<PAGE>
<TABLE>
<S><C>
===============================================================================================================

                                      SECURITIES AND EXCHANGE COMMISSION
                                            WASHINGTON, D.C. 20549

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


                                                   FORM 10-Q

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


(Mark One)

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

For the quarterly period ended April 30, 2000

                                                      OR

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

For the transition period from           to

                                        COMMISSION FILE NUMBER 0-22366

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

                                         CREDENCE SYSTEMS CORPORATION
                            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                                                --------------



                      DELAWARE                                                  94-2878499
            (STATE OR OTHER JURISDICTION)                                     (IRS  EMPLOYER
          OF INCORPORATION OR ORGANIZATION)                                 IDENTIFICATION NO.)


        215 FOURIER AVE., FREMONT, CALIFORNIA                                      94539
      (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                                  (ZIP CODE)

                       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (510) 657-7400
                                                --------------



---------------------------------------------------------------------------------------------------------------
         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 Sections
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 / /


                                     APPLICABLE ONLY TO CORPORATE ISSUERS:

      At June 2, 2000, there were approximately 49,726,321 shares of the Registrant's common stock, $0.001 par
value per share, outstanding.

===============================================================================================================
</TABLE>
<PAGE>

                          CREDENCE SYSTEMS CORPORATION

                                      INDEX

<TABLE>
<CAPTION>

                                                                                                                            Page No.
                                                                                                                            --------

PART I. FINANCIAL INFORMATION

<S>                                                                                                                             <C>
Item 1. Financial Statements.................................................................................................... 3

        Condensed Consolidated Balance Sheets................................................................................... 3

        Condensed Consolidated Statements of Operations......................................................................... 4

        Condensed Consolidated Statements of Cash Flows......................................................................... 5

        Notes to Condensed Consolidated Financial Statements.................................................................... 6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 9

PART II. OTHER INFORMATION

Item 1. Legal Proceedings...................................................................................................... 23

Item 2. Changes in Securities.................................................................................................. 23

Item 3. Defaults upon Senior Securities........................................................................................ 23

Item 4. Submission of Matters to a Vote of Securityholders..................................................................... 23

Item 5. Other Information...................................................................................................... 24

Item 6. Exhibits and Reports on Form 8-K....................................................................................... 24
</TABLE>


                                        2
<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                          CREDENCE SYSTEMS CORPORATION

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                          APRIL 30,  OCTOBER 31,
                                                                           2000      1999(a)
                                                                          --------   --------
ASSETS                                                                    (UNAUDITED)
<S>                                                                       <C>        <C>
Current assets:
  Cash and cash equivalents...........................................    $201,334   $ 52,104
  Short-term investments..............................................      66,414     39,774
  Accounts receivable, net............................................     131,141     71,506
  Inventories.........................................................      55,701     40,284
  Other current assets................................................      23,954     24,045
                                                                          --------   --------
    Total current assets..............................................     478,544    227,713
Long-term investments.................................................     181,028     50,005
Property and equipment, net...........................................      48,850     43,063
Other assets..........................................................      20,291     19,639
                                                                          --------   --------
    Total assets......................................................    $728,713   $340,420
                                                                          ========   ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable....................................................    $ 40,461   $ 23,611
  Accrued liabilities.................................................      38,260     31,163
  Income taxes payable................................................      17,401      6,212
                                                                          --------   --------
    Total current liabilities.........................................      96,122     60,986
Convertible subordinated notes........................................      96,249     96,610
Other liabilities.....................................................         867      1,134
Minority interest.....................................................         330        282
Stockholders' equity..................................................     535,145    181,408
                                                                          --------   --------
    Total liabilities and stockholders' equity........................    $728,713   $340,420
                                                                          ========   ========
</TABLE>


                             SEE ACCOMPANYING NOTES.

--------------
 (a)  Derived from the audited consolidated balance sheet included in the
      Company's Form 10-K/A for the year ended October 31, 1999.


                                       3
<PAGE>

                          CREDENCE SYSTEMS CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                     THREE MONTHS ENDED       SIX MONTHS ENDED
                                                                         APRIL 30,                APRIL 30,
                                                                    ---------------------    --------------------
                                                                      2000        1999        2000        1999
                                                                    ---------   ---------    ---------   ---------
<S>                                                                 <C>         <C>          <C>         <C>
Net sales.......................................................    $153,754    $ 38,100     $255,522    $ 64,590
Cost of goods sold..............................................      62,796      19,001      105,819      34,277
                                                                    ---------   ---------    ---------   ---------
Gross margin....................................................      90,958      19,099      149,703      30,313
Operating expenses:
   Research and development.....................................      16,880       9,146       30,817      18,149
   Selling, general and administrative..........................      24,891      13,872       44,235      26,103
   Special charges..............................................          --       6,231           --       6,231
                                                                    ---------   ---------    ---------   ---------
     Total operating expenses...................................      41,771      29,249       75,052      50,483
                                                                    ---------   ---------    ---------   ---------
Operating income (loss).........................................      49,187     (10,150)      74,651     (20,170)
Interest and other income (expenses), net.......................       2,809         240        3,492         (61)
                                                                    ---------   ---------    ---------   ---------
Income (loss) before income tax provision (benefit).............      51,996      (9,910)      78,143     (20,231)
Income tax provision (benefit)..................................      18,458      (3,571)      27,740      (7,300)
Minority interest (benefit).....................................          44          (8)          47         (46)
                                                                    ---------   ---------    ---------   ---------
Net income (loss) before extraordinary items....................      33,494      (6,331)      50,356     (12,885)
Gain on extinguishment of debt (net of taxes of $652) ..........          --       1,158           --       1,158
                                                                    ---------   ---------    ---------   ---------
Net income (loss)...............................................    $ 33,494    $ (5,173)    $ 50,356    $(11,727)
                                                                    =========   =========    =========   =========
Net income (loss) per share
   Basic (before extraordinary items)...........................    $   0.70    $  (0.15)    $   1.10    $  (0.31)
   Basic (extraordinary items)..................................          --    $   0.03           --    $   0.03
                                                                    ---------   ---------    ---------   ---------
   Basic........................................................    $   0.70    $  (0.12)    $   1.10    $  (0.28)
                                                                    =========   =========    =========   =========
   Diluted (before extraordinary items).........................    $   0.63    $  (0.15)    $   1.00    $  (0.31)
   Diluted (extraordinary items)................................          --    $   0.03           --    $   0.03
                                                                    ---------   ---------    ---------   ---------
   Diluted......................................................    $   0.63    $  (0.12)    $   1.00    $  (0.28)
                                                                    =========   =========    =========   =========
Number of shares used in computing per share amount
   Basic........................................................      47,984      41,622       45,900      41,220
                                                                    =========   =========    =========   =========
   Diluted......................................................      53,010      41,622       50,386      41,220
                                                                    =========   =========    =========   =========
</TABLE>


                             SEE ACCOMPANYING NOTES.


                                       4
<PAGE>

                          CREDENCE SYSTEMS CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                            (UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                                             SIX MONTHS ENDED
                                                                                                 APRIL 30,
                                                                                           ----------------------
                                                                                             2000         1999
                                                                                           ----------   ---------
<S>                                                                                        <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)...................................................................    $  50,356    $(11,727)
   Adjustments to reconcile net income (loss) to net cash used in operating activity
     Depreciation and amortization.....................................................       12,609      10,445
     Special charges...................................................................           --       6,231
     (Gain) loss on disposal of property and equipment.................................         (277)        700
     Gain on extinguishment of debt....................................................           --      (1,810)
     Minority interest.................................................................            3         (46)
     Changes in operating assets and liabilities:
       Accounts receivable, inventories and other current assets.......................      (79,137)     14,570
       Accounts payable, accrued liabilities and income taxes payable..................       42,486        (234)
                                                                                          ----------   ---------
         Net cash provided by operating activities.....................................       26,040      18,129
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of available-for-sale securities..........................................     (189,545)    (50,336)
   Maturities of available-for-sale short-term securities..............................       14,350      29,757
   Sales of available-for-sale securities..............................................       17,532      17,488
   Acquisition of property and equipment...............................................      (11,474)    (10,068)
   Other assets........................................................................       (3,737)     (1,635)
   Proceeds from sale of property and equipment........................................          616          --
                                                                                          ----------   ---------
         Net cash used in investing activities.........................................     (172,258)    (14,794)
CASH FLOWS FROM FINANCING ACTIVITIES:
   Issuance of common & treasury stock.................................................      295,635       4,989
   Other...............................................................................         (187)        (21)
                                                                                           ---------    --------
         Net cash provided by financing activities.....................................      295,448       4,968
                                                                                           ---------    --------
Net increase in cash and cash equivalents..............................................      149,230       8,303
Cash and cash equivalents at beginning of period.......................................       52,104      48,391
                                                                                           ---------    --------
Cash and cash equivalents at end of period.............................................    $ 201,334      56,694
                                                                                           =========    ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Interest paid.......................................................................    $   2,536    $  3,108
   Income taxes paid (refunded) .......................................................    $   9,062    $(17,227)
NONCASH ACTIVITIES:
   Net transfers of inventory to property and equipment................................    $   3,709    $  2,521
   Income tax benefit form stock option exercises......................................    $   7,399    $    576
   Issuance of common or treasury stock for convertible subordinated notes.............    $     579    $  7,040
   Exchange of convertible sub. notes for common stock plus issuance costs.............    $    (579)   $ (8,850)
</TABLE>

                            SEE ACCOMPANYING NOTES.




                                       5
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.       QUARTERLY FINANCIAL STATEMENTS

     The condensed consolidated financial statements and related notes for the
three and six months ended April 30, 2000 and 1999 are unaudited but include all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and results of operations of the Company for the interim periods. The
results of operations for the three and six months ended April 30, 2000 and 1999
were not necessarily indicative of the operating results to be expected for the
full fiscal year. The information included in this report should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the fiscal year ended October 31, 1999 included in the
Company's most recent Annual Report on Form 10-K and the additional risk factors
contained herein and therein, including, without limitation, risks relating to
fluctuations in our quarterly net sales and operating results, limited systems
sales, backlog, cyclicality of semiconductor industry, expansion of our product
lines, limited sources of supply, reliance on our subcontractors, highly
competitive industry, rapid technological change, importance of timely product
introduction, customer concentration, lengthy sales cycle, risks associated with
acquisitions, changes in financial accounting standards and accounting
estimates, dependence on key personnel, transition in our executive management,
international sales, proprietary rights, future capital needs, leverage,
volatility of our stock price and effects of certain anti-takeover provisions,
as set forth in this Report. Any party interested in reviewing a free copy of
the Form 10-K/A or the Company's other publicly available documents should write
to the Chief Financial Officer of the Company.

     USE OF ESTIMATES--The preparation of the accompanying unaudited
consolidated condensed financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates.

2.       INVENTORIES

     Inventories are stated at the lower of standard cost (which approximates
first-in, first-out cost) or market. The October 31, 1999 inventory balances
have been restated to reflect a reclassification of receivable balances with
subcontract manufacturers. These amounts have been reclassified from inventory
to other current assets in the balance sheet. Inventories consist of the
following (in thousands):
<TABLE>
<CAPTION>

                                                                           APRIL 30,    OCTOBER 31,
                                                                             2000          1999
                                                                           ----------   -----------
                                                                           (UNAUDITED)
<S>                                                                        <C>          <C>
Raw materials..........................................................    $  24,038    $   13,772
Work-in-process........................................................       23,477        21,281
Finished goods.........................................................        8,186         5,231
                                                                           ----------   -----------
             Total.....................................................    $  55,701    $   40,284
                                                                           ==========   ===========
</TABLE>


                                       6
<PAGE>

3.       NET INCOME (LOSS) PER SHARE

     On March 23, 2000, the Company announced a two-for-one stock split effected
by a stock dividend paid on May 17, 2000. All share and per share data has been
adjusted to give effect to the stock split. Net income (loss) per basic share is
based upon the weighted average number of common shares outstanding during the
period. Net income (loss) per diluted share is based upon the weighted average
number of common and dilutive potential common shares outstanding during the
period. The Company's convertible subordinated notes are potential dilutive
common shares and, accordingly, are included in the fiscal 2000 calculation of
net income per diluted share. For the fiscal 1999 calculation, the convertible
subordinated notes are not dilutive potential common shares and, accordingly,
are excluded from the calculation of net income (loss) per diluted share.
Options to purchase approximately 4,024,000 shares at an average price of $8.40
per share were outstanding at April 30, 1999 but were not included in the
computation of diluted net loss per share because options are antidilutive in
periods when the Company incurs a net loss. The following table sets forth the
computation of basic and dilutive earnings per share (in thousands), except per
share amounts:
<TABLE>
<CAPTION>

                                                        THREE MONTHS ENDED      SIX MONTHS ENDED
                                                             APRIL 30,             APRIL 30,
                                                        --------------------  ---------------------
                                                          2000       1999       2000        1999
                                                        ---------   --------  ---------   ---------
<S>                                                      <C>         <C>       <C>         <C>
Numerator:
   Numerator for basic and diluted net income (loss)
     per share--net income (loss).....................   $ 33,494    $(5,173)  $ 50,356    $(11,727)
                                                        ---------   --------  ---------   ---------
Denominator:
   Denominator for basic net income (loss) per
     share--weighted-average shares...................     47,984     41,622     45,900      41,220
   Effect of dilutive securities--employee stock
     options.........................................       3,738         --      3,554          --
   Effect of dilutive securities--subordinated
     convertible notes...............................       1,288         --        932          --
                                                        ---------   --------  ---------   ---------
Denominator for diluted earnings
   per share--adjusted weighted-average shares and
   assumed conversions...............................      53,010     41,622     50,386      41,220
                                                        ---------   --------  ---------   ---------
   Basic net income (loss) per share.................   $    0.70    $ (0.12)  $   1.10    $  (0.28)
                                                        =========   ========  =========   =========
   Diluted net income (loss) per share...............   $    0.63    $ (0.12)  $   1.00    $  (0.28)
                                                        =========   ========  =========   =========
</TABLE>

4.       RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133), which is required to be adopted
in fiscal years beginning after June 15, 2000. SFAS 133 will require the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through earnings. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in the fair value
of the hedged assets, liabilities or firm commitments through earnings, or
recognized in other comprehensive income (loss) until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. Adoption of SFAS 133 is not
expected to have a material impact on the Company's financial condition or
results of operations.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 ("SAB 101") "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. All registrants are expected to
apply the accounting and disclosure described in SAB 101. Because the Company
has complied with generally accepted accounting principles for its historical
revenue recognition, the change if any, in its revenue policy resulting from SAB
101 will be reported as a change in accounting principle in the first quarter of
fiscal 2001. The Company is assessing the impact of SAB 101 on its financial
statements, but currently such impact is uncertain.


                                       7
<PAGE>

5.       CONTINGENCIES

     The Company is involved in various claims arising in the ordinary course of
business, none of which, in the opinion of management, if determined adversely
against the Company, will have a material adverse effect on the Company's
business, financial condition or results of operations.

6.       SPECIAL CHARGES AND EXTRAORDINARY ITEM

     In the second quarter of fiscal 1999, the Company recorded special charges
of $6.2 million. These charges were primarily from costs relating to the
disposal of excess facilities and severance. Cash expenditures associated with
these special charges during the second fiscal quarter of 1999 were
approximately $290,000. Approximately $1.8 million of cash expenditures related
to excess facilities was paid out in the second half of fiscal year 1999 and the
remaining $4.1 million related to non-cash asset disposals.

     During the second quarter of fiscal 1999, the Company recorded an
extraordinary gain of $1.2 million, net of tax of $652,000 on the exchange of
328,000 shares of the Company's common stock held in treasury for an aggregate
of $9,040,000 of its 5 1/4% Convertible Subordinated Notes due 2002.

7.       ACCUMULATED OTHER COMPREHENSIVE LOSS

     Accumulated other comprehensive loss and changes thereto consist of:
<TABLE>
<CAPTION>

                                                                                      OCTOBER 31,
                                                                         APRIL 30,  ---------------
                                                                          2000      1999     1998
                                                                         --------   ------   ------
<S>                                                                           <C>      <C>    <C>
Beginning balance gain (loss)........................................    $  (661)   $(241)   $  --
Unrealized gain (loss) on available for-sale securities..............       (279)    (517)      --
Currency translation adjustments.....................................         47       97     (241)
                                                                         --------   ------   ------
             Total...................................................    $  (893)   $(661)   $(241)
                                                                         ========   ======   ======
</TABLE>

8.       SUBSEQUENT EVENTS

     On May 12, 2000, the Company completed the acquisition of TMT, Incorporated
for $70 million in cash plus $10 million for the assumption of TMT's outstanding
employee stock options. TMT, located in Sunnyvale, CA employs over 100 people
and has been in business since 1991. TMT focuses on providing cost-effective
test equipment for the high volume RF/wireless semiconductor device market.

     On March 23, 2000 the Company announced a two-for-one stock split effected
by a stock dividend paid on May 17, 2000. All share and per share data has been
adjusted to give effect to the stock split.


                                       8
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following discussion may contain predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties.
While this discussion represents the Company's current judgment on the future
direction of the business, such risks and uncertainties could cause actual
results to differ materially from any future performance suggested herein.
Factors that could cause actual results to differ are identified throughout the
discussion below, as well as in the section entitled "Risk Factors" below, and
elsewhere in this report. The Company undertakes no obligation to publicly
revise any forward-looking statements to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.

     The following table sets forth items from the Condensed Consolidated
Statements of Operations as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>

                                                                              THREE MONTHS         SIX MONTHS
                                                                                 ENDED                ENDED
                                                                               APRIL 30,            APRIL 30,
                                                                            -----------------    ----------------
                                                                             2000      1999       2000      1999
                                                                            -------   -------    ------    ------
<S>                                                                          <C>       <C>       <C>        <C>
Net sales..............................................................      100.0%    100.0%    100.0%     100.0%
Cost of goods sold.....................................................       40.8      49.9      41.4       53.1
                                                                            -------   -------    ------    ------
Gross margin...........................................................       59.2      50.1      58.6       46.9
Operating expenses
   Research and development............................................       11.0      24.0      12.1       28.1
   Selling, general and administrative.................................       16.2      36.4      17.3       40.4
   Special charges.....................................................         --      16.4        --        9.6
                                                                            -------   -------    ------    ------
     Operating expenses................................................       27.2      76.8      29.4       78.2
                                                                            -------   -------    ------    ------
Operating income (loss)................................................       32.0     (26.7)     29.2      (31.3)
Interest and other income..............................................        1.8       0.6       1.4        0.0
                                                                            -------   -------    ------    ------
Income (loss) before income tax provision (benefit)....................       33.8     (26.1)     30.6      (31.3)
Income tax provision (benefit).........................................       12.0       9.4      10.9      (11.3)
                                                                            -------   -------    ------    ------
Net income (loss) before extraordinary items...........................       21.8     (16.7)     19.7      (20.0)
                                                                            =======   =======    ======    ======
Gain on extinguishment of debt.........................................         --       3.0%       --        1.8%
                                                                            -------   -------    ------    ------
Net income (loss)......................................................       21.8%    (13.7)%    19.7%     (18.2)%
                                                                            =======   =======    ======    ======
</TABLE>

RESULTS OF OPERATIONS

NET SALES

     Net sales consist of revenues from systems sales, spare parts sales,
maintenance contracts and software sales. Net sales were $153.8 million for the
second quarter of fiscal 2000, representing an increase of 304% from the net
sales of $38.1 million in the comparable second quarter of fiscal 1999. During
fiscal 1999 and into the second quarter of fiscal 2000, our net sales improved
each sequential quarter because of three principal factors:

     o    a significant increase in the worldwide demand for semiconductor ATE;

     o    improved business and economic conditions in Asia and particularly in
          Taiwan; and

     o    the launch of three major products: the Quartet high-performance mixed
          signal tester, the Kalos memory tester, and the Valstar
          high-performance digital tester.

     These factors resulted in our experiencing increasing net sales activity
through fiscal 1999 and into the first half of fiscal 2000. The improved
worldwide demand for semiconductor ATE has led to customers purchasing for
increased capacity and the launch of our new products has led to some customers
purchasing products with new features or capabilities.

     International net sales accounted for approximately 83%, 64% and 69% of
total net sales in the first six months of 2000 and fiscal years 1999 and 1998,
respectively. Our net sales to the Asia Pacific region accounted for


                                       9
<PAGE>

approximately 75%, 55% and 60% of total net sales in the first six months of
fiscal 2000 and fiscal years 1999 and 1998, respectively, and thus are subject
to the risk of economic instability in that region that materially adversely
affected the demand for our products in 1998. Capital markets in Korea and other
areas of Asia have been highly volatile, resulting in economic instabilities.
These instabilities may reoccur, which could materially adversely affect demand
for our products.

     Our net sales by product line in the first six months of fiscal 2000 and
fiscal years 1999 and 1998 consisted of:
<TABLE>
<CAPTION>

                                                                                         FISCAL
                                                                              SIX        YEARS
                                                                             MONTHS      ENDED
                                                                             ENDED      OCTOBER 31,
                                                                            APRIL 30,  ------------
                                                                              2000     1999   1998
                                                                            --------   ----   -----
<S>                                                                              <C>    <C>     <C>
Mixed-Signal............................................................         68%    65%     66%
Logic...................................................................         17     16      18
Memory..................................................................          9      7       4
Service and software....................................................          6     12      12
                                                                            --------   ----   -----
Total...................................................................        100%   100%    100%
                                                                            ========   ====   =====
</TABLE>

     The increase in the memory percentage and the high percentage of net sales
attributable to mixed-signal products is principally derived from the sales of
the new Kalos and Quartet products. Revenues from software were not material to
our operations in the first half of fiscal 2000 and fiscal years 1999 and 1998,
representing no more than 4% of our net sales in each period.

GROSS MARGIN

     The Company's gross margin has been and will continue to be affected by a
variety of factors, including manufacturing efficiencies, pricing by competitors
or suppliers, new product introductions, product sales mix, production volume,
customization and reconfiguration of systems, international and domestic sales
mix and field service margins. Our gross margin was 59.2% and 58.6% for the
three and first six months ended April 30, 2000, respectively, compared with
50.1%, 46.9%, and 51.7% for the three months, six months, and year ended April
30, 1999, respectively. The increase in gross margin as a percent of sales was
due to lower average selling prices in fiscal 1999 as well as significantly
higher costs caused by under-absorption of manufacturing expenses and product
development delays.

RESEARCH AND DEVELOPMENT

     Research and development ("R&D") expenses were $30.8 million in the first
six months of fiscal 2000, an increase of $12.7 million or 70% over the same
period of fiscal 1999. The lower level of spending in 1999 reflects cutbacks in
project expenses as well as savings generated by a two-week plant shutdown in
the first quarter of fiscal 1999. These project expense cutbacks were initiated
in fiscal 1998 while the Company was reacting to a severe downturn in the
industry. As a percentage of net sales, R&D expenses were 12.1% for the first
six months of fiscal 2000, a decrease from 28.1% in the first six months of
fiscal 1999. The decrease in these expenses as a percentage of net sales is
attributable primarily to the significant lower net sales in the first six
months of fiscal 1999 as compared with the same period of fiscal 2000. The
Company currently intends to continue to invest significant resources in the
development of new products and enhancements for the foreseeable future. These
investments typically include hiring additional staff as well as contracting
specific projects to outside parties. Accordingly, the Company expects these
expenses to increase in absolute dollars for the remainder of fiscal 2000.

SELLING, GENERAL AND ADMINISTRATIVE

     Selling, general and administrative expenses ("SG&A") were $44.2 million in
the first six months of fiscal 2000, representing an $18.1 million or 69%
increase from the comparable period of fiscal 1999. The lower spending in 1999
was primarily due to reduced sales commissions on lower sales volumes and
reduced payroll related expenses from reduced headcount as well as the savings
generated by a two-week plant shutdown in the first quarter of fiscal 1999. As a
percentage of net sales, SG&A expenses were 17.3% for the first six months of
fiscal 2000, compared with 40.4% for the corresponding period in fiscal 1999.
This decrease as a percentage of net sales is


                                       10
<PAGE>

attributable primarily to the significantly lower net sales in the first six
months of fiscal 1999 as compared with the same period of fiscal 2000. The
Company expects SG&A expenses for the remainder of fiscal 2000 to increase in
absolute dollars as we hire additional staff and incur additional expense to
support the current business activity.

INTEREST AND OTHER INCOME EXPENSES, NET

     The Company generated net interest and other income of $3.5 million for the
first six months of fiscal 2000, as compared to a loss of $0.1 million for the
first six months of fiscal 1999. The increase is primarily due to lower interest
expense caused by lower average debt balances as well as higher interest income
generated by larger cash and investment balances. The Company received
approximately $288 million on February 25, 2000 when an aggregate of 5,290,000
shares of common stock were issued in a public offering at $57.50 per share.

INCOME TAXES

     The Company's estimated effective tax rate for the first six months of
fiscal 2000 was 35.5%, compared to 36% in the first six months of fiscal 1999.
The tax rate applied to pre-tax book income for the first six months is computed
based on a projected effective tax rate for the year. Realization of the net
deferred tax assets at April 30, 2000, is dependent on the Company's ability to
generate approximately $40,000,000 of future taxable income. Management believes
that it is more likely than not that the assets will be realized based on
forecasted income. However, there can be no assurance that the Company will meet
its expectations of future income. A valuation allowance was established in both
fiscal 1999 and 1998 to offset a portion of the deferred tax assets attributable
to the in-process research and development. Due to the period over which these
tax benefits will be recognized, sufficient uncertainty exists regarding the
realizability of a portion of these assets to warrant a valuation allowance.
Management will evaluate the realizability of the deferred tax assets on a
quarterly basis and assess the need for additional valuation allowances.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash provided by operating activities was $26.0 million and $18.1
million for the six months ended April 30, 2000 and 1999, respectively. Net cash
flows provided by operating activities for the first six months of fiscal 2000
was primarily due to net income before depreciation and amortization of $64.2
million, offset by a net increase in operating assets and liabilities of $37.3
million. The increased requirement for net operating assets and liabilities
reflects the Company's current higher business activity levels in fiscal 2000.

     Investing activities used net cash flows of approximately $172.3 million
and $14.8 million in the six months ended April 30, 2000 and 1999, respectively.
For fiscal 2000, approximately $157.7 million was for net purchases of
available-for-sale securities and $11.5 million was for purchases of property
and equipment to support the Company's business.

     Net cash flows from financing activities provided $295.6 million and $5.0
million for the six months ended April 30, 2000 and 1999, respectively. The
increase in net cash flows primarily represent the issuance of common stock
through the public offering on February 25, 2000 of approximately $288 million,
as well as issuances under the Company's employee equity plans.

     As of April 30, 2000, the Company had working capital of approximately
$382.4 million, including cash and short-term investments of $267.7 million, and
accounts receivable and inventories representing $186.8 million. The Company
expects its accounts receivable to continue to represent a significant portion
of working capital. The Company believes that because of the relatively long
manufacturing cycles of many of its testers and the new products it has and
plans to continue to introduce, investments in inventories will also continue to
represent a significant portion of working capital. Significant investments in
accounts receivable and inventories may subject the Company to increased risks
which could materially adversely affect the Company's business, financial
condition and results of operations. Total current liabilities of $96.1 million
as of April 30, 2000 increased from $61 million as of October 31, 1999.

     The Company's principal sources of liquidity as of April 30, 2000 consisted
of approximately $201.3 million of cash and cash equivalents, short-term
investments of $66.4 million and $20.0 million available under the Company's
unsecured working capital line of credit expiring on July 22, 2000. In addition,
the Company has $181.0 million of available-for-sale securities, classified as
long-term at April 30, 2000. No amounts were outstanding under the unsecured
line of credit.


                                       11
<PAGE>

     On February 25, 2000, the Company issued an aggregate of 5,290,000 shares
of its common stock in a public offering at $57.50 per share. The net proceeds
to the Company after expenses was approximately $288 million.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133), which is required to be adopted
in fiscal years beginning after June 15, 2000. SFAS 133 will require the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through earnings. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in the fair value
of the hedged assets, liabilities or firm commitments through earnings, or
recognized in other comprehensive income (loss) until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. Adoption of SFAS 133 is not
expected to have a material impact on the Company's financial condition or
results of operations.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 ("SAB 101") "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. All registrants are expected to
apply the accounting and disclosure described in SAB 101. Because the Company
has complied with generally accepted accounting principles for its historical
revenue recognition, the change if any, in its revenue policy resulting from SAB
101 will be reported as a change in accounting principle in the first quarter of
fiscal 2001. The Company is assessing the impact of SAB 101 on its financial
statements, but currently such impact is uncertain.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio and long-term debt obligations.
The Company maintains a strict investment policy which ensures the safety and
preservation of its invested funds by limiting default risk, market risk, and
reinvestment risk. The Company's investments consists primarily of commercial
paper, medium term notes, asset backed securities, US. Treasury notes and
obligations of U.S. Government agencies, bank certificates of deposit, auction
rate preferred securities, corporate bonds and municipal bonds. The table below
presents notional amounts and related weighted-average interest rates by year of
maturity for the Company's investment portfolio and long-term debt obligations
(in thousands, except percent amounts):
<TABLE>
<CAPTION>

                                                2000         2001        2002      2003       2004    THEREAFTER
                                              ----------  -----------  --------- ---------- --------- -----------
Cash Equivalents
<S>                                            <C>         <C>          <C>       <C>        <C>       <C>
   Fixed rate................................. $ 201,334           --         --         --        --          --
   Average rate...............................      5.94%          --         --         --        --          --
Short term investments
   Fixed rate................................. $  40,396   $   26,018         --         --        --          --
   Average rate...............................      6.81%        6.11%        --         --        --          --
Long term investments
   Fixed rate................................. $   8,269   $   83,347   $ 44,531  $  29,464  $  3,498  $   11,919
   Average rate...............................      6.59%        6.17%      5.45%      6.38%     7.16%       6.37%
                                              ----------  -----------  --------- ---------- --------- -----------
Total investment securities................... $ 249,999   $  109,365   $ 44,531  $  29,464  $  3,498  $   11,919
Average rate..................................      6.10%        6.16%      5.45%      6.38%     7.16%       6.37%
Long term debt--Fixed rate.....................       --           --   $ 96,249         --        --          --
   Average rate...............................        --           --       5.25%        --        --          --
</TABLE>

     The Company mitigates default risk by attempting to invest in high credit
quality securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity and maintains a
prudent amount of diversification.

     The Company has no cash flow exposure due to rate changes for its $96.2
million Convertible Subordinated Notes. The Company has a $20 million line of
credit under which it can borrow either at the bank's prime rate or the LIBOR
rate. As of April 30, 2000, the Company had no borrowings under its line of
credit.


                                       12
<PAGE>

                                  RISK FACTORS

OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY WHICH MAY ADVERSELY AFFECT
OUR STOCK PRICE

                                     [GRAPH]

     A variety of factors affect our results of operations. The above graph
illustrates that our quarterly net sales and operating results have fluctuated
significantly. We believe they will continue to fluctuate for a number of
reasons, including:

     o  economic conditions in the semiconductor industry in general and
        capital equipment industry specifically;

     o  manufacturing capacity and ability to volume produce systems,
        including our newest systems, and meet customer requirements;

     o  timing of new product announcements and new product releases by us or
        our competitors;

     o  market acceptance of our new products and enhanced versions of
        existing products;

     o  manufacturing inefficiencies associated with the start-up of our new
        products, changes in our pricing or payment terms and cycles, and those
        of our competitors, customers and suppliers;

     o  write-offs of excess and obsolete inventories and accounts receivable
        that are not collectible;

     o  supply constraints;

     o  ability to obtain adequate facilities;

     o  patterns of capital spending by our customers, delays, cancellations or
        reschedulings of customer orders due to customer financial difficulties
        or otherwise;

     o  changes in overhead absorption levels due to changes in the number of
        systems manufactured, the timing and shipment of orders, availability of
        components including custom ICs, subassemblies and services,
        customization and reconfiguration of our systems and product
        reliability;

     o  expenses associated with acquisitions and alliances;

     o  operating expense reductions associated with cyclical industry
        downturns, including costs relating to facilities consolidations and
        related expenses;

     o  the proportion of our direct sales and sales through third parties,
        including distributors and OEMS, the mix of products sold, the length of
        manufacturing and sales cycles, product discounts;

     o  natural disasters, political and economic instability, currency
        fluctuations, regulatory changes and outbreaks of hostilities; and


                                       13
<PAGE>

     o  ability to hire and retain employees in a competitive market.

     We presently intend to introduce new products and product enhancements in
the future, the timing and success of which will affect our business, financial
condition and results of operations. Our gross margins on system sales have
varied significantly and will continue to vary significantly based on a variety
of factors including:

     o  manufacturing inefficiencies;

     o  pricing concessions by us and our competitors and pricing by our
        suppliers;

     o  hardware and software product sales mix;

     o  inventory write-downs;

     o  production volumes;

     o  new product introductions;

     o  product reliability;

     o  absorption levels and the rate of capacity utilization;

     o  customization and reconfiguration of systems;

     o  international and domestic sales mix and field service margins; and

     o  facility relocations and expansions.

     New and enhanced products typically have lower gross margins in the early
stages of commercial introduction and production. Although we have recorded and
continue to record provisions for estimated sales returns, accounts receivable
that might not be collectible, and product warranty costs, we cannot be certain
that our estimates will be adequate.

     We cannot forecast with any certainty the impact of these and other factors
on our sales and operating results in any future period. Results of operations
in any period, therefore, should not be considered indicative of the results to
be expected for any future period. Because of this difficulty in predicting
future performance, our operating results may fall below the expectations of
securities analysts or investors in some future quarter or quarters. Our failure
to meet these expectations would likely adversely affect the market price of our
common stock. In addition, our need for continued significant expenditures for
research and development, marketing and other expenses for new products, capital
equipment purchases and worldwide training and customer service and support will
impact our sales and operations results in the future. Other significant
expenditures may make it difficult for us to reduce our significant fixed
expenses in a particular period if we do not meet our net sales goals for that
period. These other expenditures include:

     o  research and development;

     o  distribution channels;

     o  marketing and other expenses for new products;

     o  capital equipment purchases and world-wide training; and

     o  customer support and service.

     As a result, we cannot be certain that we will be profitable in the future.

WE HAVE A LIMITED BACKLOG AND OBTAIN MOST OF OUR NET SALES FROM A RELATIVELY FEW
NUMBER OF SYSTEM SALES TRANSACTIONS WHICH CAN RESULT IN FLUCTUATIONS OF
QUARTERLY RESULTS

     Other than some memory products and software products, for which the price
range is typically below $50,000, we obtain most of our net sales from the sale
of a relatively few number of systems that typically range in price from
$350,000 to $3.6 million. This has and could continue to result in our net sales
and operating results for a particular period being significantly impacted by
the timing of recognition of revenue from a single transaction. Our net sales
and operating results for a particular period could also be materially adversely
affected if an anticipated order from even one customer is not received in time
to permit shipment during that period. Backlog at the


                                       14
<PAGE>

beginning of a quarter typically does not include all orders necessary to
achieve our sales objectives for that quarter. In addition, orders in backlog
are subject to cancellation, delay, deferral or rescheduling by customers with
limited or no penalties. Consequently, our quarterly net sales and operating
results have in the past and will in the future depend upon our obtaining orders
for systems to be shipped in the same quarter that the order is received.

     We believe that some of our customers may from time to time, place orders
with us for more systems than they will ultimately require, or they will order a
more rapid delivery than they will ultimately require. For this reason, our
backlog may include customer orders in excess of those actually delivered to
them or other customers.

     Furthermore, we generally ship products generating most of our net sales
near the end of each quarter. Accordingly, our failure to receive an anticipated
order or a delay or rescheduling in a shipment near the end of a particular
period may cause net sales in a particular period to fall significantly below
expectations, which could have a material adverse effect on our business,
financial condition or results of operations. The relatively long manufacturing
cycle of many of our testers has caused and could continue to cause future
shipments of testers to be delayed from one quarter to the next. Furthermore, as
we and our competitors announce new products and technologies, customers may
defer or cancel purchases of our existing systems. We cannot forecast the impact
of these and other factors on our sales and operating results.

THE SEMICONDUCTOR INDUSTRY HAS BEEN CYCLICAL

     Our business and results of operations depend largely upon the capital
expenditures of manufacturers of semiconductors and companies that specialize in
contract packaging and/or testing of semiconductors. This includes manufacturers
and contractors that are opening new or expanding existing fabrication
facilities or upgrading existing equipment, which in turn depend upon the
current and anticipated market demand for semiconductors and products
incorporating semiconductors. The semiconductor industry has been highly
cyclical with recurring periods of oversupply, which often have had a severe
effect on the semiconductor industry's demand for test equipment, including the
systems we manufacture and market. We believe that the markets for newer
generations of semiconductors will also be subject to similar fluctuations.

     We have experienced shipment delays, delays in commitments and restructured
purchase orders by customers and we expect this activity to continue.
Accordingly, we cannot be certain that we will be able to achieve or maintain
our current or prior level of sales or rate of growth. We anticipate that a
significant portion of new orders may depend upon demand from semiconductor
device manufacturers building or expanding fabrication facilities and new device
testing requirements that are not addressable by currently installed test
equipment, and there can be no assurance that such demand will develop to
significant degree, or at all. In addition, our business, financial condition or
results of operations may be adversely affected by any factor adversely
affecting the semiconductor industry in general or particular segments within
the semiconductor industry. For example, the 1997/1998 Asian financial crisis
contributed to widespread uncertainty and, in part, a slowdown in the
semiconductor industry. This slowdown in the semiconductor industry resulted in
reduced spending for semiconductor capital equipment, including ATE which we
sell. This industry slowdown had and may in the future have a material adverse
effect on our product backlog, balance sheet, financial condition and results of
operations. Therefore, there can be no assurance that our operating results will
not be materially adversely affected if downturns or slowdowns in the
semiconductor industry occur again in the future.

WE HAVE EXPERIENCED OVER THE LAST SEVERAL YEARS SIGNIFICANT FLUCTUATIONS IN OUR
OPERATING RESULTS AND INCREASED THE SCALE OF OPERATIONS

     In fiscal 2000, we have generated revenue of $101.8 million in the first
fiscal quarter and $153.8 million in the second fiscal quarter, a sequential
increase of 51%. In fiscal 1999, we generated revenue of $26.5 million in the
first quarter and $80.2 million in the fourth quarter, an increase of 203%. In
fiscal 1998, we generated revenue of $82.4 million for the first quarter and
$22.4 million for the fourth quarter, a decrease of 73%. Since 1993, except for
cost-cutting efforts during fiscal 1998 and most of 1999, we have overall
significantly increased the scale of our operations in general to support
periods of generally increased sales levels and expanded product offerings and
have expanded operations to address critical infrastructure and other
requirements, including the hiring of additional personnel, significant
investments in research and development to support product development, the new
facilities in Oregon, a new ERP system and numerous acquisitions. These
fluctuations in our sales and operations have placed and are placing a
considerable strain on our management, financial, manufacturing and other
resources. In order to effectively deal with the changes brought on by the
cyclical nature of the industry, we have been required to


                                       15
<PAGE>

implement and improve a variety of highly flexible operating, financial and
other systems, procedures and controls capable of expanding, or contracting
consistent with our business. However, we cannot be certain that any existing or
new systems, procedures or controls, including our ERP system, will be adequate
to support fluctuations in our operations or that our systems, procedures and
controls will be cost-effective or timely. Any failure to implement, improve and
expand or contract such systems, procedures and controls efficiently and at a
pace consistent with our business could have a material adverse effect on our
business, financial condition or results of operations.

WE ARE EXPANDING AND INTEND TO CONTINUE THE EXPANSION OF OUR PRODUCT LINES

     We are currently devoting and intend to continue to devote significant
resources to the development, production and commercialization of new products
and technologies. During fiscal 1999, we launched three major new products. We
invested and continue to invest significant resources in plant and equipment,
leased facilities, inventory, personnel and other costs, to begin or prepare to
increase production of these products. A significant portion of these
investments will provide the marketing, administration and after-sales service
and support required for these new hardware and software products. Accordingly,
we cannot be certain that gross profit margin and inventory levels will not be
adversely impacted by delays in new product introductions or start-up costs
associated with the initial production and installation of these new product
lines. We also cannot be certain that we can manufacture these systems per the
time and quantity required by our customers. The start-up costs include
additional manufacturing overhead, additional inventory and warranty reserve
requirements and the enhancement of after-sales service and support
organizations. In addition, the increases in inventory on hand for new hardware
and software product development and customer support requirements have
increased and will continue to increase the risk of inventory write-offs. We
cannot be certain that our net sales will increase or remain at recent levels or
that any new products will be successfully commercialized or contribute to
revenue growth or that any of our additional costs will be covered.

THERE ARE LIMITATIONS ON OUR ABILITY TO FIND THE SUPPLIES AND SERVICES
NECESSARY TO RUN OUR BUSINESS

     We obtain certain components, subassemblies and services necessary for the
manufacture of our testers from a limited group of suppliers. We do not maintain
long-term supply agreements with most of our vendors and we purchase most of our
components and subassemblies through individual purchase orders. The manufacture
of certain of our components and subassemblies is an extremely complex process.
We also rely on outside vendors to manufacture certain components and
subassemblies and to provide certain services. We have recently experienced and
continue to experience significant reliability, quality and timeliness problems
with several critical components including certain custom integrated circuits.
In addition, we and certain of our subcontractors are experiencing significant
shortages and delays in delivery of various components and subassemblies. We
cannot be certain that these or other problems will not continue to occur in the
future with our suppliers or outside subcontractors. Our reliance on a limited
group of suppliers and on outside subcontractors involves several risks,
including an inability to obtain an adequate supply of required components,
subassemblies and services and reduced control over the price, timely delivery,
reliability and quality of components, subassemblies and services. Shortages,
delays, disruptions or terminations of the sources for these components and
subassemblies have delayed and could continue to delay shipments of our systems
and new products and could continue to have a material adverse effect on our
business. Our continuing inability to obtain adequate yields or timely
deliveries or any other circumstance that would require us to seek alternative
sources of supply or to manufacture such components internally could also have a
material adverse effect on our business, financial condition or results of
operations. Such delays, shortages and disruptions would also damage
relationships with current and prospective customers and have and could continue
to allow competitors to penetrate our customer accounts. We cannot be certain
that our internal manufacturing capacity or that of our suppliers and
subcontractors will be sufficient to meet customer requirements.

THE ATE INDUSTRY IS INTENSELY COMPETITIVE WHICH CAN ADVERSELY AFFECT OUR
REVENUE GROWTH

     With the substantial investment required to develop test application
software and interfaces, we believe that once a semiconductor manufacturer has
selected a particular ATE vendor's tester, the manufacturer is likely to use
that tester for a majority of its testing requirements for the market life of
that semiconductor and, to the extent possible, subsequent generations of
similar products. As a result, once an ATE customer chooses a system for the
testing of a particular device, it is difficult for competing vendors to achieve
significant ATE sales to such customer for similar use. Our inability to
penetrate any large ATE customer or achieve significant sales to any ATE
customer could have a material adverse effect on our business, financial
condition or results of operations.

                                       16
<PAGE>

     We face substantial competition from ATE manufacturers throughout the
world, as well as several of our customers. We do not currently compete in the
testing of microprocessors, linear ICs or DRAMs. Moreover, a substantial portion
of our net sales are derived from sales of mixed-signal testers. Many
competitors have substantially greater financial and other resources with which
to pursue engineering, manufacturing, marketing and distribution of their
products. Certain competitors have recently introduced or announced new products
with certain performance or price characteristics equal or superior to products
we currently offer. These competitors have recently introduced products that
compete directly against our products. We believe that if the ATE industry
continues to consolidate through strategic alliances or acquisitions, we will
continue to face significant additional competition from larger competitors that
may offer product lines and services more complete than ours. Our competitors
are continuing to improve the performance of their current products and to
introduce new products, enhancements and new technologies that provide improved
cost of ownership and performance characteristics. New product introductions by
our competitors could cause a decline in our sales or loss of market acceptance
of our existing products.

     Moreover, our business, financial condition, or results of operations could
continue to be materially adversely affected by increased competitive pressure
and continued intense price-based competition. We have experienced and continue
to experience significant price competition in the sale of our testers. In
addition, pricing pressures typically become more intense at the end of a
product's life cycle and as competitors introduce more technologically advanced
products. We believe that, to be competitive, we must continue to expend
significant financial resources in order to, among other things, invest in new
product development and enhancements and to maintain customer service and
support centers worldwide. We cannot be certain that we will be able to compete
successfully in the future.

THE ATE MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE

     Our ability to compete in this market depends upon our ability to
successfully develop and introduce new hardware and software products and
enhancements and related software tools with greater features on a timely and
cost-effective basis, including products under development internally as well as
products obtained in acquisitions. Our customers require testers and software
products with additional features and higher performance and other capabilities.
We are therefore required to enhance the performance and other capabilities of
our existing systems and software products and related software tools. Any
success we may have in developing new and enhanced systems and software products
and new features to our existing systems and software products will depend upon
a variety of factors, including:

     o  product selection;

     o  timely and efficient completion of product design;

     o  implementation of manufacturing and assembly processes;

     o  successful coding and debugging of software;

     o  product performance;

     o  reliability in the field; and

     o  effective sales and marketing.

     Because we must make new product development commitments well in advance of
sales, new product decisions must anticipate both future demand and the
availability of technology to satisfy that demand. We cannot be certain that we
will be successful in selecting, developing, manufacturing and marketing new
hardware and software products or enhancements and related software tools. Our
inability to introduce new products and related software tools that contribute
significantly to net sales, gross margins and net income would have a material
adverse effect on our business, financial condition and results of operations.
New product or technology introductions by our competitors could cause a decline
in sales or loss of market acceptance of our existing products. In addition, if
we introduce new products, existing customers may curtail purchases of the older
products and delay new product purchases. Any unanticipated decline in demand
for our hardware or software products could have a materially adverse effect on
our business, financial condition or results of operations.


                                       17
<PAGE>

SIGNIFICANT DELAYS CAN OCCUR BETWEEN THE TIME WE INTRODUCE A SYSTEM AND THE TIME
WE ARE ABLE TO PRODUCE THAT SYSTEM IN VOLUME

     We have in the past experienced significant delays in the introduction,
volume production and sales of our new systems and related feature enhancements.
We have experienced significant delays in the introduction of our VS2000 and
Kalos series testers as well as certain enhancements to our existing testers.
These delays have been primarily related to our inability to successfully
complete product hardware and software engineering within the time frame
originally anticipated, including design errors and redesigns of ICs. As a
result, some customers have experienced significant delays in receiving and
using our testers in production. We cannot be certain that these or additional
difficulties will not continue to arise or that delays will not continue to
materially adversely affect customer relationships and future sales. Moreover,
we cannot be certain that we will not encounter these or other difficulties that
could delay future introductions or volume production or sales of our systems or
enhancements and related software tools. We have incurred and may continue to
incur substantial unanticipated costs to ensure the functionality and
reliability of our testers and to increase feature sets. If our systems continue
to have reliability, quality or other problems, or the market perceives our
products to be feature deficient, we may suffer reduced orders, higher
manufacturing costs, delays in collecting accounts receivable and higher
service, support and warranty expenses, or inventory write-offs, among other
effects. Our failure to have a competitive tester and related software tools
available when required by a customer could make it substantially more difficult
for us to sell testers to that customer for a number of years. We believe that
the continued acceptance, volume production, timely delivery and customer
satisfaction of our newer digital, mixed signal and non-volatile memory testers
are of critical importance to our future financial results. As a result, our
inability to correct any technical, reliability, parts shortages or other
difficulties associated with our systems or to manufacture and ship the systems
on a timely basis to meet customer requirements could damage our relationships
with current and prospective customers and would continue to materially
adversely affect our business, financial condition and results of operations.

WE MAY NOT BE ABLE TO DELIVER CUSTOM HARDWARE OPTIONS AND SOFTWARE APPLICATIONS
TO SATISFY SPECIFIC CUSTOMER NEEDS IN A TIMELY MANNER

     We must develop and deliver customized hardware and software to meet our
customers' specific test requirements. We must be able to manufacture these
systems on a timely basis. Our test equipment may fail to meet our customers'
technical or cost requirements and may be replaced by competitive equipment or
an alternative technology solution. Our inability to meet such hardware and
software requirements could impact our ability to recognize revenue on the
related equipment. Our inability to provide a test system that meets requested
performance criteria when required by a device manufacturer would severely
damage our reputation with that customer. This loss of reputation may make it
substantially more difficult for us to sell test systems to that manufacturer
for a number of years.

WE RELY ON SPIROX CORPORATION FOR A SIGNIFICANT PORTION OF OUR REVENUES AND THE
TERMINATION OF THIS DISTRIBUTION RELATIONSHIP WOULD MATERIALLY ADVERSELY AFFECT
OUR BUSINESS

     One distributor, Spirox Corporation, a distributor in Taiwan that sells to
end-user customers in Taiwan and China, accounted for approximately 54%, 39%,
34% and 30% of our net sales in the first half of fiscal 2000 and fiscal years
1999, 1998, and 1997, respectively. Our agreement with Spirox can be terminated
for any reason on 90 days prior written notice. The semiconductor industry is
highly concentrated, and a small number of semiconductor device manufacturers
and contract assemblers account for a substantial portion of the purchases of
semiconductor test equipment generally, including our test equipment. Our top
ten end user customers have recently accounted for a substantial portion of our
net sales. Consequently, our business, financial condition and results of
operations could be materially adversely affected by the loss of or any
reduction in orders by Spirox or any other significant customer, including
losses, the potential for reductions in orders by assembly and tester service
companies which that customer may utilize or reductions due to continuing or
other technical, manufacturing or reliability problems with our products or
continued slow-downs in the semiconductor industry or in other industries that
manufacture products utilizing semiconductors. Our ability to maintain or
increase sales levels will depend upon:

     o  our ability to obtain orders from existing and new customers;

     o  our ability to manufacture systems on a timely and cost-effective
        basis;

     o  our ability to complete the development of our new hardware and
        software products;


                                       18
<PAGE>

     o  our customers' financial condition and success;

     o  general economic conditions; and

     o  our ability to meet increasingly stringent customer performance and
        other requirements and shipment delivery dates.

OUR LONG AND VARIABLE SALES CYCLE DEPENDS UPON FACTORS OUTSIDE OF OUR CONTROL
AND COULD CAUSE US TO EXPEND SIGNIFICANT TIME AND RESOURCES PRIOR TO EARNING
ASSOCIATED REVENUES

     Sales of our systems depend in part upon the decision of semiconductor
manufacturers to develop and manufacture new semiconductor devices or to
increase manufacturing capacity. As a result, sales of our testers are subject
to a variety of factors we cannot control. The decision to purchase a tester
generally involves a significant commitment of capital, with the attendant
delays frequently associated with significant capital expenditures. For these
and other reasons, our systems have lengthy sales cycles during which we may
expend substantial funds and management effort to secure a sale, subjecting us
to a number of significant risks. We cannot be certain that we will be able to
maintain or increase net sales in the future or that we will be able to retain
existing customers or attract new ones.

IF WE ENGAGE IN ACQUISITIONS, WE WILL INCUR A VARIETY OF COSTS, AND THE
ANTICIPATED BENEFITS OF THE ACQUISITIONS MAY NEVER BE REALIZED

     We have developed in significant part through mergers and acquisitions of
other companies and businesses. We intend in the future to pursue additional
acquisitions of complementary product lines, technologies and businesses. We may
have to issue debt or equity securities to pay for future acquisitions, which
could be dilutive. We have also incurred and may continue to incur certain
liabilities or other expenses in connection with acquisitions, which have and
could continue to materially adversely affect our business, financial condition
and results of operations.

     In addition, acquisitions involve numerous other risks, including:

     o  difficulties assimilating the operations, personnel, technologies and
        products of the acquired companies;

     o  diversion of our management's attention from other business concerns;

     o  risks of entering markets in which we have no or limited experience;
        and

     o  the potential loss of key employees of the acquired companies.

     For these reasons, we cannot be certain what effect future acquisitions may
have on our business, financial condition and results of operations.

CHANGES TO FINANCIAL ACCOUNTING STANDARDS MAY EFFECT OUR REPORTED RESULTS OF
OPERATIONS

     We prepare our financial statements to conform with generally accepted
accounting principles, or GAAP. GAAP are subject to interpretation by the
American Institute of Certified Public Accountants, the SEC and various bodies
formed to interpret and create appropriate accounting policies. A change in
those policies can have a significant effect on our reported results and may
even affect our reporting of transactions completed before a change is
announced. Accounting policies affecting many other aspects of our business,
including rules relating to purchase and pooling-of-interests accounting for
business combinations, in-process research and development charges, revenue
recognition, employee stock purchase plans and stock option grants have recently
been revised or are under review. Changes to those rules or the questioning of
current practices may have a material adverse effect on our reported financial
results or on the way we conduct our business. In addition, our preparation of
financial statements in accordance with GAAP requires that we make estimates and
assumptions that affect the recorded amounts of assets and liabilities,
disclosure of those assets and liabilities at the date of the financial
statements and the recorded amounts of expenses during the reporting period. A
change in the facts and circumstances surrounding those estimates could result
in a change to our estimates and could impact our future operating results.


                                       19
<PAGE>

OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS

     Our future operating results depend substantially upon the continued
service of our executive officers and key personnel, none of whom are bound by
an employment or non-competition agreement. Our future operating results also
depend in significant part upon our ability to attract and retain qualified
management, manufacturing, technical, engineering, marketing, sales and support
personnel. Competition for personnel is intense, and we cannot ensure success in
attracting or retaining personnel. There may be only a limited number of persons
with the requisite skills to serve in these positions and it may be increasingly
difficult for us to hire personnel over time. Our business, financial condition
and results of operations could be materially adversely affected by the loss of
any of our key employees, by the failure of any key employee to perform in his
or her current position, or by our inability to attract and retain skilled
employees.

WE HAVE A NEW EXECUTIVE MANAGEMENT TEAM AND IF THEY ARE UNABLE TO WORK TOGETHER
EFFECTIVELY, OUR BUSINESS MAY BE HARMED

     In July 1999, we announced the appointment of Dr. Graham J. Siddall as our
new President and Chief Executive Officer. Dr. Siddall joined Credence from
KLA-Tencor where he was Executive Vice President of the Wafer Inspection Group.
We have experienced several other transitions in executive management in recent
years. These transitions have placed significant demands on our operational,
administrative and financial staff and we anticipate that these demands will not
decline in the near term. We cannot be certain that such transitions will not
have a material adverse effect on our business, financial condition and results
of operations, or the way we are perceived by the market or on the price of our
common stock.

OUR INTERNATIONAL BUSINESS EXPOSES US TO ADDITIONAL RISKS

     International sales accounted for approximately 83%, 64%, 69% and 70% of
our total net sales for the first half of fiscal 2000 and fiscal years 1999,
1998 and 1997, respectively. As a result, we anticipate that international sales
will continue to account for a significant portion of our total net sales in the
foreseeable future. These international sales will continue to be subject to
certain risks, including:

     o  changes in regulatory requirements;

     o  tariffs and other barriers;

     o  political and economic instability;

     o  an outbreak of hostilities;

     o  integration of foreign operations of acquired businesses;

     o  foreign currency exchange rate fluctuations;

     o  difficulties with distributors, joint venture partners, original
        equipment manufacturers, foreign subsidiaries and branch operations;

     o  potentially adverse tax consequences; and

     o  the possibility of difficulty in accounts receivable collection.

     We are also subject to the risks associated with the imposition of domestic
and foreign legislation and regulations relating to the import or export of
semiconductor equipment. We cannot predict whether the import and export of our
products will be subject to quotas, duties, taxes or other charges or
restrictions imposed by the United States or any other country in the future.
Any of these factors or the adoption of restrictive policies could have a
material adverse effect on our business, financial condition or results of
operations. Net sales to the Asia Pacific region accounted for approximately
75%, 55%, 60% and 66% of our total net sales in the first half of fiscal 2000
and fiscal years 1999, 1998 and 1997, respectively, and thus demand for our
products is subject to the risk of economic instability in that region and could
continue to be materially adversely affected. Countries in the Asia Pacific
region, including Korea and Japan, have experienced weaknesses in their
currency, banking and equity markets in the recent past. These weaknesses could
continue to adversely affect demand for our products, the availability and
supply of our product components, and our consolidated results of operations.
The 1997/1998 Asian financial crisis contributed to a widespread uncertainty and
a slowdown in the semiconductor industry. This slowdown resulted in


                                       20
<PAGE>

reduced spending on semiconductor capital equipment, including ATE, and has had,
and may in the future have, a material adverse effect on our product backlog,
balance sheet and results of operations.

     In addition, one of our major distributors, Spirox Corporation, is a
Taiwanese based company. This subjects a significant portion of our receivables
and future revenues to the risks associated with doing business in a foreign
country, including political and economic instability, currency exchange rate
fluctuations and regulatory changes. Disruption of business in Asia caused by
the previously mentioned factors could continue to have a material impact on the
Company's business, financial condition or results of operations.

IF THE PROTECTION OF PROPRIETARY RIGHTS IS INADEQUATE, OUR BUSINESS COULD BE
HARMED

     We attempt to protect our intellectual property rights through patents,
copyrights, trademarks, maintenance of trade secrets and other measures,
including entering into confidentiality agreements. However, we cannot be
certain that others will not independently develop substantially equivalent
intellectual property or that we can meaningfully protect our intellectual
property. Nor can we be certain that our patents will not be invalidated, deemed
unenforceable, circumvented or challenged, or that the rights granted thereunder
will provide us with competitive advantages, or that any of our pending or
future patent applications will be issued with claims of the scope we seek, if
at all. Furthermore, we cannot be certain that others will not develop similar
products, duplicate our products or design around our patents, or that foreign
intellectual property laws, or agreements into which we have entered will
protect our intellectual property rights. Inability or failure to protect our
intellectual property rights could have a material adverse effect upon our
business, financial condition and results of operations. We have been involved
in extensive, expensive and time-consuming reviews of, and litigation
concerning, patent infringement claims.

OUR BUSINESS MAY BE HARMED IF WE ARE FOUND TO INFRINGE PROPRIETARY RIGHTS OF
OTHERS

     We have at times been notified that we may be infringing intellectual
property rights of third parties and we have litigated patent infringement
claims in the past. We expect to continue to receive notice of such claims in
the future. In July 1998, inTEST IP Corporation, or inTEST, alleged in writing
that one of our products is infringing a patent held by inTEST. We may also be
obligated to other third parties relating to this allegation. We believe we have
meritorious defenses to the claims. However, we cannot be certain of success in
defending this patent infringement claim or claims for indemnification resulting
from infringement claims.

     Some of our customers have received notices from Mr. Jerome Lemelson
alleging that the manufacture of semiconductor products and/or the equipment
used to manufacture semiconductor products infringes certain patents issued to
Mr. Lemelson. We have been notified by customers that we may be obligated to
defend or settle claims that our products infringe Mr. Lemelson's patents, and
that if it is determined that the customers infringe Mr. Lemelson's patents,
that customer intends to seek indemnification from us for damages and other
related expenses.

     We cannot be certain of success in defending current or future patent
infringement claims or claims for indemnification resulting from infringement
claims. Our business, financial condition and results of operations could be
materially adversely affected if we must pay damages to a third party or suffer
an injunction or if we expend significant amounts in defending any such action,
regardless of the outcome. With respect to any claims, we may seek to obtain a
license under the third party's intellectual property rights. We cannot be
certain, however, that the third party will grant us a license on reasonable
terms or at all. We could decide, in the alternative, to continue litigating
such claims. Litigation has been and could continue to be extremely expensive
and time consuming, and could materially adversely affect our business,
financial condition or results of operations, regardless of the outcome.

OUR HIGH CAPITAL EXPENDITURES MAY REQUIRE US TO OBTAIN ADDITIONAL FINANCING
WHICH MAY NOT BE AVAILABLE ON TERMS SATISFACTORY TO US

     Developing and manufacturing new ATE systems and enhancements is highly
capital intensive. In order to be competitive, we must make significant
investments in, among other things:

     o  capital equipment;

     o  expansion of operations;

     o  systems;


                                       21
<PAGE>

     o  procedures and controls;

     o  research and development and worldwide training; and

     o  customer service and support.

     We may be unable to obtain additional financing in the future on acceptable
terms, or at all. In connection with our issuance in September 1997 of
convertible promissory notes, we currently have outstanding $96.2 million of
these notes which resulted in a ratio of long-term debt to total capitalization
at April 30, 2000 of approximately 15%. As a result, our principal and interest
obligations are substantial. The degree to which we are leveraged could
materially adversely affect our ability to obtain financing for working capital,
acquisitions or other purposes and could make our business more vulnerable to
industry downturns and competitive pressures. Our ability to meet debt service
obligations will be dependent upon our future performance, which will be subject
to financial, business and other factors affecting our operations, many of which
are beyond our control. If we raise additional funds by issuing equity
securities, our stockholders could be significantly diluted. We may exchange
notes for shares of our common stock or may refinance, exchange or redeem the
notes, which may also dilute stockholders and may make it difficult for us to
obtain additional future financing, if needed.

     If we are unable to obtain adequate funds, we may be required to
restructure or refinance our debt or to delay, scale back or eliminate certain
of our research and development, acquisition or manufacturing programs. We may
also need to obtain funds through arrangements with partners or others and we
may be required to relinquish rights to certain of our technologies or potential
products or other assets.

A VARIETY OF FACTORS MAY CAUSE THE PRICE OF OUR STOCK TO BE VOLATILE

     In recent years, the stock market in general, and the market for shares of
high-tech companies in particular, including ours, have experienced extreme
price fluctuations, which have often been unrelated to the operating performance
of affected companies. For example, in fiscal 1999, the price of our common
stock ranged from a closing high of $24.94 to a closing low of $7.19. In fiscal
2000 through May 25, 2000, the price of our common stock ranged from a closing
high of $74.60 to a closing low of $22.22. The market price of our common stock
is likely to continue to fluctuate significantly in the future, including
fluctuations unrelated to our performance.

     We believe that fluctuations of our stock price may be caused by a variety
     of factors, including:

     o  announcements of developments related to our business;

     o  fluctuations in our financial results;

     o  general conditions or developments in the semiconductor and capital
        equipment industry and the general economy;

     o  sales or purchases of our common stock in the marketplace;

     o  announcements of our technological innovations or new products or
        enhancements or those of our competitors;

     o  developments in patents or other intellectual property rights;

     o  developments in our relationships with customers and suppliers; or

     o  a shortfall or changes in revenue, gross margins or earnings or other
        financial results from analysts' expectations or an outbreak of
        hostilities or natural disasters.

WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT AN
ACQUISITION OF OUR COMPANY

     Provisions of our amended and restated certificate of incorporation,
shareholders rights plan, equity incentive plans, bylaws and Delaware law may
discourage transactions involving a change in corporate control. In addition to
the foregoing, our classified board of directors, the stockholdings of our
officers, directors and persons or entities that may be deemed affiliates, our
shareholder rights plan and the ability of our board of directors to issue
preferred stock without further stockholder approval could have the effect of
delaying, deferring or preventing a third party to acquire us and may adversely
affect the voting and other rights of holders of our common stock.


                                       22
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     None

ITEM 2. CHANGES IN SECURITIES

     None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

     The following proposals were voted upon by the Company's stockholders at
the Annual Meeting of Stockholders held on March 22, 2000:

     1. A proposal to elect two directors to serve for three-year terms ending
in 2003 or until their respective successors are elected and qualified, was
approved as follows:

     Henk J. Evenhuis              For 40,492,068, Withheld 490,024
     Bernard V. Vonderschmitt      For 40,494,372, Withheld 487,720

     2. A proposal to approve an amendment to the Company's certificate of
incorporation to increase the number of shares of Common Stock authorized for
issuance thereunder by an additional 110,000,000 shares to a total of
150,000,000 shares of Common Stock, was approved as follows:

     In Favor 27,254,120
     Opposed  13,702,808
     Abstain  24,044
     Non-Vote 1,120

     3. A proposal to approve a series of amendments to the Company's 1993 Stock
Option Plan (the "1993 Plan") which will (i) increase the number of shares of
Common Stock reserved for issuance under the Plan by an additional 500,000
shares, (ii) revise the automatic share increase provisions so that the number
of shares of Common Stock reserved under the 1993 Plan will automatically
increase on the first trading day of each fiscal year, beginning November 1,
2000, by an amount equal to 3.5% of the total number of shares of the Company's
Common Stock outstanding on the last day of the immediately preceding fiscal
year, but no such annual increase is to exceed 1,500,000 shares, (iii) increase
the number of shares of Common Stock subject to the option grants to be made to
the continuing non-employee Board members under the Automatic Option Grant
Program from 5,000 shares to 10,000 shares, effective as of the Annual Meeting,
and (iv) extend the term of the 1993 Plan from August 30, 2003 to December 31,
2004, was approved as follows:

     In Favor 20,299,798
     Opposed  18,234,264
     Abstain  88,128
     Non-Vote 2,359,902


                                       23
<PAGE>

     4. A proposal to approve a series of amendments to the Company's 1994
Employee Stock Purchase Plan (the "Purchase Plan") which will (i) implement an
automatic share increase feature whereby the number of shares of Common Stock
reserved under the Purchase Plan will automatically increase on the first
trading day of each fiscal year, beginning November 1, 2000, by an amount equal
to 0.5% of the total number of shares of the Company's Common Stock outstanding
on the last day of the immediately preceding fiscal year, but no such annual
increase is to exceed 250,000 shares, (ii) revise the offering periods in effect
under the Purchase Plan so that each such period may have a maximum duration of
12 months, with purchases occurring at 6-month intervals during the offering
period on the 14th day of February and August each year, and (iii) extend the
termination date of the Purchase Plan to August 14, 2010, was approved as
follows:

     In Favor 30,360,816
     Opposed  8,183,468
     Abstain  77,906
     Non-Vote 2,359,902

     5. A proposal to ratify the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending October 31, 2000, was
approved as follows:

     In Favor 40,350,902
     Opposed  623,324
     Abstain  7,866

ITEM 5. OTHER INFORMATION

     None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a) See Exhibit Index on page 26.

     (b) The Company filed a report on Form 8-K on May 12, 2000 announcing the
completion of its acquisition of TMT, Inc., a California corporation ("TMT")
pursuant to the terms of the previously reported Agreement and Plan of
Reorganization dated as of March 27, 2000 (the "Merger Agreement").

     (c) The Company filed a report on Form 8-K on March 28, 2000 announcing the
execution of the definitive agreement for the registrant's acquisition of TMT,
Inc.

     (d) The Company filed a report on Form 8-K on March 23, 2000 announcing a
two-for-one stock split of its Common Stock.

     (e) The Company filed a report on Form 8-K on March 14, 2000 reporting the
signing of a Letter of Intent to acquire TMT, Inc.

     (f) The Company filed a report on Form 8-K on March 1, 2000 reporting a
follow-on offering of shares of common stock.


                                       24
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.

                                           CREDENCE SYSTEMS CORPORATION
                                       ------------------------------------
                                                   (Registrant)




            JUNE 13, 2000                       /S/ DENNIS P. WOLF
      ------------------------         -----------------------------------
                Date                              Dennis P. Wolf
                                       Dennis P. Wolf, Executive Vice President,
                                        Chief Financial Officer and Secretary


                                       25
<PAGE>

                                       EXHIBIT INDEX

EXHIBIT
NUMBER
------

  3.1         Amended and Restated Certificate of Incorporation of Credence
              Systems Corporation

 10.33        Amendment to Graham J. Siddall Employment Agreement

 27.1         EDGAR Financial Data Schedule

 99.1         Amended and Restated 1993 Stock Option Plan

 99.10        Amended and Restated Employee Stock Purchase Plan

 99.21        TMT, Inc. 1996 Stock Option Plan


                                          26