<PAGE>   1

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                                  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, 2001.

                                       or

( )  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 27, 2001 was 35,366,433.


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<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,
        2001 and September 30, 2000                                             3

        Consolidated Condensed Statements of Operations for the
        Quarters and Six Months Ended March 31, 2001 and 2000                   4

        Consolidated Condensed Statements of Cash Flows for
        the Six Months Ended March 31, 2001 and 2000                            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                                                    22

SIGNATURES                                                                     24
</TABLE>



                                       2
<PAGE>   3

PART I.  FINANCIAL INFORMATION
SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)                           MARCH 31,      SEPTEMBER 30,
                                                                 2001             2000
                                                                 ----             ----
                                                              (UNAUDITED)
<S>                                                            <C>              <C>
ASSETS

Current Assets:
     Cash and equivalents                                      $  50,538        $ 105,954
     Short-term investments                                        5,000           20,987
     Accounts receivable (net of allowance of $5,308 and
         $4,973 respectively)                                    224,979          218,936
     Inventories                                                 377,150          287,594
     Prepaid expenses and other assets                            13,954           12,269
     Deferred income taxes                                        34,226           31,789
                                                               ---------        ---------
          Total current assets                                   705,847          677,529
Property and equipment, net                                      205,960          198,697
Deposits and other assets                                         29,449           14,100
Goodwill, net                                                      1,968            2,046
                                                               ---------        ---------
Total                                                          $ 943,224        $ 892,372
                                                               =========        =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
     Accounts payable                                          $  56,066        $  65,640
     Accrued liabilities                                         173,131          153,119
     Current portion of long-term debt                             1,329            1,285
     Income taxes payable                                         11,928           11,974
                                                               ---------        ---------
          Total current liabilities                              242,454          232,018
                                                               ---------        ---------
Long-term debt                                                    21,790           24,768
                                                               ---------        ---------
Deferred and other liabilities                                    15,469           10,393
                                                               ---------        ---------
Stockholders' Equity:
     Convertible preferred stock - shares
        Outstanding: 15,000                                       14,976           14,976
     Common stock - shares outstanding:
          March 31, 2001:       35,216,165
          September 30, 2001:   34,547,167                       444,858          429,986
     Retained earnings                                           207,155          181,749
     Accumulated other comprehensive loss                         (3,478)          (1,518)
                                                               ---------        ---------
     Total stockholders' equity                                  663,511          625,193
                                                               ---------        ---------
TOTAL                                                          $ 943,224        $ 892,372
                                                               =========        =========
</TABLE>

See accompanying notes to consolidated condensed financial statements.


                                       3
<PAGE>   4


SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
                                                    QUARTERS ENDED               SIX MONTHS ENDED
                                                      MARCH 31,                     MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)         2001           2000           2001           2000
                                                 ----           ----           ----           ----
<S>                                            <C>            <C>            <C>            <C>
Net sales                                      $ 208,865      $ 204,596      $ 463,913      $ 384,397

Cost of sales                                    130,896        115,603        279,377        220,383
                                               ---------      ---------      ---------      ---------

Gross profit                                      77,969         88,993        184,536        164,014

Operating expenses:

     Research, development and related
            engineering                           32,682         33,260         66,959         63,399
     Marketing, general and administrative        40,419         40,107         83,714         76,499
                                               ---------      ---------      ---------      ---------
Operating income                                   4,868         15,626         33,863         24,116

Interest and other income
                                                   1,388          2,619          2,070          4,909
Interest expense
                                                    (220)          (416)          (647)        (1,129)
                                               ---------      ---------      ---------      ---------
Income before income taxes                         6,036         17,829         35,286         27,896

Provision (benefit) for income taxes                 (65)         6,218          9,880         10,043
                                               ---------      ---------      ---------      ---------
Net income                                     $   6,101      $  11,611      $  25,406      $  17,853
                                               =========      =========      =========      =========

Net income per share - basic                   $    0.17      $    0.35      $    0.73      $    0.53
                                               =========      =========      =========      =========
Shares used in per share
     computations - basic                         34,959         33,460         34,830         33,398
                                               =========      =========      =========      =========
Net income per share - diluted                 $    0.16      $    0.32      $    0.68      $    0.51
                                               =========      =========      =========      =========
Shares used in per share
     computations - diluted                       37,518         35,928         37,402         35,282
                                               =========      =========      =========      =========
</TABLE>


See accompanying notes to consolidated condensed financial statements.


                                       4
<PAGE>   5

SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
                                                                     SIX MONTHS ENDED
                                                                         MARCH 31,
(IN THOUSANDS)                                                      2001           2000
                                                                    ----           ----
<S>                                                               <C>            <C>
Cash Flows from Operating Activities:
     Net income                                                   $  25,406      $  17,853
     Reconciliation to net cash provided by (used for)
          operating activities:
               Depreciation and amortization                         26,728         24,244
               Amortization of intangibles                               78            139
               Deferred income taxes                                 (2,437)         4,002
               Tax benefit of stock option transactions               3,603             --
               Changes in assets and liabilities:
                    Accounts receivable                              (6,043)         5,166
                    Refundable income taxes                              --            850
                    Inventories                                     (89,556)       (12,415)
                    Prepaid expenses and other assets                (1,685)        (2,710)
                    Deposits and other assets                       (15,349)        (1,369)
                    Accounts payable                                 (9,574)         4,279
                    Accrued and deferred liabilities                 24,695          9,548
                    Income taxes payable                                (46)           347
                                                                  ---------      ---------
     Net cash provided by (used for) operating activities           (44,180)        49,934
                                                                  ---------      ---------

Cash Flows from Investing Activities:
     Purchases of short-term investments, available for sale             --        (17,023)
     Maturities of short-term investments, available for sale        14,640         16,838
     Purchases of property and equipment                            (36,013)       (22,263)
                                                                  ---------      ---------
     Net cash used for investing activities                         (21,373)       (22,448)
                                                                  ---------      ---------

Cash Flows from Financing Activities:
     Sale of common stock                                            11,269          5,947
     Repayment of debt                                                 (523)          (722)
                                                                  ---------      ---------
     Net cash provided by financing activities                       10,746          5,225
                                                                  ---------      ---------

Effect of Exchange Rate Changes on Cash                                (609)          (535)
                                                                  ---------      ---------

Increase (decrease) in cash and equivalents                         (55,416)        32,176

Cash and equivalents:
     Beginning of period                                            105,954         98,278
                                                                  ---------      ---------
     End of period                                                $  50,538      $ 130,454
                                                                  =========      =========
</TABLE>


See accompanying 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 in the United States of America 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, 2000. Results for fiscal 2001 interim
periods are not necessarily indicative of results to be expected for the fiscal
year ending September 30, 2001.

The Company uses a 52-53 week fiscal year ending on the Friday closest to
September 30. Both fiscal 2001 and 2000 contain 52 weeks.

The consolidated financial statements include the accounts of the Company and
its majority owned subsidiaries, after elimination of significant intercompany
transactions and balances. All operating units are aggregated into one segment
because of their similarities in the nature of product and services, production
processes, types of customers and distribution method.

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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. PENDING MERGER WITH ASM LITHOGRAPHY HOLDING N.V.

On October 1, 2000, the Company signed a definitive merger agreement with ASM
Lithography Holding N.V. ("ASML"), whereby ASML will acquire the Company in an
all stock transaction. Under the terms of the merger agreement, the Company will
become a wholly owned subsidiary of ASML, and the Company's stockholders will
receive 1.286 ordinary shares of ASML for each share of the Company's common
stock. The transaction is intended to be accounted for as a pooling of
interests. On November 6, 2000, the Company received early termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
clearing the merger for United States antitrust purposes, on February 7, 2001
the stockholders of the Company approved the merger and on May 3, 2001 the
Company announced that it reached agreement with the Committee on Foreign
Investment in the United States to conclude action under provisions of Section
721 of the Defense Production Act of 1950, also known as the Exon-Florio
Amendment. Consummation of the merger remains subject to completion of customary
closing conditions. The merger is expected to close before June 1, 2001.


3. INVENTORIES

Inventories are comprised of:

<TABLE>
<CAPTION>
                                           MARCH 31,        SEPTEMBER 30,
                                             2001               2000
                                             ----               ----
<S>                                        <C>                <C>
     (IN THOUSANDS)
       Raw materials                       $184,164           $128,467
       Work-in-process                      184,087            152,393
       Finished goods                         8,899              6,734
                                           --------           --------
                                           $377,150           $287,594
                                           ========           ========
</TABLE>


                                       6
<PAGE>   7

4. NET INCOME PER SHARE

Basic net income per common share is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted net
income per share reflects the potential dilution that could occur if securities
to issue common stock (convertible preferred stock and common stock options)
were exercised or converted into common stock.

Weighted average options to purchase 1,561,000 shares of common stock at a
weighted average exercise price of $31.10 per share were outstanding at March
31, 2001 but were not included in the computation of diluted earnings per share
because their exercise price exceeded the market price and therefore, the effect
would be antidilutive.

The following table sets forth the computation of basic and diluted net income
per share:

<TABLE>
<CAPTION>
                                                             QUARTERS ENDED         SIX MONTHS ENDED
                                                                MARCH 31,               MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)                    2001        2000        2001        2000
                                                            ----        ----        ----        ----
<S>                                                        <C>         <C>         <C>         <C>
    Numerator:
      Net income                                           $ 6,101     $11,611     $25,406     $17,853
                                                           -------     -------     -------     -------

    Denominator:
      Denominator for basic net income per share -
          Weighted average shares outstanding               34,959      33,460      34,830      33,398
      Employee stock options and convertible
          preferred Stock                                    2,559       2,468       2,572       1,884
                                                           -------     -------     -------     -------
    Denominator for diluted net income per share -
          Adjusted weighted average shares outstanding      37,518      35,928      37,402      35,282
                                                           =======     =======     =======     =======
    Basic net income per share                             $  0.17     $  0.35     $  0.73     $  0.53
                                                           =======     =======     =======     =======
    Diluted net income per share                           $  0.16     $  0.32     $  0.68     $  0.51
                                                           =======     =======     =======     =======
</TABLE>

5. REVENUE RECOGNITION

The Company recognizes revenue from sales of products based on existing
technologies when the customer takes title to the product, generally at the time
of shipment. Costs to install equipment in the customers' facilities are accrued
at the time the product revenue is recognized. The Company recognizes revenue
prior to installation as the installation costs, and the related estimated fair
value, are insignificant relative to the sales price and gross profit of the
transaction. In addition, the Company has a long history of successful
installations within a short timeframe of delivery and the cost to complete
installation does not vary materially from one instance to another. Revenue is
deferred on initial shipments of new products based on new technologies until
after customer acceptance.

During the quarters ended March 31, 2001 and 2000, the Company recognized net
sales of approximately $4,000,000 and $18,000,000 from a 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 future shipment dates. At
March 31, 2001 the Company was storing approximately $10,000,000 of such
equipment with scheduled shipment dates through May 2001. Product liability and
installation costs are accrued in the period that sales are recognized.

6.  COMPREHENSIVE INCOME


                                       7
<PAGE>   8

Components of comprehensive income include net income, unrealized gains
(losses) on investments, unrealized gains (losses) on derivatives and foreign
currency translation adjustments. For the quarters and six months ended March
31, 2001 and 2000, the components of total comprehensive income are as follows:

<TABLE>
<CAPTION>
                                                      QUARTERS ENDED            SIX MONTHS ENDED
                                                        MARCH 31,                  MARCH 31,
(IN THOUSANDS)                                      2001          2000         2001          2000
                                                    ----          ----         ----          ----
<S>                                               <C>           <C>          <C>           <C>
Net income                                        $  6,101      $ 11,611     $ 25,406      $ 17,853

Net unrealized gain (loss) on investments             (751)          249       (1,347)          561
Net unrealized gain (loss) on derivatives and
foreign currency translation adjustments              (265)          283         (613)          244
                                                  --------      --------     --------      --------
Other comprehensive income (loss)                   (1,016)          532       (1,960)          805
                                                  --------      --------     --------      --------
Total comprehensive income                        $  5,085      $ 12,143     $ 23,446      $ 18,658
                                                  ========      ========     ========      ========
</TABLE>

7. DERIVATIVE FINANCIAL INSTRUMENTS

Effective October 1, 1999, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires that all
derivative financial instruments be recognized in the financial statements and
measured at fair value. Changes in the fair value are recognized periodically in
either income or stockholders' equity as a component of comprehensive income
(loss), depending on whether the derivative is being used to hedge changes in
fair value or cash flows. The adoption of SFAS 133 did not have a material
effect on the Company's financial results. The Company principally uses
derivative financial instruments to manage foreign exchange and interest rate
risks. The Company's risk management policy is to enter into such contracts only
when pre-existing or probable risk exists that the Company wishes to reduce or
eliminate. No derivative contracts are entered into for speculative purposes.

There were no gains or losses due to hedge ineffectiveness for the quarters
ended March 31, 2001 and 2000.

8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements of all public registrants. SAB
101, as amended, requires implementation by the Company no later than the fourth
quarter of fiscal 2001. Accordingly, any revenues that do not meet SAB 101's
guidance will be deferred and recorded as revenue in future periods, including
such revenue previously reported for the first three quarters of fiscal 2001
that do not meet the criteria of SAB 101. Changes in the Company's revenue
recognition policy resulting from the implementation of SAB 101 would be
reported as a change in accounting principle as of October 1, 2000.

Management is currently evaluating the potential effect of the implementation
of SAB 101 on the financial condition and results of its operations. Management
believes that the impact of implementing SAB 101 will not effect the
fundamental aspects of the Company's operations as measured by shipments and
cash flows.


                                       8
<PAGE>   9

                           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, 2000, 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 semiconductor equipment industry is a cyclical business frequently affected
by oversupply of product from our customers, progression of equipment
technology, global and or regional economic events and other factors. During the
quarter, customer cancellations and rescheduling impacted all of our product
sectors, but most significantly our lithography segment resulting in a
significant decline in sales and backlog. There is concern for the strength of
semiconductor and semiconductor equipment business during the remainder of our
fiscal year. However, this belief is a forward-looking statement subject to a
number of risks and uncertainties, and we can not assure you that the
semiconductor industry will not experience a prolonged period of order
reschedules and cancellations or contraction, which could negatively impact our
growth, profitability and shipments beyond fiscal 2001.* Please review the
section entitled "Risks Inherent in Our Business" for a discussion of the
factors which could impact industry strength and our profitability.

On October 2, 2000, we announced that we had entered into an Agreement and Plan
of Merger with ASM Lithography, Inc. ("ASML"). To date, we have received early
termination of the Hart-Scott-Rodino antitrust waiting period, approval by our
stockholders of the merger and regulatory approval related to the Exon-Florio
amendments to the Defense Production Act of 1950. We expect to complete the
transaction with ASML before June 1, 2001. Completion of the transaction is
subject to certain customary closing conditions and we cannot assure you that
we will be able to timely or successfully complete the merger.

NET SALES

Our net sales for the second fiscal quarter ended March 31, 2001 were
$208,865,000, an increase of 2% over second quarter net sales for the preceding
fiscal year of $204,596,000 and a decrease of 18% from first quarter fiscal
2001 sales of $255,048,000. During the first six months of fiscal 2001, net
sales of $463,913,000 increased 21% over net sales of $384,397,000 during the
comparable period of fiscal 2000. The increase in net sales compared to the
second quarter of fiscal 2000 is primarily the result of increased shipments of
Track and Thermal


                                       9
<PAGE>   10

products, offset by decreased Lithography sales. The decrease in net sales from
the prior quarter is principally the result of decreased Lithography and Thermal
shipments resulting from reduced customer requirements. The increase in net
sales for the six months ended March 31, 2001 compared to the prior year period
is due to increased shipments of Lithography, Track and Thermal products.

Our international net sales (based on shipment destination) as a percentage of
total net sales for the quarters ended March 31, 2001, March 31, 2000 and
December 31, 2000 were 38%, 50% and 28%, respectively. The decrease in our
international net sales as a percentage of net sales during the second quarter
of fiscal 2001 compared to the second quarter of 2000 primarily relates to
increased domestic shipments combined with reduced international shipments
resulting primarily from a reduction of lithography product shipments into
Europe.

During the quarters ended March 31, 2001 and December 31, 2000, we recognized
approximately $4,000,000 and $31,000,000 respectively of net sales to one
customer who accepted and took title to the related equipment, and agreed to
normal payment terms, but requested that we store the equipment until
predetermined shipment dates ($18,000,000 during the quarter March 31, 2000). At
March 31, 2001, we were storing approximately $10,000,000 of such equipment from
this customer. The customer has scheduled the shipment dates for this equipment
through May 2001.

We rely on a few customers for a substantial percentage of our net sales. For
the six months ended Mach 31, 2001, our largest customer accounted for 57% of
net sales compared to 49% for the six months ended in fiscal 2000. We believe
for the foreseeable future we will continue to rely on a few major customers for
a substantial percentage of our net sales.*

BOOKINGS

New bookings during the second quarter of fiscal 2001 were $219,177,000, a 28%
decrease from new bookings of $305,693,000 during the second quarter of fiscal
2000 and a 6% decrease from new bookings of $232,256,000 during our preceding
quarter. Our backlog at March 31, 2001 was $419,556,000 compared to $483,789,000
at March 31, 2000 and $681,150,000 at December 31, 2000. Our backlog at March
31, 2001 is net of customer cancellations of approximately $232,000,000, a
portion of which were replaced by new orders from the same customer, and net of
customer shipment rescheduling beyond twelve months of approximately
$40,000,000. Our backlog consists of only those orders to which a purchase order
number has been assigned by our customer, with substantially all of the terms
and conditions agreed upon and for which delivery has been specified within
twelve months. Our backlog at March 31, 2001 includes orders for 37 Micrascan
photolithography systems. Additionally, we have orders for 14 Micrascan systems
with scheduled delivery dates outside our twelve-month backlog window.

GROSS MARGIN

Our gross margin was 37% during the second quarter of fiscal year 2001 and 43%
for the second quarter of fiscal 2000, compared to 42% during the first quarter
of fiscal 2001. During the first six months of fiscal 2001, gross margin was 40%
compared to 43% during the comparable period of fiscal 2000. The decline in our
gross margin during the quarter and six month periods ended March 31, 2001 when
compared to our gross margin during the first quarter of fiscal 2001 and the
comparable periods ended March 31, 2000 is primarily the result of decreased
gross profit on Lithography products resulting from reduced volume and increased
material related costs, and increased inventory costs on Thermal products.

RESEARCH AND DEVELOPMENT


                                       10
<PAGE>   11

Our research, development and related engineering ("R&D") expenses consist
primarily of personnel, material and outside contract costs associated with our
product development activities and are net of funding we receive from outside
parties under various development agreements. Funding is typically payable upon
our attainment of one or more development milestones specified in the agreement.
Neither our spending, nor our recognition of the funding related to the
development milestones is ratable over the term of the agreements.

During the second quarter of fiscal 2001, our R&D expenses were $32,682,000 (16%
of net sales), compared to $33,260,000 (16% of net sales) during the year
earlier quarter and $34,277,000 (13% of net sales) during the first quarter of
fiscal 2001. Such R&D amounts are net of funding we recognized under joint
development agreements of $1,355,000 during the second quarter of fiscal 2001,
$1,197,000 during the second quarter of fiscal 2000 and $1,242,000 during the
first quarter of fiscal 2001. R&D expense decreased from the second quarter of
fiscal 2000 and the first quarter of fiscal 2001 primarily due to slightly
reduced spending on lithography development programs. The fluctuation in R&D as
a percentage of net sales primarily reflects the changes in period-to-period net
sales.

Our R&D expense for the six months ended March 31, 2001 was $66,959,000 or 14%
of net sales compared to $63,399,000 or 16% of net sales for the same period of
the prior fiscal year. We recognized under joint development agreements and
offset against R&D expenditures $2,597,000 for the six-month period ended March
31, 2001 and $3,567,000 for the six month period ended March 31, 2000. R&D
expense increased primarily due to increased spending on Track and Thermal
engineering initiatives.

MARKETING, GENERAL AND ADMINISTRATIVE

Our marketing, general and administrative ("MG&A") expenses consist primarily of
product support, administrative and selling and marketing costs. MG&A expenses
were $40,419,000 (19% of net sales) during the second quarter of fiscal 2001,
compared to $40,107,000 (20% of net sales) and $43,295,000 (17% of net sales)
during the second quarter of fiscal 2000 and the first quarter of fiscal 2001,
respectively. During the six month period ended March 31, 2001, MG&A expenses
were $83,714,000 (18% of net sales) compared to $76,499,000 (20% of net sales)
at March 31, 2000. The increase in MG&A over the second quarter of the preceding
fiscal year is primarily due to increased administration expense off set in part
by reduced product support costs. The decrease in our MG&A from the first
quarter of fiscal 2001 is primarily the result of lower product support costs
resulting from reduced shipments.

INTEREST AND OTHER INCOME

Interest and other income for our second quarter of fiscal 2001 was $1,388,000
compared to $2,619,000 during the second quarter of fiscal 2000 and $682,000
during the first quarter of fiscal 2001. For the six month period ended March
31, 2001, interest and other income was $2,070,000 compared to $4,909,000 for
the comparable period of fiscal 2000. The decrease in interest and other income
between the fiscal 2001 and fiscal 2000 periods is primarily due to foreign
exchange losses resulting from strengthening of the U.S. dollar against the
Japanese Yen and the Euro and lower cash balances available for investment.

INTEREST EXPENSE

Our interest expense during the second quarter of fiscal 2001 was $220,000
compared to $416,000 during the second quarter of fiscal 2000 and $427,000
during the first quarter of fiscal 2001. During the first six months of fiscal
2001 interest expense was $647,000 compared to $1,129,000.

TAX EXPENSE


                                       11
<PAGE>   12

We recorded a 28% tax provision during the first six months of fiscal 2001,
compared to a 34% provision during the first quarter of fiscal 2001 and a 36%
provision for fiscal 2000. Changes in our effective tax rate are due primarily
to expected profitability and the geographic distribution of our pretax income.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents and short-term investments at March 31, 2001
totaled $55,538,000, a decrease of $35,401,000 from our December 31, 2000
balance of $90,939,000.

Our operating activities consumed $44,180,000 in cash during the six months
ended March 31, 2001. Cash utilized in operations result primarily from
increased accounts receivable, inventory and deposits and reduced payables
offset in part by net income and increased accrued liabilities.

We used $21,373,000 in net cash for investing activities during the six months
ended March 31, 2001 resulting primarily from capital equipment purchases of
$36,013,000 offset in part by maturities of temporary investments of
$14,640,000.

Net cash provided by financing activities was $10,746,000 during the six months
ended March 31, 2001 resulting primarily from proceeds due to the exercise of
employee stock options and the Company's employee stock purchase plan.

In connection with the proposed merger with ASM Lithography, we would be
obligated to make payments under employment agreements with officers totaling
approximately $15 million. Certain of these agreements will be replaced and
superseded upon completion of the merger.

We have an unsecured $150,000,000 bank revolving line of credit agreement. Our
line of credit agreement was amended to extend its expiration until September
30, 2001. Advances under the line bear interest at the bank's prime rate or
0.65% to 1.50% over LIBOR. Our agreement, as amended, includes covenants
regarding liquidity, profitability, leverage, and coverage of certain charges
and minimum net worth and prohibits the payment of cash dividends to our
shareholders. We are in compliance with the covenants as amended. At May 14,
2001, we had outstanding borrowings of $50,000,000 and irrevocable letters of
credit for $8,000,000 under this line.

We believe that we have sufficient working capital and available bank credit to
sustain our operations and research and development activities, to the extent
such activities are not funded by third parties for the next twelve months.*

RISKS INHERENT IN OUR BUSINESS

OUR OPERATING RESULTS WILL FLUCTUATE.

We have previously experienced quarterly fluctuations in our operating results.
Our operating results may in the future vary from quarter to quarter due to a
number of factors, not all of which we control. These factors include:

        -  our ability to introduce new products

        -  the mix of our product shipments

        -  our sales volume

        -  our geographic mix of shipments

        -  our competitors' activities

        -  merger and acquisition activity

        -  international events


                                       12
<PAGE>   13

        -  economic conditions affecting our customers' demand

        -  exchange rate fluctuations

        -  difficulties obtaining materials or components on a timely basis

Many of these factors are beyond out control and, whether or not we manage these
risks effectively, we will likely experience variability in our quarterly
operating results in the future.

WE RELY ON A FEW CUSTOMERS AND IF WE LOSE ANY OF THESE CUSTOMERS OR IF ANY OF
THESE CUSTOMERS CANCEL OR DELAY SHIPMENTS OF OUR PRODUCTS, OUR OPERATING RESULTS
WILL BE MATERIALLY ADVERSELY AFFECTED.

We rely on a limited number of customers for the majority of our net sales. Our
largest customer accounted for 49% of our net sales in fiscal 2000 and 57% of
our net sales for the six month period ended March 31, 2001. We believe that,
for the foreseeable future, we will continue to rely on a limited number of
customers for the majority of our net sales.* The loss of any single customer
can have a large negative impact on our sales. For example, due to the delay and
subsequent cancellation of our 200-APS Track product, our largest Track customer
decided to purchase systems with similar capabilities from another supplier. We
expect that this decision will continue to have a harmful effect on our future
Track product sales. If we lose any other significant customers or experience
additional reductions in orders by a significant customer for any reason, our
business, profitability and our cash flow will be harmed.*

The risk of losing a single customer is heightened by the fact that we sell a
relatively small number of systems to a few customers during each fiscal quarter
at a high per system sales price. Our expenses for the most part are fixed in
the short term and are based in part on our expectations for future revenues. As
a result, our operating results for a quarter may be impacted because we can not
adjust our expenses if:

        -  our customers cancel or reschedule their orders or shipments,

        -  we experience production or shipping delays,

        -  we do not receive anticipated customer orders or

        -  we ship fewer systems than we anticipate

WE HAVE SIGNED AN AGREEMENT TO MERGE WITH ASM LITHOGRAPHY HOLDING N.V. AND
FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY IMPACT OUR STOCK PRICE AND
FUTURE BUSINESS AND OPERATIONS.

On October 2, 2000, we announced the signing of a merger agreement with ASM
Lithography Holding N.V. whereby ASM Lithography will acquire us in an all stock
transaction. Under the terms of the merger agreement, we will become a wholly
owned subsidiary of ASM Lithography, and our stockholders will receive 1.286
ordinary shares of ASM Lithography for each share of our common stock.
Completion of the merger is subject to customary closing conditions. We expect
the merger to close before June 1, 2001 if all the closing conditions are met.*

If the merger is not completed for any reason, we may be subject to a number of
material risks, including the following:

        -  if for any reason we decide to terminate the merger, we may be
           required to pay ASM Lithography a termination fee of $47,000,000,
           which amounts to approximately 2.75% of the total value of the merger
           consideration to be received by our stockholders as of the time the
           merger was publicly announced on October 2, 2000.

        -  the price of our common stock may decline to the extent that the
           current market price of our common stock reflects a market assumption
           that the merger will be completed

        -  costs related to the merger, such as legal and accounting fees, must
           be paid and expensed even if the merger is not completed


                                       13
<PAGE>   14

        -  uncertainty related to the merger may damage relationships with our
           employees which may adversely affect our ability to attract and
           retain key personnel

        -  our customers may delay, defer or cancel purchasing decisions.

THE SEMICONDUCTOR INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE. IF WE
DO NOT CONSTANTLY DEVELOP NEW PRODUCTS TO KEEP PACE WITH THE TECHNOLOGICAL
CHANGE AND MEET OUR CUSTOMERS' DEMAND WE WILL LOSE CUSTOMERS AND OUR BUSINESS
WILL SUFFER.

Our products and processes are affected by rapid technological change and can
quickly become obsolete. We believe our future success depends on our ability to
continue to enhance our existing products and their process capabilities. We
must develop and manufacture new products with improved process capabilities
that enable our customers to fabricate more advanced semiconductors with
increased efficiency. We are developing new technology products in our Track,
Thermal and Lithography operations that are expected to be capable of processing
or will be able to be upgraded in the field for processing 300mm wafers. Our
failure to successfully introduce these or any other new products in a timely
manner would result in the loss of our competitive position and could reduce the
sale of our existing products.* In addition, new product introductions could
contribute to quarterly fluctuations in our operating results as orders for new
products commence and increase the potential for a decline in orders of our
existing products, particularly if new products are delayed.*

We believe that advanced logic devices, DRAMs and ASICs will require
increasingly finer line widths.* Therefore, we must continue our development of
future systems capable of processing wafers faster, printing line widths finer
than .10 micron and processing 300mm wafers at a progressively lower cost of
ownership. If we fail to develop the advanced technology required by our
customers at progressively lower costs of ownership and supply sufficient
quantities to a worldwide customer base we will experience a material adverse
impact on our net sales and profitability.*

Furthermore, in order for us to continue growing and to meet expected technology
requirements of our customers, we must timely introduce, manufacture and obtain
sufficient orders of our products. If we are not able to effectively transition
from our legacy products to our new products, including 300mm versions, our
financial condition and results of operations could be materially harmed. *

WE HAVE EXPERIENCED DELAYS IN THE INTRODUCTION OF OUR PRODUCTS WHICH, IN THE
PAST, HAVE CAUSED US TO LOSE CUSTOMERS. IF WE EXPERIENCE SIMILAR DELAYS IN THE
INTRODUCTION OF OUR FUTURE PRODUCTS, OUR CUSTOMERS MAY DECIDE TO PURCHASE FROM
OUR COMPETITORS INSTEAD, AND OUR BUSINESS WILL SUFFER.

We have experienced delays in the introduction of new products and product
enhancements due to technical, manufacturing and other difficulties and we may
experience similar delays in the future. For example, in September 1998, we
terminated future development of our previously announced 200-APS Track product
and concentrated our efforts on completing the development of our next
generation product, the ProCell. During June of 1999 we introduced the ProCell
product which we initially shipped to a customer during our third quarter of
fiscal 2000. We believe if there are delays in delivering initial quantities of
the ProCell product, or any new product to multiple customers, this would result
in customers purchasing our competitors' equipment.* This could harm industry
acceptance of our ProCell product or any of our products. If we are unable to
timely produce the ProCell or any other next generation product or the market
does not accept such products, our business and results of operations will be
harmed.*

In June 1999, five participants withdrew from our 193-nanometer development
program and declined delivery of initial tools. These participants withdrew in
part due to delays in our product development and due to changes in their
technical requirements for our product. We are responding to this change in
requirement by accelerating development of a very high numerical aperture
version of our 193-nanometer product. Very high numerical aperture or "VHNA"
technology is the physical attribute of the lens to achieve higher resolution
and smaller line widths. We also are enhancing the VHNA version of our 193
product to optimize cost of ownership and to address


                                       14
<PAGE>   15

a broader market. We can not assure you that we will introduce this product on
time or that customers will commit to this product for their production needs.
If we are unsuccessful in the introduction of this product or in obtaining
sufficient orders for this product from our customers, future profitability
could be harmed.*

Our customers usually select either a single supplier or a primary supplier for
their equipment needs. We believe that significant delays in delivering
quantities of newly developed products to multiple customers, due to engineering
or manufacturing difficulties, could result in our customers electing to
purchase our competitors equipment for their production requirements.* Due to
the delay and subsequent termination of our 200-APS Track product in September
1998, and delays in our initial shipment of the ProCell until June 2000, our
competitors have increased their Track market share. It has become increasingly
difficult for us to regain Track market position. Our inability to produce new
products on time or any failure of our products to achieve market acceptance
could materially harm our business and results of operations.*

NEW PRODUCT INTRODUCTIONS ARE FREQUENTLY ACCOMPANIED BY A NEGATIVE IMPACT ON
GROSS PROFITS. IF WE FAIL TO SUCCESSFULLY INTRODUCE NEW PRODUCTS OR TO ACHIEVE
LONG TERM EFFICIENCIES FOLLOWING THE INTRODUCTION OF NEW PRODUCTS, THEN OUR
GROSS PROFITS MAY BE MATERIALLY ADVERSELY AFFECTED IN THE LONG TERM.

The unit cost of our products has historically been the highest when they are
newly introduced into production and have at times had a negative impact on our
gross profit, results of operations and cash flow. Cost reductions and
enhancements come over time through:

        -  engineering improvements,

        -  economies of scale,

        -  improvements in our manufacturing process and

        -  improved serviceability of our products.

Additionally, the unfavorable effect of new products on profitability and cash
flow can be exacerbated when there is intense competition in the marketplace. We
can not assure you that initial shipments of our new products will not adversely
effect our profit or cash flow or that we will be able to improve our gross
profit, results of operations and cash flow.*

WE HAVE INVESTED HEAVILY IN OUR 193 NANOMETER MICRASCAN STEP AND SCAN
TECHNOLOGY. IF THE MARKET FOR THIS TECHNOLOGY DOES NOT DEVELOP AS WE EXPECT OR
IF OUR COMPETITORS PRODUCE 193 NANOMETER TECHNOLOGY MORE TIMELY AND EFFECTIVELY
THAN US, OUR RESULTS OF OPERATIONS MAY BE MATERIALLY ADVERSELY AFFECTED.

We believe that the photolithography exposure equipment market is one of the
largest segments of the semiconductor processing equipment industry.* The
development of a market for our Micrascan step-and-scan photolithography
products is highly dependent on the continued trend towards finer line widths in
integrated circuits and the ability of our competitors to keep pace with this
trend. If these industry trends do not materialize or if we are not able to
successfully develop products to meet the demands of the industry, our business
will suffer.*

We believe that the transition of our customers to step-and-scan systems has
accelerated.* We also believe that our customers will require volume quantities
of production equipment as advanced as the current and pending versions of our
Micrascan to produce both critical and to some degree sub-critical layers of
semiconductor devices.* Currently, competitive step-and-scan equipment capable
of producing .25 micron line widths and below is available from competitors. Our
customer's technological advancements are requiring our products to produce
line-widths to satisfy 130-nanometer and 100-nanometer nodes requiring the use
of new laser and photoresist technology. We currently have under development a
193-nanometer product to address these requirements which we expect will be
available in 2001.* Our current plans are to have machines available as bridge
tools, capable of being upgraded on our customer's factory floor from a 200mm to
a 300mm machine.*

Our business will suffer if demand for our Micrascan Products and our
193-nanometer products in particular, does not develop. This demand may not
develop if:

        -  We do not timely and successfully complete development of our
           193-nanometer product,

        -  If our competitors high numerical aperture 248-nanometer steppers are
           able to achieve finer line widths,

        -  If our competitors are successful in timely developing and supplying
           193-nanometer products that are more competitive than those we
           currently are developing, or

        -  Economic conditions of the semiconductor industry delay the trend
           towards finer line width in integrated circuits.

                                       15
<PAGE>   16
WE FACE INTENSE COMPETITION.

The semiconductor equipment industry is very competitive. We face substantial
competition throughout the world in all of our products. Many of our competitors
have greater financial resources than we do. The trend toward consolidation in
our industry has made it increasingly important for us to have the financial
resources necessary to compete on a worldwide basis across a broad range of
product offerings, to fund customer service and support and to invest in both
product and process research and development. Significant competitive factors
include;

        -  technology,

        -  cost of ownership, a formula that includes: initial price, system
           throughput and reliability and time to maintain or repair,

        -  familiarity with particular manufacturers' products,

        -  established relationships between suppliers and customers,

        -  product availability and

        -  technological differentiation.

We do encounter intense price competition, particularly in Asia and have
experienced difficulty establishing new relationships with certain customers who
have long-standing relationships with other suppliers. We believe that outside
Japan and the Pacific Rim we compete favorably with respect to most of these
competitive factors.*

We believe we will continue to face severe price competition globally from our
competitors, the majority of whom are Japanese corporations.* We may continue to
be forced to compete for customers on the basis of reduced prices, which could
reduce our net sales and gross margins and adversely impact our cash flow.*

IF WE CANNOT SUCCESSFULLY SELL OUR PRODUCTS TO THE JAPANESE AND PACIFIC RIM
MARKETS OUR MARKET SHARE AND FUTURE GROWTH WILL SUFFER

Historically our customers have been 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 or their partners) represent a large portion of
the overall market for our products. We believe that our Japanese competitors
have a significant advantage resulting from their dominance of the Japanese and
Pacific Rim semiconductor equipment market.* This advantage provides our
competitors with the sales and technology base to compete more effectively
throughout the rest of the world. As we are not engaged in any significant
collaborative effort with any Japanese or Pacific Rim semiconductor
manufacturers we may be at a competitive disadvantage to our Japanese
competitors who are engaged in collaborative efforts with such semiconductor
manufacturers. To date we have not had significant success in penetrating either
of these markets particularly with our photolithography equipment. We believe
that for us to succeed in the long term we must substantially increase our share
of the Japanese and Pacific Rim markets if we are 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
with potentially different economic cycles than those affecting the sales of
devices manufactured by the majority of our U.S. and European customers. If we
fail to gain customers in these markets it may limit the worldwide market share
available to us and increase our risk of industry or geographic downturns and
would adversely affect our business.*


                                       16
<PAGE>   17

We are attempting to compete throughout the Pacific Rim against competitors
having greater market share and more established service and support
infrastructures. We have invested in the staffing and facilities we believe are
necessary to sell, service and support customers in the Pacific Rim including a
36,000 square foot customer demonstration facility in Kawasaki City, Japan.
However, we anticipate that we will continue to face significant price and
technological competition.* There can be no assurance that our Pacific Rim
operations will be profitable, even if we are successful in obtaining
significant sales into this region.*

We are focused on increasing our penetration into Korea and Taiwan, but to date
have had limited success in securing volume orders from customers in this area.
Many of our customers, who often have long standing relationships with our
competitors, are outsourcing their manufacturing to foundries located in Taiwan.
If we are not successful in selling into these markets, it could have a harmful
effect on our net sales, profitability and cash flow.*

IF WE DO NOT SUCCESSFULLY INTEGRATE THE SEMICONDUCTOR EQUIPMENT GROUP WE
PURCHASED FROM WATKINS-JOHNSON COMPANY, OUR NET SALES, PROFITABILITY AND CASH
FLOW COULD BE HARMED.

We completed our acquisition of the Semiconductor Equipment Group of
Watkins-Johnson on July 6, 1999. We may not realize the intended benefits from
the acquisition due to the following:

        -  we may experience difficulty with integrating the operations and
           personnel of the Semiconductor Equipment Group,

        -  we may require additional financial resources to fund the operations,

        -  we may be unable to maximize our financial and strategic position by
           the incorporation or development of the acquired technology and
           products,

        -  if we are unable to continue to attract and retain key personnel,

        -  if we are unable to integrate the acquired products, technology and
           information systems from engineering, sales, product development and
           marketing perspectives and

        -  if we are unable to consolidate functions and facilities

We believe we must successfully transition our Semiconductor Equipment Group
products to incorporate process improvements such as single wafer processing and
scalability from 200mm to 300mm wafer capability.* We can not assure you that we
will not experience difficulties or delays in transitioning our products, which
could materially harm our net sales, profitability and cash flow.*

Our acquisition included the assumption of certain liabilities of the
Semiconductor Equipment Group, which may prove more costly than we have
anticipated. As an example, certain environmental remediation steps were put in
place in the Scotts Valley California facility. We can not assure you that
additional environmental hazards, liabilities or actions to streamline the
operations may not result in future charges which may have a material adverse
impact on our profitability and cash flow.*

WE MANUFACTURE OUR PRODUCTS IN LOCATIONS SUBJECT TO NATURAL DISASTERS AND
UNCERTAIN ENERGY SUPPLIES.

Our California facilities are located in seismically active regions. We
manufacture our Track products in San Jose, California and substantially all of
our Thermal products in Orange and Scotts Valley, California. Our Tinsley
optical components are manufactured in Richmond California. Our photolithography
exposure products are manufactured in Wilton and Ridgefield, Connecticut. If we
lose the use of any of our facilities as a result of a natural disaster, we
would experience a material adverse effect on our operating results and cash
flow.*

Our California facilities are subject to an ongoing energy crisis being faced by
that state. As a result of a variety of factors relating to increased energy
demand and difficulties experienced with energy deregulation in the state of
California, businesses and residences in California are subject to uncertain
power supplies, rolling power blackouts


                                       17
<PAGE>   18

and extremely high energy costs. If we are not able to secure a consistent
energy supply for our manufacturing and corporate facilities at manageable rates
our ability to timely and cost effectively manufacture our products may be
seriously harmed.* The uncertainty and risks related to the California energy
crises are expected to last for the foreseeable future.*

WE ARE SUBJECT TO A NUMBER OF ENVIRONMENTAL REGULATIONS. IF WE FAIL TO COMPLY
WITH THESE REGULATIONS WE MAY FACE PENALTIES OR DELAYS IN PRODUCTION THAT COULD
CAUSE US TO LOSE CUSTOMERS.

We are subject to a number of governmental regulations related to our discharge
or disposal of toxic and hazardous chemicals used in our manufacturing process.
We believe that in general we are in compliance with these regulations and that
we have obtained or expect to obtain shortly all necessary environmental permits
to conduct our business.* The failure to comply with present or future
regulations could result in fines or penalties being assessed against us,
interruption of our production or in our customers refusing to accept our
products.*

Our Scotts Valley, California facility is subject to an environmental
remediation plan being monitored by various governmental agencies.
Watkins-Johnson Company purchased a guaranteed fixed price remediation contract
from a third party environmental consultant to remediate the groundwater
contamination at the facility. The remediation agreement obligates the third
party to perform all of the obligations and responsibilities of Watkins-Johnson
Company. We can not assure you that the third party consultant will have the
financial resources or technical expertise to execute under the remediation
agreement or that environmental regulatory agencies will not ultimately look to
us to remediate the groundwater contamination at the site.*

In 1996, we purchased from Perkin Elmer approximately 50 acres of land with a
201,000 square foot building thereon located in Ridgefield, Connecticut. At the
time we purchased this property, we were aware that certain groundwater and soil
contamination was present and that the property was subject to a clean-up order
being performed by Perkin Elmer under the jurisdiction of the Connecticut
Department of Environmental Protection. Agreements we have with Perkin Elmer
provide that Perkin Elmer has sole responsibility for all obligations or
liabilities related to the clean-up order. We believe we are adequately
indemnified by Perkin Elmer, but, if for some reason Perkin Elmer was unable to
comply or did not comply with the clean-up order, we could be required to do
so.*

IF WE CANNOT SUCCESSFULLY SUPPLY LARGE VOLUMES OF MICRASCAN PRODUCTS TO MULTIPLE
CUSTOMERS, WE MAY LOSE CUSTOMERS AND MARKET SHARE AND AS A RESULT OUR BUSINESS
WILL SUFFER.

We believe that our ability to supply systems in volume to multiple customers
will be a major factor in customer decisions to commit to our Micrascan
technology.* Based upon the expected future demand for our advanced lithography
step-and-scan products, we have increased our Micrascan production capacity and
in particular our optical manufacturing floor space. In 1996, we purchased from
Perkin Elmer a 243,000 square foot facility (subsequently increased to 276,000
square feet) that we occupied in Wilton, Connecticut and an additional 201,000
square foot building, which we now occupy, in Ridgefield, Connecticut. While we
have invested in significant capital improvements related to the buildings
purchased and the equipment required to expand our Micrascan production and
optical manufacturing capabilities, we have not invested in all of the metrology
and other equipment required to complete our expansion and maximize our
manufacturing capacity. If we are not able to complete our expansion, we may not
be able to meet customer demand and our market share will suffer.

As we continue to expand our manufacturing infrastructure, this will require our
continued recruitment, training and retention of a high quality workforce, as
well as the achievement of manufacturing results on a scale greater than we have
been successful at in the past. If we are unsuccessful in managing this
expansion it could result in


                                       18
<PAGE>   19
production delays and a subsequent loss of future orders and customers. We
believe that significant delays in delivering quantities of our Micrascan
products could result in customers electing to install competitive equipment in
their facilities. These factors could impede acceptance of our Micrascan
products on an industry-wide basis resulting in our profit being adversely
affected by the increase in fixed costs and operating expenses without a
commensurate increase in net sales.*

The time required for us to build our Micrascan systems is significant. For us
to be successful, we will need to build more systems faster and reduce the cycle
time required to build projection optics. To accomplish these objectives we will
require;

        -  additional trained personnel,

        -  additional raw materials and components,

        -  improved manufacturing and testing techniques and

        -  continued development of our vendor supply infrastructure

We also must continue building our factory, field service and technical support
organization and infrastructure to support anticipated customer requirements.*
We can not assure you that we will not experience manufacturing difficulties or
encounter problems in our attempt to increase or upgrade operations or that the
anticipated customer requirements will not be reached.*

Our Tinsley Laboratories, Inc. subsidiary designs, provides research and
manufactures precision optical components, assemblies and systems, primarily for
our photolithography products. Tinsley provides technology and expertise
relating to aspherical lenses, a key component of our photolithography products.
The adaptation of certain of Tinsley's manufacturing processes by us and
Tinsley's commencement of the fabrication of non-aspherical lenses is important
to our ability to supply large volumes of photolithography products. However,
there is no certainty that Tinsley's manufacturing technology is scaleable, or
that such expertise can be transferred to us without substantial time or
expense, if at all.* The inability of us to transfer these technology's and
manufacturing processes for use in a substantially larger scale or the inability
of Tinsley to manufacture non-aspherical lenses in sufficient quantities could
adversely affect our ability to supply large volumes of Micrascan products.*

OUR MICRASCAN PRODUCTS UTILIZE CERTAIN MATERIAL AND COMPONENTS PROVIDED BY SOLE
SOURCE SUPPLIERS.

There are certain raw materials, components and subassemblies that we obtain
either from single sources or from a limited group of qualified suppliers.
Although to date we have not experienced significant delays in our production
due to unavailability or delays in procurement of component parts or raw
materials, disruption of these sources could occur which could at least
temporarily harm our operating results. Moreover, if we experience prolonged
delays in obtaining certain components, this could materially harm our business,
operating results and damage relationships with our customers.*

The raw material for a proprietary component of the optical system for our
Micrascan product is available from only one supplier. This supplier has
expanded their capacity to meet our projected long-term requirements and has
created and stored agreed upon quantities of safety stock. Additionally, a
version of our Micrascan III system utilizes an Excimer laser that is
manufactured in volume by only one supplier. In fiscal 1999 we qualified an
additional source of lasers for current and future versions of our Micrascan
products, allowing the potential for the integration of such lasers into our
system. If our suppliers are unable to meet their commitments and provide
acceptable quantities of material, we would be unable to manufacture the
quantity of products we require to meet our customers anticipated future demand,
which may have a material adverse effect on our business, revenue and
profitability.*

Calcium fluoride is a raw material that has historically been in short supply
and is integral to the production of optics capable of producing quality line
widths of .10 micron and below. The optical system for our MSV, 193 HNA product
and our 157-nanometer lithography product, currently under development, utilizes
calcium


                                       19
<PAGE>   20

fluoride.* We have qualified a supplier and have put in place a Supply Agreement
with this supplier for the production and supply of calcium fluoride. We can not
assure you that this supplier will be able to supply the quality or quantity of
calcium fluoride necessary for us to meet expected customer demand.* Failure to
secure adequate supplies of calcium fluoride could have a material adverse
effect on our business and operating results.*

WE DEPEND ON OUTSIDE RESEARCH AND DEVELOPMENT FUNDING TO ASSIST IN DEVELOPING
OUR ADVANCED MICRASCAN TECHNOLOGY. IF WE LOSE THIS FUNDING OR ARE UNSUCCESSFUL
IN RECEIVING OUTSIDE FUNDING FROM OTHER SOURCES OUR OPERATING RESULTS WILL BE
ADVERSELY AFFECTED.

In fiscal 1999, we entered into an agreement with Intel for the development of
157-nanometer lithography technology. This agreement obligates us, among other
things, to develop and sell to Intel a predetermined number of initial tools.
Intel has agreed to provide advanced payments for the development and
manufacture of these machines, based upon predetermined milestones. At September
30, 2000, $2,000,000 of development funding from Intel has been recognized and
offset against R&D expense. Separately, in 1999 Intel invested approximately
$15,000,000 in us in the form of the purchase of Series 1 Convertible Preferred
Stock. We are obligated to dedicate a certain amount of our 157-nanometer unit
production output to Intel and are required to use the proceeds from the Series
1 Preferred investment and funds received under the agreement for the
development of technology for use on 157-nanometer lithography equipment. We can
not assure you that we will be successful in developing 157-nanometer technology
or that we will be able to manufacture significant quantities of machines to
satisfy our obligations to Intel or other customers.* We can not assure you that
we will be able to fund from operations the development program or that we will
be able to obtain future outside funding beyond that which we are currently
receiving.* If we fail to receive such funds or if we are required to increase
our own funds to fund development, our research and development expenses would
increase and our operating income would be reduced correspondingly.*

THE FUTURE PROFITABILITY OF OUR LITHOGRAPHY OPERATION IS UNCERTAIN.

If we are to attain our objective of being a volume supplier of advanced
photolithography products to multiple customers, we must expand our customer
base to include additional customers who order production-quantities of
products. We believe the costs associated with the following factors make it
difficult for our Lithography division to operate profitably in the future*:

        -  our continued development of our Micrascan technology,

        -  our expansion of SVGL's manufacturing capacity,

        -  our related increase in manpower and customer support,

        -  increased competition and

        -  developing and manufacturing current and future Micrascan products,
           in particular the projection optics.

If we cannot appropriately manage the costs related to these factors, we will
not be able to operate profitably.

WE ARE DEPENDENT ON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL.

Our future success is dependent to a large extent on the continued contributions
of our executive officers and key management and technical personnel. In
particular, the future growth of our Lithography division is especially
dependent on our ability to attract and retain key skilled employees,
particularly those related to the optical segment of our business.

We have agreements with each of our executive officers to encourage their
continued service to us in the event of a change-in-control. Each of our
executive officers, key management and technical personnel would be difficult to
replace. The loss of the services of one or more of our executive officers or
key personnel, or the inability to continue to attract qualified personnel could
delay our product development initiatives or otherwise have a material adverse
effect on our business, financial condition and operating results.


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<PAGE>   21
WE ARE SUBJECT TO LEGAL PROCEEDINGS, WHICH MAY HAVE A MATERIALLY ADVERSE IMPACT
ON OUR FINANCIAL RESULTS.

On or about August 12, 1998, Fullman initiated a lawsuit in the United States
District Court for the District of Oregon alleging claims for fraudulent
conveyance, constructive trust and declaratory relief in connection with a
settlement we had previously entered into resolving claims against a Thailand
purchaser of our equipment. In its complaint against us, Fullman, allegedly
another creditor of the Thailand purchaser, alleges damages of approximately
$11,500,000 plus interest. We successfully moved to transfer the case to the
United States District Court for the Northern District of California. The court
granted our motion for summary judgement, dismissing the plaintiffs claims on
February 1, 2001 and denied plaintiffs motion for summary judgement. The
plaintiff has appealed the grant of summary judgement which has been denied.

We believe we have meritorious defenses to any appeal by the plaintiff and
intend to conduct a vigorous defense. However, an unfavorable outcome in this
matter could have a material adverse effect on our financial condition.*

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements of all public registrants. SAB
101, as amended, requires implementation by the Company no later than the fourth
quarter of fiscal 2001. Accordingly, any revenues that do not meet SAB 101's
guidance will be deferred and recorded as revenue in future periods, including
such revenue previously reported for the first three quarters of fiscal 2001
that do not meet the criteria of SAB 101. Changes in the Company's revenue
recognition policy resulting from the implementation of SAB 101 would be
reported as a change in accounting principle as of October 1, 2000. Under the
Company's existing revenue recognition policy, revenue from sales of products
based on existing technologies is recognized when the customer takes title to
the product, generally at the time of shipment. Costs to install equipment in
the customers' facilities are accrued at the time the product revenue is
recognized. The Company has historically recognized revenue prior to
installation as the installation costs, and the related estimated fair value,
are insignificant relative to the sales price and gross profit of the
transaction. In addition, the Company has a long history of successful
installations within a short timeframe of delivery and the cost to complete
installation does not vary materially from one instance to another.










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<PAGE>   22
We are currently evaluating the potential effect of the implementation of
SAB 101 on our financial results and operations. While SAB 101 is not expected
to affect the fundamental aspects of our operations as measured by shipments
and cash flows, the implementation of SAB 101 could result in changes to the
timing of our revenue recognition practices, and therefore could have a
material and adverse effect on our financial condition and results of
operations in the period of implementation.*

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, including changes in foreign currency
exchange rates and interest rates. We attempt to minimize our currency
fluctuation risk by actively managing the balances of current assets and
liabilities denominated in foreign currencies. A 10% change in the foreign
currency exchange rates would not have a material impact on our results of
operations.*

We purchase foreign exchange contracts to hedge certain of our existing firm
commitments (primarily Yen denominated). We recognize gains and losses on these
contracts to income when the related transaction being hedged is recognized. As
the effect of movements in currency exchange rates on forward exchange contracts
generally offsets the related effects on the underlying items being hedged,
these financial instruments are not expected to subject us to risks that
otherwise result from changes in currency exchange rates.*

We have investments in marketable debt securities that are subject to interest
rate risk. However, due to the short-term nature of our debt investments and our
ability to hold our fixed income investments to maturity, the impact of a 10%
interest rate change would not have a material impact on the value of such
investments.*

We have fixed rate debt obligations, which range between 2.2% to 12% with a
weighted average of 3.1% and maturity dates through February 2011. Certain of
our manufacturing facilities are leased under operating lease agreements under
which the monthly rent payments adjust based on LIBOR. Monthly rent payments are
variable at 0.75% to 2.0% over LIBOR. For one of the leases, we have entered
into an interest rate swap contract to fix the interest rate and therefore, the
lease payment. For the other lease, we have income and cash flow exposure to the
extent that LIBOR changes. The impact of a 10% change in interest rates would
not have a material impact on the amount of our lease payment.*

                           PART II. OTHER INFORMATION

                           SILICON VALLEY GROUP, INC.

ITEM 1. LEGAL PROCEEDINGS.

               On or about August 12, 1998, Fullman initiated a lawsuit in the
               United States District Court for the District of Oregon alleging
               claims for fraudulent conveyance, constructive trust and
               declaratory relief in connection with a settlement we had
               previously entered into resolving claims against a Thailand
               purchaser of our equipment. In its complaint against us, Fullman,
               allegedly another creditor of the Thailand purchaser, alleges
               damages of approximately $11,500,000 plus interest. We
               successfully moved to transfer the case to the United States
               District Court for the Northern District of California. The court
               granted our motion for summary judgement, dismissing the
               plaintiffs claims on February 1, 2001 and denied plaintiffs
               motion for summary judgement. The plaintiff has appealed the
               grant of summary judgement which has been denied.

               On July 8, 1999, we filed a complaint for copyright infringement
               to protect our investment and intellectual property from six
               third party vendors. We subsequently settled or withdrew


                                       22
<PAGE>   23

               complaints against five of the defendants. Our complaint alleged
               that the named defendant has infringed upon certain of our
               copyrights on our 8X series equipment by duplicating or modifying
               software in the refurbishment and sale of replacement boards. Our
               complaint further asks for preliminary and permanent injunction
               against the defendants' further infringement of our copyrights
               and sale of infringing systems and boards, and for an award of
               damages. This defendant filed a counterclaim against us in
               response to our complaint. We entered into a settlement agreement
               with the final defendant/counter claimant on January 11, 2001.

               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)  A Special Meeting of Stockholders of the Company was held on
                    February 7, 2001 ("the Meeting"). The vote of holders of
                    record of 34,826,388 shares of the Company's Stock
                    outstanding at the close of business on December 20, 2000
                    was solicited by proxy pursuant to Regulation 14A under the
                    Securities Act of 1934.

               (b)  At the Meeting, holders of 21,020,898 shares of Company
                    Common stock, or 60 per cent of the outstanding Company
                    Common Stock, were represented in person or by proxy,
                    constituting a quorum.

               (c)  At the Meeting the votes cast with respect to the resolution
                    to adopt the ASM Lithography Merger Agreement were as
                    follows:

                    FOR 20,898,728 AGAINST 97,484 ABSTAIN 24,686 NOT VOTING None
                        ----------         ------         ------            ----

ITEM 5. OTHER INFORMATION.

               None.

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

               (a)  Exhibits.

               (b)  Reports on Form 8-K.



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<PAGE>   24
               The Company filed a report on 8-K on January 8, 2001, in
               connection with a press release announcing that the Company and
               ASM Lithography Holding N.V. voluntarily requested the withdrawal
               of their filing in connection with the Exon-Florio review process
               in order to provide more time to address certain United States
               government inquiries regarding the pending merger.

               The Company filed a report on 8-K on February 6, 2001, in
               connection with a press release announcing that the Company and
               ASM Lithography Holding N.V. had refiled their petition in
               connection with the Exon-Florio review.

               The Company filed a report on 8-K on March 26, 2001, in
               connection with a press release announcing that the Company
               expected a decline in revenues due to lower global demand.

               The Company filed a report on 8-K on May 7, 2001, in connection
               with a press release announcing that the Company and ASM
               Lithography Holding N.V. had reached an agreement with the
               Committee on Foreign Investment in the United States (CFIUS),
               under the provisions of the Exon-Florio amendment to the Defense
               Procurement Act of 1950, to proceed with their previously
               announced merger.




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<PAGE>   25


                           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 14, 2001                     By: /s/Papken S. Der Torossian
                                            ----------------------------------
                                            Papken S. Der Torossian
                                            Chief Executive Officer and
                                            Chairman of the Board


Date:  May 14, 2001                     By: /s/Russell G. Weinstock
                                            ----------------------------------
                                            Russell G. Weinstock
                                            Vice President Finance and
                                            Chief Financial Officer




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