<PAGE>   1


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

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

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

                                    FORM 10-Q

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

                 For the quarterly period ended March 31, 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
April 28, 2000 was 33,707,659.


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


<PAGE>   2

                           SILICON VALLEY GROUP, INC.

                                      INDEX


PART I. FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                      PAGE NO.
                                                                      -------
<S>     <C>                                                           <C>
        Consolidated Condensed Balance Sheets as of March 31,
        2000 and September 30, 1999                                       3

        Consolidated Condensed Statements of Operations for the
        Quarters and Six Months Ended March 31, 2000 and 1999             4

        Consolidated Condensed Statements of Cash Flows for
        the Six Months Ended March 31, 2000 and 1999                      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                                              24


SIGNATURES                                                               26
</TABLE>



                                       2
<PAGE>   3

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

<TABLE>
<CAPTION>
                                                             March 31,      September 30,
                                                               2000             1999
                                                           -----------      -------------
                                                           (Unaudited)
<S>                                                          <C>             <C>
ASSETS
Current Assets:
     Cash and equivalents                                    $ 130,454       $  98,278
     Short-term investments                                     44,714          43,968
     Accounts receivable (net of allowance for doubtful
          accounts of $5,344 and $5,038 respectively)          148,815         153,981
     Refundable income taxes                                     1,650           2,500
     Inventories                                               213,184         200,769
     Prepaid expenses and other assets                          12,536           9,826
     Deferred income taxes                                      31,487          35,489
                                                             ---------       ---------
          Total current assets                                 582,840         544,811
Property and equipment, net                                    195,942         198,403
Deposits and other assets                                        9,668           8,299
Intangible assets, net                                           3,121           3,260
                                                             ---------       ---------
Total                                                        $ 791,571       $ 754,773
                                                             =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
     Accounts payable                                        $  38,481       $  34,202
     Accrued liabilities                                       131,012         123,266
     Current portion of long-term debt                           1,523           1,620
     Income taxes payable                                        3,915           3,568
                                                             ---------       ---------
          Total current liabilities                            174,931         162,656
                                                             ---------       ---------
Long-term debt                                                  25,518          26,790
                                                             ---------       ---------
Deferred and other liabilities                                   8,980           7,790
                                                             ---------       ---------
Stockholders' Equity:
     Convertible preferred stock - shares
        Outstanding: 15,000                                     14,976          14,976
     Common stock - shares outstanding:
        March 31, 2000:     33,674,548
        September 30, 1999: 33,333,884                         416,015         410,068
     Retained earnings                                         152,781         134,928
     Accumulated other comprehensive loss                       (1,630)         (2,435)
                                                             ---------       ---------
     Total stockholders' equity                                582,142         557,537
                                                             ---------       ---------
TOTAL                                                        $ 791,571       $ 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                Six Months Ended
                                                        March 31,                       March 31,
                                                ------------------------       -------------------------
                                                    2000           1999           2000           1999
                                                ---------       --------       ---------       ---------
<S>                                             <C>             <C>            <C>             <C>
Net sales                                       $ 204,596       $ 61,496       $ 384,397       $ 146,983
Cost of sales                                     115,603         47,326         220,383         108,783
                                                ---------       --------       ---------       ---------
Gross profit                                       88,993         14,170         164,014          38,200

Operating expenses:
     Research, development and related
       engineering                                 33,260         21,651          63,399          37,652
     Marketing, general and administrative         40,107         20,094          76,499          39,567
                                                ---------       --------       ---------       ---------
Operating income (loss)                            15,626        (27,575)         24,116         (39,019)
Interest and other income                           2,619          1,325           4,909           2,790
Interest expense                                     (416)          (200)         (1,129)           (574)
                                                ---------       --------       ---------       ---------
Income (loss) before income taxes                  17,829        (26,450)         27,896         (36,803)
Provision (benefit) for income taxes                6,218         (8,456)         10,043         (11,777)
                                                ---------       --------       ---------       ---------
Net income (loss)                               $  11,611       $(17,994)      $  17,853       $ (25,026)
                                                =========       ========       =========       =========
Net income (loss) per share - basic             $    0.35       $  (0.55)      $    0.53       $   (0.76)
                                                =========       ========       =========       =========
Shares used in per share
  computations - basic                             33,460         32,833          33,398          32,796
                                                =========       ========       =========       =========
Net income (loss) per share - diluted           $    0.32       $  (0.55)      $    0.51       $   (0.76)
                                                =========       ========       =========       =========
Shares used in per share
     computations - diluted                        35,928         32,833          35,282          32,796
                                                =========       ========       =========       =========
</TABLE>


            See Notes to Consolidated Condensed Financial Statements


                                       4
<PAGE>   5

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

<TABLE>
<CAPTION>
                                                                       Six Months Ended
                                                                           March 31,
                                                                   -------------------------
                                                                     2000            1999
                                                                   ---------       ---------
<S>                                                                <C>             <C>
Cash Flows from Operating Activities:
     Net income (loss)                                             $  17,853       $ (25,026)

     Reconciliation to net cash provided
          by operating activities:
               Depreciation and amortization                          24,244          23,170
               Amortization of intangibles                               139             338
               Deferred income taxes                                   4,002         (12,701)
               Changes in assets and liabilities:
                    Accounts receivable                                5,166          43,818
                    Refundable income taxes                              850           8,534
                    Inventories                                      (12,415)         (7,693)
                    Prepaid expenses and other assets                 (2,710)         (2,697)
                    Deposits and other assets                         (1,369)         (1,470)
                    Accounts payable                                   4,279          (7,577)
                    Accrued and deferred liabilities                   9,548         (26,329)
                    Income taxes payable                                 347            (297)
                                                                   ---------       ---------
     Net cash provided by (used in) operating activities              49,934          (7,930)
                                                                   ---------       ---------

Cash Flows from Investing Activities:
     Purchases of short-term investments, available for sale         (17,023)        (22,946)
     Maturities of short-term investments, available for sale         16,838          30,233
     Purchases of property and equipment                             (22,263)        (16,987)
                                                                   ---------       ---------
     Net cash used for investing activities                          (22,448)         (9,700)
                                                                   ---------       ---------

Cash Flows from Financing Activities:
     Sale of common stock                                              5,947           2,581
     Repayment of debt                                                  (722)           (340)
                                                                   ---------       ---------
     Net cash provided by financing activities                         5,225           2,241
                                                                   ---------       ---------

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

Increase in cash and equivalents                                      32,176         (15,389)

Cash and equivalents:
     Beginning of period                                              98,278         121,575
                                                                   ---------       ---------
     End of period                                                 $ 130,454       $ 106,186
                                                                   =========       =========
</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>
                                                  March 31,    September 30,
                                                    2000           1999
                                                  ---------    -------------
                                                      (In thousands)
<S>                                               <C>             <C>
Raw materials                                     $ 91,142        $ 83,080
Work-in-process                                    115,825         115,172
Finished goods                                       6,217           2,517
                                                  --------        --------
                                                  $213,184        $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 817,000 shares of common stock at a
weighted average exercise price of $27.28 per share were outstanding at March
31, 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 six months ended
March 31, 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 earnings
(loss) per share (in thousands, except per share amounts.)

<TABLE>
<CAPTION>
                                              Quarters ended              Six months ended
                                                 March 31,                    March 31,
                                            ---------------------       ---------------------
                                              2000         1999          2000          1999
                                            -------      --------       -------      --------
<S>                                         <C>          <C>            <C>          <C>
Net income (loss)                           $11,611      $(17,994)      $17,853      $(25,026)
                                            -------      --------       -------      --------

Weighted average shares outstanding          33,460        32,833        33,398        32,796
Employee stock options and convertible
preferred stock                               2,468            --         1,884            --
                                            -------      --------       -------      --------
Diluted average shares outstanding           35,928        32,833        35,282        32,796
                                            =======      ========       =======      ========
Basic earnings (loss) per share             $  0.35      $  (0.55)      $  0.53      $  (0.76)
                                            =======      ========       =======      ========
Diluted earnings (loss) per share           $  0.32      $  (0.55)      $  0.51      $  (0.76)
                                            =======      ========       =======      ========
</TABLE>


4. REVENUE RECOGNITION

The Company generally recognizes revenue from the sale of equipment upon
shipment and transfer of title. During the quarters ended March 31, 2000 and
December 31, 1999, the Company recognized approximately $18,000,000 and
$4,000,000, 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 March 31, 1999). At March 31, 2000, the
Company was storing approximately $18,000,000 of such equipment for this
customer. The customer has scheduled the shipment dates for the remaining
equipment through the fourth quarter of fiscal 2000.



                                       7
<PAGE>   8

5.  COMPREHENSIVE INCOME (LOSS)

For the quarters and six months ended March 31, 2000 and 1999, the components of
total comprehensive income (loss) are as follows:

<TABLE>
<CAPTION>
                                                   Quarters ended           Six months ended
                                                       March 31,                 March 31,
                                                 --------------------      --------------------
                                                   2000         1999         2000        1999
                                                 -------     --------      -------     --------
                                                    (In thousands)               (In thousands)
<S>                                              <C>         <C>           <C>         <C>
Net income (loss)                                $11,611     $(17,994)     $17,853     $(25,026)
Net unrealized gain on investments                   249          136          561          169
Net unrealized gain on derivatives
and foreign currency translation adjustments         283          (77)         244          315
                                                 -------     --------      -------     --------
Other comprehensive income                           532           59          805          484
                                                 -------     --------      -------     --------
Total comprehensive income (loss)                $12,143     $(17,935)     $18,658     $(24,542)
                                                 =======     ========      =======     ========
</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 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
March 31, 2000 nor were there any derivative instruments during the quarter
ended March 31, 1999.



                                       8
<PAGE>   9

8. RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements of all public registrants. Changes in the
Company's revenue recognition policy resulting from the interpretation of SAB
101 would be reported as a change in accounting principle in the Company's first
fiscal quarter beginning October 1, 2000. The Company has not determined what
the full effect of adopting SAB 101 will have on the Company's financial
statements.


                           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, 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. During 1997, as a result of various factors,



                                       9
<PAGE>   10

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 half of fiscal 2000, the Company has seen a
recovery in the semiconductor industry and, in particular, its placement of
orders for both expansion and new technology products. The Company expects this
recovery to continue throughout the remainder of fiscal 2000.* The Company
expects its customer orders and net sales for fiscal year 2000 to significantly
exceed the prior fiscal year's amounts.* However, there can be no assurance that
the semiconductor industry will continue to recover in fiscal year 2000, that
customer orders and net sales will exceed the prior fiscal years, 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 half 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 second fiscal quarter ended March 31, 2000 were $204,596,000,
an increase of 233% over net sales of $61,496,000 for the second quarter of the
preceding fiscal year and 14% above net sales of $179,801,000 during the first
quarter of fiscal 2000. During the first six months of fiscal 2000, net sales of
$384,397,000 increased 162% over net sales of $146,983,000 during the first half
of fiscal 1999. The increase in net sales during the quarter and year to date
periods ended March 31, 2000 compared to the comparable periods of 1999 and to
the first 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 March 31, 2000, March 31, 1999 and December 31,
1999 were 50%, 20% and 61%, 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 March 31, 2000 and December 31, 1999, the Company
recognized approximately $18,000,000 and $4,000,000, 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 March 31,
1999). At March 31, 2000, the Company was storing approximately $18,000,000 of
such equipment for this customer. The customer has scheduled the shipment dates
for the remaining equipment through the fourth quarter of fiscal 2000.


During the second quarter of fiscal 2000 the Company recorded bookings of
$305,693,000, an increase of approximately 84% over bookings of $165,710,000
during the second quarter of fiscal 1999 and an increase of 49% over the
preceding quarters bookings of $205,028,000. The Company includes in backlog
only those orders to which a purchase order number has been assigned by the
customer, with



                                       10
<PAGE>   11

all terms and conditions agreed upon and for which delivery has been specified
within twelve months. The Company's backlog at March 31, 2000 totaled
$483,789,000, above backlog of $360,143,000 and $382,682,000 at March 31, 1999
and December 31, 1999, respectively. At March 31, 2000, backlog included orders
for 54 Micrascan photolithography systems. Additionally, the Company had orders
for 10 Micrascan systems with scheduled delivery dates outside the Company's
twelve-month backlog window.

Gross margin was 44% in the second quarter of fiscal 2000, compared to 23%
during the year earlier quarter and 42% in the first quarter of fiscal 2000.
During the first six months of fiscal 2000, gross margin was 43% of net sales
compared to 26% of net sales during the comparable period of fiscal 1999. The
improvement in gross margin during the quarter and year to date periods ended
March 31, 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 for the second fiscal quarter of 2000
when compared to the preceding fiscal quarter is due primarily to increased
shipments and the favorable 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 $33,260,000 (16% of net sales) for the second quarter of
fiscal 2000, $21,651,000 (35% of net sales) for the year earlier quarter and
$30,139,000 (17% of net sales) for the first quarter of fiscal 2000. For the
second and first quarters of fiscal 2000, and the second quarter of fiscal 1999,
development funding of $1,197,000, $2,370,000 and $600,000, respectively, was
recognized and offset against R&D expense. R&D expense increased over the second
quarter of fiscal 1999 primarily due to increased spending on Thermal's single
wafer engineering initiatives, continued development of the very high numerical
aperture version of the 193-nanometer product and spending under the
157-nanometer development program. The increase in R&D expense over the first
quarter of fiscal 2000 is primarily due to reduced development funding having
been earned, and increased spending on product development and sustaining
engineering.

R&D expense for the six months ended March 31, 2000 was $63,399,000 (16% of net
sales) compared to $37,652,000 (26% of net sales) for the same period of the
prior fiscal year. For the six-month periods ended March 31, 2000 and 1999,
funding recognized under joint development agreements and offset against R&D
expenditures was $3,567,000 and $2,877,000 respectively. R&D expense increased
primarily due to increased spending on Thermal's single wafer engineering
initiatives, spending under the 157-nanometer development program and continued
development of the very high numerical aperture version of the 193-nanometer
product.

Marketing, general and administrative ("MG&A") expenses were $40,107,000 (20% of
net sales) for the second quarter of fiscal 2000, $20,094,000 (33% of net sales)
for the year earlier quarter and $36,392,000 (20% of net sales) for the first
quarter of fiscal 2000. During the first six months of fiscal 2000, MG&A
expenses were $76,499,000 (20% of net sales) compared to $39,567,000 (27% of net
sales) for the first six months of fiscal 1999. The increase in MG&A over the
second fiscal quarter of 1999 and the first quarter of fiscal 2000 was
principally due to increased shipment, selling, administration and product
support costs required to support increased shipment volume.



                                       11
<PAGE>   12

The Company had operating income of $15,626,000 for the second quarter of fiscal
2000, compared to an operating loss of $27,575,000 for the year earlier quarter
and an operating income of $8,490,000 for the first quarter of fiscal 2000. The
increase in operating income over the second quarter of fiscal 1999 and the
first 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 second quarter ended March 31, 2000 was
$2,619,000 compared to $1,325,000 during the second quarter of fiscal 1999 and
$2,290,000 during the first quarter of fiscal 2000. For the first half of fiscal
2000 interest and other income was $4,909,000 compared to $2,790,000 for the
comparable period of fiscal 1999. The increase in interest and other income
during the periods ended March 31, 2000 compared to the comparable periods of
1999 and to the first quarter of fiscal 2000 was primarily due to higher cash
balances available for investment at higher average interest rates.

Interest expense was $416,000 during the second quarter of fiscal 2000, compared
to $200,000 in the second quarter of fiscal 1999 and $713,000 during the first
quarter of fiscal 2000. During the first six months of fiscal 2000, interest
expense was $1,129,000 compared to $574,000 during the first half 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 35% income tax provision for the second quarter of fiscal
2000 and an income tax provision of 36% for the six months ended March 31, 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 $11,611,000 ($0.32 per diluted share) for the
second quarter of fiscal 2000 compared to a net loss of $17,994,000 ($0.55 loss
per diluted share) for the second quarter of fiscal 1999 and net income of
$6,242,000 ($0.18 per diluted share) for the first quarter of fiscal 2000. For
the first half of fiscal 2000, the Company had net income of $17,853,000 ($0.51
per diluted share), compared to a net loss of $25,026,000 ($0.76 loss per
diluted share) for the first six months of fiscal 1999.


LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

At March 31, 2000, cash and cash equivalents and short-term investments totaled
$175,168,000, an increase of $32,922,000 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, as amended in the prior year includes covenants



                                       12
<PAGE>   13

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 covenants as amended. At March 31, 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. The
Company will continue to monitor its Year 2000 risk, as Year 2000 issues are
identified, plans will be developed and implemented as required. There can be no
assurance that unforeseen problems will not happen which could have a material
adverse effect on the Company.*


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



                                       13
<PAGE>   14

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 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 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.*

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 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



                                       14
<PAGE>   15

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 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



                                       15
<PAGE>   16

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 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,



                                       16
<PAGE>   17

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
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



                                       17
<PAGE>   18

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.*

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 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




                                       18
<PAGE>   19

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 in limited quantities from three
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 fiscal 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 or 193-nanometer steppers are able to further enhance
existing technology to achieve finer line widths sufficiently to erode the
competitive and technological advantages of 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 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



                                       19
<PAGE>   20

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 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.*

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, 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



                                       20
<PAGE>   21

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.*

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 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



                                       21
<PAGE>   22

are complete.* At March 31, 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 March 31, 2000 $1,000,000 of development funding
from Intel was recognized and offset against R&D expense. 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 (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



                                       22
<PAGE>   23

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.

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 ("SAB
101"). 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. Changes in the Company's revenue recognition policy
resulting from the interpretation of SAB 101 would be reported as a change in
accounting principle in the Company's first fiscal quarter beginning October 1,
2000. 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. However, management believes that applying
the guidance in this bulletin will not affect the underlying strength or
weakness of the Company's operations as measured by the dollar value of its
product shipments and cash flows.*



                                       23
<PAGE>   24

                           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.

               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.


                                       24
<PAGE>   25


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

               (a)  The annual Meeting of Stockholders of the Company was held
                    on February 23, 2000 (the "Annual Meeting"). The vote of
                    holders of record of 33,339,857 shares of the Company's
                    Stock outstanding at the close of business on December 29,
                    1999 was solicited by proxy pursuant to Regulation 14A under
                    the Securities Act of 1934.

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

<TABLE>
<CAPTION>
                                                            Votes Withholding
                                           Votes For            Authority
                                           ---------        -----------------
<S>                                        <C>                   <C>
               Michael J. Attardo          28,852,013            624,987
               Papken S. Der Torossian     28,728,851            748,149
               William A. Hightower        28,754,649            722,351
               William L. Martin           28,850,632            626,368
               Nam P. Suh                  28,849,260            627,740
               Lawrence Tomlinson          28,854,970            622,030
</TABLE>

               (c)  The stockholder proposal regarding retention of an
                    investment banker was defeated by votes of 6,264,288 For,
                    14,525,382 Against, 2,007,411 Abstaining and 6,679,919
                    Broker Non-Voting.


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 March 31, 2000.

               (b) Reports on Form 8-K.


               None.



                                       25
<PAGE>   26

                           SILICON VALLEY GROUP, INC.
                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                      SILICON VALLEY GROUP, INC.

                               .........................................
                                            (Registrant)


Date:   May 12, 2000                   By: /s/ Papken S. Der Torossian
                                          ------------------------------
                                           Papken S. Der Torossian
                                             Chief Executive Officer and
                                             Chairman of the Board


Date:   May 12, 2000                   By: /s/ Russell G. Weinstock
                                           -----------------------------
                                            Russell G. Weinstock
                                              Vice President Finance and
                                              Chief Financial Officer



                                       26

<PAGE>   27
                                 Exhibit Index


27.0      Financial Data Schedule