<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 December 31, 1999.

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934.

        For the period from ________ to ________.

        Commission File Number 0-11348

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

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


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

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

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

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

        The number of shares outstanding of the Registrant's Common Stock as of
January 28, 2000 was 33,371,042.


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


<PAGE>   2

                           SILICON VALLEY GROUP, INC.

                                      INDEX



<TABLE>
<CAPTION>
                                                                            PAGE NO.
                                                                            --------
<S>                                                                         <C>
PART I. FINANCIAL INFORMATION

        Consolidated Condensed Balance Sheets as of December 31,
        1999 and September 30, 1999                                             3

        Consolidated Condensed Statements of Operations for the
        Quarters Ended December 31, 1999 and 1998                               4

        Consolidated Condensed Statements of Cash Flows for
        the Quarters Ended December 31, 1999 and 1998                           5

        Notes to Consolidated Condensed Financial Statements                    6

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


PART II.  OTHER INFORMATION                                                    25


SIGNATURES                                                                     27
</TABLE>



                                       2
<PAGE>   3

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

<TABLE>
<CAPTION>
                                                             December 31,    September 30,
                                                                1999             1999
                                                              ---------        ---------
                                                             (Unaudited)
<S>                                                          <C>             <C>
ASSETS

Current Assets:
     Cash and equivalents                                     $ 126,612        $  98,278
     Short-term investments                                      46,734           43,968
     Accounts receivable (net of allowance for doubtful
          accounts of $6,177 and $5,038 respectively)           132,563          153,981
     Refundable income taxes                                      1,646            2,500
     Inventories                                                209,501          200,769
     Prepaid expenses and other assets                           11,446            9,826
     Deferred income taxes                                       32,070           35,489
                                                              ---------        ---------
          Total current assets                                  560,572          544,811
Property and equipment, net                                     196,544          198,403
Deposits and other assets                                         9,086            8,299
Intangible assets, net                                            3,190            3,260
                                                              ---------        ---------
Total                                                         $ 769,392        $ 754,773
                                                              =========        =========


LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
     Accounts payable                                         $  37,432        $  34,202
     Accrued liabilities                                        128,110          123,266
     Current portion of long-term debt                            1,638            1,620
     Income taxes payable                                         2,961            3,568
                                                              ---------        ---------
          Total current liabilities                             170,141          162,656
                                                              ---------        ---------
Long-term debt                                                   26,991           26,790
                                                              ---------        ---------
Deferred and other liabilities                                    8,140            7,790
                                                              ---------        ---------
Stockholders' Equity:
     Convertible preferred stock - shares
        Outstanding: 15,000                                      14,976           14,976
     Common stock - shares outstanding:
          December 31, 1999: 33,339,932
          September 30, 1999: 33,333,884                        410,136          410,068
     Retained earnings                                          141,170          134,928
     Accumulated other comprehensive loss                        (2,162)          (2,435)
                                                              ---------        ---------
     Total stockholders' equity                                 564,120          557,537
                                                              ---------        ---------
TOTAL                                                         $ 769,392        $ 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
                                                        December 31,
                                                   1999             1998
                                                 ---------        ---------
<S>                                              <C>              <C>
Net sales                                        $ 179,801        $  85,487

Cost of sales                                      104,780           61,457
                                                 ---------        ---------

Gross profit                                        75,021           24,030

Operating expenses:

     Research, development and related
            engineering                             30,139           16,001
     Marketing, general and administrative          36,392           19,473
                                                 ---------        ---------

Operating income (loss)                              8,490          (11,444)

Interest and other income                            2,290            1,465

Interest expense                                      (713)            (374)
                                                 ---------        ---------

Income (loss) before income taxes                   10,067          (10,353)

Provision (benefit) for income taxes                 3,825           (3,321)
                                                 ---------        ---------

Net income (loss)                                $   6,242        $  (7,032)
                                                 =========        =========

Net income (loss) per share - basic              $    0.19        $   (0.21)
                                                 =========        =========
Shares used in per share
     computations - basic                           33,337           32,759
                                                 =========        =========

Net income (loss) per share - diluted            $    0.18        $   (0.21)
                                                 =========        =========
Shares used in per share
     computations - diluted                         34,637           32,759
                                                 =========        =========
</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>
                                                                          Quarters Ended
                                                                           December 31,
                                                                      1999              1998
                                                                    ---------        ---------
<S>                                                                 <C>              <C>
Cash Flows from Operating Activities:
     Net income (loss)                                              $   6,242        $  (7,032)
     Reconciliation to net cash provided
          by operating activities:
               Depreciation and amortization                           12,087           11,246
               Amortization of intangibles                                 70              168
               Deferred income taxes                                    3,419           (3,813)
               Changes in assets and liabilities:
                    Accounts receivable                                21,418           21,963
                    Refundable income taxes                               854            8,534
                    Inventories                                        (8,732)             941
                    Prepaid expenses and other assets                  (1,620)            (548)
                    Deposits and other assets                            (787)              88
                    Accounts payable                                    3,230           (5,657)
                    Accrued and deferred liabilities                    5,308          (11,290)
                    Income taxes payable                                 (607)             247
                                                                    ---------        ---------
     Net cash provided by operating activities                         40,882           14,847
                                                                    ---------        ---------

Cash Flows from Investing Activities:
     Purchases of short-term investments, available for sale           (9,039)          (6,600)
     Maturities of short-term investments, available for sale           6,585           14,101
     Purchases of property and equipment                               (9,782)         (12,320)
                                                                    ---------        ---------
     Net cash used for investing activities                           (12,236)          (4,819)
                                                                    ---------        ---------

Cash Flows from Financing Activities:
     Sale of common stock                                                  68            1,039
     Repayment of debt                                                   (318)            (164)
                                                                    ---------        ---------
               Net cash provided by financing activities                 (250)             875
                                                                    ---------        ---------

Effect of Exchange Rate Changes on Cash                                   (62)             492
                                                                    ---------        ---------

Increase in cash and equivalents                                       28,334           11,395

Cash and equivalents:
     Beginning of period                                               98,278          121,575
                                                                    ---------        ---------
     End of period                                                  $ 126,612        $ 132,970
                                                                    =========        =========
</TABLE>



            See Notes to Consolidated Condensed Financial Statements



                                       5
<PAGE>   6

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

1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The accompanying consolidated condensed financial statements have been prepared
by the Company without audit and reflect all adjustments, consisting only of
normal recurring adjustments, which in the opinion of management are necessary
to present fairly the financial position and the results of operations for the
interim periods. The statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. The interim
condensed consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 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>
                    December 31,   September 30,
                        1999           1999
                      --------       --------
                          (In thousands)
<S>                   <C>            <C>
Raw materials         $ 80,649       $ 83,080
Work-in-process        125,706        115,172
Finished goods           3,146          2,517
                      --------       --------
                      $209,501       $200,769
                      ========       ========
</TABLE>


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



                                       6
<PAGE>   7

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 3,600,000 shares of common stock at a
weighted average exercise price of $18.86 per share were outstanding at December
31, 1999 but were not included in the computation of diluted earnings per share
because their exercise price exceeded the market price and therefore, the effect
would be antidilutive. The quarter ended December 31, 1998 was a loss period;
therefore the effect of common stock equivalents would be antidilutive and were
not included in the calculation of diluted net loss per share.

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

<TABLE>
<CAPTION>
                                                  Quarters ended
                                                   December 31,
                                               1999           1998
                                             --------       --------
<S>                                          <C>            <C>
Net income (loss)                            $  6,242       $ (7,032)
                                             --------       --------
Weighted average shares outstanding            33,337         32,759
Employee stock options and convertible
preferred stock                                 1,300             --
                                             --------       --------
Diluted average shares outstanding             34,637         32,759
                                             ========       ========
Basic earnings (loss) per share              $   0.19       $  (0.21)
                                             ========       ========
Diluted earnings (loss) per share            $   0.18       $  (0.21)
                                             ========       ========
</TABLE>

4.  REVENUE RECOGNITION

The Company generally recognizes revenue from the sale of equipment upon
shipment and transfer of title. During the quarters ended December 31, 1999 and
1998, the Company recognized approximately $4,000,000 and $20,000,000
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. At December 31,
1999, the Company was storing a total of approximately $5,500,000 of such
equipment from this customer. The customer has scheduled the shipment dates for
the remaining equipment through the second quarter of fiscal 2000.

5.  COMPREHENSIVE INCOME (LOSS)

In the first quarter of fiscal 1999, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for the reporting and display of comprehensive
income. Components of comprehensive income (loss) include net income (loss),
unrealized gains (losses) on investments, unrealized gains (losses) on
derivatives and foreign currency translation adjustments. The adoption of SFAS
No. 130 required additional disclosure but did not impact the Company's



                                       7
<PAGE>   8

consolidated financial position, results of operation or cash flows. For the
quarters December 31, 1999 and 1998, the components of total comprehensive
income (loss) are as follows:

<TABLE>
<CAPTION>
                                                      Quarters ended
                                                       December 31,
                                                    1999           1998
                                                   -------        -------
                                                        (In thousands)
<S>                                                <C>            <C>
Net income (loss)                                  $ 6,242        $(7,032)
Net unrealized gain (loss) on investments              312            (25)
Net unrealized gain (loss) on derivatives
and foreign currency translation adjustments           (39)           392
                                                   -------        -------
Other comprehensive income                             273            367
                                                   -------        -------
Total comprehensive income (loss)
                                                   $ 6,515        $(6,665)
                                                   =======        =======
</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
$3,750,000 included approximately $1,050,000 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 material
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 has up to
twelve months from the closing date to file claims for indemnification against
this escrow fund. At the end of this period, the remaining funds, interest and
earnings accrued revert 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
December 31, 1999 nor were there any derivative instruments during the quarter
ended December 31, 1998.



                                       8
<PAGE>   9

                           SILICON VALLEY GROUP, INC.

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



The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are subject to
certain risks and uncertainties, including those discussed below, as well as
risk factors included in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 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.

RESULTS OF OPERATIONS

The Company designs, manufactures, markets and services semiconductor processing
equipment used in the fabrication of integrated circuits. The Company's products
are used in photolithography for exposure and photoresist processing, and in
deposition for oxidation/diffusion and low pressure chemical vapor deposition
("LPCVD"), and with the acquisition of the Semiconductor Equipment Group of
Watkins-Johnson, thermal processing products which address atmospheric pressure
chemical vapor deposition ("APCVD"). The Company manufactures and markets
photolithography exposure SVGL products, photoresist processing Track products,
oxidation/diffusion, chemical vapor deposition and LPCVD, APCVD Thermal products
and certain precision optical components.

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. As a result of the Asian economic crisis which began in
1997, an oversupply of certain semiconductor products, the impact of low cost
personal computers, and various other factors, semiconductor manufacturers
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 into the first
quarter of fiscal 2000, the Company has seen a recovery in the semiconductor
industry and, in particular, its orders for both expansion and new technology
products. The Company expects this recovery to continue throughout the remainder
of fiscal



                                       9
<PAGE>   10

2000.* The Company expects its customer orders and net sales for fiscal year
2000 to exceed the prior fiscal year's amounts.* There can be no assurance that
the semiconductor industry will continue to recover in fiscal year 2000 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.

During fiscal 1998 in an effort to lessen the impact of lower sales, the Company
took several steps to reduce operating expenses including a reduction in
workforce, temporary shutdowns and the restructuring of certain portions of the
Company's business. During the second half of fiscal 1998, the Company recorded
restructuring and related charges of $33,680,000. The restructuring and related
charges include costs of $28,521,000 resulting from the termination of the
Company's previously announced 200-APS photoresist processing system and a
provision of $5,159,000 for 1998 reductions in the Company's workforce.

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 quarter of fiscal
2000, this trend continued as the Company's largest customer accounted for 48%
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.*

During the quarters ended December 31, 1999 and 1998, the Company recognized
approximately $4,000,000 and $20,000,000 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. At December 31, 1999, the Company was storing
approximately $5,500,000 of such equipment from this customer. The customer has
scheduled the shipment dates for the remaining equipment through the second
quarter of fiscal 2000.

Net sales for the first fiscal quarter ended December 31, 1999 were
$179,801,000, up 110% from net sales of 85,487,000 for the first quarter of the
preceding fiscal year and 5% below net sales of $189,813,000 during the fourth
quarter of fiscal 1999. The increase in net sales compared to the first quarter
of fiscal year 1999 was principally the result of increased shipments of
Thermal, SVGL and Track products. The decrease in first quarter fiscal 2000 net
sales compared to the preceding quarter was due to reduced SVGL product
shipments offset in part by increased shipments of Thermal products.

International net sales (based on shipment destination) as a percentage of total
net sales for the quarters ended December 31, 1999, December 31, 1998 and
September 30, 1999 were 61%, 35% and 43%, respectively. The increase in
international net sales during the first quarter of fiscal 2000 primarily
relates to increased shipments of Thermal products to Asia Pacific.

During the first quarter of fiscal 2000 the Company recorded new bookings of
$205,028,000, an increase of approximately 135% over new bookings of $87,286,000
during the first quarter of fiscal 1999 and an increase of 13% over the
preceding quarters new bookings of $181,335,000. The Company includes in backlog
only those orders to which a purchase order number has been assigned by the
customer, with all terms and conditions agreed upon and for which delivery has
been specified within twelve months. The Company's backlog at December 31, 1999
totaled $382,682,000, above



                                       10
<PAGE>   11

backlog of $255,928,000 and $357,455,00 at December 31, 1998 and September 30,
1999, respectively. At December 31, 1999, backlog included orders for 48
Micrascan photolithography systems. Additionally, the Company had orders for 11
Micrascan systems with scheduled delivery dates outside the Company's
twelve-month backlog window.

Gross margin was 42% in the first quarter of fiscal 2000, compared to 28% during
the year earlier quarter and 40% in the fourth quarter of fiscal 1999. The
improvement in gross margin during the first quarter of fiscal 2000 compared to
the year earlier quarter is primarily the result of increased shipments. First
quarter fiscal 2000 gross margin improved over the preceding fiscal quarter is
due primarily to the absence of inventory provisions provided during the fourth
quarter of fiscal 1999 for the Low numerical aperture 193nm Lithography program.

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 $30,139,000 (17% of net sales) for the first quarter of fiscal
2000, $16,001,000 (19% of net sales) for the year earlier quarter and
$33,030,000 (17% of net sales) for the fourth quarter of fiscal 1999. For the
first quarter of fiscal 2000, and the first and fourth quarters of fiscal 1999,
development funding of $2,370,000, $2,277,000 and $619,000, respectively, was
recognized and offset against R&D expense. R&D expense increased over the first
quarter of fiscal 1999 primarily due to increased spending under the
157-nanometer development program, continued development of the very high
numerical aperture version of the 193-nanometer product and spending on APCVD
engineering initiatives. The decrease in R&D expense from the fourth quarter of
fiscal 1999 is primarily due to reduced SVGL expenses resulting from a decline
in outside engineering expenses and increased development funding. These
decreases from the fourth quarter of fiscal 1999 were partially offset by
increased spending on Thermal and Track engineering.

Marketing, general and administrative ("MG&A") expenses were $36,392,000 (20% of
net sales) for the first quarter of fiscal 2000, $19,473,000 (23% of net sales)
for the year earlier quarter and $41,027,000 (22% of net sales) for the fourth
quarter of fiscal 1999. The increase in MG&A over the first fiscal quarter of
1999 was principally due to increased shipments and higher product support
costs. The decrease in MG&A from the fourth quarter of fiscal 1999 is primarily
due to lower product support costs.

The Company had operating income of $8,490,000 for the first quarter of fiscal
2000, an operating loss of $11,444,000 for the year earlier quarter and
operating income of $1,254,000 for the fourth quarter of fiscal 1999. The
increase in operating income from the first quarter of fiscal 1999 was primarily
the result of higher net sales at improved gross margin offset in part by
increased operating expenses. In comparison to the fourth quarter of fiscal
1999, operating profit improved due to improved gross margin with reduced
operating expenses.

Interest and other income for the first quarter of fiscal 2000 was $2,290,000
compared to $1,465,000 during the first quarter of fiscal 1999 and $1,593,000
during the fourth quarter of the fiscal 1999. The increase in first quarter
fiscal year 2000 interest and other income over the year earlier quarter and the
previous quarter was primarily due to foreign exchange translation gains
resulting from the strengthening of the US dollar against the European
currencies.



                                       11
<PAGE>   12

Interest expense was $713,000 during the first quarter of fiscal 2000, compared
to $374,000 in the first quarter of fiscal 2000 and $443,000 during the fourth
quarter of fiscal 1999. The increase in interest expense during fiscal 2000 is
primarily due to additional commitment fees associated with the Company's
revolving line of credit agreement.

The Company recorded a 38% income tax provision for the quarter ended December
31, 1999. 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 and certain tax free and tax
advantaged interest income.

The Company had net income of $6,242,000 ($0.18 per diluted share) for the first
quarter of fiscal 2000 compared to a net loss of $7,032,000 ($0.21 loss per
diluted share) for the first quarter of fiscal 1999 and net income of $1,635,000
($0.05 per diluted share) for the fourth quarter of fiscal 1999.


LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1999, cash and cash equivalents and short-term investments
totaled $173,346,000, an increase of $31,100,000 from the September 30, 1999
balance of $142,246,000. This increase is primarily attributable to increased
profitability, improved collection results on accounts receivable, increased
accrued liabilities and accounts payable offset in part by purchases of property
and equipment and increased inventory levels.

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 includes covenants regarding liquidity, profitability, leverage,
and coverage of certain charges and minimum net worth and prohibits the payment
of cash dividends. On October 23, 1998 and May 14, 1999, certain of the
covenants were amended, in part to reflect the acquisition of SEG and change
quarterly profitability covenants. The Company is in compliance with the
covenants as amended. At December 31, 1999, there were no borrowings outstanding
under the facility.

The Company believes that it has sufficient working capital and available bank
credit to sustain operations and 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 and continues to evaluate 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



                                       12
<PAGE>   13

readiness of critical suppliers; and Year 2000 compliance of the products the
Company supplies to its customers.

The Company evaluated its information technology infrastructure for Year 2000
compliance, which included reviewing what actions were required to make all
internal-use software systems Year 2000 compliant. The Company has completed the
modification of its internal-use computer software for the Year 2000. The third
party costs associated with such modifications were $124,000 and were expensed
in fiscal 1998. Although the Company believes that the solutions, which were
extensively tested, have resulted in its internal-use systems being Year 2000
compliant, there can be no assurance that unforeseen problems that could disrupt
operations will not arise, or that the Company will not be required to expend
further cost and effort to solve such problems.*

The Company has contacted its critical suppliers and service providers to
ascertain their state of readiness and compliance for Year 2000 issues.
Responses have generally indicated substantial remediation, or documented plans
to remediate the Year 2000 issue. Some suppliers have given written
certification of internal and product compliance. Substantially all critical
suppliers have indicated compliance of their products or service. The Company
will continue to monitor their progress and compliance for these issues. There
can be no assurance, however, that the Company's suppliers and service providers
will timely provide the Company with products or services which are Year 2000
compliant. Any failure to do so by such third parties could have a material
adverse impact on the Company's results of operations.*

The Company has evaluated its products and identified those areas containing
date sensitive Year 2000 issues. The Company adheres to Year 2000 test case
scenarios established by SEMATECH, an industry group comprised of U.S.
semiconductor manufacturers. The Company's compliance efforts and review and
identification of corrective measures are substantially complete. Based on this
review, the Company believes that all products currently being shipped are Year
2000 compliant. The Company has made available for potential sale the necessary
modifications to bring previously shipped products into compliance. As all
customer events cannot be anticipated, the Company may see an increase in
product warranty and other claims.* In the event that any of the Company's
products ultimately are not Year 2000 compliant, or there are customer claims
made against the Company, the Company's business, financial condition and
results of operations could be adversely affected.*

The total cost to address the Year 2000 issue has not been and is not expected
to be material to the Company's financial condition.* The Company is using both
internal and external resources in its Year 2000 project.* The Company does not
segregate internal costs incurred to assess and remedy deficiencies related to
the Year 2000 problem or modifications to its products.

At this time, the Company has not experienced any material Year 2000 issues. As
Year 2000 issues are identified, plans will be developed and implemented as
required.

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






                                       13
<PAGE>   14
RISKS INHERENT IN THE COMPANY'S BUSINESS

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

Rapid Technological Change; Dependence on New Product Development. Semiconductor
manufacturing equipment and processes are subject to rapid technological change.
The Company believes that its future success will depend upon its ability to
continue to enhance its existing products and their process capabilities and to
develop and manufacture new products with improved process capabilities that
enable semiconductor manufacturers to fabricate more advanced semiconductors
with increased efficiency.* The Company is developing Track and Lithography
products, and has shipped limited quantities of Thermal products, capable of
processing 300mm wafers in anticipation of the industry's transition to this
larger wafer standard.* Failure to successfully introduce these or any other new
products in a timely manner 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 or manufacturing problems
related to the ProCell product as a result of instability of the design of
either the hardware or software elements of the new technology, or be able to
efficiently manufacture the new product or other products.* During June of 1999
the Company introduced the ProCell product for initial shipment in 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 such products 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.*



                                       14
<PAGE>   15

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 .13 micron, there can be no assurance that the
product will be introduced on time or that customers will wait for the product
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.*

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.*

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



                                       15
<PAGE>   16

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. In fiscal 1998, the Company's
three largest customers accounted for 40%, 17% and 13% of net sales. The Company
believes that, for the foreseeable future, it will continue to rely on a limited
number of major customers for a substantial percentage of its net sales.* As a
result of delays in delivering initial quantities of the subsequently terminated
200-APS Track product, one of the Company's largest Track customers has decided
to purchase systems with similar capabilities from another supplier. We expect
that the decision 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 the 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



                                       16
<PAGE>   17

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
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



                                       17
<PAGE>   18

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
and North Hollywood, California. These California facilities are located in
seismically active regions. SVGL's photolithography exposure products are
manufactured in Wilton and Ridgefield, Connecticut. If the Company were to lose
the use of one of its facilities as a result of an earthquake, flood or other
natural disaster, the resultant interruptions in operations would have a
material adverse effect on the Company's results of operations and financial
condition.*

Euro Conversion. On January 1, 1999, 11 of the 15 member countries of the
European Union established fixed conversion rates between each of their existing
sovereign currencies and the Single European Currency. 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



                                       18
<PAGE>   19

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.*

SVGL - Uncertain Market for Micrascan Products. The Company believes that the
photolithography exposure equipment market is one of the largest segments of the
semiconductor processing equipment industry.* To address the market for advanced
photolithography exposure systems, the Company has invested and expects to
continue to invest substantial resources in SVGL's Micrascan technology and its
family of Micrascan DUV step-and-scan photolithography systems, 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 DUV lithography is required to fabricate
devices with line widths below 0.3 micron.* Semiconductor manufacturers can
purchase DUV steppers to produce product at .25 micron line widths. However, the
Company believes that as devices increase in complexity and size and require
finer line widths, the technical advantages of DUV step-and-scan systems, as
compared to DUV steppers, will enable semiconductor manufacturers to achieve
finer line widths with improved critical dimension control which will result in
higher yields of faster devices.* The Company also believes that the industry
transition to DUV step-and-scan systems has accelerated in calendar 1999 and
that advanced semiconductor manufacturers are beginning to require volume
quantities of production equipment as advanced as the current and pending
versions of Micrascan to produce both critical and to some degree sub-critical
layers of semiconductor devices.* Currently, competitive DUV step-and-scan
equipment capable of producing .25 micron line widths and below is available in
limited quantities from three competitors.* Further, if manufacturers of DUV
steppers are able to further enhance existing technology to achieve finer line
widths sufficiently to erode the competitive and technological advantages of DUV
step-and-scan systems, or other manufacturers of step-and-scan systems are
successful in supplying sufficient quantities of product in a timely manner that
are technically equal to or better than the Micrascan, demand for the Micrascan
technology may not develop as the Company expects.*

The Company believes that advanced logic devices, 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



                                       19
<PAGE>   20

parts of the world which are operated by Japanese and Pacific Rim semiconductor
manufacturers as well 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.* Once there is sustained demand, 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 to recover or, that if it does, that the Company can manage these
efforts successfully. Any failure to successfully manage such efforts could
result in product delivery delays and a subsequent loss of future revenues. In
particular, the Company believes that protracted delays in delivery quantities
of current and future Micrascan products could result in semiconductor
manufacturers electing to install competitive equipment in their advanced
fabrication facilities, which could impede acceptance of the Micrascan products
on an industry-wide basis.* This could result in the Company's operating results
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.*

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.*



                                       20
<PAGE>   21

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

The Company believes that protracted delays in delivering quantities of both
current and future generations of Micrascan products to multiple 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
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.*



                                       21
<PAGE>   22

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 and below. The Company has or will
shortly qualify three suppliers who could be sources of this raw material for
the Company.* 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 on operations.

SVGL - Research and Development Funding. Historically, the Company has depended
on external funding to assist in the high cost of development in its
photolithography operation. Beginning in fiscal 1996, the Company entered into
agreements with certain customers (the "Participants") whereby each agreed to
assist in funding the Company's development of an advanced technology
193-nanometer Micrascan system. In exchange for such funding, each Participant
received the right to purchase one such system and, in addition, received a
right of first refusal (ratable among such Participants) to all such machines
manufactured during the first two years following the initial system shipments.
For each initial system ordered, each Participant agreed to fund $5,000,000 in
such development costs. The agreements call for each Participant to pay
$1,000,000 of initial development funding and four subsequent payments of
$1,000,000 upon the completion of certain development milestones. The
Participants may withdraw from the development program without penalty, but
payments made against completed development milestones are not refundable and
all rights to future equipment are forfeited. At December 31, 1999, the Company
had received and recognized $21,000,000 in funding from program Participants
against research and development expenditures. Three competitors of the Company
have either announced the development of, or have shipped 193-nanometer
products. 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.*

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. Separately, Intel has 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 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 on a
global basis.* The Japanese market



                                       22
<PAGE>   23

(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 sub-.25 micron Micrascan products, in particular
the projection optics required for these products, there can be no assurance
that SVGL will be able to operate profitably in the future.*

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. The trial is tentatively scheduled for November 2000.

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



                                       23
<PAGE>   24

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. Although the company has not fully assessed the impact of
adoption, management believes that applying the guidance in this bulletin will
not have a significant impact on its financial statements.*



                                       24
<PAGE>   25

                           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. The trial is tentatively scheduled for
        November 2000.

        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.

        None.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

        None.



                                       25
<PAGE>   26

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.

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

        (b) Reports on Form 8-K.


        None.



                                       26
<PAGE>   27

                           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:   February 11, 2000                   By:/s/ Papken S. Der Torossian
                                               ---------------------------------
                                               Papken S. Der Torossian
                                               Chief Executive Officer and
                                               Chairman of the Board



Date:   February 11, 2000                   By:/s/ Russell G. Weinstock
                                               ---------------------------------
                                               Russell G. Weinstock
                                               Vice President Finance and
                                               Chief Financial Officer



                                       27
<PAGE>   28


                                 EXHIBIT INDEX

Exhibit
  No.                             Description
-------                           -----------

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