<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 June 30, 2000.

                                       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
July 28, 2000 was 33,975,670.


--------------------------------------------------------------------------------


<PAGE>   2

                           SILICON VALLEY GROUP, INC.

                                      INDEX


PART I. FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                        PAGE NO.
                                                                                        --------
<S>                                                                                     <C>

           Consolidated Condensed Balance Sheets as of June 30,
           2000 and September 30, 1999                                                       3

           Consolidated Condensed Statements of Operations for the
           Quarters and Nine Months Ended June 30, 2000 and 1999                             4

           Consolidated Condensed Statements of Cash Flows for
           the Nine Months Ended June 30, 2000 and 1999                                      5

           Notes to Consolidated Condensed Financial Statements                              6

           Management's Discussion and Analysis of Financial
           Condition and Results of Operations                                              10


PART II.  OTHER INFORMATION                                                                 28


SIGNATURES                                                                                  30
</TABLE>



                                       2
<PAGE>   3

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

<TABLE>
<CAPTION>
                                                               June 30,        September 30,
                                                                2000              1999
                                                              ---------         ---------
                                                             (Unaudited)
<S>                                                           <C>              <C>
ASSETS

Current Assets:
     Cash and equivalents                                     $ 129,272         $  98,278
     Short-term investments                                      26,941            43,968
     Accounts receivable (net of allowance for doubtful
           accounts of $6,064 and $5,038 respectively)          187,742           153,981
     Refundable income taxes                                         --             2,500
     Inventories                                                249,306           200,769
     Prepaid expenses and other assets                           10,018             9,826
     Deferred income taxes                                       29,336            35,489
                                                              ---------         ---------
          Total current assets                                  632,615           544,811
Property and equipment, net                                     193,964           198,403
Deposits and other assets                                         9,559             8,299
Intangible assets, net                                            2,084             3,260
                                                              ---------         ---------
Total                                                         $ 838,222         $ 754,773
                                                              =========         =========


LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
     Accounts payable                                         $  56,119         $  34,202
     Accrued liabilities                                        140,794           123,266
     Current portion of long-term debt                            1,549             1,620
     Income taxes payable                                         3,642             3,568
                                                              ---------         ---------
          Total current liabilities                             202,104           162,656
                                                              ---------         ---------
Long-term debt                                                   25,784            26,790
                                                              ---------         ---------
Deferred and other liabilities                                   10,338             7,790
                                                              ---------         ---------
Stockholders' Equity:
     Convertible preferred stock - shares
          outstanding: 15,000                                    14,976            14,976
     Common stock - shares outstanding:
          June 30, 2000: 33,920,882
          September 30, 1999: 33,333,884                        420,875           410,068
     Retained earnings                                          165,888           134,928
     Accumulated other comprehensive loss                        (1,743)           (2,435)
                                                              ---------         ---------
     Total stockholders' equity                                 599,996           557,537
                                                              ---------         ---------
Total                                                         $ 838,222         $ 754,773
                                                              =========         =========
</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                    Nine Months Ended
                                                        June 30,                           June 30,
                                                2000              1999               2000              1999
                                              ---------         ---------         ---------         ---------
<S>                                           <C>               <C>               <C>               <C>
Net sales                                     $ 218,008         $ 136,894         $ 602,405         $ 283,877

Cost of sales                                   119,686            89,034           340,069           197,817
                                              ---------         ---------         ---------         ---------

Gross profit                                     98,322            47,860           262,336            86,060

Operating expenses:

     Research, development and related
            engineering                          37,772            24,016           101,171            61,668
     Marketing, general and
            administrative                       41,852            28,719           118,351            68,286
                                              ---------         ---------         ---------         ---------

Operating income (loss)                          18,698            (4,875)           42,814           (43,894)

Interest and other income                         2,371             2,126             7,280             4,916

Interest expense                                   (590)             (288)           (1,719)             (862)
                                              ---------         ---------         ---------         ---------

Income (loss) before income taxes                20,479            (3,037)           48,375           (39,840)

Provision (benefit) for income taxes              7,372              (972)           17,415           (12,749)
                                              ---------         ---------         ---------         ---------
Net income (loss)                             $  13,107         $  (2,065)        $  30,960         $ (27,091)
                                              =========         =========         =========         =========

Net income (loss) per share - basic           $    0.39         $   (0.06)        $    0.92         $   (0.82)
                                              =========         =========         =========         =========
Shares used in per share
     computations - basic                        33,798            33,031            33,532            32,874
                                              =========         =========         =========         =========

Net income (loss) per share - diluted         $    0.36         $   (0.06)        $    0.87         $   (0.82)
                                              =========         =========         =========         =========
Shares used in per share
     computations - diluted                      36,288            33,031            35,618            32,874
                                              =========         =========         =========         =========
</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>
                                                                          Nine Months Ended
                                                                               June 30,
                                                                        2000             1999
                                                                     ---------         ---------
<S>                                                                  <C>               <C>
Cash Flows from Operating Activities:
     Net income (loss)                                               $  30,960         $ (27,091)
     Reconciliation to net cash provided
          by operating activities:
               Depreciation and amortization                            38,579            35,044
               Amortization of intangibles                               1,176               408
               Deferred income taxes                                     6,153           (14,108)
               Changes in assets and liabilities:
                    Accounts receivable                                (33,761)           23,756
                    Refundable income taxes                              2,500             8,534
                    Inventories                                        (48,537)            9,727
                    Prepaid expenses and other assets                     (192)             (660)
                    Deposits and other assets                           (1,260)           (1,271)
                    Accounts payable                                    21,917            (4,301)
                    Accrued and deferred liabilities                    20,777           (20,077)
                    Income taxes payable                                    74              (805)
                                                                     ---------         ---------
     Net cash provided by operating activities                          38,386             9,156
                                                                     ---------         ---------

Cash Flows from Investing Activities:
     Purchases of short-term investments, available for sale           (17,023)          (44,757)
     Maturities of short-term investments, available for sale           34,648            35,374
     Purchases of property and equipment                               (34,143)          (25,021)
                                                                     ---------         ---------
     Net cash used for investing activities                            (16,518)          (34,404)
                                                                     ---------         ---------

Cash Flows from Financing Activities:
     Sale of convertible preferred stock                                    --            14,976
     Sale of common stock                                               10,807             2,988
     Repayment of debt                                                  (1,004)             (512)
                                                                     ---------         ---------
     Net cash provided by financing activities                           9,803            17,452
                                                                     ---------         ---------

Effect of Exchange Rate Changes on Cash                                   (677)             (230)
                                                                     ---------         ---------

Increase (decrease) in cash and equivalents                             30,994            (8,026)

Cash and equivalents:
     Beginning of period                                                98,278           121,575
                                                                     ---------         ---------
     End of period                                                   $ 129,272         $ 113,549
                                                                     =========         =========
</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 unaudited consolidated condensed financial statements have been
prepared by the Company 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, 1999. Results for fiscal 2000 interim periods are not necessarily
indicative of results to be expected for the fiscal year ending September 30,
2000.

The Company uses a 52-53 week fiscal year ending on the Friday closest to
September 30. Both fiscal 2000 and 1999 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. 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 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>
                              June 30,      September 30,
                               2000            1999
                             --------        --------
                                  (In thousands)
<S>                          <C>            <C>
      Raw materials          $106,707        $ 83,080
      Work-in-process         134,928         115,172
      Finished goods            7,671           2,517
                             --------        --------
                             $249,306        $200,769
                             ========        ========
</TABLE>



                                       6
<PAGE>   7

3.      NET INCOME (LOSS) PER SHARE

Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding for the
period. Diluted net income (loss) 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. Common
share equivalents are excluded from the computation in loss periods, as their
effect is antidilutive.

Weighted average options to purchase approximately 1,232,000 shares of common
stock at a weighted average exercise price of $25.41 per share were outstanding
at June 30, 2000 but were not included in the computation of diluted earnings
per share because their exercise price exceeded the market price of these shares
and therefore, the effect would be antidilutive. The quarter and nine months
ended June 30, 1999 were loss periods; therefore the effect of common stock
equivalents would be antidilutive and were not included in the calculation of
diluted loss per share.

The following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands, except per share amounts.)

<TABLE>
<CAPTION>
                                                Quarters ended                  Nine months ended
                                                   June 30,                         June 30,
                                             2000            1999             2000            1999
                                           --------        --------         --------        --------
<S>                                        <C>             <C>              <C>             <C>
Net income (loss)                          $ 13,107        $ (2,065)        $ 30,960        $(27,091)
                                           --------        --------         --------        --------
Weighted average shares outstanding          33,798          33,031           33,532          32,874
Employee stock options and
    convertible preferred stock               2,490              --            2,086              --
                                           --------        --------         --------        --------
Diluted average shares outstanding           36,288          33,031           35,618          32,874
                                           ========        ========         ========        ========
Basic net income (loss) per share          $   0.39        $  (0.06)        $   0.92        $  (0.82)
                                           ========        ========         ========        ========
Diluted net income (loss) per share        $   0.36        $  (0.06)        $   0.87        $  (0.82)
                                           ========        ========         ========        ========
</TABLE>

4.      REVENUE RECOGNITION

The Company generally recognizes revenue from the sale of equipment upon
shipment and transfer of title. During the quarter ended June 30, 2000, the
Company recognized approximately $23,000,000 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 June 30, 1999). At June 30, 2000,
the Company was storing approximately $35,000,000 of such equipment for this
customer. The customer has scheduled shipment of approximately $23,000,000 of
the equipment in the fourth quarter of fiscal 2000 and the remaining equipment
through the first quarter of fiscal 2001.



                                       7
<PAGE>   8

5.      COMPREHENSIVE INCOME (LOSS)

For the quarters and nine months ended June 30, 2000 and 1999, the components of
total comprehensive income (loss) are as follows:

<TABLE>
<CAPTION>
                                                       Quarters ended                  Nine months ended
                                                           June 30,                         June 30,
                                                    2000             1999             2000            1999
                                                  --------         --------         --------        --------
                                                        (In thousands)                   (In thousands)
<S>                                               <C>              <C>              <C>             <C>
Net income (loss)                                 $ 13,107         $ (2,065)        $ 30,960        $(27,091)
Net unrealized gain on investments                      37               39              598             150
Net unrealized gain on derivatives and
  foreign currency translation adjustments            (150)             247               94             562
                                                  --------         --------         --------        --------
Other comprehensive income                            (113)             286              692             712
                                                  --------         --------         --------        --------

Total comprehensive income (loss)                 $ 12,994         $ (1,779)        $ 31,652        $(26,379)
                                                  ========         ========         ========        ========
</TABLE>

6.      ACQUISITION OF THE SEMICONDUCTOR EQUIPMENT GROUP OF WATKINS-JOHNSON

On July 6, 1999, the Company acquired the business of the Semiconductor
Equipment Group of Watkins-Johnson Company ("SEG"). The total purchase price of
$4,100,000 included approximately $1,400,000 in costs directly attributable to
the acquisition and was allocated to the assets acquired and liabilities assumed
based on their respective fair values. The excess of the net SEG assets over the
total purchase price was used to proportionately reduce the value of noncurrent
assets acquired.

Also, in connection with the acquisition, $3,450,000 was placed in escrow by
Watkins-Johnson to cover potential claims by the Company. The Company had up to
twelve months from the closing date to file claims for indemnification against
this escrow fund. The Company did not file any claims for indemnification
against the escrow fund. In July 2000, the remaining funds, interest and
earnings reverted to Watkins-Johnson.

The operating results of SEG have been included in the consolidated statements
of operations since the date of acquisition.

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.

There were no gains or losses due to hedge ineffectiveness for the quarter ended
June 30, 2000 nor were there any derivative instruments during the quarter ended
June 30, 1999.



                                       8
<PAGE>   9

8.      RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB101"), "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements of all public registrants. The SEC
has subsequently issued SAB 101A in March 2000 and SAB 101B in June 2000
delaying the implementation date of SAB 101 until no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. Changes in the
Company's revenue recognition policy resulting from the interpretation of SAB
101 would be reported as a change in accounting principle no later than the
Company's fourth quarter beginning July 1, 2001. The Company has not determined
what the full effect of adopting SAB 101 will have on the Company's financial
statements.



                                       9
<PAGE>   10

                           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, 1999, 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.

OVERVIEW

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 chemical vapor deposition
("LPCVD"), and with the acquisition of the Semiconductor Equipment Group of
Watkins-Johnson in 1999, thermal processing products which address atmospheric
pressure chemical vapor deposition ("APCVD"). The Company manufactures and
markets photolithography exposure SVGL products, photoresist processing Track
products and oxidation/diffusion and chemical vapor deposition and LPCVD, APCVD
Thermal products.

On July 6, 1999, the Company acquired the business of the Semiconductor
Equipment Group of Watkins-Johnson Company ("SEG"). The acquisition was
accounted under the purchase method of accounting for financial reporting
purposes. The results of the Company include the operating results of SEG from
the date of acquisition.

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. During 1997, as a result of various factors, semiconductor
manufacturers 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 continued to
impact the Company throughout fiscal 1999. During the second half of fiscal 1999
and through the first nine months of fiscal 2000, the Company has seen continued
strength in the semiconductor industry and, in particular, its placement of
orders for both expansion and new technology products. The Company expects this
strength to continue through the remainder of fiscal 2000.* The Company expects
its customer orders and net sales for fiscal year 2000 to significantly exceed


                                       10
<PAGE>   11

the prior fiscal year's amounts.* However, there can be no assurance that the
semiconductor industry will sustain the growth realized in fiscal year 2000,
that customer orders and net sales will continue to grow, or that the Company
will not again experience 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.


Historically, the Company has relied on a limited number of customers for a
substantial percentage of its net sales. In fiscal 1999, the Company's largest
customer accounted for 56% of net sales. During the first nine months of fiscal
2000, this trend continued as the Company's largest customer accounted for 49%
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.*



RESULTS OF OPERATIONS

Net sales for the third fiscal quarter ended June 30, 2000 were $218,008,000, an
increase of 59% over net sales of $136,894,000 for the third quarter of the
preceding fiscal year and 7% above net sales of $204,596,000 during the second
quarter of fiscal 2000. During the nine-month period ended June 30, 2000, net
sales of $602,405,000 increased 112% over net sales of $283,877,000 during the
comparable period of fiscal 1999. The increase in net sales during the quarter
and year to date periods ended June 30, 2000 compared to the comparable periods
of 1999 and to the second quarter of fiscal 2000 was principally the result of
increased shipments resulting from increased customer demand for both expansion
and new technology products.

International net sales (based on shipment destination) as a percentage of total
net sales for the quarters ended June 30, 2000, June 30, 1999 and March 31, 2000
were 44%, 20% and 50%, respectively. The increase in international net sales
during fiscal 2000 primarily relates to increased shipments of Thermal products
to Asia and increased shipments of Lithography products to Europe.

During the quarters ended June 30, 2000 and March 31, 2000, the Company
recognized approximately $23,000,000 and $18,000,000, 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 the Company store the equipment
until predetermined shipment dates (none during the quarter ended June 30,
1999). At June 30, 2000, the Company was storing approximately $35,000,000 of
such equipment for this customer. The customer has scheduled the shipment dates
for the remaining equipment through the first quarter of fiscal 2001.


During the third quarter of fiscal 2000 the Company recorded new bookings of
$382,601,000, an increase of approximately 168% over new bookings of
$142,878,000 during the third quarter of fiscal 1999 and an increase of 25% over
new bookings of $ 305,693,000 during second quarter of fiscal 2000. 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
June 30, 2000 totaled $648,372,000, above backlog of $334,637,000 and


                                       11
<PAGE>   12

$483,789,000 at June 30, 1999 and March 31, 2000, respectively. At June 30,
2000, backlog included orders for 77 Micrascan photolithography systems.
Additionally, the Company had orders for 20 Micrascan systems with scheduled
delivery dates outside the Company's twelve-month backlog window.

Gross margin was 45% in the third quarter of fiscal 2000, compared to 35% during
the year earlier quarter and 44% in the second quarter of fiscal 2000. During
the nine-month period ended June 30, 2000, gross margin was 44% of net sales
compared to 30% of net sales during the comparable period of fiscal 1999. The
improvement in gross margin during the quarter and year to date periods ended
June 30, 2000 compared to the comparable periods of fiscal 1999 was principally
the result of increased shipments resulting in improved absorption of overhead
costs. The improvement in gross margin during the third fiscal quarter of 2000
when compared to the preceding fiscal quarter is primarily the result of
improved efficiencies and utilization of inventories resulting from increased
demand, partially offset by the benefit in the previous fiscal quarter resulting
from a settlement of a customer order termination.

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 recognition
of the funding related to the development milestones is ratable over the term of
the agreements.

R&D expenses were $37,772,000 (17% of net sales) for the third quarter of fiscal
2000, $24,016,000 (18% of net sales) for the year earlier quarter and
$33,260,000 (16% of net sales) for the second quarter of fiscal 2000. For the
third and second quarters of fiscal 2000, and the third quarter of fiscal 1999,
development funding of $835,000, $1,197,000 and $1,071,000, respectively, was
recognized and offset against R&D expense. R&D expense increased over the third
quarter of fiscal 1999 primarily due to increased spending on Thermal's single
wafer development and product sustaining initiatives, continued development of
the very high numerical aperture version of the 193-nanometer product and
spending for the 157-nanometer development program. The increase in R&D expense
over the second quarter of fiscal 2000 is primarily due to increased spending
for the 157-nanometer development program and continued development of the very
high numerical aperture version of the 193-nanometer product.

R&D expense for the nine months ended June 30, 2000 was $101,171,000 (17% of net
sales) compared to $61,668,000 (22% of net sales) for the nine months ended June
30, 1999. For the nine-month periods ended June 30, 2000 and 1999, funding
recognized under joint development agreements and offset against R&D
expenditures was $4,402,000 and $2,139,000 respectively. R&D expense increased
primarily due to increased spending on Thermal's single wafer development and
product sustaining initiatives, spending on the high throughput
cross-performance Lithography Micrascan platform and spending under the
157-nanometer development program.

Marketing, general and administrative ("MG&A") expenses were $41,852,000 (19% of
net sales) for the third quarter of fiscal 2000, $28,719,000 (21% of net sales)
for the year earlier quarter and $40,107,000 (20% of net sales) for the second
quarter of fiscal 2000. During the nine-month period ended June 30, 2000, MG&A
expenses were $118,351,000 (20% of net sales) compared to $68,286,000 (24%


                                       12
<PAGE>   13

of net sales) for the nine-month period ended June 30, 1999. The increase in
MG&A over the third fiscal quarter of 1999 and the second quarter of fiscal 2000
was principally due to increased administrative and volume related costs
required to support increased shipment volume offset in part by reduced product
support costs. The increase in MG&A for the nine-month period ended June 30,
2000 when compared to the comparable period of the prior fiscal year is due to
increased volume related, administrative and selling costs required to support
increased shipment volume.

The Company had operating income of $18,698,000 for the third quarter of fiscal
2000, compared to an operating loss of $4,875,000 for the year earlier quarter
and operating income of $15,626,000 for the second quarter of fiscal 2000. The
increase in operating income over the third quarter of fiscal 1999 and the
second quarter of fiscal 2000 was primarily the result of higher net sales at
improved gross margin offset in part by increased operating expenses.

Interest and other income for the third quarter ended June 30, 2000 was
$2,371,000 compared to $2,126,000 during the comparable quarter of fiscal 1999
and $2,619,000 during the second quarter of fiscal 2000. For the nine-month
period ended June 30, 2000 interest and other income was $7,280,000 compared to
$4,916,000 for the comparable period of fiscal 1999. The increase in interest
and other income during the periods ended June 30, 2000 compared to the
comparable periods of 1999 was primarily due to higher cash balances available
for investment at higher average interest rates. The decrease in interest and
other income between the third quarter ended June 30, 2000 and the previous
quarter of fiscal 2000 is primarily the result of lower cash balances available
for investment.

Interest expense was $590,000 during the third quarter of fiscal 2000, compared
to $288,000 in the third quarter of fiscal 1999 and $416,000 during the second
quarter of fiscal 2000. During the nine-month period ended June 30, 2000,
interest expense was $1,719,000 compared to $862,000 during the comparable
period of fiscal 1999. The increase in interest expense during fiscal 2000 is
primarily due to interest expense associated with the Yen-denominated bank loans
assumed in connection with the acquisition of SEG and additional commitment fees
associated with the Company's revolving line of credit agreement.

The Company recorded a 36% income tax provision for the third quarter of fiscal
2000 and for the nine-month period ended June 30, 2000. During fiscal 1999, the
Company recorded a tax benefit of 32%. Changes in the effective tax rate relate
primarily to changes in the geographic distribution of the Company's pretax
income.


The Company had net income of $13,107,000 ($0.36 per diluted share) for the
third quarter of fiscal 2000 compared to a net loss of $2,065,000 ($0.06 loss
per diluted share) for the third quarter of fiscal 1999 and net income of
$11,611,000 ($0.32 per diluted share) for the second quarter of fiscal 2000. For
the nine-month period ended June 30, 2000, the Company had net income of
$30,960,000 ($0.87 per diluted share), compared to a net loss of $27,091,000
($0.82 loss per diluted share) for the comparable period of fiscal 1999.


                                       13
<PAGE>   14

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2000, cash and cash equivalents and short-term investments totaled
$156,213,000, an increase of $13,967,000 from the September 30, 1999 balance of
$142,246,000. This increase is primarily attributable to net cash provided by
operating activities of $38,386,000 which is comprised of net income of
$30,960,000, non-cash depreciation and amortization charges of $39,755,000 and
increases in accounts payable of $21,917,000 and accrued and deferred
liabilities of $20,777,000. These increases in operating cash were partially
offset by increases in inventories and accounts receivable of $48,537,000 and
$33,761,000 respectively, required to support the increase in sales volume.
During the nine month period ended June 30, 2000 the Company purchased property
and equipment of $34,143,000 and received proceeds from stock issued under
employee option and stock purchase programs of $10,807,000.

In connection with the acquisition of SEG, the Company assumed three
Yen-denominated bank loans totaling approximately $22,700,000 bearing interest
at rates of between 2.2% and 3.1%.

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 bank's prime rate or 0.65% to 1.50% over LIBOR.
The 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. The Company is in compliance with the amended
covenants. At June 30, 2000, 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 research and development activities, to the
extent such activities are not funded by third parties, and provide for the
expansion of its business for the next twelve months.* However, there can be no
assurance that the Company will not require additional working capital during
this time or that such additional capital will be available to the Company on
terms acceptable to the Company or at all.*


YEAR 2000

The Year 2000 compliance issue pertains to how existing application software
programs and operating systems can accommodate date values. The Company has
evaluated its Year 2000 risk as it exists in three areas: information technology
infrastructure, including reviewing what actions are necessary to bring all
software tools used internally to Year 2000 compliance; Year 2000 readiness of
critical suppliers; and Year 2000 compliance of the products the Company
supplies to its customers. At this time, the Company has not experienced any
material Year 2000 issues with its information technology infrastructure, its
critical suppliers or with its products or services provided to customers. There
can be no assurance that unforeseen problems will not happen which could have a
material adverse effect on the Company.*


                                       14
<PAGE>   15

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, economic conditions affecting customer demand, 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 more advanced semiconductors
with increased efficiency.* The Company is developing new technology products in
it's Track, Thermal and Lithography operations. These new products are expected
to be capable of processing or will be able to be upgraded in the field for
processing 300mm wafers.* Failure to successfully introduce these or any other
new products in a timely manner would result in the loss of competitive position
and could reduce sales of existing products.* In addition, new product
introductions could contribute to quarterly fluctuations in operating results as
orders for new products commence and increase the potential for a decline in
orders of existing products, particularly if new products are delayed.*

From time-to-time, the Company has experienced delays in the introduction of its
products and product enhancements due to technical, manufacturing and other
difficulties and may experience similar delays in the future.* For example,
during fiscal 1996, the Company announced 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 the development of the Company's next
generation product, the ProCell. There can be no assurance that the Company will
not experience delays in completing the development of, or experience
manufacturing problems related to, the ProCell product. Among other difficulties
the Company may experience instability of the design of either the hardware or
software elements of the new ProCell technology, or be unable to efficiently
manufacture the new product or other products.* During June of 1999 the Company
introduced the ProCell product which was initially shipped during the third


                                       15
<PAGE>   16

quarter of fiscal 2000. The Company believes that if there are protracted
delays in delivering initial quantities of the Procell product, or any new
product to multiple customers, this could result in semiconductor manufacturers
electing to install competitive equipment and could preclude industry acceptance
of the ProCell product or any of the Company's products.* The inability to
produce the ProCell or any product or any failure to achieve market acceptance
could have a material effect on the Company's business, results of operations
and could result in a subsequent loss of future sales.*

In June of 1999, five participants in the 193-nanometer Development Program
decided that their product needs have changed for initial 193-nanometer machines
and have withdrawn from the development program and declined delivery of initial
tools. These participants withdrew in part due to delays in product introduction
and changes in participant's technical requirements. As the Lithography demands
continue, the Company is responding by accelerating the development of a very
high numerical aperture ("VHNA") version of its 193-nanometer product. In order
to address a broader market with this tool, the Company is also redesigning its
stage technology to optimize cost of ownership. Although the Company believes
that the timing of the introduction of the product will be sufficient to meet
volume production requirements of 130-nanometer nodes, there can be no assurance
that the product will be introduced on time or that customers will wait for the
product, in order to commit for their production needs.* The absence of a
successful implementation of the product or obtaining sufficient orders for this
product could have a material adverse impact on the future profitability of the
Company.*

Currently, the Company is primarily benefiting from the increased demand for its
legacy products to satisfy customer requirements to expand production. In order
to continue growth and meet expected technology requirements of the
semiconductor industry, the Company must timely introduce its new Track, Thermal
and Lithography products, efficiently manufacture these products and obtain
sufficient orders for these products. The inability to effectively transition to
new products, including 300mm versions, could have a material adverse effect on
the Company's financial condition and results of operations.*

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. Initial
shipments into the market of the new Track product, the ProCell, were not
expected until fiscal 2000.* 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.*


                                       16
<PAGE>   17

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,
LPCVD equipment; in its APCVD products competitors include Applied Materials and
Quester; 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. 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" for a discussion of risks
related to the Company's ability to compete in Japanese and Pacific Rim
markets.)

Many of the Company's competitors are Japanese corporations. Although the
economic conditions in Asia have improved, the Company believes that it will
continue to face severe price competition globally from these competitors.* 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.*

Customer Concentration. Historically, the Company has relied on a limited number
of customers for a substantial percentage of its net sales. In fiscal 1999, the
Company's largest customer accounted for 56% of net sales and no other single
customer accounted for 10% or more 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, the Company's largest Track customers has decided to purchase systems
with similar capabilities from another supplier. We expect that the decision


                                       17
<PAGE>   18

by such customer to purchase systems from other suppliers and the cancellation
of the 200-APS Track product 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" for a
discussion of risks related to the Company's decision to cancel the 200-APS
Track product). The loss of any other significant customer 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
enhancements will further exacerbate the adverse effect customer order
rescheduling and cancellations discussed above will have on the Company's
business 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. 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.*

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 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. The Company has invested in the staffing and
facilities that it believes are necessary to sell, service and support customers
in the Pacific Rim and with the acquisition of SEG, the Company acquired from


                                       18
<PAGE>   19

the Watkins-Johnson Company a 36,000 square foot customer demonstration
facility in Kawasaki City, Japan. However, the Company anticipates that it will
continue to 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.* Failure to secure customers in these
markets would have an adverse effect on the Company's business and results of
operations.*

Due to the high cost of building, equipping and maintaining fabrication
facilities, many customers are outsourcing their manufacturing to foundries,
many of which are located in Taiwan. Although the Company is focused on
increasing its penetration into Taiwan, it has had limited success in securing
volume orders from companies in this area, which have long standing
relationships with the Company's competitors. If the Company is not successful
in penetrating this market, it could have an adverse effect on the Company's net
sales and results of operations.*

Risks Associated with Acquisition of Watkins-Johnson Company's Semiconductor
Equipment Group. On July 6, 1999, the Company completed the acquisition of the
Semiconductor Equipment Group ("SEG") of Watkins-Johnson. The acquisition of the
assets of SEG is accompanied by a variety of risks, which could prevent the
Company from realizing any significant benefits from the transaction. The
Company may experience difficulty with integrating the operations and personnel
of the business acquired from Watkins-Johnson, need additional financial
resources to fund the operations of the acquired business, be unable to maximize
the Company's financial and strategic position by the incorporation or
development of the acquired technology and products or lose key employees of the
acquired business. In particular, the Company believes it must successfully
transition the acquired technology of SEG to incorporate process improvements
such as single wafer processing and scalability from 200mm to 300mm wafer
processing capability.* There can be no assurance that the Company will not
experience difficulties or delays in transitioning this technology which could
have a material adverse effect on the Company.*

The acquisition of SEG also included the assumption of certain liabilities of
SEG, which may prove more costly than the Company anticipates. For example,
certain environmental remediation steps have been put in place at the site,
there can be no assurance that additional environmental hazards or liabilities
will not surface which may have an adverse impact on the Company's business.* 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, product development
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.*

Business Interruption. The Company manufactures its Track products in San Jose,
California and substantially all of its Thermal products in Orange and Scotts
Valley, California. Tinsley's optical components are manufactured in Richmond
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 SVGL -


                                       19
<PAGE>   20

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. 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.*

Environmental Matters. The Company is subject to a number of governmental
regulations related to the discharge or disposal of toxic and hazardous
chemicals used in the manufacture of certain of the Company's products. The
Company believes that it is in general compliance with these regulations and
that it has obtained or expects to obtain shortly all necessary environmental
permits to conduct its business.* The failure to comply with present or future
regulations could result in fines or penalties being assessed against the
Company, interruption of production or reduction in the Company's customers
accepting its products.*

The 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 (which includes
insurance policies covering performance of the environmental consultant and
coverage for undiscovered contamination) obligates the third party to perform
all of the obligations and responsibilities of Watkins-Johnson Company. There
can be no assurance that the third party consultant will have the financial
resources or technical expertise to execute under the remediation agreement.* It
is conceivable that environmental regulatory agencies could ultimately look to
the Company to remediate the groundwater contamination at the site.*

In August 1996, the Company purchased from Perkin-Elmer, approximately 50 acres
of land and a 201,000 square foot building thereon (the "Property") located in
Ridgefield, Connecticut. At the time the Company purchased the Property, it was
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 between the Company and Perkin-Elmer provide that Perkin-Elmer has
sole responsibility for all obligations or liabilities related to the clean-up
order. While the Company believes that it has been adequately indemnified, if
for some reason Perkin-Elmer was unable to comply or did not comply with the
clean-up order, the Company could be required to do so.*

The Company does not anticipate any material capital expenditures for
environmental control facilities in 2000.*



                                       20
<PAGE>   21

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 step-and-scan photolithography systems, eventually 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 248-nanometer lithography is required to fabricate devices with
line widths below 0.3 micron.* Semiconductor manufacturers can purchase
248-nanometer 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 step-and-scan systems, as
compared to 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 step-and-scan systems has accelerated and that advanced
semiconductor manufacturers are requiring 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 step-and-scan equipment capable of producing
 .25 micron line widths and below is available from competitors.* Technology
advancements are requiring photolithography exposure equipment to produce
line-widths to satisfy 130-nanometer and 100-nanometer nodes. This will
necessitate the use of new laser and photoresist technology. The Company has
under development a 193-nanometer product to address these requirements which
will be available in the early part of its next calendar year.* Current plans
are to have machines available as bridge tools, capable of being upgraded on the
customers factory floor from a 200mm to a 300mm machine.* If manufacturers of
248-nanometer steppers are able to further enhance existing technology to
achieve finer line widths sufficiently to erode the competitive and
technological advantages of 193-nanometer step-and-scan systems, or other
manufacturers of 193-nanometer 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, DRAMs and ASICs 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 processing wafers faster, 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 and supply sufficient quantities to a
worldwide customer base 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 as well


                                       21
<PAGE>   22

as foundries located primarily in Taiwan) represent a substantial portion of
the overall market for photolithography exposure equipment. To date, the Company
has not been successful in 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 to multiple customers will
be a major factor in customer decisions to commit to the Micrascan technology.*
Based upon the expected 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. In August 1996, as part of this expansion, the Company purchased from
The Perkin-Elmer Corporation a 243,000 square foot facility (subsequently
increased by the Company to 276,000 square feet) occupied by SVGL in Wilton,
Connecticut and an additional 201,000 square foot building, which SVGL now
occupies, in Ridgefield, Connecticut. 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 has
essentially completed its facility expansion activities, it has not invested in
all of the metrology and other equipment required to maximize manufacturing
capacity. However, the Company plans to continue increasing capacity to produce
optical components, thus enabling it to quickly respond to customer
requirements.* The timely 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 continue 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 delivering 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 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 as it
increases its penetration of the Micrascan product, 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.*



                                       22
<PAGE>   23

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.*

In November 1997, the Company acquired Tinsley Laboratories, Inc. ("TLI") in
exchange for approximately 1,091,000 shares of Company common stock. TLI
designs, provides research and manufactures precision optical components,
assemblies and systems, primarily for SVGL. 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 worldwide
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 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. In fiscal 1999 SVGL qualified an additional source of
lasers for its current and future versions of Micrascan products, allowing the


                                       23
<PAGE>   24

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.*

It is anticipated that a critical component of the optical system for the
157-nanometer lithography product, which is currently under development, will
utilize calcium fluoride.* Calcium fluoride is a raw material that has been
known to be in short supply and is integral to the production of optics capable
of producing quality line widths of .10 micron and below. The Company has or
will shortly qualify three suppliers who could be sources of this raw material
for the Company and is attempting to put in place certain supply agreements for
the production of calcium fluoride.* There can be no assurance that these
suppliers will be able to supply the quality or quantity of the product
necessary for the Company to meet expected future demand, or that the Company
will be able to identify and procure adequate supplies of calcium fluoride.
Failure to secure adequate supplies of calcium fluoride could 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 June 1999, certain Participants decided that
their product needs have changed for initial 193-nanometer machines and have
withdrawn from the program and chosen to use or are evaluating other solutions.
At September 30, 1999, the Company's obligations under these agreements are
complete.* At June 30, 2000, the Company had received and recognized $21,000,000
in funding from program Participants against research and development
expenditures and no additional funding is expected or required from the
Participants.*

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 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 June 30, 2000, $1,500,000 of development funding
from Intel has been recognized and offset against R&D expense. Separately in
1999 Intel invested approximately $15,000,000 in the Company in the form of a
purchase of Series 1 Convertible Preferred Stock. 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 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.* 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

                                       24
<PAGE>   25

receiving, and any failure to do so could have a material adverse impact on the
Company's results of operations.* 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.

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 in
volume 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 to multiple customers, 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 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, increased competition and the potential difficulties inherent
in developing and manufacturing current and future 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.*

Dependence on Key Personnel. The Company's future success will continue to
depend to a large extent on the continued contributions of its executive
officers and key management and technical personnel. In particular, SVGL's
future growth is very dependent on the Company's ability to attract and retain
key skilled employees, particularly those related to the optical segment of its
business. The Company is a party to agreements with each of its executive
officers to help ensure the officers' continual service to the Company in the
event of a change-in-control. Each of the Company's executive officers, and key
management and technical personnel would be difficult to replace. The loss of
the services of one or more of the Company's executive officers or key
personnel, or the inability to continue to attract qualified personnel could
delay product development cycles or otherwise have a material adverse effect on
the Company's business, financial condition and results of operations.*

Legal Proceedings. On or about August 12, 1998, Fullman International Inc. and
Fullman Company LLC (collectively, "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 the Company had previously entered into resolving its claims against
a Thailand purchaser of the Company's equipment. In its complaint against the
Company, Fullman, allegedly 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. Discovery is ongoing and trial has been set to begin on
February 26, 2001.



                                       25
<PAGE>   26

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.*

On July 8, 1999, the Company filed a complaint for copyright infringement to
protect its investment and intellectual property from six third party vendors
("the Defendants") subsequently complaints against two of the Defendants were
withdrawn by the Company. The complaint was filed against the Defendants
alleging that the named defendants have infringed upon certain copyrights owned
by the Company on its 8X series equipment by duplicating or modifying software
in the refurbishment and sale of replacement boards. The complaint further asks
for preliminary and permanent injunction against the Defendants' further
infringement of the Company's copyrights and sale of infringing systems and
boards, and for an award of damages. One of the Defendants has filed a
counterclaim against the Company in response to the Company's complaint.

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.*

Recently Issued Accounting Pronouncements. In December 1999, the Securities and
Exchange Commission ("SEC") released Staff Accounting Bulletin No. 101
("SAB101"). SAB 101 summarizes certain interpretations and practices followed by
the Division of Corporation finance and the Office of the Chief Accountant of
the SEC in administering the disclosure requirements of the Federal securities
laws in applying generally accepted accounting principles to revenue recognition
in financial statements. The SEC has subsequently issued SAB 101A in March 2000
and SAB 101B in June 2000 delaying the implementation date of SAB 101 until no
later than the fourth fiscal quarter of fiscal years beginning after December
15, 1999. Changes in the Company's revenue recognition policy resulting from the
interpretation of SAB 101 would be reported as a change in accounting principle
no later than the Company's fourth fiscal quarter beginning July 1, 2001. This
change in accounting principle would result in a cumulative adjustment
reflecting the deferral of revenue and expenses for shipments previously
reported as revenue that do not meet SAB 101 interpretation. The Company has not
determined what the full effect of adopting SAB 101 will have on the Company's
financial statements.

QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to financial market risks, including changes in foreign
currency exchange rates and interest rates. The Company attempts to minimize its
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 the Company's
results of operations.*

The Company purchases foreign exchange contracts to hedge certain existing firm
commitments (primarily Yen denominated). Gains and losses on these contracts are
recognized in 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,


                                       26
<PAGE>   27

these financial instruments are not expected to subject the Company to risks
that otherwise result from changes in currency exchange rates.

The Company has investments in marketable debt securities that are subject to
interest rate risk. However, due to the short-term nature of the Company's debt
investments and the Company's ability to hold it's 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.*

The Company has fixed rate debt obligations which range between 2.2% to 12% with
a weighted average of 3.93% and maturity dates through February 2011. Certain of
the Company's 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,
the Company has entered into an interest rate swap contract to fix the interest
rate and therefore, the lease payment. For the other lease, the Company has
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
lease payment.



                                       27
<PAGE>   28

                           PART II. OTHER INFORMATION

                           SILICON VALLEY GROUP, INC.


ITEM 1.      LEGAL PROCEEDINGS.

             On or about August 12, 1998, Fullman International Inc. and Fullman
             Company LLC (collectively, "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 the Company had
             previously entered into resolving its claims against a Thailand
             purchaser of the Company's equipment. In its complaint against the
             Company, Fullman, allegedly 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. Discovery is ongoing and trial has been set to begin on
             February 26, 2001.

             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. *

             On July 8, 1999, the Company filed a complaint for copyright
             infringement to protect its investment and intellectual property
             from six third party vendors ("the Defendants"), subsequently,
             complaints against two of the Defendants were withdrawn by the
             Company. The complaint was filed against the Defendants alleging
             that the named defendants have infringed upon certain copyrights
             owned by the Company on its 8X series equipment by duplicating or
             modifying software in the refurbishment and sale of replacement
             boards. The complaint further asks for preliminary and permanent
             injunction against the Defendants' further infringement of the
             Company's copyrights and sale of infringing systems and boards, and
             for an award of damages. One of the Defendants has filed a
             counterclaim against the Company in response to the Company's
             complaint.

             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 AND USE OF PROCEEDS.

             None.


                                       28
<PAGE>   29


ITEM 3.      DEFAULTS UPON SENIOR SECURITIES.

             None.


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

             None


ITEM 5.      OTHER INFORMATION.

             None.


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

             (a) Exhibits.

             10.60 Third Amendment to Credit Agreement, dated August 11, 2000 by
                   and among the Registrant, ABN Amro Banks, N.V. as Agent and
                   Certain Lenders with respect thereto.

             27.0  Financial Data Schedule for the fiscal quarter ended
                   June 30, 2000.

             (b) Reports on Form 8-K.

             None.



                                       29
<PAGE>   30

                           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: August 14, 2000                  By: /s/    Papken S. Der Torossian
                                          ------------------------------------
                                                Papken S. Der Torossian
                                          Chief Executive Officer and
                                          Chairman of the Board



Date: August14, 2000                   By: /s/     Russell G. Weinstock
                                          ------------------------------------
                                                  Russell G. Weinstock
                                          Vice President Finance and
                                          Chief Financial Officer



                                       30

<PAGE>   31
                                 EXHIBIT INDEX

<TABLE>
<S>     <C>
10.60   Third Amendment to Credit Agreement, dated August 11, 2000 by and among
        the Registrant, ABN Amro Banks, N.V. as Agent and Certain Lenders with
        respect thereto.

27.0    Financial Data Schedule for the fiscal quarter ended June 20, 2000.
</TABLE>