<PAGE>   1
================================================================================


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

                                    FORM 10-Q

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

        For the quarterly period ended March 31, 1999.

(   )   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
        For the period from ________ to ________.

        Commission File Number 0-11348

                           SILICON VALLEY GROUP, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

          DELAWARE                                  94-2264681
 (State of incorporation)                    (IRS Employer Identification No.)


             101 METRO DRIVE, SUITE #400, SAN JOSE, CALIFORNIA 95110
               (Address of principal executive offices) (Zip Code)

                                 (408) 441-6700
              (Registrant's telephone number, including area code)

                                      NONE
              (Former name, former address and former fiscal year,
                         if changed since last report)

    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 [ ]

    The number of shares outstanding of the Registrant's Common Stock as of
 April 30, 1999 was 33,024,986.

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

<PAGE>   2



                           SILICON VALLEY GROUP, INC.

                                      INDEX


PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>

                                                                            PAGE NO.
                                                                            --------

<S>                                                                         <C> 
        Consolidated Condensed Balance Sheets as of March 31,
        1999 and September 30, 1998                                             3

        Consolidated Condensed Statements of Operations for the
        Quarters and Six Months Ended March 31, 1999 and 1998                   4

        Consolidated Condensed Statements of Cash Flows for
        the Six Months Ended March 31, 1999 and 1998                            5

        Notes to Consolidated Condensed Financial Statements                    6

        Management's Discussion and Analysis of Financial
        Condition and Results of Operations                                     9


PART II.  OTHER INFORMATION                                                    23


SIGNATURES                                                                     26
</TABLE>



                                       2
<PAGE>   3



                          PART I. FINANCIAL INFORMATION
                           SILICON VALLEY GROUP, INC.
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                   March 31,           September 30,
                                                                     1999                   1998
                                                                -------------          -------------
                                                                (Unaudited)
ASSETS

CURRENT ASSETS:
<S>                                                               <C>                    <C>     
     Cash and equivalents                                         $106,186               $121,575
     Temporary investments                                          21,307                 28,425
     Accounts receivable (net of allowance for doubtful
          accounts of $8,540 and $8,232 respectively)               77,744                121,562
     Refundable income taxes                                         6,466                 15,000
     Inventories                                                   220,668                212,975
     Prepaid expenses and other assets                              10,182                  7,485
     Deferred taxes                                                 35,441                 22,740
                                                                  --------               --------
          Total current assets                                     477,994                529,762
PROPERTY AND EQUIPMENT - NET                                       184,839                191,022
DEPOSITS AND OTHER ASSETS                                            7,540                  6,070
INTANGIBLE ASSETS - NET                                              3,398                  3,736
                                                                  --------               --------
TOTAL                                                             $673,771               $730,590
                                                                  ========               ========


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Accounts payable                                              $17,769                $25,346
     Accrued liabilities                                           103,265                130,532
     Current portion of long-term debt                                 659                    640
     Income taxes payable                                              987                  1,284
                                                                  --------               --------
          Total current liabilities                                122,680                157,802
LONG-TERM DEBT                                                       5,506                  5,865
DEFERRED AND OTHER LIABILITIES                                       6,016                  5,393
STOCKHOLDERS' EQUITY:
     Common Stock - shares outstanding:
              March 31, 1999: 32,991,585
          September 30, 1998: 32,696,394                           407,043                404,462
     Retained earnings                                             135,358                160,384
     Accummulated other comprehensive loss                          (2,832)                (3,316)
                                                                  --------               --------
     Stockholders' equity                                          539,569                561,530
                                                                  --------               --------
TOTAL                                                             $673,771               $730,590
                                                                  ========               ========
</TABLE>


            See Notes to Consolidated Condensed Financial Statements


                                       3
<PAGE>   4



                           SILICON VALLEY GROUP, INC.
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                Quarters Ended                 Six Months Ended
                                                                    March 31,                       March 31,
                                                         --------------------------        --------------------------
                                                            1999             1998             1999             1998
                                                         ---------        ---------        ---------        ---------

<S>                                                        <C>             <C>              <C>              <C>     
NET SALES                                                 $ 61,496        $ 195,872        $ 146,983        $ 384,579

COST OF SALES                                               47,326          118,358          108,783          232,677
                                                          --------        ---------        ---------        ---------

GROSS PROFIT                                                14,170           77,514           38,200          151,902

OPERATING EXPENSES:

     Research, development and related engineering          21,651           25,560           37,652           46,629
     Marketing, general and administrative                  20,094           39,469           39,567           76,156
                                                          --------        ---------        ---------        ---------

OPERATING INCOME (LOSS)                                    (27,575)          12,485          (39,019)          29,117

INTEREST AND OTHER INCOME-NET                                1,325            1,829            2,790            3,311

INTEREST EXPENSE                                              (200)            (255)            (574)            (509)
                                                          --------        ---------        ---------        ---------

INCOME (LOSS) BEFORE INCOME TAXES                          (26,450)          14,059          (36,803)          31,919

PROVISION (BENEFIT) FOR INCOME TAXES                        (8,456)           4,499          (11,777)          10,214
                                                          --------        ---------        ---------        ---------
NET INCOME (LOSS)                                         $(17,994)       $   9,560        $ (25,026)       $  21,705
                                                          ========        =========        =========        =========

NET INCOME (LOSS) PER SHARE - BASIC                       $  (0.55)       $    0.30        $   (0.76)       $    0.67
                                                          ========        =========        =========        =========
SHARES USED IN PER SHARE
     COMPUTATIONS - BASIC                                   32,833           32,345           32,796           32,311
                                                          ========        =========        =========        =========

NET INCOME (LOSS) PER SHARE - DILUTED                     $  (0.55)       $    0.29        $   (0.76)       $    0.66
                                                          ========        =========        =========        =========
SHARES USED IN PER SHARE
     COMPUTATIONS - DILUTED                                 32,833           32,989           32,796           33,090
                                                          ========        =========        =========        =========
</TABLE>


            See Notes to Consolidated Condensed Financial Statements


                                       4
<PAGE>   5


                           SILICON VALLEY GROUP, INC.
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                    Six Months Ended
                                                                       March 31,
                                                               --------------------------
                                                                  1999             1998
                                                               ---------        ---------
<S>                                                             <C>               <C>    
CASH FLOWS FROM OPERATING ACTIVITIES
     Net income (loss)                                          $(25,026)        $ 21,705
     Reconciliation to net cash provided
          by operating activities:
               Depreciation and amortization                      23,170           18,006
               Amortization of intangibles                           338              489
               Deferred income taxes                             (12,701)          (3,953)
               Changes in assets and liabilities:
                    Accounts receivable                           43,818          (16,684)
                    Inventories                                   (7,693)          (4,997)
                    Prepaid expenses                              (2,697)             540
                    Deposits and other assets                     (1,470)            (695)
                    Accounts payable                              (7,577)            (212)
                    Accrued and deferred liabilities             (26,329)           4,192
                    Income taxes payable/refundable                8,237              454
                                                                --------        ---------
               Net cash provided by (used in)
               operating activities                               (7,930)          18,845
                                                                --------        ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of temporary investments                          (22,946)          (5,186)
     Maturities of temporary investments                          30,233           20,575
     Purchases of property and equipment                         (16,987)         (47,150)
                                                                --------        ---------
               Net cash used for investing activities             (9,700)         (31,761)
                                                                --------        ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Repayment of debt                                              (340)          (1,365)
     Proceeds from borrowings                                         --              250
     Sale of Common Stock                                          2,581            3,026
                                                                --------        ---------
               Net cash provided by financing activities           2,241            1,911
                                                                --------        ---------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                               --           (3,208)
                                                                --------        ---------

NET DECREASE IN CASH AND EQUIVALENTS                             (15,389)         (14,213)

CASH AND EQUIVALENTS:
     Beginning of period                                         121,575          129,689
                                                                --------        ---------
     End of period                                              $106,186        $ 115,476
                                                                ========        =========
</TABLE>

            See Notes to Consolidated Condensed Financial Statements



                                       5
<PAGE>   6



                           SILICON VALLEY GROUP, INC.
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1.  CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The accompanying consolidated condensed financial statements have been prepared
by the Company without audit and reflect all adjustments, consisting only of
normal recurring adjustments, which in the opinion of management are necessary
to present fairly the financial position and the results of operations for the
interim periods. The statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. The interim
condensed consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 1998. Results for fiscal 1999 interim periods are not necessarily
indicative of results to be expected for the fiscal year ending September 30,
1999.

The Company uses a 52-53 week fiscal year ending on the Friday closest to
September 30. Both fiscal 1999 and 1998 contain 52 weeks.

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, after elimination of intercompany transactions
and balances.

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 consolidated condensed financial statements
and accompanying notes. The Company regularly assesses those estimates and,
while actual results may differ, management believes that the estimates are
reasonable.


2.  INVENTORIES

    Inventories are comprised of:
<TABLE>
<CAPTION>

                           March 31,   September 30,
                             1999          1998
                           ---------   -------------
                                (In thousands)

<S>                        <C>           <C>     
    Raw materials         $ 92,027       $103,738
    Work-in-process        122,041        103,362
    Finished goods           6,600          5,875
                          --------       --------
                          $220,668       $212,975
                          ========       ========

</TABLE>

3.  NET INCOME (LOSS) PER SHARE

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," effective October 1, 1997, which replaces prior earnings
per share (EPS) reporting and requires dual presentation of basic and diluted
EPS.

                                       6
<PAGE>   7

Basic net income (loss) per share is computed by dividing net income by the
weighted average number of common shares outstanding.

The quarter ended March 31, 1999 was a loss period, therefore common stock
equivalents would be anti-dilutive and were not included in the calculation of
diluted net loss per share. Options to purchase 3,700,000 shares of common stock
at prices ranging from $4.66 to $32.69 per share were outstanding at March 31,
1999 but were not included in the computation of diluted EPS. Diluted net income
per share includes an additional 644,000 shares at the quarter ended March 31,
1998 to reflect the potential dilution from shares issuable upon the assumed
exercise of dilutive stock options.

4.  REVENUE RECOGNITION

The Company recognizes revenue when the buyer accepts and takes title to the
equipment, generally upon shipment. During the quarter ended December 31, 1998,
the Company recognized approximately $20,000,000 of net sales to one customer
who accepted and took title to the related equipment, and agreed to normal
payment terms, but requested that the Company store the equipment until
predetermined shipment dates (none during the quarter ended March 31, 1999). At
March 31, 1999, the Company was storing a total of approximately $7,500,000 of
such equipment from this customer with shipment dates ranging through July 1999.

5.  COMPREHENSIVE INCOME (LOSS)

In the first quarter of fiscal 1999, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for the reporting and display of comprehensive
income. Components of comprehensive income (loss) include net income (loss),
unrealized gains (losses) on investments and foreign currency translation
adjustments. The adoption of SFAS No. 130 requires additional disclosure but
does not impact the Company's consolidated financial position, results of
operation or cash flows. For the three and six month periods ended March 31,
1999 and 1998, the components of total comprehensive income (loss) are as
follows: 
<TABLE>
<CAPTION>

                                           Three months ended            Six months ended
                                                March 31,                    March 31,
                                        ------------------------        ------------------------
                                           1999          1998              1999           1998
                                        --------        --------        --------        --------
                                               (In thousands)                 (In thousands)
                                                                      
<S>                                      <C>             <C>            <C>              <C>    
Net income (loss)                        $(7,032)        $12,145        $(25,026)        $21,705
Unrealized gain on Investments                --              --             169              --
Cumulative translation adjustment            392          (2,819)            315          (2,616)
                                        --------        --------        --------        --------
Other comprehensive income (loss)            392          (2,819)            484          (2,616)
                                        --------        --------        --------        --------
Total comprehensive income (loss)
                                         $(6,640)        $ 9,326        $(24,542)        $19,089
                                        ========        ========        ========        ========
</TABLE>

6.  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes annual and 



                                       7
<PAGE>   8

interim reporting standards for a Company's business segments and related
disclosures about its products, services, geographic areas and major customers.
This statement is required to be adopted in the Company's annual consolidated
financial statements for the fiscal year ending September 30, 1999. The Company
believes that the application of SFAS No. 131 will not have a material effect on
the consolidated financial statements.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivatives used for
hedging activities. It requires that all derivatives be recognized either as an
asset or liability, be measured at fair value and that the results of such
measurement be included either in the income statement or in stockholders'
equity, depending on the nature of the transaction. SFAS No. 133 is effective
for fiscal years beginning after June 15, 1999. The Company believes that the
application of SFAS No. 133 will not have a material effect on the Company's
consolidated financial statements.

7.  RESTRUCTURING AND RELATED CHARGES

During the fourth quarter of fiscal 1998, the Company recorded restructuring and
related charges of $33,680,000. The charge included costs of $28,521,000
resulting from the termination of the Company's previously announced 200-APS
photoresist processing system (the "200-APS charge") and a provision of
$5,159,000 for reductions in the Company's workforce that included severance
compensation and benefit costs.

Changes to the restructuring accrual in fiscal 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>

                                        200-APS
                         Severance   Inventory and                     Other
                            and         Purchase      Customer         Exit
                         Benefits     Commitments    Obligations       Costs          Total
                         --------    -------------   ----------       -------        -------
<S>                      <C>         <C>             <C>              <C>            <C>   
Balance at
September 30, 1998        $3,006        $ 1,832         $2,293          $ 201         $7,332

Incurred to date          (1,581)        (1,832)        (1,073)          (201)        (4,687)
                         -------        -------        -------        -------        -------

Balance at
March 31, 1999            $1,425        $    --         $1,220          $  --         $2,645
                         =======        =======        =======        =======        =======
</TABLE>


The Company expects to make cash payments of approximately $2,145,000 related to
the restructuring for the remaining six months of fiscal 1999, with the
remaining $500,000 in cash payments to occur in fiscal 2000. Substantially all
employee terminations will be completed by July 1999.



8. SUBSEQUENT EVENTS

On April 30, 1999 the Company signed a definitive agreement to acquire certain
assets and assume certain liabilities of the Semiconductor Equipment Group
("SEG") of Watkins-Johnson. The closing of the transaction is subject to
completion of Hart-Scott-Rodino review and other  customary conditions to
closing. At the closing date, the Company will make a preliminary payment to
Watkins-Johnson in the amount of approximately $6,000,000 and 



                                       8
<PAGE>   9

assume liabilities of approximately $40,000,000. These amounts are based upon
certain values of assets and liabilities at December 31, 1998 and subsequently
will be adjusted to reflect the changes in business activity through the date of
closing. In connection with this transaction the Company is negotiating an
arrangement with a third party to acquire SEG's manufacturing location in Scotts
Valley, California and lease it to the Company.

On May 5, 1999 Intel Corporation ("Intel") made a $15,000,000 equity
investment in the Company in the form of a purchase of 15,000 shares of newly
issued non-voting Series 1 Convertible Preferred Stock ("Series 1 Preferred").
The Series 1 Preferred investment is convertible into 1,111,111 shares of the
Company's Common Stock subject to adjustments for events of dilution in certain
circumstances such as stock splits or dividends. Intel has the option to
convert, at any time, it's Series 1 Preferred into shares of the Company's
Common Stock.

In connection with the Series 1 Preferred investment, Intel and the Company
entered into an agreement for the development of 157-nanometer lithography
technology. This agreement obligates the Company, among other things, to develop
and sell to Intel a predetermined number of initial development tools. Intel has
agreed to provide advance payments for the development and manufacture of these
machines based on predetermined milestones. Under certain conditions, the
Company is obligated to dedicate a certain amount of 157-nanometer unit
production output to Intel. The Company is required to use the proceeds from the
Series 1 Preferred investment and funds received under this development
agreement for the development of technology for use on 157-nanometer lithography
equipment.




                           SILICON VALLEY GROUP, INC.

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




The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are subject to
certain risks and uncertainties, including those discussed below, as well as
risk factors included in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998, that could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. Forward-looking statements are indicated by an asterisk (*) following
the sentence in which such statement is made. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.

RESULTS OF OPERATIONS

The Company designs, manufactures, markets and services semiconductor processing
equipment used in the fabrication of integrated circuits. The Company's products
are used in photolithography for exposure and photoresist processing, and in
deposition for oxidation/diffusion and low pressure 



                                       9
<PAGE>   10

chemical vapor deposition ("LPCVD"). The Company manufactures and markets
photolithography exposure SVGL products, photoresist processing Track products,
oxidation/diffusion and LPCVD Thermco products and certain precision optical
components.

The semiconductor industry into which the Company sells its products is highly
cyclical and has, historically, experienced periodic downturns that have had a
severe effect on the semiconductor industry's demand for semiconductor
processing equipment. As a result of the Asian economic crisis which began in
1997, an oversupply of certain semiconductor products, the impact of low cost
personal computers, and various other factors, semiconductor manufacturers have
reduced planned expenditures and cancelled or delayed the construction of new
fabrication facilities. This slowdown in demand began to impact the Company
during the first quarter of fiscal 1998 and has continued to impact the Company
through the second quarter of fiscal 1999. The slowdown in demand resulted in
the Company experiencing lower new customer orders, customer deferrals of
scheduled equipment delivery dates and, to a lesser extent, customer order
cancellations. Customer orders with scheduled delivery dates are referred to by
the Company as bookings. Second quarter fiscal 1999 bookings of $165,710,000
showed improvement over first quarter fiscal 1999 bookings of $87,286,000,
fourth quarter fiscal 1998 bookings of $65,936,000 and second quarter fiscal
1998 bookings of $100,442,000. However, second quarter fiscal 1999 bookings were
lower than fourth quarter fiscal 1997 bookings of $214,987,000. Last year's
lower bookings, order rescheduling and cancellations, have caused sales during
the first half of fiscal 1999 to decline from the corresponding period of the
prior year. A continued decrease in sales could result in further reductions in
the Company's gross margin and net income during the third and fourth quarters
of fiscal 1999.* There can be no assurance that the Company will not experience
further customer delivery deferrals, additional order cancellations or a
prolonged period of customer orders at reduced levels, any or a combination of
which would have a material adverse effect on the Company's business and results
of operations.*

In an effort to lessen the impact of these lower sales volumes, the Company took
several steps to reduce operating expenses including a reduction in workforce,
temporary shutdowns and the restructuring of certain portions of the Company's
business. During the third quarter of fiscal 1998, the Company reduced its
workforce by approximately 200 employees and shut down the majority of its
operations for five days. During the fourth quarter of fiscal 1998, the Company
shut down the majority of its operations for ten additional days and recorded
restructuring and related charges of $33,680,000. The restructuring and related
charges include costs of $28,521,000 resulting from the termination of the
Company's previously announced 200-APS photoresist processing system (the
"200-APS charge") and a provision of $5,159,000 for the fourth quarter fiscal
1998 reductions in the Company's workforce for approximately 950 employees.

Historically, the Company has relied on a limited number of customers for a
substantial percentage of its net sales. In fiscal 1998, the Company's two
largest customers accounted for 40% and 17% of net sales. During the first half
of fiscal 1999, this trend continued with these two customers accounting for 51%
and 7% of net sales. The Company believes that, for the foreseeable future, it
will continue to rely on a limited number of major customers for a substantial
percentage of its net sales.* As a result of delays in delivering initial
quantities of the subsequently terminated 200-APS Track product, one of the
Company's largest Track customers has decided to purchase systems with similar
capabilities from another supplier, which the Company expects will continue to
have an adverse effect on Track product sales in future periods.* (See "Risks
Inherent in the Company's Business - Rapid Technological Change; Dependence on
New Product Development"). The loss of any other significant customer, further
delays in shipments due to rescheduling or additional reductions in orders by a
significant customer, including reductions in orders due to market, economic or
competitive conditions in the semiconductor industry, or delays in the
introduction of newly developed products and product 



                                       10
<PAGE>   11

enhancements will further exacerbate the adverse effect the customer order
rescheduling and cancellations discussed above will have on the Company's
business and results of operations.*

During the first quarter of fiscal 1999, the Company recognized net sales of
approximately $20,000,000 from one customer who accepted and took title to the
related equipment and agreed to normal payment terms, but requested that the
Company store the equipment until predetermined shipment dates (none in quarter
ended March 31, 1999). At March 31, 1999, the Company was storing a total of
approximately $7,500,000 of such equipment from this customer with shipment
dates ranging through July 1999.

Net sales for the fiscal quarter ended March 31, 1999 were $61,496,000, down 28%
from net sales for the preceding quarter of $85,487,000 and 69% below net sales
of $195,872,000 for the corresponding period of the prior fiscal year. The
decrease in net sales compared to the preceding quarter and the second quarter
of fiscal 1998 was principally the result of lower shipments of SVGL and Track
products. The decrease in SVGL product shipments is primarily the result of the
timing of customer requirements and a minor production delay.

During the first half of fiscal 1999 net sales of $146,983,000 declined 62% from
first half of fiscal 1998 net sales of $384,579,000. The decrease in net sales
between periods is due to reduced shipments of SVGL, Track and Thermco products.

During the second quarter of fiscal 1999 the Company had bookings of
$165,710,000, an increase of approximately 90% over the preceding fiscal
quarter's bookings of $87,286,000, and an increase of 65% over the second
quarter fiscal 1998 bookings of $100,442,000.

The Company includes in backlog only those orders to which a purchase order
number has been assigned by the customer, with all terms and conditions agreed
upon and for which delivery has been specified within twelve months. The
Company's backlog at March 31, 1999 totaled $360,143,000, significantly above
both the March 31, 1998 backlog of $288,598,000 and the backlog of $255,928,000
at December 31, 1998. At March 31, 1999, the backlog included orders for 54
Micrascan photolithography systems. Additionally, the Company had orders for 6
additional systems with scheduled delivery dates outside the twelve-month
backlog window.

Gross margin was 23% in the second quarter of fiscal 1999, compared to 28.1%
during the preceding quarter and 39.6% in the second quarter of fiscal 1998. The
decline in gross margin during the second quarter of fiscal 1999 compared to the
previous quarter of fiscal 1999 was primarily the result of lower margins on
SVGL and Track product shipments offset in part by improved margins on Thermco
products resulting from reduced manufacturing variances. Second quarter fiscal
1999 gross margin declined from the corresponding period of the prior fiscal
year due to reduced volumes of Track, Thermco and Lithography products.

For the first six months of fiscal 1999 gross margin was 26% compared to 39.5%
for the corresponding period of the prior fiscal year. The decline from the
year-earlier period is due primarily to reduced volumes of Track, Thermco and
Lithography products resulting in reduced factory utilization.

Research, development and related engineering ("R&D") expenses are net of
funding received from outside parties under development agreements. Such funding
is typically payable upon the attainment of one or more development milestones
that are specified in the agreement. Neither the spending, nor the 



                                       11
<PAGE>   12

recognition of the funding related to the development milestones is ratable over
the term of the agreements. For all the periods being compared, such funding was
primarily related to agreements between SVGL and certain customers for the
development of a 193-nanometer Micrascan system. (See "SVG Lithography Systems,
Inc. (SVGL)").

R&D expenses were $21,651,000 (35% of net sales) for the second quarter of
fiscal 1999, $16,001,000 (19% of net sales) for the preceding quarter and
$25,560,000 (13% of net sales) for the second quarter of fiscal 1998. For the
second and first quarters of fiscal 1999 and the second quarter of fiscal 1998,
development funding of $600,000, $2,277,000, and $3,136,000, respectively, was
recognized and offset against R&D expense. R&D expense increased over the first
quarter of fiscal 1999 primarily in the SVGL division due to higher spending on
the Company's 157-nanometer development program and lower development-funding
offset against R&D expense. The decrease in R&D expense from the second quarter
of fiscal 1998 is primarily attributed to reduced spending on the 200-APS Track
product resulting from its fourth quarter fiscal 1998 cancellation, reduced
sustaining activities on Thermco products offset in part by reduced development
funding having been offset against R&D expense.

R&D expense for the first six months of fiscal 1999 was $37,652,000 (26% of net
sales) compared to $46,629,000 (12% of net sales) for the same period of the
prior fiscal year. For the six month periods ended March 31, 1999 and 1998,
funding recognized under joint development agreements and offset against R&D
expenditures was $2,877,000 and $5,504,000, respectively. The reasons for the
period to period decrease correspond to the year over year discussion above.

Marketing, general and administrative expenses (MG&A) were $20,094,000 (33% of
net sales) for the second quarter of fiscal 1999 compared to $19,473,000 (23% of
net sales) for the preceding quarter and $39,469,000 (20% of net sales) for the
second quarter of fiscal 1998. During the first half of fiscal 1999, MG&A
expenses were $39,567,000 (27% of net sales) compared to $76,156,000 (20% of net
sales) for the comparable period of fiscal 1998. The increase in MG&A over the
preceding quarter was principally due to higher marketing and product support
costs offset in part by lower shipment related costs. The decrease in MG&A from
the year earlier periods is primarily due to lower shipment related costs and
reduced levels of employee headcount resulting from the reductions in force of
the fourth quarter of fiscal 1998.

The Company had an operating loss of $27,575,000 for the second quarter of
fiscal 1999 compared to an operating loss of $11,444,000 for the preceding
quarter and an operating profit of $12,485,000 for the second quarter of fiscal
1998. The increased operating loss over the previous quarter was primarily the
result of lower net sales at reduced gross margin and increased R&D
expenditures. In comparison to the second quarter of fiscal 1998, operating
profit declined due to significantly lower net sales at reduced gross margin
offset in part by lower expenses.

For the first six months of fiscal 1999 the Company had an operating loss of
$39,019,000 compared to operating income of $29,117,000 during the corresponding
period of the prior fiscal year. The reasons for the period to period decrease
correspond to the year over year discussion above.

Interest and other income for the second quarter of fiscal 1999 was $1,325,000
compared to $1,465,000 in the previous quarter of fiscal 1999 and $1,829,000
during the second quarter of the previous fiscal year. For the first six months
of fiscal 1999 interest and other income was $2,790,000 compared to $3,311,000
for the comparable period of fiscal 1998. The decrease in second quarter and


                                       12
<PAGE>   13

first half fiscal 1999 interest and other income from the previous quarter and
the year earlier periods was primarily due to lower average cash balances
available for investment.

Interest expense was $200,000 during the second quarter of fiscal 1999, compared
to $374,000 in the preceding quarter and $255,000 in the second fiscal quarter
of 1998. During the first six months of fiscal 1999, interest expense was
$574,000 compared $509,000 during the first half of fiscal 1998.

The Company recorded a 32% income tax benefit for the first half of fiscal 1999
compared to a 50% tax benefit for fiscal 1998. Variations in the Company's
effective tax rate relate primarily to changes in the geographic distribution of
the Company's pretax income and certain tax free and tax advantaged interest
income.

The Company had a net loss of $17,994,000 ($0.55 diluted loss per share) for the
second quarter of fiscal 1999 compared to net income of $9,560,000 ($0.29
diluted earnings per share) for the second quarter of fiscal 1998 and a net loss
of $7,032,000 ($0.21 diluted loss per share) for the first quarter of fiscal
1999. For the first half of fiscal 1999, the Company had a net loss of
$25,026,000 ($0.76 diluted loss per share), compared to net income of
$21,705,000 ($0.66 diluted earnings per share) for the first six months of
fiscal 1998.

RISKS INHERENT IN THE COMPANY'S BUSINESS

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

Rapid Technological Change; Dependence on New Product Development. Semiconductor
manufacturing equipment and processes are subject to rapid technological change.
The Company believes that its future success will depend upon its ability to
continue to enhance its existing products and their process capabilities and to
develop and manufacture new products with improved process capabilities that
enable semiconductor manufacturers to fabricate semiconductors more
efficiently.* The Company is developing Track and Lithography products, and has
shipped limited quantities of Thermco products capable of processing 300mm
wafers in anticipation of the industry's transition to this larger wafer
standard.* Failure to successfully introduce these or any other new products in
a timely manner could result in the loss of competitive position and could
reduce sales of existing products.* In addition, new product introductions could
contribute to quarterly fluctuations in operating 


                                       13
<PAGE>   14

results as orders for new products commence and increase the potential for a
decline in orders of existing products, particularly if new products are
delayed.*

From time-to-time, the Company has experienced delays in the introduction of its
products and product enhancements due to technical, manufacturing and other
difficulties and may experience similar delays in the future.* For example,
during fiscal 1996, the Company announced the subsequently terminated 200-APS
Track product. Initial shipments of the 200-APS were scheduled to commence
during the second quarter of fiscal 1997, and were delayed until the second
quarter of fiscal 1998. This delay, as well as industry developments, caused the
Company to implement a plan, which was announced on September 30, 1998, to
terminate future development and shipments of its 200-APS products, and to
concentrate its efforts on completing a new product which has been in
development for approximately one year. There can be no assurance that the
Company will not experience delays in development or manufacturing problems
related to its new product as a result of instability of the design of either
the hardware or software elements of the new technology, or be able to
efficiently manufacture the new product or other products.* These issues could
result in product delivery delays and a subsequent loss of future sales.*
Semiconductor manufacturers tend to select either a single supplier or a primary
supplier for a certain type of equipment. The Company believes that prolonged
delays in delivering initial quantities of newly developed products to multiple
customers, whether due to the protracted release of product from engineering
into manufacturing or due to manufacturing difficulties, could result in
semiconductor manufacturers electing to install competitive equipment in their
fabrication facilities and could preclude industry acceptance of the Company's
products.* For example, the Company's largest Track customer has decided to
secure deliveries from another source, a decision the Company believes is
primarily due to the delay and subsequent termination of the 200-APS. The
release into the market of a new technology Track product will not be
accomplished for a number of quarters.* As a result, competitors will increase
their market share, and it will be increasingly more difficult for the Company
to regain market position.* The Company's inability to effect the timely
production of new products or any failure of these products to achieve market
acceptance could have a material adverse effect on the Company's business and
results of operations.*

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

Competition. The semiconductor equipment industry is intensely competitive. The
Company faces substantial competition both in the United States and other
countries in all of its products. The Company's competitors include Tokyo
Electron, Ltd. ("TEL") and DaiNippon Screen Mfg. Co., Ltd. in photoresist
processing equipment; TEL and Kokusai Electric Co., Ltd. in oxidation/diffusion
and LPCVD equipment; and Nikon, Canon, ASM Lithography and other suppliers of
photolithography exposure equipment, and projection aligners. The trend toward
consolidation in the semiconductor processing equipment industry has made it
increasingly important to have the financial resources necessary to compete
effectively across a broad range of product offerings, to fund customer service
and support on a worldwide basis and to invest in both product and process
research and development. 


                                       14
<PAGE>   15

Significant competitive factors include technology and cost of ownership, a
formula which includes such data as initial price, system throughput and
reliability and time to maintain or repair. Other competitive factors include
familiarity with particular manufacturers' products, established relationships
between suppliers and customers, product availability and technological
differentiation. Occasionally, the Company has encountered intense price
competition with respect to particular orders and has had difficulty
establishing new relationships with certain customers who have long-standing
relationships with other suppliers. The Company believes that outside Japan and
the Pacific Rim it competes favorably with respect to most of these factors.*
(See "Importance of Japanese and Pacific Rim Markets".)

Many of the Company's competitors are Japanese corporations. In light of the
recent economic downturn in certain Asian countries that represent significant
markets for such competitors, the Company believes that an oversupply of
equipment from certain Japanese competitors may cause more severe price
competition in its non-Asian markets.* To compete effectively in these markets,
the Company may be forced to reduce prices, which could cause further reduction
in net sales and gross margins and, consequently, have a material adverse effect
on the Company's financial condition and results of operations.*

Importance of the Japanese and Pacific Rim Markets. The Company's customers are
heavily concentrated in the United States and Europe. The Japanese and Pacific
Rim markets (including fabrication plants located in other parts of the world
which are operated by Japanese and Pacific Rim semiconductor manufacturers)
represent a substantial portion of the overall market for semiconductor
manufacturing equipment. To date, neither the Company's shipments into Japan nor
the Pacific Rim have been significant. The Company believes that the Japanese
companies with which it competes have a competitive advantage because their
dominance of the Japanese and Pacific Rim semiconductor equipment market
provides them with the sales and technology base to compete more effectively
throughout the rest of the world. The Company is not engaged in any significant
collaborative effort with any Japanese or Pacific Rim semiconductor
manufacturers. As a result, the Company may be at a competitive disadvantage to
the Japanese equipment suppliers that are engaged in such collaborative efforts
with Japanese and Pacific Rim semiconductor manufacturers. The Company believes
that it must substantially increase its share of these markets if it is to
compete as a global supplier.* Further, in many instances, Japanese and Pacific
Rim semiconductor manufacturers fabricate devices such as dynamic random access
memory devices ("DRAMs"), with potentially different economic cycles than those
affecting the sales of devices manufactured by the majority of the Company's
U.S. and European customers. Failure to secure customers in these markets may
limit the global market share available to the Company and may increase the
Company's vulnerability to industry or geographic downturns.* Recent economic
difficulties in certain Asian countries, particularly Korea, will adversely
affect the Company's ability to penetrate such markets.*

In the past, several of the Company's larger customers have entered into joint
ventures ("JV") with European, Japanese or Pacific Rim semiconductor
manufacturers. In such cases, the Company has encountered intense price
competition from foreign competitors who are suppliers to the non-U.S. member of
the JV. Further, in certain instances the Company has not secured the equipment
order when the non-U.S. member has had the responsibility for selecting the
equipment to be used by the JV in its U.S. operations. There can be no assurance
that as the Company's customers form additional alliances, whether in the U.S.
or in other parts of the world, that the Company will be successful in obtaining
equipment orders or that it will be able to obtain orders with sufficient gross
margin to 



                                       15
<PAGE>   16

generate profitable transactions, either of which could have an adverse effect
on the Company's results of operations.*

Throughout the Pacific Rim, the Company is attempting to compete with major
equipment suppliers having significant market share and established service and
support infrastructures in place. Although the Company has invested in the
staffing and facilities that it believes are necessary to sell, service and
support customers in the Pacific Rim, it anticipates that it will encounter
significant price competition as well as competition based on technological
ability.* There can be no assurance that the Company's Pacific Rim operations
will be profitable, even if it is successful in obtaining significant sales into
this region.* Further, due to recent economic issues in certain Asian countries,
particularly Korea, the Company's ability to penetrate such markets has been
more difficult. Failure to secure customers in these markets would have an
adverse effect on the Company's business and results of operations.*

Risks Associated with Acquisition of Watkins-Johnson Company's Semiconductor
Equipment Group. On April 30, 1999 the Company signed a definitive agreement to
purchase the Semiconductor Equipment Group ("SEG") from Watkins-Johnson. The
Company faces significant risks associated with the acquisition of SEG. The
acquisition is scheduled to close in the third quarter of fiscal 1999 and is
subject to a number of conditions to closing, including Hart-Scott-Rodino
review. There can be no assurance that the Company will close the acquisition or
realize the desired benefits of this acquisition.* Acquisitions inherently
entail numerous risks, including difficulties in the assimilation of acquired
operations, technologies and products, diversion of management's attention from
other business concerns, and potential loss of key employees of acquired
organizations.* In order to successfully integrate SEG, the Company must, among
other things, continue to attract and retain key personnel, integrate the
acquired products, technology and information systems from engineering, sales
and marketing perspectives, and consolidate functions and facilities, which may
result in future charges to streamline the combined operations. Difficulties
encountered in the integration of SEG may have a material adverse effect on the
Company. *

Year 2000. As the Year 2000 approaches, a universal issue has emerged regarding
how existing application software programs and operating systems can accommodate
date values. The Company has completed the modification of its internal-use
computer software for the Year 2000. The third party costs associated with such
modifications were not material and were expensed in fiscal 1998. The Company
does not segregate internal costs incurred to assess and remedy deficiencies
related to the Year 2000 problem or modifications to its products, however, the
Company has incurred approximately $124,000 with third parties to identify and
modify its internal-use computer systems. Although the Company believes that the
solutions, which were extensively tested, have resulted in its internal-use
systems being Year 2000 compliant, there can be no assurance that unforeseen
problems that could disrupt operations will not arise, or that the Company will
not be required to expend further cost and effort to solve such problems.*

The Company has evaluated its products and identified those areas containing
date sensitive Year 2000 issues. The Company has informed its customers of ship
dates for Year 2000 compliant products and has made available for potential sale
the necessary modifications to bring previously shipped products into
compliance. The Company is in the process of contacting its suppliers and
service providers to ascertain their state of readiness and compliance for Year
2000 issues. The Company will continue to monitor their progress and compliance
for these issues. There can be no assurance, however, that the Company's
suppliers and service providers will timely provide the Company with products or
services 



                                       16
<PAGE>   17

which are Year 2000 compliant. Any failure to do so by such third parties could
have a material adverse impact on the Company's results of operations.*

At this time the Company does not feel it is necessary to develop a contingency
plan. As risks are identified, plans will be developed and implemented as
required.

Although the Company believes its Year 2000 plans will be successful, there can
be no assurance that unforeseen problems will not happen which could have a
material adverse effect on the Company.*

Business Interruption. The Company manufactures its Track products in San Jose,
California and substantially all of its Thermco products in Orange, California.
Tinsley's optical components are manufactured in Richmond and North Hollywood,
California. These California facilities are located in seismically active
regions. SVGL's photolithography exposure products are manufactured in Wilton
and Ridgefield, Connecticut. If the Company were to lose the use of one of its
facilities as a result of an earthquake, flood or other natural disaster, the
resultant interruptions in operations would have a material adverse effect on
the Company's results of operations and financial condition.*

Euro Conversion. On January 1, 1999, 11 of the 15 member countries of the
European Union established fixed conversion rates between each of their existing
sovereign currencies and the Single European Currency ("euro"). The
participating countries adopted the euro as their common legal currency on that
date, with a transition period through January 2002 regarding certain elements
of the Euro change. In January 1999, the Company implemented changes to its
internal systems to make them euro capable. The cost of system modifications to
date has not been material, nor are future system modifications expected to be
material.* The Company does not expect the transition to, or use of, the euro to
have a material adverse effect on the Company's results of operations and
financial condition.*

SVGL - Uncertain Market for Micrascan Products. The Company believes that the
photolithography exposure equipment market is one of the largest segments of the
semiconductor processing equipment industry.* To address the market for advanced
photolithography exposure systems, the Company has invested and expects to
continue to invest substantial resources in SVGL's Micrascan technology and its
family of Micrascan DUV step-and-scan photolithography systems, capable of
producing line widths of .10 micron and below. The development of a market for
the Company's Micrascan step-and-scan photolithography products will be highly
dependent on the continued trend towards finer line widths in integrated
circuits and the ability of other lithography manufacturers to keep pace with
this trend through either enhanced technologies or improved processes.* The
Company believes DUV lithography will be required to fabricate devices with line
widths below 0.3 micron.* Semiconductor manufacturers can purchase DUV steppers
to produce product at .25 micron line widths. However, the Company believes that
as devices increase in complexity and size and require finer line widths, the
technical advantages of DUV step-and-scan systems, as compared to DUV steppers,
will enable semiconductor manufacturers to achieve finer line widths with
improved critical dimension control which will result in higher yields of faster
devices.* The Company also believes that the industry transition to DUV
step-and-scan systems will accelerate in calendar 1999 and that advanced
semiconductor manufacturers are beginning to require volume quantities of
production equipment as advanced as the current and pending versions of
Micrascan to produce both critical and to some degree sub-critical layers of
semiconductor devices.* Currently, competitive DUV step-and-scan equipment
capable of producing .25 micron line widths and below is available in limited
quantities from two competitors, and the Company believes that at least one
other manufacturer of advanced photolithography systems will begin limited
shipments 



                                       17
<PAGE>   18

of step-and-scan machines in the near future.* There can be no assurance that
the Company will be successful in competing with such systems.* Further, if
manufacturers of DUV steppers are able to further enhance existing technology to
achieve finer line widths sufficiently to erode the competitive and
technological advantages of DUV step-and-scan systems, or other manufacturers of
step-and-scan systems are successful in supplying sufficient quantities of
product in a timely manner that are technically equal to or better than the
Micrascan, demand for the Micrascan technology may not develop as the Company
expects.*

The Company believes that advanced logic devices and DRAMs will require
increasingly finer line widths.* Consequently, SVGL must continue to develop
advanced technology equipment capable of meeting its customers' current and
future requirements while offering those customers a progressively lower cost of
ownership.* In particular, the Company believes that it must continue its
development of future systems capable of printing line widths finer than .10
micron and processing 300mm wafers.* Any failure by the Company to develop the
advanced technology required by its customers at progressively lower costs of
ownership could have a material adverse impact on the Company's financial
condition and results of operations.*

The Company believes that for SVGL to succeed in the long term, it must sell its
Micrascan products on a global basis. The Japanese and Pacific Rim markets
(including fabrication plants located in other parts of the world which are
operated by Japanese and Pacific Rim semiconductor manufacturers) represent a
substantial portion of the overall market for photolithography exposure
equipment. To date, the Company has not been successful penetrating either of
these markets. (See "Importance of the Japanese and Pacific Rim Markets".)

SVGL - Need to Increase Manufacturing Capacity and System Output. The Company
believes that its ability to supply systems in volume will be a major factor in
customer decisions to commit to the Micrascan technology.* Based upon its
forecast of continued growth in demand, the transition from steppers to
step-and-scan equipment for photolithography equipment, and potential future
demand for advanced lithography products, the Company has been in the process of
increasing SVGL's production capacity under an extremely aggressive expansion
schedule. In August 1996, as part of this expansion, the Company purchased from
The Perkin-Elmer Corporation a 243,000 square foot facility occupied by SVGL in
Wilton, Connecticut and an additional 201,000 square foot building, which SVGL
now occupies, in Ridgefield, Connecticut. Through fiscal 1998, the Company has
invested in significant capital improvements related to the buildings purchased
and the equipment required to expand the production capabilities of SVGL. While
the Company intends to continue certain of the expansion activities, it may not
invest in all of the metrology and other equipment required to maximize
manufacturing capacity until industry demand recovers.* However, the Company
plans to continue increasing capacity to produce optical components, thus
enabling it to quickly respond to customer requirements. Once demand recovers,
the timely construction and equipping of facilities to successfully complete the
increase in capacity will require the continued recruitment, training and
retention of a high quality workforce, as well as the achievement of
satisfactory manufacturing results on a scale greater than SVGL has attempted in
the past. There can be no assurance that demand will recover or, that if it
does, that the Company can manage these efforts successfully. Any failure to
successfully manage such efforts could result in product delivery delays and a
subsequent loss of future revenues. In particular, the Company believes that
protracted delays in delivery quantities of current and future Micrascan
products could result in semiconductor manufacturers electing to install
competitive equipment in their advanced fabrication facilities, which could
impede acceptance of the Micrascan products on an industry-wide basis.* This
could result in the Company's operating results



                                       18
<PAGE>   19

being adversely affected by the increase in fixed costs and operating expenses
related to increases in production capacity if net sales, for any reason, do not
increase commensurately.*

The time required to build a Micrascan system is significant. If SVGL is to be
successful in supplying increased quantities of Micrascan systems, it will not
only need to be able to build more systems, it will need to build them faster.*
SVGL will require additional trained personnel, additional raw materials and
components and improved manufacturing and testing techniques to both facilitate
volume increases and shorten manufacturing cycle time.* To that end, SVGL is
continuing to develop its vendor supply infrastructure, and implement
manufacturing improvements.* Additionally, the Company believes that once
industry demand recovers, it must resume increasing its factory, field service
and technical support organization staffing and infrastructure to support the
anticipated customer requirements.* There can be no assurance that the Company
will not experience manufacturing difficulties or encounter problems in its
attempt to increase production and upgrade or expand existing operations.*

One of the most critical components of the Micrascan systems is the projection
optics, which are primarily manufactured by SVGL. As part of its overall
investment in capacity, the Company has increased SVGL's optical manufacturing
floor space. The Company believes that in order for SVGL to be a viable supplier
of advanced lithography systems in the future, it must successfully reduce the
cycle times required to build projection optics.*

On November 26, 1997, the Company acquired Tinsley Laboratories, Inc. ("TLI") in
exchange for approximately 1,091,000 shares of Company Common Stock. TLI
designs, manufactures and sells precision optical components, assemblies and
systems to customers in a variety of industries and research endeavors. The
primary reasons for the acquisition were TLI's technology and expertise relating
to aspherical lenses, a key component of SVGL's photolithography products, the
adaptation of certain of TLI's manufacturing processes by SVGL and TLI's
commencement of the fabrication of non-aspherical lenses which are currently
produced by SVGL. However, there can be no assurance that TLI's manufacturing
technology is scaleable, or that such expertise can be transferred without
substantial time or expense, if at all.* The inability of SVGL to transfer this
production technology for use in processes of a substantially larger scale or
the inability of TLI to manufacture non-aspherical lenses for SVGL in sufficient
quantities to realize efficiencies of scale could adversely affect the Company's
ability to realize any significant benefits from the acquisition of TLI.*

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

SVGL - Sole Source Materials and Components. Most raw materials and components
not produced by the Company are available from more than one supplier. However,
certain raw materials, components and subassemblies are obtained from single
sources or a limited group of suppliers. Although the Company seeks to reduce
its dependence on these sole and limited source suppliers, and the Company has
not experienced significant production delays due to unavailability or delay in
procurement of component parts or raw materials to date, disruption or
termination of certain of these sources could occur and such disruptions could
have at least a temporary adverse effect on the Company's business 



                                       19
<PAGE>   20

and results of operations.* Moreover, a prolonged inability to obtain certain
components could have a material adverse effect on the Company's business and
results of operations and could result in damage to customer relationships.*

The raw material for a proprietary component of the optical system for the
Micrascan is available from only one supplier. The supplier has expanded its
capacity to meet SVGL's projected long-term requirements and has created and
stored agreed upon quantities of safety stock. There can be no assurance that
the supplier will be able to provide acceptable quantities of material required
by SVGL.* Additionally, a version of the Company's Micrascan III
photolithography system utilizes an Excimer laser that is manufactured in volume
by only one supplier, which until the first quarter of fiscal 1998 was the only
supplier the Company had determined could meet its specifications. SVGL has
recently qualified an additional source of lasers for its current and future
versions of Micrascan products, allowing the potential for the integration of
such lasers into its system configurations.* However, there can be no assurance
that its customers will be receptive to procuring products with lasers from this
supplier, or the supplier will be able to provide product of sufficient quantity
and quality. If these suppliers were unable to meet their commitments, SVGL
would be unable to manufacture the quantity of products required to meet the
anticipated future demand, which would have a material adverse effect on the
Company's business and results of operations.*

SVGL - Research and Development Funding. Historically, the Company has depended
on external funding to assist in the high cost of development in its
photolithography operation. Beginning in fiscal 1996, the Company entered into
agreements with certain customers (the "Participants") whereby each agreed to
assist in funding the Company's development of an advanced technology 193-
nanometer Micrascan system. In exchange for such funding, each Participant
received the right to purchase one such system and, in addition, received a
right of first refusal (ratable among such Participants) to all such machines
manufactured during the first two years following the initial system shipments.
For each initial system ordered, each Participant agreed to fund $5,000,000 in
such development costs. The agreements call for each Participant to pay
$1,000,000 of initial development funding and four subsequent payments of
$1,000,000 upon the completion of certain development milestones. The
Participants may withdraw from the development program without penalty, but
payments made against completed development milestones are not refundable and
all rights to future equipment are forfeited. At March 31, 1999, the Company had
received $20,000,000 in funding from Participants and had recognized $21,690,000
of the program's total $24,000,000 against research and development
expenditures. Three competitors of the Company have either announced the
development of or have shipped 193-nanometer products. There can be no
assurances that the Participants will remain in the program.* In the event that
the Company does not receive the funding anticipated under the agreements, it
would be required to replace the shortfall from its own funds or other sources.
If the Company were required to use its own funds, its research and development
expenses would increase and its operating income would be reduced
correspondingly. The agreements with the Participants stipulate that if the
Company receives funding for the development program in excess of $25,000,000,
it will issue, ratably to the Participants, credits totaling such excess in the
form of a cash discount which can be applied to the purchase of additional
products by each Participant. There is no assurance that the Company will
receive all funding which it currently anticipates or that it will be able to
obtain future outside funding beyond that which it is currently receiving, and
any failure to do so could have a material adverse impact on the Company's
results of operations.*

In May 1999, the Company entered into an agreement with Intel Corporation
("Intel") for the development of 157-nanometer lithography technology. This
agreement obligates the Company among 



                                       20
<PAGE>   21
other things to develop and sell to Intel a predetermined number of initial
development tools. Intel has agreed to provide advanced payments for the
development and manufacture of these machines, based upon predetermined
milestones. Separately, Intel has made a $15,000,000 investment in the Company
in the form of a purchase of Series 1 Convertible Preferred Stock (see Note 8 to
Consolidated Condensed Financial Statements). Under certain conditions, the
Company is obligated to dedicate a certain amount of its 157-nanometer unit
production output to Intel. The Company is required to use the proceeds from the
Series 1 Preferred investment and funds received under the development agreement
for the development of technology for use on 157-nanometer lithography
equipment. There can be no assurance that the Company will be successful in
developing 157-nanometer technology or will be able to manufacture significant
quantities of machines to satisfy its obligations to Intel or other customers.*

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

SVGL - Future Profitability. If SVGL is to attain its objective of being a
volume supplier of advanced photolithography products, the Company believes that
it must expand its customer base to include additional customers from whom it
secures and successfully fulfills orders for production-quantities of Micrascan
products.* The Company believes that in light of the downturn in industry
demand, costs associated with the continued development of the Micrascan
technology, the expansion of SVGL's manufacturing capacity, the related increase
in manpower and customer support, and the potential difficulties inherent in
manufacturing sub-.25 micron Micrascan products, in particular the projection
optics required for these products, there can be no assurance that SVGL will be
able to operate profitably in the future.*

LEGAL PROCEEDINGS

On or about August 12, 1998, Fullman International and Fullman Company
(collectively, "Fullman") initiated a lawsuit in the United States District
Court for the District of Oregon alleging a cause of action for fraudulent
transfer in connection with a settlement the Company had previously entered into
resolving its claims against a Thailand purchaser of the Company's equipment. In
its complaint against the Company, the plaintiff, another creditor of the
Thailand purchaser, alleges damages of approximately $11,500,000 plus interest.
The Company has successfully moved to transfer the case to the United States
District Court for the Northern District of California.

While the outcome of such litigation is uncertain, the Company believes it has
meritorious defenses to the claims and intends to conduct a vigorous defense.
However, an unfavorable outcome in this matter could have a material adverse
effect on the Company's financial condition.*

In addition to the above, the Company, from time to time, is party to various
legal actions arising out of the normal course of business, none of which is
expected to have a material effect on the Company's financial position or
operating results.*


                                       21
<PAGE>   22

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 1999, cash and cash equivalents and temporary investments totaled
$127,493,000, down $22,507,000 from the September 30, 1998 balance of
$150,000,000. The decrease was primarily attributable to the net loss during the
first half of fiscal 1999, the reduction of accrued liabilities and accounts
payable associated with lower business volumes and the purchase of capital
equipment, offset in part by a reduction of receivables caused by lower business
volumes, depreciation and amortization and the refund of income taxes.

On June 30, 1998, the Company entered into an unsecured $150,000,000 bank
revolving line of credit agreement that expires June 30, 2001. Advances under
the line bear interest at the prime rate or 0.65% to 1.50% over LIBOR. The
agreement includes covenants regarding liquidity, profitability, leverage, and
coverage of certain charges and minimum net worth and prohibits the payment of
cash dividends. On May 14, 1999, certain of the covenants were amended, in part
to allow for the Company's second quarter fiscal 1999 net loss. The Company is
in compliance with the covenants as amended. At May 14, 1999, there were no
borrowings outstanding under the facility.

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




                                       22
<PAGE>   23



                           PART II. OTHER INFORMATION

                           SILICON VALLEY GROUP, INC.




ITEM 1.        LEGAL PROCEEDINGS.

               On or about August 12, 1998, Fullman International and Fullman
               Company (collectively, "Fullman") initiated a lawsuit in the
               United States District Court for the District of Oregon alleging
               a cause of action for fraudulent transfer in connection with a
               settlement the Company had previously entered into resolving its
               claims against a Thailand purchaser of the Company's equipment.
               In its complaint against the Company, the plaintiff, another
               creditor of the Thailand purchaser, alleges damages of
               approximately $11,500,000 plus interest. The Company has
               successfully moved to transfer the case to the United States
               District Court for the Northern District of California.

               While the outcome of such litigation is uncertain, the Company
               believes it has meritorious defenses to the claims and intends to
               conduct a vigorous defense. However, an unfavorable outcome in
               this matter could have a material adverse effect on the Company's
               financial condition.*

               In addition to the above, the Company, from time to time, is
               party to various legal actions arising out of the normal course
               of business, none of which is expected to have a material effect
               on the Company's financial position or operating results.*


ITEM 2.        CHANGES IN SECURITIES.

               None.


ITEM 3.        DEFAULTS UPON SENIOR SECURITIES.

               None.


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

               (a)  The Annual Meeting of Stockholders of the Company was held
                    on February 23, 1999 (the "Annual Meeting"). The vote of
                    holders of record of 32,819,438 shares of the Company's
                    Common Stock outstanding at the close of business on 
                    December 29, 1998 was solicited by proxy pursuant to 
                    Regulation 14A under the Securities Act of 1934.

               (b)  The following persons were elected Directors of the Company
                    at the Annual Meeting:



                                       23
<PAGE>   24
<TABLE>
<CAPTION>

                                             Votes Withholding
                            Votes For           Authority
                            ---------           ---------

<S>                          <C>                 <C>    
Papken S. DerTorossian       21,020,832          322,000
William A. Hightower         21,043,062          299,770
William L. Martin            21,025,881          316,951
Nam P. Suh                   21,038,025          304,807
Lawrence Tomlinson           21,048,259          294,573
Kenneth M. Thompson          21,044,822          298,010
</TABLE>

           (c) The Company's 1996 Stock Plan was amended to increase the number
               of shares available for issuance thereunder by 1,500,000 shares
               to an aggregate of 3,000,000 shares. The Stockholders' vote on
               the amendment was 8,303,789 shares FOR; 6,393,492 shares AGAINST;
               228,286 shares ABSTAINED from voting; and 6,417,265 shares were
               NON-VOTES.

           (d) The Company's 1996 Employee Stock Purchase Plan was amended to
               increase the number of shares available for issuance thereunder
               by 750,000 to an aggregate of 1,750,000 shares. The Stockholders'
               vote on the amendment was 13,683,888 shares FOR; 1,013,837 shares
               AGAINST; 227,842 shares ABSTAINED from voting; and 6,417,265
               shares were NON-VOTES.

           (e) The Company's 1996 Employee Stock Purchase Plan was amended to
               provide for an annual increase, commencing on October 1, 1999, in
               the number of shares reserved for issuance thereunder equal to
               the lessor of: (i) 750,000 shares, (ii) 1.5% of the outstanding
               shares of Common Stock of the Company or (iii) a number of shares
               determined by the Board of Directors. The Stockholders' vote on
               the amendment was 11,385,516 shares FOR; 3,277,272 shares
               AGAINST; 261,679 shares ABSTAINED from voting; and 6,418,365
               shares were NON-VOTES.


ITEM 5.       OTHER INFORMATION.

              None.


ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K.

              (a) Exhibits.

               4.2      Certificate of Designation of Series 1 Convertible
                        Preferred Stock of Silicon Valley Group, Inc.

               10.48    Registration Rights agreement dated May 5, 1999 by and
                        among Silicon Valley Group, Inc., a Delaware corporation
                        and Intel Corporation, a Delaware corporation.

               10.49    Second Amendment to Credit Agreement, dated May 14, 1999
                        by and among the Registrant, ABN Amro Bank, N.V. as
                        Agent and certain Lenders with respect thereto.

                                       24
<PAGE>   25

                27.0    Financial Data Schedule for the fiscal quarter ended
                        March 31, 1999.

                (b)  Reports on Form 8-K.

                    None.



                                       25
<PAGE>   26




                           SILICON VALLEY GROUP, INC.
                                   SIGNATURES


Pursuant to the requirements 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.


                                               SILICON VALLEY GROUP, INC.
                                               .................................
                                                       (Registrant)




Date:   May 17, 1999                       By: /s/ Papken S. Der Torossian      
                                                   -----------------------------
                                                    Papken S. Der Torossian
                                                    Chief Executive Officer and
                                                    Chairman of the Board



Date:   May 17, 1999                       By: /s/ Russell G. Weinstock   
                                                   -----------------------------
                                                   Russell G. Weinstock
                                                   Vice President Finance and
                                                   Chief Financial Officer





                                       26


<PAGE>   27

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number         Description
-------        -----------
<S>            <C> 
   4.2         Certificate of Designation of Series 1 Convertible Preferred
               Stock of Silicon Valley Group, Inc.

 10.48         Registration Rights agreement dated May 5, 1999 by and among
               Silicon Valley Group, Inc., a Delaware corporation and Intel
               Corporation, a Delaware corporation.

 10.49         Second Amendment to Credit Agreement, dated May 14, 1999 by and
               among the Registrant, ABN Amro Bank, N.V. as Agent and certain
               Lenders with respect thereto.

  27.0         Financial Data Schedule for the fiscal quarter ended
               March 31, 1999.
</TABLE>