The decrease in the effective tax rate (benefit) in 1998 compared to 1997
was primarily due to the lower percentage impact of tax-exempt investment income
and the valuation allowance recorded against the net deferred tax assets. The
Company has provided a valuation allowance of $17.5 million against its deferred
tax assets at December 31, 1999 due to uncertainties surrounding their
realization.


LIQUIDITY AND CAPITAL RESOURCES


The Company's cash, cash equivalents, short-term investments, and restricted
cash were $140.9 million at December 31, 1999, an increase of $9.3 million from
$131.5 million at December 31, 1998.

  Cash generated by operations was $12.8 million during 1999. This was due to
net income excluding depreciation and amortization of $14.2 million and an
increase in long term deferred revenue of $1.8 million, offset partially by an
increase in net current assets of $2.6 million. Accounts receivable increased by
$17.0 million as a result of higher revenues at the end of 1999 compared to the
same period in 1998. Accounts payable increased by $6.3 million due to higher
production volume at the end of 1999, and income taxes receivable decreased by
$10.4 million as a result of income tax refunds received during 1999.
Inventories increased by only $0.4 million in the late 1999 production ramp up
as the Company benefited from the outsourcing of its subassembly manufacturing
in the third quarter of 1999. Prepaid expenses and accrued liabilities used $1.8
million.

  Cash provided by investing activities was $29.9 million due primarily to net
maturities of investments of $19.8 million, and restricted cash of $17.7 million
that was no longer required to collateralize the construction of the Company's
San Jose campus. This was offset partially by an equity investment in, and
license agreement with, Cascade Microtech Inc. ("Cascade") for $4.5 million and
capital expenditures of $3.1 million.

  Cash provided by financing activities was $5.3 million. This resulted from the
sale of common stock of $5.2 million under employee stock plans and additional
short-term borrowings of $1.1 million by the Company's Japanese subsidiary,
offset by the repurchase of an additional 71,000 shares of the Company's common
stock at a cost of $1.0 million.

  The Company's Japanese subsidiary has credit facilities with a total borrowing
capacity of approximately $5.9 million (denominated in Yen) with two Japanese
banks. A $2.0 million standby letter of credit issued by the Company guarantees
one of the facilities. As of December 31, 1999, the amount outstanding was $1.6
million (denominated in Yen), renewable quarterly at the current bank interest
rate (2.19% at December 31, 1999).

  In March 1997, the Company entered into a $12.0 million five-year operating
lease for approximately 21.5 acres of land in San Jose, California. On July 1,
1998, the lease agreement was amended to provide a construction allowance of
$43.0 million for certain buildings currently under construction on the land.
The monthly payments are based on the London Interbank Offering Rate (LIBOR). At
current interest rates and based on the lease amount of $37.9 million at
December 31, 1999, the annual lease payments currently represent approximately
$2.3 million, which will increase as the construction funding increases to an
estimated total of $55.0 million in the second quarter of 2000. At the end of
the lease, the Company has the option to purchase the land and buildings at
approximately $55.0 million. The guaranteed residual payment on the lease is
approximately $55.0 million.


                                       16
<PAGE>   17

The lease contains certain restrictive covenants. At December 31, 1999, the
Company was in compliance with these covenants. In addition, the Company was in
compliance with its lease collateral requirements and was not required to
collateralize the lease. The Company voluntarily collateralized $37.9 million as
of December 31, 1999, which was included in cash and cash equivalents since it
can withdraw the cash with 10 days notice. The amount of collateralization will
increase as funding increases over the remaining construction period.

  In 1999, the Company entered into an agreement to purchase a minority equity
interest in Cascade. In addition, the Company entered into an agreement to
license certain technology from Cascade. The purchase price for the equity
investment and license was approximately $4.5 million and was paid in cash in
July 1999.

  Historically, the Company has generated cash in an amount sufficient to fund
its operations. The Company anticipates that its existing capital resources and
cash flow generated from future operations will enable it to maintain its
current level of operations and its planned operations including capital
expenditures for the foreseeable future.


YEAR 2000 UPDATE


Up to February 29, 2000, our operations around the world were fully functioning
and have not experienced any significant issues associated with the Year 2000
problem (as described below). Our customer-support operations continue to
communicate to us that our customers have not reported any consequential Year
2000 incidents. The number of Year 2000-related telephone calls from customers
into our sales and support offices have been much lower than anticipated. At our
sites worldwide, we have not experienced any significant Year 2000-related issue
that would affect our ability to manufacture, ship, sell or service our
products. While we are encouraged by the success of our Year 2000 efforts and
that of our customers and partners, we will continue to offer Year 2000 support
to customers and monitor our own operations.

  The Year 2000 problem is pervasive and complex, as virtually every computer
operation will be affected in some way by the rollover of the two-digit year
value to 00. Systems that do not properly recognize date-sensitive information
when the year changed to 2000 could generate erroneous data or cause a system to
fail. Significant uncertainty exists in the software industry concerning the
potential effects associated with the Year 2000 problem.

  The Company has reviewed its own information technology infrastructure for
Year 2000 readiness, including reviewing what actions are required to make all
software systems Year 2000 ready as well as actions needed to mitigate the risks
of Year 2000. Such actions include a review of vendors' contracts, attention to
Year 2000 issues in future contracts with vendors and formal communications with
suppliers requesting that they certify that their products are Year 2000 ready.


State of Readiness

The Company is actively addressing the Year 2000 issues. The following sections
broadly address Year 2000 matters with respect to the Company's (a) information
technology systems, (b) suppliers, (c) products, and (d) facilities and
infrastructure for Year 2000 readiness assessment.


                                       17
<PAGE>   18

Information Technology Systems

A Year 2000 ready upgrade to the Company's enterprise resource planning system
was completed in the third quarter of 1998. Other core business applications and
operating systems upgrades were completed in June 1999. The Company completed
the remediation and testing of all of its critical business systems and core
applications upgrades in the third quarter of 1999, and believes that they are
Year 2000 ready. Major national and international carriers provide the Company's
wide-area network requirements, and the Company expects these carriers to be
Year 2000 ready. During fiscal 1997 and 1998, the Company invested in a desktop
upgrade program. The standard personal computers, servers and laptop computers
installed during this period are Year 2000 ready to the extent the vendors have
affirmed. The Company completed the remediation and testing of its critical
desktop applications in the third quarter of 1999, and believes that they are
substantially Year 2000 ready. Over the past several years, the Company has
replaced or upgraded its local PBX and voice mail systems to Year 2000 ready
systems. In the third quarter of 1999, the Company completed the remediation and
testing of these systems in its domestic and international sales offices.


Suppliers

During fiscal 1998, the Company sent Year 2000 Readiness Questionnaires to its
suppliers. To date, the Company has received responses from 100% of its major
suppliers, stating that they have completed all known Y2K upgrades to be Year
2000 ready. The Company will continue to follow up with the small number of
second tier suppliers that did not respond to the Year 2000 Readiness
Questionnaire. In some cases, alternate suppliers may need to be identified by
the Company. There can be no assurance that the Company will be able to find
suitable alternate suppliers and contract with them on reasonable terms, or at
all, and such inability could have a material and adverse impact on the
Company's business and results of operations.


Products

The Company's Year 2000 product testing is complete. The Company used two
nationally- and industry-recognized test procedures to verify that the Company's
products are Year 2000 ready. They are the YMARK2000 program (NSTL), for
PC-based products, and the SEMATECH Year 2000 Readiness Test Scenarios for all
products. The Company notified its customers of known risk areas and proposed
remediation plans during the fourth quarter of 1998. The Company made Year 2000
upgrades available to customers during the first quarter of 1999, and installed
upgrades in the field in 1999. There can be no assurance that the Company's
products will contain all necessary date code changes. Any failure of the
Company's products to perform, including system malfunctions due to the onset of
Year 2000, could result in claims against the Company, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, the Company's customers could choose to convert
to other Year 2000 ready products in order to avoid such malfunctions, either of
which could have a material adverse effect on the Company's business, financial
condition and results of operations.


Facilities and Infrastructure

The Company has completed the assessment and remediation of its Year 2000 risk
with respect to building automation, electronic security, water and utility
systems. The Company is primarily an assemble-to-order manufacturing operation.
There is no significant automated assembly equipment on its manufacturing shop
floor. The Company completed the assessment and remediation of its manufacturing
operations during the first quarter of 1999.


                                       18
<PAGE>   19

Costs to Address Year 2000 Issues

The Company identified for its customers the corrective measures that are
necessary to ensure that its installed products are Year 2000 ready. In this
regard, the Company is incurring, and will continue to incur throughout 2000,
various costs to provide customer support regarding Year 2000 issues, and
certain of such costs are expected to be borne not by the Company but, instead,
to be passed on to the customers. The full cost of these activities, including
corrective measures, is not fully known. However, costs incurred to date have
not been material and the Company believes that the potential future financial
impact of assuring such Year 2000 readiness will not be material. The Company is
continuing its assessments and developing alternatives that will necessitate
refinement of this estimate over time. There can be no assurance, however, that
there will not be a delay in, or increased costs associated with, the efforts
described in this section. Since the efforts described in this section are
ongoing, all potential Year 2000 complications have not yet been identified.
Therefore, the potential impact of these complications on the Company's
financial condition and results of operations cannot be determined at this time.
If computer systems used by the Company or its suppliers, the product integrity
of products provided to the Company by suppliers, or the software applications
used in systems manufactured and sold by the Company, fail or experience
significant difficulties related to the Year 2000, the Company's results of
operations and financial condition could be materially affected.


Contingency Plans

In the third quarter of 1999, the Company completed contingency plans for the
Year 2000 readiness issues noted above. The contingency plans implemented by the
Company are intended to ensure that temporary disruptions to regional and global
infrastructure systems will have no materially adverse effect on the Company's
operations and financial performance. However, extended disruptions in these
systems beyond the Company's control could impact our ability to deliver product
and services to customers on schedule and to maintain Company operations, and
could, thereby, potentially have a materially adverse effect on the Company's
business, operating results and financial condition.


Euro

The Company has established a team to address issues raised by the introduction
of the Single European Currency ("Euro") for initial implementation as of
January 1, 1999, and through the transition period to January 1, 2002. The
Company believes it met the related legal requirements in effect as of January
1, and will continue to meet the legal requirements through the transition
period. The Company does not expect the cost of any system modifications to be
material and does not currently expect that introduction and use of the Euro
will materially affect its foreign exchange activities or will result in any
material increase in transaction costs. The Company will continue to evaluate
the impact over time of the introduction of the Euro; however, based on
currently available information, management does not believe that the
introduction of the Euro will have a material adverse impact on the Company's
financial condition or the overall trends in results of operations.


                                       19
<PAGE>   20

FACTORS THAT MAY AFFECT RESULTS AND FINANCIAL CONDITION


The statements contained in this Form 10-K which are not purely historical are
forward-looking statements, including statements regarding the Company's
beliefs, expectations, hopes, plans or intentions regarding the future.
Forward-looking statements in this document include statements in Item 1 hereof
under the headings "Overview" regarding the Company's strategy to move to become
a process management tool provider; "Company Strategy" with respect to the
Company's expectations regarding continued emphasis on research and
strengthening of customer relationships and the Company's intentions regarding
broadening existing product lines; "Manufacturing and Suppliers" regarding the
effect of outsourcing certain of our operations to Sanmina and "Backlog"
regarding backlog. All forward-looking statements included in this document are
made as of the date hereof, based on information available to the Company as of
the date hereof, and Electroglas assumes no obligation to update any forward
looking-statement or statements. It is important to note that the Company's
actual results could differ materially from those in such forward-looking
statements. The following important factors, as well as those set forth in the
previous discussion in Item 1 hereof, among others, in some cases have affected,
and in the future could affect, the Company's actual operating results and could
cause the Company's actual consolidated operating results to differ materially
from those expressed in any forward-looking statement made by, or on behalf of,
the Company.

Semiconductor Industry Downturns Adversely Affect Electroglas Revenues and
Operating Results. The Company's business largely depends on capital
expenditures by semiconductor manufacturers, which in turn depend on the current
and anticipated market demand for integrated circuits and products that use
integrated circuits. The semiconductor industry is highly cyclical and has
historically experienced periods of oversupply resulting in significantly
reduced demand for capital equipment. The industry recently had an overcapacity
situation which began during the period between 1995 and 1997 when a significant
number of new or expanded fabs were brought into production, creating a
significant over capacity and declining prices for devices, especially DRAM.
These events caused certain semiconductor manufacturers to postpone or cancel
equipment deliveries to previously planned expansions or new fab construction
projects which, in turn, resulted, according to an industry analyst, in a 29%
decline in the worldwide sales of semiconductor capital equipment in 1998. In
1999, the worldwide semiconductor industry recovered from its prolonged downturn
growing 18.9% as companies ramped up production and capacity utilization. This,
in turn, drove a 12.1% increase in the semiconductor equipment market. There can
be no assurance that the semiconductor industry will not again experience
downturns or slowdowns in the future, which would likely materially and
adversely affect the Company's business and operating results. In addition, the
need to invest in the engineering, research and development and marketing
required to penetrate targeted foreign markets and maintain extensive customer
service and support capabilities limits the Company's ability to reduce expenses
during such downturns.


                                       20
<PAGE>   21

Variability and Uncertainty of Quarterly Operating Results. The Company has
experienced and expects to continue to experience significant fluctuations in
its quarterly results. The Company's backlog at the beginning of each quarter
does not necessarily determine actual sales for any succeeding period. The
Company's sales will often reflect orders shipped in the same quarter that they
are received. Moreover, customers may cancel or reschedule shipments, and
production difficulties could delay shipments. Other factors which may influence
the Company's operating results in a particular quarter include the timing of
the receipt of orders from major customers, product mix, competitive pricing
pressures, the relative proportions of domestic and international sales, the
Company's ability to design, manufacture and introduce new products on a
cost-effective and timely basis, the delay between expenses to further develop
marketing and service capabilities and the realization of benefits from those
improved capabilities, and the introduction of new products by the Company's
competitors. Accordingly, the Company's results of operations are subject to
significant variability and uncertainty from quarter to quarter.

Dependence on New Products and Processes. Electroglas believes that its future
success will depend in part upon its ability to continue to enhance its existing
products and to develop and manufacture new products, particularly those related
to implementation of the Company's strategy to become a process management tool
provider. As a result, the Company expects to continue to make a significant
investment in engineering, research and development. There can be no assurance
that the Company will be successful in the introduction, marketing and cost
effective manufacture of any of its new products, that the Company will be able
to develop and introduce new products in a timely manner; enhance its existing
products and processes to satisfy customer needs or achieve market acceptance;
or that the new markets for which the Company is developing new products or
expects to sell current products, such as the market for 300 mm wafer probers
and markets related to the growth in the use of flip chips, will develop
sufficiently. To develop new products successfully, the Company depends on close
relationships with its customers and the willingness of those customers to share
information with the Company. The failure to develop products and introduce them
successfully and in a timely manner could adversely affect the Company's
competitive position and results of operations.

Dependence on Principal Customers. For the years ended December 31, 1999, 1998
and 1997, five of the Company's customers accounted for 52%, 38% and 33%,
respectively, of its net sales. In 1999, one customer accounted for 19% of net
sales and another customer accounted for 14% of net sales. No single customer
accounted for more than 10% of net sales in 1998 and 1997. If one or more of the
Company's major customers ceased or significantly curtailed its purchases, it
would likely have a material adverse effect on the Company's results of
operations.

Highly Competitive Industry. Electroglas faces substantial competition from
established competitors, some of which, in particular Tokyo Electron Limited
("TEL") and Tokyo Seimitsu ("TSK"), are larger companies that have greater
financial, engineering and manufacturing resources than the Company and have
larger service organizations and long-standing customer relationships. The
Company's competitors can be expected to continue to improve the design and
performance of their products and to introduce new products with competitive
price/performance characteristics. Competitive pressures may force price
reductions that could adversely affect the Company results of operations.
Although the Company believes it has certain technological and other advantages
over its competitors, maintaining and capitalizing on these advantages will
require the Company to continue a high level of investment in engineering,
research and development, marketing and customer service and support. There can
be no assurance that the Company will have sufficient resources to continue to
make these investments or that the Company will be able to make the
technological advances necessary to maintain such competitive advantages. See
"Business--Competition."


                                       21
<PAGE>   22

Japanese Market Segment and Japanese Competition. Electroglas believes that
competing Japanese companies have a competitive advantage because they dominate
the Japanese market segment (comprised of semiconductor fabrication facilities
located in Japan and those located outside Japan which are controlled by
Japanese companies). Electroglas has found it difficult to penetrate the large
and technically advanced Japanese market, which represents a substantial
percentage of the worldwide wafer prober market. In particular, TEL, a large
supplier of wafer probers and other semiconductor capital equipment in Japan,
dominates the Japanese market segment for wafer probers. TEL's dominance of the
Japanese market segment and its position as a large supplier of wafer probers
worldwide provide it with a sales and technology base that enables it to compete
throughout the rest of the world. Another Japanese company, TSK, is also a large
supplier of wafer probers in the Japanese market segment. See
"Business - Competition."

  Although Electroglas believes it is the largest supplier of wafer probers in
the non-Japanese market segment, Electroglas has not yet established itself as a
significant participant in the Japanese market segment. While Japanese
semiconductor manufacturers in recent years have begun to build semiconductor
fabrication facilities outside Japan, Electroglas has not yet had significant
sales into such facilities. Further, Japanese semiconductor manufacturers have
extended their influence outside Japan by licensing products and process
technologies to non-Japanese semiconductor manufacturers; these licenses
typically include a recommendation to use wafer probers and other semiconductor
equipment manufactured by Japanese companies. In particular, Electroglas may be
at competitive disadvantage with respect to the Japanese semiconductor capital
equipment suppliers who have been engaged for some time in collaborative efforts
with Japanese semiconductor manufacturers. There can be no assurance that
Electroglas will be able to establish a significant presence in or ever compete
successfully in the Japanese market segment. In addition, to the extent that the
slowdown in the Japanese market segment has left the Company's Japanese
competitors with excess inventory or excess capacity, they may offer substantial
discounts on their products, increasing pricing pressure in both the Japanese
market segment and elsewhere. Furthermore, the current weakness of the yen
compared to the dollar may exacerbate this situation.

Patents and Other Intellectual Property. The Company's success depends in
significant part on its intellectual property. While the Company attempts to
protect its intellectual property through patents, copyrights and trade secrets,
it believes that its success will depend more upon innovation, technological
expertise and distribution strength. There can be no assurance that the Company
will successfully protect its technology or that competitors will not be able to
develop similar technology independently. No assurance can be given that the
claims allowed on any patents held by the Company will be sufficiently broad to
protect the Company's technology. In addition, no assurance can be given that
any patents issued to the Company will not be challenged, invalidated or
circumvented or that the rights granted thereunder will provide competitive
advantages to the Company.

  Some customers using certain products of Electroglas have received a notice of
infringement from Technivison Corporation and Jerome H. Lemelson alleging that
the manufacture of semiconductor products infringes certain patents issued to
Mr. Lemelson. Certain of these customers have notified Electroglas that, in the
event it is subsequently determined that the customer infringes certain of the
Lemelson patents, they may seek reimbursement from Electroglas for some damages
or expenses resulting from this matter. Electroglas believes that its products
do not infringe the Lemelson patents. Certain of the Company's customers are
currently engaged in litigation with Mr. Lemelson involving 17 of his patents
and the validity of those patents has been placed in issue. In the future, it is
possible that the Company's participation in the litigation may be required.
Electroglas may incur costs with respect to such participation and cannot
predict the outcome of this or similar litigation or the effect of such
litigation upon Electroglas. To the best of the Company's knowledge, neither it
nor any of its products has been identified by Mr. Lemelson as infringing his
patents.


                                       22
<PAGE>   23

Dependence on Certain Suppliers. Electroglas obtains certain of the components
and subassemblies for its systems from a single source or a limited group of
suppliers, most notably Sanmina Corporation ("Sanmina") supplies many of the
subassemblies used in the Company's products. In addition, Cognex Corporation
("Cognex") supplies all of the machine vision processor systems used in the
Company's products. The partial or complete loss of Sanmina, Cognex, or certain
other limited source suppliers could adversely affect the Company's results of
operations and damage customer relationships. Further, a significant increase in
the price of one or more of these components could adversely affect the
Company's results of operations.

International Operations. International sales accounted for 38%, 43% and 43% of
the Company's net sales for 1999, 1998 and 1997, respectively. The Company
expects international sales to continue to represent a significant percentage of
net sales. A number of factors may adversely affect the Company's international
sales and operations, including the imposition of governmental controls,
fluctuations in the U.S. dollar, which could increase the foreign sales prices
of the Company's products in local currencies, export license requirements,
restrictions on the export of technology, political instability, trade
restrictions, changes in tariffs and difficulties in staffing and managing
international operations. Although these and similar regulatory, geopolitical
and global economic factors have not yet had a material adverse effect on the
Company's operations, there can be no assurance that such factors will not
adversely impact the Company's operations in the future or require the Company
to modify its current business practices. In addition, the laws of certain
foreign countries may not protect the Company's intellectual property rights to
the same extent as do the laws of the United States.

Dependence on Key Employees. The future success of Electroglas partly depends on
its ability to retain key personnel. The Company also needs to attract
additional skilled personnel in all areas of its business to grow. While many of
the Company's current employees have many years of service with Electroglas,
there can be no assurance that the Company will be able to retain its existing
personnel or attract additional qualified employees in the future.

Acquisitions. The Company may pursue acquisitions of complementary product
lines, technologies or businesses, such as the acquisitions of Knights and
Techne in May and December 1997, respectively. Acquisitions by the Company may
result in potentially dilutive issuances of equity securities, the incurrence of
debt and contingent liabilities and amortization expenses related to goodwill
and other intangible assets, which could materially adversely affect the
Company's profitability. In 1998, the Company recorded asset impairment charges
of $9.6 million. The charges related principally to acquired goodwill and other
intangible assets in connection with the Knights and Techne acquisitions. The
Company may experience similar charges related to future acquisitions. Current
or future acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies and products of the acquired
companies, the diversion of management's attention from other business concerns,
risks of entering markets in which the Company has no or limited direct prior
experience, and the potential loss of key employees of the acquired company.
There can be no assurances as to the effect thereof of these, or future,
acquisitions on the Company's business or operating results.


                                       23
<PAGE>   24

Environmental Matters. The Company has been performing environmental remediation
activities on its leased property in Santa Clara, California, in cooperation
with the California Regional Water Quality Board. In 1997, the Company accrued
$1.6 million, which was the Company's best estimate of its obligation and has
since incurred actual costs of $0.8 million. During 1999, the Company
reevaluated the on-going remediation efforts and determined its remaining
liability to be approximately $0.1 million. As a result, the Company reduced
accrued environmental remediation expenses by $0.7 million in 1999, which was
included in the statement of operations as a reduction of selling, general and
administrative expenses. It is possible that the Company's recorded estimate of
its obligations may change in the near term due to unexpected additional
environmental remediation expenses in the event the current remediation efforts
need to be expanded or ongoing investigation reveals additional contamination.

Possible Volatility of Common Stock Price. The market price of Electroglas
Common Stock could fluctuate significantly in response to variations in
quarterly operating results and other factors, such as announcements of
technological innovations or new products by the Company or by the Company's
competitors, government regulations, developments in patent or other property
rights, and developments in the Company's relationships with its customers. In
addition, the stock market has in recent years experienced significant price
fluctuations. These fluctuations often have been unrelated to the operating
performance of the specific companies whose stock is traded. Broad market
fluctuations, general economic conditions and specific conditions in the
semiconductor industry may adversely affect the market price of the Company's
Common Stock.

Antitakeover Provisions. The Company's Shareholders Rights Plan, certain
provisions of the Company's Certificate of Incorporation and Delaware law could
discourage potential acquisition proposals and could delay or prevent a change
in control of Electroglas. Such provisions could diminish the opportunities for
a stockholder to participate in tender offers, including tender offers at a
price above the then current market value of Electroglas Common Stock. Such
provisions may also inhibit fluctuations in the market price of Electroglas
Common Stock that could result from takeover attempts. In addition, the Board of
Directors, without further stockholder approval, may issue additional series of
preferred stock that could have the effect of delaying, deterring or preventing
a change in control of Electroglas. The issuance of additional series of
preferred stock could also adversely affect the voting power of the holders of
Common Stock, including the loss of voting control to others. The Company has no
current plans to issue any Preferred Stock.

Effect Of New Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." It establishes accounting and reporting standards for
derivative instruments including stand alone instruments, such as forward
currency exchange contracts and interest rate swaps or embedded derivatives,
such as conversion options contained in convertible debt investments and
requires that these instruments be marked-to-market on an ongoing basis. The
Company is required to adopt Statement 133, as amended by Statement No. 137,
"Deferral of Effective Date of FASB Statement No. 133," for the year ending
December 2001. Because of the Company's minimal use of derivatives, management
does not expect that the adoption of the new statement will have a significant
effect on earnings or the financial position of the Company.

  In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in the financial statements. All registrants are expected to apply the
accounting and disclosures described in SAB 101. Because the Company has
complied with generally accepted accounting principles for its historical
revenue recognition, a change, if any, in its revenue recognition policy
resulting from SAB 101 will be reported as a change in accounting principle in
the quarter ended March 31, 2000. The change in accounting policy may result in
a cumulative adjustment in the first quarter of 2000 to reflect the deferral of
revenue for shipments previously reported as revenue, which had not been
accepted by customers as of December 31, 1999. The Company is still in the
process of assessing the impact of SAB 101 on its financial statements, however
it believes that it may require a portion of its year 2000 revenues to be
deferred. While SAB 101 would not affect the fundamental aspects of the
Company's operations as measured by its shipments and cash flows,
implementation of SAB 101 could have a material adverse effect on its reported
results of operations for fiscal 2000.


                                       24
<PAGE>   25

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS



Interest Rate Risk

At December 31, 1999, the Company's cash equivalents and short-term investments
consisted primarily of fixed income securities. The Company maintains a strict
investment policy which ensures the safety and preservation of its invested
funds by limiting default risk, market risk, and reinvestment risk. The
portfolio includes only marketable securities with active secondary or resale
markets. These securities are subject to interest rate risk and may decline in
value when interest rates change. The table below presents notional amounts and
related weighted-average interest rates by year of maturity for the Company's
investment portfolio.

<TABLE>
<CAPTION>
(dollars in thousands)                  2000        2001       Total  Fair value
--------------------------------------------------------------------------------
<S>                                 <C>         <C>         <C>         <C>
Cash equivalents
   Fixed rate                       $ 55,909    $     --    $ 55,909    $ 55,909
   Average                             5.47%          --       5.47%          --
Short-term investments
   Fixed rate                       $ 65,192    $ 10,999    $ 76,191    $ 76,127
   Average rate                        5.48%       6.15%       5.58%          --
Preferred stock
   Fixed rate                       $  4,000    $     --    $  4,000    $  4,000
   Average rate                        6.30%          --       6.30%          --
Total Investment Securities
   Fixed rate                       $125,101    $ 10,999    $136,100    $136,036
   Average rate                        5.50%       6.15%       5.55%          --
</TABLE>



Foreign Currency Exchange Rate Risk

The current foreign exchange exposure in all international operations is deemed
to be immaterial. The Company believes the impact of a 10% change in exchange
rates would not be material to the Company's financial condition and results of
operations. Accordingly, the Company does not use derivative financial
instruments to hedge its current foreign exchange exposure. See Note 1 - Summary
of Significant Accounting Policies, Foreign Currency Accounting.


                                       25
<PAGE>   26

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements and Financial Statement Schedule             Pages
--------------------------------------------------------------------------------


<TABLE>
<S>                                                                        <C>
CONSOLIDATED FINANCIAL STATEMENTS:


Consolidated Statements of Operations --
  Years Ended December 31, 1999, 1998 and 1997 ............................   27

Consolidated Balance Sheets -- December 31, 1999 and 1998..................   28

Consolidated Statements of Stockholders' Equity --
  Years Ended December 31, 1999, 1998 and 1997 ............................   29

Consolidated Statements of Cash Flows --
  Years Ended December 31, 1999, 1998 and 1997 ............................   30

Notes to Consolidated Financial Statements ................................   31

Report of Ernst & Young LLP, Independent Auditors .........................   46



FINANCIAL STATEMENT SCHEDULE:


   Schedule II -- Consolidated Valuation and Qualifying Accounts --
     Years Ended December 31, 1999, 1998 and 1997 .........................   47
</TABLE>


                                       26
<PAGE>   27

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
(in thousands, except per share data)
Years Ended December 31,                            1999        1998        1997
--------------------------------------------------------------------------------
<S>                                             <C>         <C>         <C>
Net sales                                       $126,695    $101,599    $150,035
Cost of sales                                     68,900      67,875      86,409
                                                --------------------------------

Gross profit                                      57,795      33,724      63,626
                                                --------------------------------
Operating expenses:
   Engineering, research and development          26,865      30,538      21,897
   Selling, general and administrative            29,667      33,334      32,532
   In-process research and development                --          --      27,029
   Impairment of long-lived assets                    --       9,578          --
                                                --------------------------------

Total operating expenses                          56,532      73,450      81,458
                                                --------------------------------
Operating income (loss)                            1,263     (39,726)    (17,832)
Interest income                                    6,347       5,580       5,207
Other income (expense), net                         (176)        (53)       (363)
                                                --------------------------------

Income (loss) before income taxes                  7,434     (34,199)    (12,988)
Provision (benefit) for income taxes               1,858      (2,614)      2,949
                                                --------------------------------

Net income (loss)                               $  5,576    $(31,585)   $(15,937)
                                                ================================

Basic net income (loss) per share               $   0.28    $ (1.62)    $  (0.86)
                                                ================================

Diluted net income (loss) per share             $   0.27    $ (1.62)    $  (0.86)
                                                ================================
Shares used in basic calculations                 19,591      19,437      18,460
                                                ================================

Shares used in diluted calculations               20,278      19,437      18,460
                                                ================================
</TABLE>



See the accompanying notes to consolidated financial statements.


                                       27
<PAGE>   28

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
(in thousands, except per share data)
December 31,                                                    1999        1998
--------------------------------------------------------------------------------
<S>                                                         <C>         <C>
Assets
Current assets:
   Cash and cash equivalents                                $ 60,732    $ 12,966
   Short-term investments                                     80,127     100,858
   Accounts receivable, net of allowance for
     doubtful accounts of $459 in 1999 and $448 in 1998       28,992      11,945
   Inventories                                                14,867      14,428
   Prepaid expenses and other assets                           2,926       2,050
   Income taxes receivable                                     1,020      10,860
                                                            --------------------

     Total current assets                                    188,664     153,107
Restricted cash                                                   --      17,712
Equipment and leasehold improvements, net                      8,193      11,768
Other assets                                                   5,334       1,654
                                                            --------------------

Total assets                                                $202,191    $184,241
                                                            ====================



Liabilities and stockholders' equity
Current liabilities:
   Short-term borrowings                                    $  1,624    $    566
   Accounts payable                                            9,074       2,738
   Accrued liabilities                                        12,235      13,160
                                                            --------------------

     Total current liabilities                                22,933      16,464
Non-current liabilities                                        1,920         110
Commitments and contingencies (Note 13)
Stockholders' equity:
   Preferred stock, $0.01 par value;
     authorized 1,000; none outstanding                           --          --
   Common stock, $0.01 par value;
     authorized 40,000; 20,241 issued and
     outstanding at December 31, 1999,
     and 19,860 at December 31, 1998                             202         199
   Additional paid-in capital                                136,672     130,927
   Deferred stock compensation                                  (393)       (688)
   Retained earnings                                          43,754      38,178
   Accumulated other comprehensive loss                         (601)       (128)
                                                            --------------------

                                                             179,634     168,488
   Less cost of common stock in treasury;
     155 shares at December 31, 1999 and
     62 shares at December 31, 1998                            2,296         821
                                                            --------------------

     Total stockholders' equity                              177,338     167,667
                                                            --------------------
Total liabilities and stockholders' equity                  $202,191    $184,241
                                                            ====================
</TABLE>



See the accompanying notes to consolidated financial statements.


                                       28
<PAGE>   29

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>

                                                   Additional  Deferred             Accumulated other   Treasury          Total
                                     Common Stock   Paid-in     Stock      Retained  Comprehensive       Stock        Stockholders'
(In thousands)                     Shares   Amount  Capital  Compensation  Earnings  Income(loss)   Shares   Amount      Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>     <C>    <C>        <C>           <C>         <C>           <C>    <C>        <C>
Balance at January 1, 1997         18,203  $ 182  $ 89,923   $ (1,278)     $ 94,673    $ (98)        (674)  $ (9,751)  $ 173,651
Net loss                               --     --        --         --       (15,937)      --           --         --     (15,937)
Net unrealized losses on
   investments                         --     --        --         --            --      (69)          --         --         (69)
Net translation adjustments            --     --        --         --            --      135           --         --         135
                                                                                                                       ----------
Total comprehensive loss                                                                                                 (15,871)
                                                                                                                       ----------
Amortization of deferred
   compensation                        --     --        --        295            --       --           --         --         295
Issuance of common stock under
   employee stock plans               588      6     6,286         --            --       --           --         --       6,292
Purchase of treasury stock             --     --        --         --            --       --         (126)    (2,041)     (2,041)
Tax benefit of stock option
   exercises                           --     --     3,337         --            --       --           --         --       3,337
Common stock issued for
   businesses acquired              1,752     17    34,054         --            --       --           --         --      34,071
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997       20,543    205   133,600       (983)       78,736      (32)        (800)   (11,792)    199,734
Net loss                               --     --        --         --       (31,585)      --           --         --     (31,585)
Net unrealized gains on
   investments                         --     --        --         --            --      217           --         --         217
Net translation adjustments            --     --        --         --            --     (313)          --         --        (313)
                                                                                                                       ----------
Total comprehensive loss                                                                                                 (31,681)
                                                                                                                       ----------
Amortization of deferred
   compensation                        --     --        --        295            --       --           --         --         295
Issuance of common stock under
   employee stock plans               317      4     3,407         --            --       --           --         --       3,411
Purchase of treasury stock             --     --        --         --            --       --         (262)    (4,092)     (4,092)
Retirement of treasury stock       (1,000)   (10)   (6,080)        --        (8,973)      --        1,000     15,063          --
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998       19,860    199   130,927       (688)       38,178     (128)         (62)      (821)    167,667
Net income                             --     --        --         --         5,576       --           --         --       5,576
Net unrealized losses on
   investments                         --     --        --         --            --     (350)          --         --        (350)
Net translation adjustments            --     --        --         --            --     (123)          --         --        (123)
                                                                                                                       ----------
Total comprehensive income                                                                                                 5,103
                                                                                                                       ----------
Amortization of deferred
   compensation                        --     --        --        295            --       --           --         --         295
Issuance of common stock under
   employee stock plans               381      3     5,230         --            --       --           --         --       5,233
Tax benefit of stock option
   exercises                           --     --       515         --            --       --           --         --         515
Purchase of treasury stock             --     --        --         --            --       --          (71)    (1,029)     (1,029)
Settlement of escrow shares            --     --        --         --            --       --          (22)      (446)       (446)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999       20,241  $ 202 $ 136,672     $ (393)     $ 43,754   $ (601)        (155)  $ (2,296)  $ 177,338
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See the accompanying notes to consolidated financial statements.


                                       29
<PAGE>   30

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
(in thousands)
Years Ended December 31,                            1999        1998        1997
--------------------------------------------------------------------------------


<S>                                             <C>         <C>         <C>
Cash flows from operating activities
Net income (loss)                               $  5,576    $(31,585)   $(15,937)
Adjustments to reconcile net income (loss) to
  net cash provided by operating
  activities:
     Depreciation                                  6,903       6,920       5,165
     Amortization                                  1,676       3,903       2,813
     Write-off of in-process research and
       development                                    --          --      27,029
     Impairment of long-lived assets                  --       9,578          --
     Loss (gain) on disposal of fixed assets        (603)        744          46
     Deferred income taxes                            (3)      5,167       1,997
     Deferred revenue -- non current               1,813          --          --
     Changes in current assets and liabilities
        net of effects from acquisitions:
          Accounts receivable                    (17,047)     23,907     (17,953)
          Inventories                               (439)     11,604        (973)
          Prepaid expenses and other current
            assets                                  (876)     (1,051)        336
          Accounts payable                         6,336      (4,686)      2,092
          Accrued liabilities                       (925)     (4,885)     (4,212)
          Income taxes receivable/payable         10,355      (7,282)      5,981
                                                --------------------------------
Cash provided by operating activities             12,766      12,334       6,384
                                                --------------------------------
Cash flows from investing activities
Capital expenditures                              (3,148)     (2,989)    (10,697)
Purchases of investments, available-for-sale    (223,957)   (299,989)   (193,692)
Maturities of investments, available-for-sale    243,747     303,104     206,126
Acquisitions, net of cash acquired                    --          --        (516)
Decrease (increase) in restricted cash            17,712     (17,712)         --
Investment in, and license with Cascade
  Microtech                                       (4,530)         --          --
Other assets                                          60        (439)       (257)
                                                --------------------------------
Cash provided by (used in) investing
  activities                                      29,884     (18,025)        964
                                                --------------------------------
Cash flows from financing activities
Net proceeds (payments) from short-term
  borrowings                                       1,058        (594)     (2,624)
Sales of common stock                              5,233       3,411       6,292
Purchases of treasury stock                       (1,029)     (4,092)     (2,041)
                                                --------------------------------
Cash provided by (used in) financing
  activities                                       5,262      (1,275)      1,627
                                                --------------------------------
Effect of exchange rate changes                     (146)       (327)        143
                                                --------------------------------
Net increase (decrease) in cash and cash
  equivalents                                     47,766      (7,293)      9,118
Cash and cash equivalents at beginning of year    12,966      20,259      11,141
                                                --------------------------------
Cash and cash equivalents at end of year        $ 60,732    $ 12,966    $ 20,259
                                                --------------------------------
Supplemental cash flow disclosure:
   Cash paid (received) during the year for
     income taxes                               $ (8,449)   $    530    $ (5,062)
Other noncash changes:
   Income tax benefits from employee stock
     plans                                      $    515    $     --    $  3,337
</TABLE>


See the accompanying notes to consolidated financial statements.


                                       30
<PAGE>   31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Principles Of Consolidation And Basis Of Presentation: The consolidated
financial statements include the accounts of the domestic and foreign business
operations of the Company for all periods. Intercompany transactions have been
eliminated.

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 amounts reported in the financial statements.
Actual results could differ from those estimates.

Cash And Cash Equivalents: The Company considers all highly liquid investments
with minimum yield risks and maturities of less than 90 days from the date of
purchase to be cash equivalents.

Investments: The Company invests its excess cash in high quality debt and equity
instruments. Management determines the appropriate classification of the debt
securities at the time of purchase as either held-to-maturity or
available-for-sale and re-evaluates such designation as of each balance sheet
date.

  Available-for-sale securities are stated at fair market value, with unrealized
gains and losses reported in a separate component of stockholders' equity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization, as well as any interest on the securities, is included in interest
income.

Inventories: Inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.

Equipment And Leasehold Improvements: Equipment and leasehold improvements are
stated at cost less accumulated depreciation and amortization. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives (three to ten years) of assets. Leasehold improvements are
amortized over the life of the related assets or the life of the lease whichever
is shorter.

Revenue Recognition: Revenue related to the majority of the Company's products
is recognized as products are shipped and services rendered, except for newly
introduced products and for initial customer installments, which are recognized
upon the successful completion of an evaluation period.

  The Company also derives revenue from software licenses and postcontract
customer support (PCS). Postcontract customer support includes telephone
support, bug fixes, and rights to upgrades on a when-and-if available basis. In
software arrangements that include rights to multiple software products,
specified upgrades and PCS, the Company allocates the total arrangement fee
among each deliverable based on the relative fair value of each of the
deliverables determined based on vendor-specific objective evidence.

Software Licenses: The Company recognizes the revenue allocable to software
licenses and specified upgrades upon delivery of the software product or upgrade
to the end user, unless the fee is not fixed or determinable or collectibility
is not probable. The Company considers all arrangements with payment terms
extending beyond twelve months and other arrangements with payment terms longer
than normal not to be fixed or determinable. If the fee is not fixed or
determinable, revenue is recognized as payments become due from the customer. If
collectibility is not considered probable, revenue is recognized when the fee is
collected.

  The Company may enter into licenses to provide software to customers for a
period of time, during which the customer, for a single fee, is entitled to
receive unspecified products as well as maintenance and support until the end of
the contract term. For these contracts, total contract revenue is recognized on
a straight-line basis over the contract period.

Postcontract Customer Support: Revenue allocable to PCS is recognized on a
straight-line basis over the period the PCS is provided.


                                       31
<PAGE>   32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Warranty: The Company generally warrants its products for a period of up to 12
months from shipment for material and labor to repair the product; accordingly,
a provision for the estimated cost of the warranty is recorded upon shipment.

Engineering, Research And Development Expenses: The Company is actively engaged
in basic technology and applied research programs designed to develop new
products and product applications. In addition, substantial ongoing product and
process improvement engineering and support programs relating to existing
products are conducted within engineering departments. Engineering, research and
development costs are charged to operations as incurred.

Foreign Currency Accounting: The U.S. dollar is the functional currency for all
foreign operations, excluding Japan. Losses that resulted from the process of
remeasuring foreign currency financial statements into U.S. dollars were $0.1
million, $0 million and $0.6 million in 1999, 1998 and 1997, respectively, and
are included in operations.

  The Japanese Yen is the functional currency for the Company's Japanese
subsidiary. Translation gains or losses related to the Japanese subsidiary are
included as a component of stockholders' equity and comprehensive income.

Net Income (Loss) Per Share: The following table sets forth the computation of
basic and diluted net income (loss) per share:

<TABLE>
<CAPTION>
(in thousands, except per share data)
Years Ended December 31,                            1999        1998        1997
--------------------------------------------------------------------------------

<S>                                             <C>         <C>         <C>
Numerator:
   Net income (loss)                            $  5,576    $(31,585)   $(15,937)
Denominator:
   Denominator for basic income (loss)
     per share--weighted average shares           19,591      19,437      18,460
   Effect of dilutive securities:
     Employee stock options                          467          --          --
     Contingently issued shares                      220          --          --
                                                --------------------------------
   Dilutive potential common shares                  687          --          --
     Denominator for diluted income
        (loss) per share--adjusted
        weighted average shares
          and assumed conversions                 20,278      19,437      18,460
                                                --------------------------------

Basic net income (loss) per share               $   0.28    $ (1.62)    $ (0.86)
Diluted net income (loss) per share             $   0.27    $ (1.62)    $ (0.86)
                                                --------------------------------
</TABLE>


  Options to purchase 2,432,000 and 2,302,000 shares of common stock and 100,000
and 100,000 shares of restricted common stock were outstanding at December 31,
1998 and 1997, respectively, but were not included in the computation of diluted
loss per share for 1998 and 1997 as the effect would be antidilutive.


                                       32
<PAGE>   33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In connection with prior acquisitions, 164,000 and 255,000 shares of common
stock were in escrow as of December 31, 1998 and 1997, respectively. These
shares were subject to certain representations and warranties, and were not
included in the computation of diluted net loss per share for 1998 and 1997 as
the effect would be antidilutive.

Accounting For Long-Lived Assets: In accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets," the Company reviews long-lived assets held and used by the Company for
impairment whenever events or changes in circumstances indicate that assets may
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets.

Effect Of New Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." It establishes accounting and reporting standards for
derivative instruments including stand alone instruments, such as forward
currency exchange contracts and interest rate swaps or embedded derivatives,
such as conversion options contained in convertible debt investments and
requires that these instruments be marked-to-market on an ongoing basis. The
Company is required to adopt Statement 133, as amended by Statement No. 137,
"Deferral of Effective Date of FASB Statement No. 133," for the year ending
December 2001. Because of the Company's minimal use of derivatives, management
does not expect that the adoption of the new statement will have a significant
effect on earnings or the financial position of the Company.

  In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in the financial statements. All registrants are expected to apply the
accounting and disclosures described in SAB 101. Because the Company has
complied with generally accepted accounting principles for its historical
revenue recognition, a change, if any, in its revenue recognition policy
resulting from SAB 101 will be reported as a change in accounting principle in
the quarter ended March 31, 2000. The change in accounting policy may result in
a cumulative adjustment in the first quarter of 2000 to reflect the deferral of
revenue for shipments previously reported as revenue, which had not been
accepted by customers as of December 31, 1999. The Company is still in the
process of assessing the impact of SAB 101 on its financial statements, however
it believes that it may require a portion of its year 2000 revenues to be
deferred. While SAB 101 would not affect the fundamental aspects of the
Company's operations as measured by its shipments and cash flows, implementation
of SAB 101 could have a material adverse effect on its reported results of
operations for fiscal 2000.


NOTE 2. ACQUISITIONS


On May 19, 1997, the Company acquired Knights, a Sunnyvale, California based
developer of yield management software for the semiconductor industry, for the
following amounts:

<TABLE>
<CAPTION>
(dollars in thousands)
--------------------------------------------------------------------------------
<S>                                                                      <C>
Common stock issued, 1,352,000 shares                                    $27,720
Assumption of Knights stock options                                        2,295
Acquisition costs                                                          1,785
                                                                         -------

                                                                         $31,800
                                                                         =======
</TABLE>


On December 19, 1997, the Company acquired all of the outstanding shares of
common stock of Techne, an Albany, Oregon based manufacturer of back-end wafer
inspection equipment for the following amounts:

<TABLE>
<CAPTION>
(dollars in thousands)
--------------------------------------------------------------------------------
<S>                                                                       <C>
Cash                                                                      $1,500
Common stock issued, 400,000 shares                                        4,340
Acquisition costs                                                            400
                                                                          ------

                                                                          $6,240
                                                                          ======
</TABLE>


                                       33
<PAGE>   34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Knights and Techne acquisitions were recorded under the purchase method of
accounting and accordingly, results of operations of Knights and Techne are
included in the accompanying consolidated financial statements subsequent to the
date of the acquisitions. The purchase prices have been allocated, based on
independent appraisals obtained by the Company, to the tangible and intangible
assets acquired and liabilities assumed based on their respective fair values on
the date of acquisition as follows:

<TABLE>
<CAPTION>
(in thousands)                                              Knights      Techne
-------------------------------------------------------------------------------
<S>                                                        <C>         <C>
Cash                                                       $    973    $     11
Other current assets                                          1,220       3,685
Non-current assets                                              712          49
Intangibles                                                   7,720       3,697
Liabilities                                                  (2,325)     (4,731)
In-process research and development                          23,500       3,529
                                                           --------------------

                                                           $ 31,800    $  6,240
                                                           ====================
</TABLE>


To determine the value of in-process research and development of the acquired
businesses, the Company considered, among other factors, the stage of
development of each project, expected income, target markets, and associated
risks. Associated risks included inherent difficulties and uncertainties in
completing the projects and, thereby, achieving technical feasibility and risks
related to the viability of and potential changes in future target markets. This
analysis resulted in a valuation for in-process research and development that
had not reached technical feasibility and did not have alternative future uses.
Therefore, in accordance with generally accepted accounting principles, $23.5
million and $3.5 million was expensed in 1997 related to the Knights and Techne
acquisitions, respectively.

  Intangible assets on the Knights acquisition relate primarily to developed
technology and goodwill. Intangible assets on the Techne acquisition relate
principally to developed technology. To determine the value of developed
technology, the expected future cash flows of each product was discounted,
taking into account risks related to the characteristics and applications of
each product, existing and future markets, and assessment of the life cycle
stage of each product. This analysis resulted in a valuation for completed
products that had reached technological feasibility and, therefore, was
capitalizable. Intangible assets are amortized on a straight-line basis over
estimated useful lives ranging from three to five years.

  The following unaudited pro forma summary presents the consolidated results of
operations of the Company, excluding the charge for in-process research and
development, as if the acquisitions of Knights and Techne had occurred at the
beginning of 1997 and does not purport to be indicative of what would have
occurred had the acquisition been made as of the beginning of 1997 or of results
which may occur in the future.

<TABLE>
<CAPTION>
(in thousands, except per share data)
Year ended December 31,                                                     1997
--------------------------------------------------------------------------------
<S>                                                                     <C>
Net sales                                                               $152,438
Net income                                                              $  8,959
Basic net income per share                                              $   0.49
Diluted net income per share                                            $   0.47
                                                                        --------
</TABLE>


                                       34
<PAGE>   35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3. IMPAIRMENT OF LONG-LIVED ASSETS


In 1998, the Company recorded asset impairment charges of $9.6 million. The
charges principally related to long-lived assets, including goodwill acquired in
connection with the 1997 acquisitions of Techne and Knights. The charges were
recorded in accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long Lived Assets." Statement 121 requires
that the Company analyze whether the cash flows attributable to an asset support
the value assigned to that asset in the financial statements. Where estimated
cash flow is not sufficient to recover the asset's net carrying value, a fair
value approach is taken towards reassigning a carrying value to the asset.

  During the second half of 1998, the Company did not receive any orders for a
new Techne inspection product being developed. Consequently, there were no
inspection products in backlog at the end of the year and there was significant
uncertainty as to future orders. In light of this, the Company re-evaluated its
forecast for such products. The Company expected that it would not be able to
recover the carrying value of the long-lived assets related to Techne, and
recorded an impairment loss in the fourth quarter of 1998.

  In addition, the Company experienced lower than expected sales of Knights'
products, which resulted in an operating loss for Knights in 1998. In light of
this, the Company re-evaluated its forecast for Knights products. The Company
expected that it would not be able to recover the carrying value of the
long-lived assets related to Knights, and recorded an impairment loss in the
fourth quarter of 1998.


NOTE 4. FINANCIAL INSTRUMENTS


Concentration Of Credit Risk: Financial instruments that potentially subject the
Company to concentration of credit risk consist principally of cash equivalents,
short-term investments and trade receivables.

  The Company places its cash equivalents and short-term investments with high
credit-quality financial institutions. The Company invests its excess cash in
commercial paper, readily marketable debt and equity instruments and
collateralized funds of U.S. and state government entities. The Company has
established guidelines relative to credit ratings, diversification and
maturities that seek to maintain safety and liquidity.

  The Company sells its systems to semiconductor manufacturers throughout the
world. The Company performs ongoing credit evaluations of its customers'
financial condition and requires collateral, such as letters of credit, whenever
deemed necessary. The write-off of uncollectable amounts has been insignificant.
Accounts receivable from customers in Asia were $4.6 million and $2.5 million at
December 31, 1999 and 1998, respectively.

Fair Value of Financial Instruments: The Company has evaluated the estimated
fair value of financial instruments. The amounts reported for cash and cash
equivalents, accounts receivable, short-term borrowings, accounts payable and
accrued expenses approximate the fair value due to their short maturities.
Investment securities are reported at their estimated fair value based on quoted
market prices.


                                       35
<PAGE>   36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Investments:  The following is a summary of the Company's investments:

<TABLE>
<CAPTION>
                                                           Gross       Gross   Estimated
(in thousands)                             Amortized  Unrealized  Unrealized        Fair
Available-for-Sale at December 31, 1999:        Cost       Gains      Losses       Value
----------------------------------------------------------------------------------------
<S>                                        <C>         <C>         <C>         <C>
Municipal bonds                             $  4,024    $     --    $     --    $  4,024
Preferred stock                                4,000          --          --       4,000
Floating rate notes                           72,167         101        (165)     72,103
                                            --------------------------------------------
                                            $ 80,191    $    101    $   (165)   $ 80,127
                                            --------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
                                                           Gross       Gross   Estimated
(in thousands)                             Amortized  Unrealized  Unrealized        Fair
Available-for-Sale at December 31, 1998:        Cost       Gains      Losses       Value
-----------------------------------------------------------------------------------------
<S>                                        <C>         <C>         <C>         <C>
Municipal bonds                             $ 54,548    $    326    $    (41)   $ 54,833
Preferred stock                               16,750          --          --      16,750
Floating rate notes                           29,274           4          (3)     29,275
                                            --------------------------------------------
                                            $100,572    $    330    $    (44)   $100,858
                                            --------------------------------------------
</TABLE>


The following is a summary of amortized costs and estimated fair values of debt
securities by contractual maturity:

<TABLE>
<CAPTION>
(in thousands)                                             Amortized   Estimated
Available-for-Sale at December 31, 1999:                        Cost  Fair Value
--------------------------------------------------------------------------------
<S>                                                         <C>         <C>
Amounts maturing within one year                            $ 48,248    $ 48,317
Amounts maturing after one year, within five years            31,943      31,810
                                                            --------------------
                                                            $ 80,191    $ 80,127
                                                            --------------------
</TABLE>



NOTE 5. INVENTORIES


The following is a summary of inventories by major category:

<TABLE>
<CAPTION>
(in thousands)
At December 31,                                                 1999        1998
--------------------------------------------------------------------------------
<S>                                                         <C>         <C>
Raw materials                                               $  4,686    $  4,502
Work in process                                                6,986       5,948
Finished goods                                                 3,195       3,978
                                                            --------------------
                                                            $ 14,867    $ 14,428
                                                            --------------------
</TABLE>


                                       36
<PAGE>   37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS


The following is a summary of equipment and leasehold improvements by major
category:

<TABLE>
<CAPTION>
(in thousands)
At December 31,                                                 1999        1998
--------------------------------------------------------------------------------
<S>                                                         <C>         <C>
Equipment                                                   $ 17,475    $ 17,241
Leasehold improvements                                         8,373       8,303
Office furniture and equipment                                12,108      10,731
                                                            --------------------
                                                              37,956      36,275
Accumulated depreciation and amortization                    (29,763)    (24,507)
                                                            --------------------
                                                            $  8,193    $ 11,768
                                                            --------------------
</TABLE>



NOTE 7. INVESTMENT IN CASCADE MICROTECH


In the second quarter of 1999, the Company entered into an agreement to purchase
a minority equity interest in Cascade Microtech, Inc. (Cascade). The investment
represented less than a 10% equity interest in Cascade. In addition, the Company
entered into an agreement to license certain technology from Cascade. The
purchase price for the equity investment and license was approximately $4.5
million.


NOTE 8. ACCRUED LIABILITIES


The following is a summary of accrued liabilities:

<TABLE>
<CAPTION>
(in thousands)
At December 31,                                                 1999        1998
--------------------------------------------------------------------------------
<S>                                                         <C>         <C>
Salaries and benefits                                       $  4,005    $  3,943
Warranty reserves                                              2,410       2,991
Customer advance payments                                        576         519
Deferred revenue                                               3,158       2,594
Environmental remediation costs (note 13)                         53         785
Other                                                          2,033       2,328
                                                            --------------------
                                                            $ 12,235    $ 13,160
                                                            --------------------
</TABLE>



NOTE 9. SHORT-TERM BORROWINGS


The Company's Japanese subsidiary has credit facilities with a total borrowing
capacity of approximately $5.9 million (denominated in Yen) with two Japanese
banks. A $2.0 million standby letter of credit issued by the Company guarantees
one of the facilities. As of December 31, 1999, the amount outstanding was $1.6
million (denominated in Yen), renewable quarterly at the current bank interest
rate (2.19% at December 31, 1999).


                                       37
<PAGE>   38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10. STOCKHOLDERS' EQUITY


Preferred Stock: The Board of Directors has the authority, without any further
vote or action by the stockholders, to provide for the issuance of up to
1,000,000 shares of preferred stock from time to time in one or more series with
such designation, rights preferences and limitations as the Board of Directors
may determine, including the consideration received therefore, the number of
shares comprising each series, dividend rates, redemption provisions,
liquidation preferences, redemption fund provisions, conversion rights and
voting rights, all without the approval of the holders of common stock.

Rights Agreement: On February 9, 1999, the Company amended its Shareholder
Rights Plan (Rights Agreement) that was adopted on November 19, 1997. Pursuant
to the Rights Agreement, rights were distributed at the rate of one right for
each share of Common Stock owned by the Company's stockholders of record on
December 5, 1997. The rights expire on December 4, 2007 unless extended or
earlier redeemed or exchanged by the Company.

  Under the Rights Agreement, each right entitles the registered holder to
purchase one-hundredth of a Series A Preferred share of the Company at a price
of $140. The rights will become exercisable only if a person or group acquires
beneficial ownership of 15% or more of the Company's common stock or commences a
tender offer or exchange offer upon consummation of which such person or group
would beneficially own 15% or more of the Company's common stock.

Escrow Shares: In connection with the Knights acquisition in May 1997, 131,000
shares of common stock were placed into escrow subject to certain
representations and warranties. In 1999, the Company reached a final settlement
with Knights' shareholders, in which 22,000 shares of the Company's common stock
at a cost of $0.4 million were returned to the Company and placed into Treasury.
The remaining escrow shares were released to Knights' shareholders.

Stock Repurchase Program: On March 14, 1996, the Board of Directors authorized
the repurchase of up to 1,000,000 shares of the Company's common stock on the
open market. The Company completed the repurchase program in early 1998 and
retired the 1,000,000 shares of its common stock held in treasury at a cost of
$15.1 million. On May 19, 1998, the Board of Directors authorized the repurchase
of an additional 1,000,000 shares of the Company's stock beyond the initial
program to reduce the dilution resulting from its employee stock option and
stock purchase plans. The Company purchased 71,000 shares of common stock at a
cost of $1.0 million and 62,000 shares of common stock at a cost of $0.8
million, in 1999 and 1998, respectively.

Stock Option Plans: In August 1997, the Company's stockholders approved the 1997
Stock Incentive Plan (1997 Plan) replacing the 1993 Long Term Stock Incentive
plan (1993 Plan). Under the 1997 and 1993 Plans, 750,000 and 3,000,000 shares,
respectively, have been reserved for issuance to eligible employees and to
provide for certain automatic grants of stock options to non-employee directors.
During 1998 and 1999, the Company's stockholders approved amendments to the 1997
Plan to increase the number of shares reserved for issuance from 750,000 to
1,050,000 and 1,050,000 to 1,350,000, respectively. Options under these plans
are granted at fair market value, expire ten years from the date of grant, and
generally vest in quarterly installments, commencing one year from the date of
grant.


                                       38
<PAGE>   39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes option activity and related information:


<TABLE>
<CAPTION>
                                               1999              1998              1997
                                         ----------------  ----------------  ---------------
                                                 Weighted          Weighted          Weighted
                                                  Average           Average           Average
(share amounts in thousands)                     Exercise          Exercise          Exercise
Years Ended December 31,                 Options   Price   Options   Price   Options   Price
---------------------------------------------------------------------------------------------
<S>                                        <C>    <C>        <C>    <C>        <C>    <C>
Outstanding-beginning of year              2,432  $ 15.15    2,302  $ 15.70    1,710  $ 13.69
Granted                                      669    16.71      591    13.48    1,149    16.49
Exercised                                   (262)   14.27     (142)   10.41     (482)   10.17
Cancelled                                   (232)   16.67     (319)   18.12      (75)   17.60
                                           ---------------------------------------------------
Outstanding-end of year                    2,607  $ 15.50    2,432  $ 15.15    2,302  $ 15.70
                                           ---------------------------------------------------
</TABLE>


The following table summarizes information about outstanding options at December
31, 1999:

<TABLE>
<CAPTION>
                                               Options Outstanding        Options Exercisable
                                        --------------------------------  --------------------
                                                    Weighted
                                                     Average    Weighted              Weighted
                                                    Remaining    Average               Average
(in thousands, except per share data)               Contractual Exercise              Exercise
Range of Exercise Prices                Outstanding   Life        Price   Exercisable    Price
----------------------------------------------------------------------------------------------
<S>                                       <C>         <C>       <C>           <C>      <C>
   $2.06 - $14.25                         1,212       6.49      $ 13.28       764      $ 13.53
   $14.26 - $17.50                          900       7.16      $ 15.82       350       $16.01
   $17.51 - $34.25                          495       8.08      $ 20.39       133      $ 20.95
                                          ----------------------------------------------------
                                          2,607                             1,247
                                          ----------------------------------------------------
</TABLE>


In addition, the Company issued 100,000 shares of restricted stock in April 1996
under the 1993 Long Term Stock Incentive Plan. The Company recorded a deferred
compensation charge equal to the fair value of the restricted stock at the time
of issuance of $1.4 million. The deferred compensation charge is being amortized
over the five-year vesting period.

Employee Stock Purchase Plan (ESPP): In May 1998, the Company's stockholders
approved the 1998 Employee Stock Purchase Plan replacing the 1993 Employee Stock
Purchase Plan that expired in June 1998. Both plans provide that eligible
employees may purchase stock at 85% of its fair value on specified dates through
payroll deductions. Under the new plan, 500,000 shares were reserved for
issuance. The Company sold 119,000 shares, 175,000 shares and 106,000 shares to
employees in 1999, 1998 and 1997, respectively.

Stock Based Compensation: As permitted under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FAS No. 123), the
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), in accounting for
stock-based awards to employees. Under APB 25, the Company generally recognizes
no compensation expense with respect to such awards.


                                       39
<PAGE>   40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pro forma information regarding net income (loss) and net income (loss) per
share is required by FAS No. 123 for awards granted after December 31, 1995 as
if the Company had accounted for its stock-based awards to employees under the
fair value method of FAS No. 123. The fair value of the Company's stock-based
awards to employees was estimated using a Black-Scholes option pricing model.
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's stock-based awards to employees have characteristics significantly
different from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair value
of the Company's stock-based awards to employees was estimated using the
following assumptions:
<TABLE>
<CAPTION>
                                           Options                     ESPP
                                   ---------------------     -----------------------
                                    1999    1998   1997       1999     1998    1997
------------------------------------------------------------------------------------
<S>                                <C>      <C>    <C>        <C>     <C>      <C>
Expected dividend yield             0.0%     0.0%   0.0%       0.0%    0.0%     0.0%
Expected stock price volatility    54.0%    55.0%  51.0%      54.0%   55.0%    51.0%
Risk-free interest rate             6.5%     4.6%   5.6%       5.6%    4.6%     5.5%
Expected life (years)               4.0      4.0    4.0        0.5     0.5      0.5
</TABLE>

  For pro forma purposes, the estimated fair value of the Company's stock-based
awards to employees is amortized over the options' vesting period (for options)
and the six-month purchase period (for stock purchases under the ESPP). The
Company's pro forma information follows:

<TABLE>
<CAPTION>
(in thousands, except per share amounts)                 1999        1998        1997
-------------------------------------------------------------------------------------
<S>                                                    <C>      <C>         <C>
Net income (loss) -- as reported                       $5,576   $(31,585)   $(15,937)
Net income (loss) -- pro forma                          1,687    (37,163)    (20,308)
                                                       ------------------------------
Basic net income (loss) per share -- as reported         0.28      (1.62)      (0.86)
Basic net income (loss) per share -- pro forma           0.09      (1.91)      (1.10)
                                                       ------------------------------
Diluted net income (loss) per share -- as reported       0.27      (1.62)      (0.86)
Diluted net income (loss) per share -- pro forma         0.08      (1.91)      (1.10)
                                                       ------------------------------
</TABLE>


FAS No. 123 is effective for stock-based awards granted by the Company
commencing January 1, 1995. All stock-based awards granted before January 1,
1995 have not been valued and no pro forma compensation expense has been
recognized.

  The weighted average fair value of options and stock purchase rights granted
during 1999 were $8.49 and $4.61, respectively.

Incentive Plans: The Company has adopted an Employee Incentive Plan and a
Savings Plan covering substantially all of its United States-resident employees.
The Board of Directors determines annually a formula for setting aside amounts
into a profit sharing pool based upon performance targets. The amounts set aside
are used to pay bonuses to employees. The charge to operations for these plans
during 1999, 1998 and 1997 was $0.5 million, $0.7 million and $1.3 million.


                                       40
<PAGE>   41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. INCOME TAXES

Significant components of the provision (benefit) for income taxes are as
follows:

<TABLE>
<CAPTION>
(in thousands)
Years Ended December 31,                            1999        1998        1997
--------------------------------------------------------------------------------
<S>                                               <C>        <C>          <C>
Federal:
   Current                                        $1,108     $(7,808)     $  631
   Deferred                                           --       3,097       1,053
                                                  ------------------------------
                                                   1,108      (4,711)      1,684
State:
   Current                                            25         (39)        (92)
   Deferred                                           --       1,960         609
                                                  ------------------------------
                                                      25       1,921         517
Foreign:
   Current                                           728          66         748
   Deferred                                           (3)        110          --
                                                  ------------------------------
                                                     725         176         748
                                                  ------------------------------
Total provision (benefit) for income taxes        $1,858     $(2,614)     $2,949
                                                  ==============================
</TABLE>


The tax benefits associated with exercises of nonqualified stock options and
disqualifying dispositions of stock acquired through incentive stock options and
the employee stock purchase plan reduce taxes currently payable for 1999, 1998
and 1997, as shown above by $0.5 million, $0 million and $3.3 million
respectively. Such benefits are credited to additional paid in capital when
realized.

  The reconciliation of income tax computed at the U.S. federal statutory rates
to income tax expense (benefit) is as follows:

<TABLE>
<CAPTION>
(in thousands except percentages)               1999                       1998                      1997
                                        ---------------------      ---------------------      ---------------------
Years Ended December 31,                Amount        Percent      Amount        Percent      Amount        Percent
-------------------------------------------------------------------------------------------------------------------
<S>                                    <C>            <C>         <C>            <C>         <C>            <C>
Tax computed at U.S. statutory rate    $  2,602         35.0%     $(11,969)       (35.0)%    $ (4,545)       (35.0)%
State income taxes
   (net of federal benefit)                  16          0.2         1,249          3.7           335          2.6
Tax exempt investment income               (295)        (4.0)       (1,227)        (3.6)       (1,312)       (10.1)
Research and development credit              --           --            --           --        (1,646)       (12.6)
Foreign taxes                               671          9.0           448          1.3           266          2.0
In-process research
   and development                           --           --            --           --         9,460         72.8
Nondeductible goodwill                     (156)        (2.1)        1,313          3.8           188          1.4
Alternative minimum tax                   1,126         15.2            --           --            --           --
Valuation allowance                      (2,148)       (28.9)        8,070         23.6            --           --
Other                                        42          0.6          (498)        (1.4)          203          1.6
                                       ----------------------------------------------------------------------------
Provision (benefit)
   for income taxes                      $1,858         25.0%      $(2,614)        (7.6%)      $2,949         22.7%
                                       ============================================================================
</TABLE>


                                       41
<PAGE>   42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.

  Significant components of the Company's deferred tax accounts are as follows:

<TABLE>
<CAPTION>
(in thousands)
Years Ended December 31,                                       1999        1998
--------------------------------------------------------------------------------
<S>                                                          <C>         <C>
Deferred tax liabilities:
   Intangible assets                                         $(3,297)    $(1,753)
                                                            --------------------
Deferred tax assets:
   Warranty reserves                                             850       1,035
   Inventories                                                 2,722       3,023
   Depreciable assets                                          3,356       1,599
   Deferred revenue                                            2,207         738
   Net operating losses                                        1,245       3,710
   Tax credit carryforwards                                    8,793       5,758
   Other                                                       1,479       2,707
                                                            --------------------

     Total deferred tax assets                               $20,652     $18,570
     Less:  Valuation allowance                              (17,462)    (16,927)
                                                            --------------------

Net deferred tax assets (liabilities)                        $  (107)    $  (110)
                                                            --------------------
</TABLE>


Realization of the deferred tax assets is dependent on future taxable income,
the timing and amount of which are uncertain. Accordingly, a valuation allowance
in an amount approximately equal to the net deferred tax assets at December 31,
1999 has been established to reflect these uncertainties.

  As of December 31, 1999, the Company had federal net operating loss and tax
credit carryforwards of approximately $3.5 million which will expire in 2018 and
2019. The research and development credit carryforwards of approximately $2.0
million will expire in varying amounts between 2011 and 2019. The alternative
minimum tax credit carryforward of approximately $2.3 million has no expiration
date. The foreign tax credit carryforwards of approximately $2.5 million will
expire in the years between 2001 and 2004.

  For state tax purposes, as of December 31, 1999, the Company had tax credit
carryforwards of approximately $2.9 million. The state investment tax credits of
approximately $0.2 million will expire in the years 2007 and 2009. The research
and development credit carryforwards of approximately $2.7 million have no
expiration dates.

  Pretax income (loss) from foreign operations was $0.1 million, $(0.8) million
and $(0.8) million for 1999, 1998 and 1997, respectively. Upon repatriation of
foreign earnings, residual U.S. taxes would be immaterial.


NOTE 12. SEGMENT INFORMATION


The Company has one reportable segment; prober products, the manufacture, sale
and servicing of wafer probers for use in the manufacture of semiconductor
devices. Revenue segments below the quantitative threshold are attributable to
two operating segments of the Company, its yield management software and wafer
inspection businesses. The Company's management has determined the operating
segments based upon how the business is managed and operated. The Company
evaluates performance and allocates resources based on operating income (loss),
excluding unusual or infrequent occurring items. There are no significant
intersegment sales or transfers. The Company's principal markets are the North
American, European and Asian-based semiconductor manufacturing companies.


                                       42
<PAGE>   43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of the Company's operating segments:

<TABLE>
<CAPTION>
                                            Prober
(in thousands)                             products     All other   Consolidated
--------------------------------------------------------------------------------
<S>                                       <C>           <C>         <C>
1999
Sales to unaffiliated customers           $ 115,857     $ 10,838     $ 126,695
Operating income (loss)                   $   8,172     $ (6,909)    $   1,263
Identifiable assets                       $ 193,291     $  8,900     $ 202,191

1998
Sales to unaffiliated customers           $  89,296     $ 12,303     $ 101,599
Operating loss                            $ (24,864)    $ (5,284)    $ (30,148)
Other significant non-cash items:
   Impairment of long-lived assets        $      --     $ (9,578)    $  (9,578)
Identifiable assets                       $ 178,219     $  6,022     $ 184,241

1997
Sales to unaffiliated customers           $ 145,996     $  4,039     $ 150,035
Operating income (loss)                   $  11,975     $ (2,778)    $   9,197
Other significant non-cash items:
   In-process research and development    $      --     $(27,029)    $ (27,029)
Identifiable assets                       $ 209,545     $ 19,374     $ 228,919
</TABLE>

The following is a summary of the Company's geographic operations:

<TABLE>
<CAPTION>
                                    United
(in thousands)                      States        Asia       Europe   Consolidated
----------------------------------------------------------------------------------
<S>                                <C>           <C>         <C>      <C>
1999
Sales to unaffiliated customers    $ 100,946     $ 2,706     $23,043    $ 126,695
Operating income (loss)            $   4,180     $(3,374)    $   457    $   1,263
Identifiable assets                $ 189,044     $ 2,494     $10,653    $ 202,191

1998
Sales to unaffiliated customers    $  76,679     $ 1,326     $23,594    $ 101,599
Operating income (loss)            $ (35,184)    $(5,925)    $ 1,383    $ (39,726)
Identifiable assets                $ 174,879     $ 1,633     $ 7,729    $ 184,241

1997
Sales to unaffiliated customers    $ 119,567     $ 1,557     $28,911    $ 150,035
Operating income (loss)            $ (13,792)    $(6,571)    $ 2,531    $ (17,832)
Identifiable assets                $ 211,898     $ 2,165     $14,856    $ 228,919
</TABLE>


Sales between geographic areas are accounted for at prices that the Company
believes are at arm's length prices.

  International sales represented 38%, 43% and 43% of the Company's net sales in
1999, 1998 and 1997, respectively. These sales represent the combined total of
export sales made by United States operations and all sales made by foreign
operations.


                                       43
<PAGE>   44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Export sales made by United States operations were 18% of net sales in 1999 (15%
to Asia, 3% to other), 19% of net sales in 1998 (16% to Asia, 3% to other) and
23% of net sales in 1997 (21% to Asia, 2% to other).

  In 1999, one customer accounted for 19% of net sales and another customer
accounted for 14% of net sales. No single customer accounted for more than 10%
of net sales in 1998 and 1997.


NOTE 13. COMMITMENTS AND CONTINGENCIES


The Company leases its facilities and certain equipment under noncancelable
operating leases. As of December 31, 1999, the minimum annual rental commitments
are as follows:

<TABLE>
<CAPTION>
(in thousands)
--------------------------------------------------------------------------------
<S>                                                                      <C>
2000                                                                     $ 5,542
2001                                                                       5,134
2002                                                                       4,608
2003                                                                       2,557
2004                                                                         717
Thereafter                                                                    17
                                                                         -------
                                                                         $18,575
                                                                         =======
</TABLE>

Rent expense was approximately $3.3 million, $3.7 million and $3.6 million for
the years ended December 31, 1999, 1998 and 1997, respectively.

Legal Matters

In the ordinary course of business, various lawsuits and claims are filed
against the Company. While the outcome of these matters is currently not
determinable, management believes that the ultimate resolution of these matters
will not have a material adverse effect on the Company's financial statements.


Lease Agreement

In March 1997, the Company entered into a $12.0 million five-year operating
lease for approximately 21.5 acres of land in San Jose, California. On July 1,
1998, the lease agreement was amended to provide a construction allowance of
$43.0 million for certain buildings currently under construction on the land.
The monthly payments are based on the London Interbank Offering Rate (LIBOR). At
current interest rates and based on the lease amount of $37.9 million at
December 31, 1999, the annual lease payments currently represent approximately
$2.3 million, which will increase as the construction funding increases to an
estimated total of $55.0 million in the second quarter of 2000. At the end of
the lease, the Company has the option to purchase the land and buildings for
approximately $55.0 million. The guaranteed residual payment on the lease is
approximately $55.0 million.

  The lease contains certain restrictive covenants. At December 31, 1999, the
Company was in compliance with these covenants. In addition, the Company was in
compliance with its lease collateral requirements and was not required to
collateralize the lease. The Company voluntarily collateralized $37.9 million as
of December 31, 1999, which was included in cash and cash equivalents since it
can withdraw the cash with 10 days notice. The amount of collateralization will
increase as funding increases over the remaining construction period.


                                       44
<PAGE>   45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Environmental Remediation

The Company has been performing environmental remediation activities on its
leased property in Santa Clara, California, in cooperation with the California
Regional Water Quality Board. In 1997, the Company accrued $1.6 million, which
was the Company's best estimate of its obligation and has since incurred actual
costs of $0.8 million. During 1999, the Company reevaluated the on-going
remediation efforts and determined its remaining liability to be approximately
$0.1 million. As a result, the Company reduced accrued environmental remediation
expenses by $0.7 million in 1999, which was included in the statement of
operations as a reduction of selling, general and administrative expenses. It is
possible that the Company's recorded estimate of its obligations may change in
the near term due to unexpected additional environmental remediation expenses in
the event the current remediation efforts need to be expanded or ongoing
investigation reveals additional contamination.


NOTE 14. RELATED PARTY TRANSACTIONS

In the third quarter of 1999, the Company entered into an agreement with Sanmina
Corporation whereby Sanmina will provide ongoing contract manufacturing services
to the Company. In connection with the agreement the Company also sold certain
inventory and fixed assets to Sanmina for $7.4 million. In addition, the Company
bought $14.2 million in inventory from Sanmina during 1999. As of December 31,
1999 the Company had $3.0 million in accounts payable and $1.1 million in
accounts receivable with Sanmina. One of the Company's Directors is also a
Director of Sanmina Corporation.

In 1997, the Company entered into an agreement to lease Techne's manufacturing
facilities from Techne's President. Under the one year operating lease which
expired in December 1998, the Company made lease payments of approximately $0.2
million and $0.1 million, plus payment of executory costs such as property
taxes, maintenance and insurance in 1998 and 1999, respectively. The lease was
terminated in the first quarter of 1999.


                                       45
<PAGE>   46

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

THE BOARD OF DIRECTORS AND STOCKHOLDERS
ELECTROGLAS, INC.


We have audited the accompanying consolidated balance sheets of Electroglas,
Inc. as of December 31, 1999 and 1998, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1999. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These financial statements
and schedule 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

  In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Electroglas, Inc.
at December 31, 1999 and 1998, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth herein.



                                                               Ernst & Young LLP

San Jose, California
January 25, 2000


                                       46
<PAGE>   47

SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Three years ended December 31, 1999
(in thousands)

<TABLE>
<CAPTION>
                                                                           Additions
                                                         Balance at       Charged to                   Balance at
                                                        Beginning of       Costs and                     End of
        Descriptions                                       Period         Expenses(b)    Deductions(a)   Period
----------------------------------------------------------------------------------------------------------------
<S>                                                     <C>               <C>            <C>           <C>
Allowance for doubtful accounts
   (deducted from accounts receivable):
       Year Ended December 31, 1999                         $ 448             $ 11           $--           $ 459
       Year Ended December 31, 1998                           465                0            17             448
       Year Ended December 31, 1997                           205              292            32             465
</TABLE>


(a) Includes write-offs and reversals.
(b) Additions in 1997 related to allowances acquired.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is included under the heading "Election of
Directors" and "Other Matters" in the Company's Proxy Statement to be filed in
connection with its 1999 Annual Meeting of Stockholders and is incorporated
herein by reference.


ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is included under the heading "Executive
Compensation and Other Information" in the Company's Proxy Statement to be filed
in connection with its 1999 Annual Meeting of Stockholders and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is included under the heading "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement to be filed in connection with its 1999 Annual Meeting of Stockholders
and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is included under the heading "Certain
Relationships and Related Transactions" in the Company's Proxy Statement to be
filed in connection with its 1999 Annual Meeting of Stockholders and is
incorporated herein by reference.


                                       47
<PAGE>   48

PART IV: ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
                  8-K

(a) Documents filed as a part of this Report:
    (1) Index to Financial Statements
        The financial statements included in Part II, Item 8 of this document
        are filed as part of this Report.
    (2) Financial Statement Schedules
        The financial statement schedule included in Part II, Item 8 of this
        document is filed as part of this Report. All of the other schedules are
        omitted as the required information is inapplicable or the information
        is presented in the consolidated financial statements or related notes.
    (3) Exhibits
(b) Reports on Form 8-K:
        No reports on Form 8-K were filed during the last period covered by this
        Report.

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number          Exhibits
--------------------------------------------------------------------------------
<S>             <C>
    3.1         Certificate of Incorporation of Electroglas, Inc., as
                amended.(1)

    3.2         By-laws of Electroglas, Inc., as amended.(15)

    3.3         Certificate of Designation for Electroglas, Inc.(15)

    4.1         Reference is made to Exhibits 3.1 and 3.2.

    4.2         Specimen Common Stock Certificate of Electroglas, Inc., a
                Delaware corporation.(1)

    10.1        Asset Transfer Agreement by and among General Signal
                Corporation, General Signal Technology Corporation and
                Electroglas, Inc., dated June 23, 1993, with schedules and
                exhibits thereto.(2)

    10.2        Foreign Units Management Service Agreement by and among General
                Signal Corporation, General Signal Technology Corporation and
                Electroglas, Inc., dated June 23, 1993.(2)

    10.3        Registration Rights Agreement by and between General Signal
                Corporation and Electroglas, Inc., dated June 23, 1993.(2)

    10.4*       Electroglas, Inc. 1993 Long-Term Incentive Plan.(2)

    10.5*       Electroglas, Inc. Amended and Restated 1993 Employee Stock
                Purchase Plan.(3)

    10.6        Lease between RREEF USA FUND-III, a California Group Trust, and
                Electroglas, Inc. dated as of December 20, 1993.(4)

    10.7*       Change of Control Agreement between Electroglas, Inc. and Neil
                R. Bonke dated as of June 9, 1995.(5)

    10.8*       Change of Control Agreement between Electroglas, Inc. and
                William J. Cornwell dated as of June 9, 1995.(5)

    10.9*       Change of Control Agreement between Electroglas, Inc. and Armand
                J. Stegall dated as of June 9, 1995.(5)

    10.10*      Electroglas, Inc. Restricted Stock Bonus Agreement Between
                Electroglas, Inc. and Curtis S. Wozniak.(6)

    10.11*      Change of Control Agreement between Electroglas, Inc. and Curtis
                S. Wozniak dated as of April 4, 1996.(6)

    10.12*      Employment and Consulting Agreement Between Electroglas, Inc.
                and Neil R. Bonke.(7)

    10.13*      Electroglas Officers' Retirement Medical and Dental Coverage
                Policy.(8)
</TABLE>


                                       48
<PAGE>   49

<TABLE>
<CAPTION>
<S>             <C>
    10.14*      Severance Agreement between Electroglas, Inc. and William J.
                Cornwell dated as of April 1, 1996.(9)

    10.15       Lease Agreement between BNP Leasing Corporation and Electroglas,
                Inc. dated March 31, 1997.(10)

    10.16       Agreement and Plan of Reorganization among Knights Technology,
                Inc., certain shareholders of Knights Technology, Inc., and
                Electroglas, Inc. dated March 12, 1997.(11)

    10.17       Rights Agreement between Electroglas, Inc., and BankBoston,
                N.A., as rights agent dated as of November 18, 1997.(12)

    10.18*      Electroglas, Inc. 1997 Stock Incentive Plan.(15)

    10.19*      Form of Change of Control Agreement between the Company and each
                of Timothy J. Boyle, Phillip M. Truckle, Conor P. O'Mahoney,
                Joseph A. Savarese, Daniel D. Welton, William J. Haydamack and
                John P. Livingston as of June 9, 1995, June 9, 1995, June 9,
                1995, June 9, 1995, June 9, 1995, December 12, 1997 and December
                8, 1997.(15)

    10.20       Construction Funding Agreement (First Amendment to Lease)
                Between BNP Leasing Corporation and Electroglas, Inc. dated July
                1, 1998.(13)

    10.21*      Electroglas, Inc. 1998 Employee Stock Purchase Plan.(14)

    10.22       Rights Agreement between Electroglas, Inc., and BankBoston,
                N.A., as amended and restated on February 9, 1999.(16)

    23.1        Consent of Ernst & Young LLP, Independent Auditors.

    27          Financial Data Schedule.
</TABLE>

(1)  Incorporated by reference to the identically numbered exhibit to the
     Company's Registration Statement on Form S-1 (Commission File No.
     33-61528), which became effective on June 23, 1993.

(2)  Incorporated by reference to the identically numbered exhibit to the
     Company's Registration Statement on Form S-1 (Commission File No.
     33-74860), which became effective on February 23, 1994.

(3)  Incorporated by reference to Exhibit 10.5 of the Company's Annual Report on
     Form 10-K, filed with the Securities and Exchange Commission on March 31,
     1995.

(4)  Incorporated by reference to Exhibit 10.9 of the Company's Annual Report on
     Form 10-K, filed with the Securities and Exchange Commission on March 31,
     1994.

(5)  Incorporated by reference to the identically numbered exhibit of the
     Company's Annual Report on Form 10-K, filed with the Securities and
     Exchange Commission on March 31, 1996.

(6)  Incorporated by reference to the identically numbered exhibit of the
     Company's Quarterly Report on Form 10-Q, for the quarter ended June 30,
     1996.

(7)  Incorporated by reference to Exhibit 10.11 of the Company's Quarterly
     Report on Form 10-Q, for the quarter ended September 31, 1996.

(8)  Incorporated by reference to Exhibit 10.12 of the Company's Quarterly
     Report on Form 10-Q, for the quarter ended September 31, 1996.

(9)  Incorporated by reference to the identically numbered exhibit of the
     Company's Annual Report on Form 10-K, filed with the Securities and
     Exchange Commission on March 26, 1997.

(10) Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report
     on Form 10-Q, for the quarter ended March 31, 1997.

(11) Incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report
     on Form 10-Q, for the quarter ended March 31, 1997.

(12) Incorporated by reference to Exhibit 1 of the Company's Registration
     Statement on Form 8-A12G (Commission File No. 0-21626), filed with the
     Securities and Exchange Commission on November 19, 1997.

(13) Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report
     on Form 10-Q, for the quarter ended June 30, 1998.

(14) Incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report
     on Form 10-Q, for the quarter ended June 30, 1998.

(15) Incorporated by reference to the identically numbered exhibit of the
     Company's Annual Report on Form 10-K, filed with the Securities and
     Exchange Commission on March 30, 1998.

(16) Incorporated by reference to Exhibit 1 of the Company's Registration
     Statement on Form 8-A12G/A (Commission File No. 0-21626), filed with the
     Securities and Exchange Commission on April 27, 1999.

*    Management contracts, or Company compensatory plans or arrangements.


                                       49
<PAGE>   50

SIGNATURES

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

                             ELECTROGLAS, INC.

Date:  March 17, 2000

                                       By  CURTIS S. WOZNIAK
                                       ------------------------------------
                                       Curtis S. Wozniak
                                       Chairman and Chief Executive Officer

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

<TABLE>
<CAPTION>
                 SIGNATURE                      TITLE                                                DATE

<S>                                             <C>                                             <C>
         /s/ CURTIS S. WOZNIAK                  Chairman and Chief Executive Officer            March 17, 2000
-----------------------------------             (Principal Executive Officer)
             Curtis S. Wozniak

         /s/ ARMAND J. STEGALL                  Vice President, Finance                         March 17, 2000
-----------------------------------             Chief Financial Officer,
             Armand J. Stegall                  Treasurer and Secretary
                                                (Principal Financial and Accounting Officer)

           /s/ NEIL R. BONKE                    Director                                        March 17, 2000
-----------------------------------
               Neil R. Bonke

           /s/ JOSEPH F. DOX                    Director                                        March 17, 2000
-----------------------------------
               Joseph F. Dox

         /s/ ROGER D. EMERICK                   Director                                        March 17, 2000
-----------------------------------
             Roger D. Emerick

       /s/ ROBERT J. FRANKENBERG                Director                                        March 17, 2000
-----------------------------------
           Robert J. Frankenberg

           /s/ MEL FRIEDMAN                     Director                                        March 17, 2000
-----------------------------------
               Mel Friedman
</TABLE>


                                       50
<PAGE>   51

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number          Exhibits
--------------------------------------------------------------------------------
<S>             <C>
    3.1         Certificate of Incorporation of Electroglas, Inc., as
                amended.(1)

    3.2         By-laws of Electroglas, Inc., as amended.(15)

    3.3         Certificate of Designation for Electroglas, Inc.(15)

    4.1         Reference is made to Exhibits 3.1 and 3.2.

    4.2         Specimen Common Stock Certificate of Electroglas, Inc., a
                Delaware corporation.(1)

    10.1        Asset Transfer Agreement by and among General Signal
                Corporation, General Signal Technology Corporation and
                Electroglas, Inc., dated June 23, 1993, with schedules and
                exhibits thereto.(2)

    10.2        Foreign Units Management Service Agreement by and among General
                Signal Corporation, General Signal Technology Corporation and
                Electroglas, Inc., dated June 23, 1993.(2)

    10.3        Registration Rights Agreement by and between General Signal
                Corporation and Electroglas, Inc., dated June 23, 1993.(2)

    10.4*       Electroglas, Inc. 1993 Long-Term Incentive Plan.(2)

    10.5*       Electroglas, Inc. Amended and Restated 1993 Employee Stock
                Purchase Plan.(3)

    10.6        Lease between RREEF USA FUND-III, a California Group Trust, and
                Electroglas, Inc. dated as of December 20, 1993.(4)

    10.7*       Change of Control Agreement between Electroglas, Inc. and Neil
                R. Bonke dated as of June 9, 1995.(5)

    10.8*       Change of Control Agreement between Electroglas, Inc. and
                William J. Cornwell dated as of June 9, 1995.(5)

    10.9*       Change of Control Agreement between Electroglas, Inc. and Armand
                J. Stegall dated as of June 9, 1995.(5)

    10.10*      Electroglas, Inc. Restricted Stock Bonus Agreement Between
                Electroglas, Inc. and Curtis S. Wozniak.(6)

    10.11*      Change of Control Agreement between Electroglas, Inc. and Curtis
                S. Wozniak dated as of April 4, 1996.(6)

    10.12*      Employment and Consulting Agreement Between Electroglas, Inc.
                and Neil R. Bonke.(7)

    10.13*      Electroglas Officers' Retirement Medical and Dental Coverage
                Policy.(8)

    10.14*      Severance Agreement between Electroglas, Inc. and William J.
                Cornwell dated as of April 1, 1996.(9)

    10.15       Lease Agreement between BNP Leasing Corporation and Electroglas,
                Inc. dated March 31, 1997.(10)

    10.16       Agreement and Plan of Reorganization among Knights Technology,
                Inc., certain shareholders of Knights Technology, Inc., and
                Electroglas, Inc. dated March 12, 1997.(11)

    10.17       Rights Agreement between Electroglas, Inc., and BankBoston,
                N.A., as rights agent dated as of November 18, 1997.(12)

    10.18*      Electroglas, Inc. 1997 Stock Incentive Plan.(15)

    10.19*      Form of Change of Control Agreement between the Company and each
                of Timothy J. Boyle, Phillip M. Truckle, Conor P. O'Mahoney,
                Joseph A. Savarese, Daniel D. Welton, William J. Haydamack and
                John P. Livingston as of June 9, 1995, June 9, 1995, June 9,
                1995, June 9, 1995, June 9, 1995, December 12, 1997 and December
                8, 1997.(15)

    10.20       Construction Funding Agreement (First Amendment to Lease)
                Between BNP Leasing Corporation and Electroglas, Inc. dated July
                1, 1998.(13)

    10.21*      Electroglas, Inc. 1998 Employee Stock Purchase Plan.(14)

    10.22       Rights Agreement between Electroglas, Inc., and BankBoston,
                N.A., as amended and restated on February 9, 1999.(16)

    23.1        Consent of Ernst & Young LLP, Independent Auditors.

    27          Financial Data Schedule.
</TABLE>

(1)  Incorporated by reference to the identically numbered exhibit to the
     Company's Registration Statement on Form S-1 (Commission File No.
     33-61528), which became effective on June 23, 1993.

(2)  Incorporated by reference to the identically numbered exhibit to the
     Company's Registration Statement on Form S-1 (Commission File No.
     33-74860), which became effective on February 23, 1994.

(3)  Incorporated by reference to Exhibit 10.5 of the Company's Annual Report on
     Form 10-K, filed with the Securities and Exchange Commission on March 31,
     1995.

(4)  Incorporated by reference to Exhibit 10.9 of the Company's Annual Report on
     Form 10-K, filed with the Securities and Exchange Commission on March 31,
     1994.

(5)  Incorporated by reference to the identically numbered exhibit of the
     Company's Annual Report on Form 10-K, filed with the Securities and
     Exchange Commission on March 31, 1996.

(6)  Incorporated by reference to the identically numbered exhibit of the
     Company's Quarterly Report on Form 10-Q, for the quarter ended June 30,
     1996.

(7)  Incorporated by reference to Exhibit 10.11 of the Company's Quarterly
     Report on Form 10-Q, for the quarter ended September 31, 1996.

(8)  Incorporated by reference to Exhibit 10.12 of the Company's Quarterly
     Report on Form 10-Q, for the quarter ended September 31, 1996.

(9)  Incorporated by reference to the identically numbered exhibit of the
     Company's Annual Report on Form 10-K, filed with the Securities and
     Exchange Commission on March 26, 1997.

(10) Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report
     on Form 10-Q, for the quarter ended March 31, 1997.

(11) Incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report
     on Form 10-Q, for the quarter ended March 31, 1997.

(12) Incorporated by reference to Exhibit 1 of the Company's Registration
     Statement on Form 8-A12G (Commission File No. 0-21626), filed with the
     Securities and Exchange Commission on November 19, 1997.

(13) Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report
     on Form 10-Q, for the quarter ended June 30, 1998.

(14) Incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report
     on Form 10-Q, for the quarter ended June 30, 1998.

(15) Incorporated by reference to the identically numbered exhibit of the
     Company's Annual Report on Form 10-K, filed with the Securities and
     Exchange Commission on March 30, 1998.

(16) Incorporated by reference to Exhibit 1 of the Company's Registration
     Statement on Form 8-A12G/A (Commission File No. 0-21626), filed with the
     Securities and Exchange Commission on April 27, 1999.

*    Management contracts, or Company compensatory plans or arrangements.


                                       51