<PAGE>

________________________________________________________________________________
                      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 January 31, 2001
                                      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 March 1, 2001, there were approximately 52,471,085 shares of the
Registrant's common stock, $0.001 par value per share, outstanding.

________________________________________________________________________________
<PAGE>

CREDENCE SYSTEMS CORPORATION

                                     INDEX                              PAGE NO.
                                     -----                              --------

PART I.  FINANCIAL INFORMATION
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
Item 3.  Quantitative and Qualitative Disclosures about Market Risk...     23

PART II. OTHER INFORMATION
Item 1.  Legal Proceedings............................................     24
Item 2.  Changes in Securities........................................     24
Item 3.  Defaults Upon Senior Securities..............................     24
Item 4.  Submission of Matters to a Vote of Securityholders...........     24
Item 5.  Other Information............................................     24
Item 6.  Exhibits and Reports on Form 8-K.............................     24

                                       2
<PAGE>

PART I  - FINANCIAL INFORMATION

Item I  - Financial Statements

                         CREDENCE SYSTEMS CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)


                                                   January 31,   October 31,
                                                      2001         2000/a/
                                                   -----------   -----------
ASSETS                                             (unaudited)
Current assets:
  Cash and cash equivalents....................... $   118,222   $   119,089
  Short-term investments..........................     106,831       124,545
  Accounts receivable, net........................     137,543       175,794
  Inventories.....................................     138,076       102,034
  Other current assets............................      27,175        29,420
                                                   -----------   -----------
   Total current assets...........................     527,847       550,882
Long-term investments.............................     128,198       133,804
Property and equipment, net.......................     106,681        94,853
Goodwill from acquisitions, net...................      52,676        55,133
Other intangible assets, net......................      39,159        42,161
Other assets......................................      10,707         2,404
                                                   -----------   -----------
   Total assets................................... $   865,268   $   879,237
                                                   ===========   ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable................................ $    38,741   $    53,287
  Accrued liabilities.............................      61,918        71,202
  Income taxes payable............................      18,707        23,866
                                                   -----------   -----------
   Total current liabilities......................     119,366       148,355
Other liabilities.................................       9,730         8,332
Minority interest.................................         191           323
Stockholders' equity..............................     735,981       722,227
                                                   -----------   -----------
    Total liabilities and stockholders'........... $   865,268   $   879,237
                                                   ===========   ===========

                            See accompanying notes.

a) Derived from the audited consolidated balance sheet included in the Company's
   Form 10-K for the year ended October 31, 2000.

                                       3
<PAGE>

                         CREDENCE SYSTEMS CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                   (in thousands, except per share amounts)
                                  (unaudited)

                                                              Three Months Ended
                                                                  January 31,
                                                              ------------------
                                                                2001      2000
                                                              --------  --------
Net sales.................................................... $123,177  $101,768
Cost of goods sold...........................................   52,560    43,023
                                                              --------  --------
Gross margin.................................................   70,617    58,745
Operating expenses:
 Research and development....................................   20,451    13,160
 Selling, general and administrative.........................   25,762    19,344
 Amortization of purchased intangibles.......................    5,178       777
                                                              --------  --------
  Total operating expenses...................................   51,391    33,281
                                                              --------  --------
Operating income.............................................   19,226    25,464
Interest and other income, net...............................    4,211       683
                                                              --------  --------
Income before income tax provision...........................   23,437    26,147
Income tax provision.........................................    8,836     9,282
Minority interest (benefit)..................................     (134)        3
                                                              --------  --------
Net income................................................... $ 14,735    16,862
                                                              ========  ========
Net income per share
 Basic....................................................... $   0.28  $   0.38
                                                              ========  ========
 Diluted..................................................... $   0.27  $   0.35
                                                              ========  ========
Number of shares used in computing per share amount

 Basic.......................................................   52,409    43,904
                                                              ========  ========
 Diluted.....................................................   54,410    47,506
                                                              ========  ========

                           See accompanying notes.

                                       4

<PAGE>

                         CREDENCE SYSTEMS CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
               Increase (decrease) in cash and cash equivalents
                                (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                         Three Months Ended
                                                                                             January 31,
                                                                                         -------------------
                                                                                           2001        2000
                                                                                         --------   --------
<S>                                                                                     <C>        <C>
Cash flows from operating activities:
 Net income............................................................................  $ 14,735   $ 16,862
 Adjustments to reconcile net income to net cash used in operating activity
   Depreciation and amortization.......................................................    11,784      6,350
   (Gain) loss on disposal of property and equipment...................................       198       (392)
   Minority interest...................................................................      (134)         3
   Changes in operating assets and liabilities:
     Accounts receivable, inventories and other current assets.........................     3,875    (37,418)
     Accounts payable, accrued liabilities and income taxes payable....................   (28,198)    13,833
                                                                                         --------   --------
      Net cash provided by (used in) operating activities..............................     2,260       (762)
Cash flows from investing activities:
 Purchases of available-for-sale securities............................................   (59,628)   (23,727)
 Maturities of available-for-sale short-term securities................................         0      5,732
 Sales of available-for-sale securities................................................    85,332      8,579
 Acquisition of property and equipment.................................................   (16,373)    (4,978)
 Other assets..........................................................................   (10,002)      (125)
 Proceeds from sale of property and equipment..........................................         0        616
 Long-term notes/deposits..............................................................     2,096         57
                                                                                         --------   --------
     Net cash provided by (used in) investing activities...............................     1,425    (13,846)
Cash flows from financing activities:
 Issuance of common & treasury stock...................................................     1,933      5,418
 Repurchase of common stock............................................................    (6,485)        --
                                                                                         --------   --------
     Net cash provided by (used in) financing activities...............................    (4,552)     5,418
                                                                                         --------   --------
Net increase (decrease) in cash and cash equivalents...................................      (867)    (9,190)
Cash and cash equivalents at beginning of period.......................................   119,089     52,104
                                                                                         --------   --------
Cash and cash equivalents at end of period.............................................  $118,222   $ 42,914
                                                                                         ========   ========
Supplemental disclosures of cash flow information:
  Income taxes paid....................................................................  $ 13,441   $    335
Noncash investing activities:
  Net transfers of inventory to property and equipment.................................  $  1,612   $    644
Noncash financing activities:
  Income tax benefit from stock option exercises.......................................  $    427   $  5,724
</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 months ended January 31, 2001 and 2000 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 months ended January 31, 2001 and 2000 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, 2000 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, management of
fluctuations in our operating results, 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 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 condensed
consolidated 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. Inventories consist of the following (in
thousands):


                                         January 31,    October 31,
                                            2001            2000
                                        -----------     -----------
                                        (unaudited)
                Raw materials.......... $    63,349     $    39,736
                Work-in-process........      58,211          44,704
                Finished goods.........      16,516          17,594
                                        -----------     -----------
                                        $   138,076     $   102,034
                                        ===========     ===========

3. Net Income Per Share

    Basic net income per share is based upon the weighted average number of
common shares outstanding during the period. Diluted net income per share is
based upon the weighted average number of common shares and dilutive-potential
common shares outstanding during the period. The following table sets forth the
computation of basic and diluted net income per share (in thousands, except per
share amounts):

                                                 Three Months Ended
                                                    January 31,
                                        ----------------------------------

                                       6
<PAGE>

<TABLE>
<CAPTION>
                                                                      2001       2000
                                                                    -------    -------
<S>                                                                <C>        <C>
Numerator:
 Numerator for basic and diluted net income per share-
 net income                                                         $14,735    $16,862
                                                                    -------    -------
Denominator:
 Denominator for basic net income per share-
 weighted-average shares                                             52,409     43,904
Effect of dilutive securities-employee stock options                  2,001      3,114
Effect of dilutive securities-subordinated convertible notes             --        488
                                                                    -------    -------
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions                      54,410     47,506
                                                                    -------    -------
 Basic net income per share                                         $  0.28    $  0.38
                                                                    =======    =======
 Diluted net income per share                                       $  0.27    $  0.35
                                                                    =======    =======
</TABLE>

4. Recent Accounting Pronouncements

    In November 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (SFAS 133). SFAS 133 requires
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
did not 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 principles and disclosure described in SAB 101. Because the
Company has complied with generally accepted accounting principles for its
historical revenue recognition, the change in its revenue policy resulting from
SAB 101 will be reported as a cumulative effect adjustment resulting from a
change in accounting principle effective November 1, 2000, in the fourth quarter
of fiscal 2001. Adoption of SAB 101 will also require the Company to re-state
the quarterly results for the three fiscal quarters ended July 31, 2001. The
Company is currently in the process of assessing SAB 101 and how it will impact
its reported revenues and income and is therefore unable to determine the impact
of SAB 101on its financial statements.

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, would have a material adverse effect on the Company's
business, financial condition or results of operations.

    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 certain of our products are infringing a patent held by inTEST. We have
since then engaged in sporadic discussions with inTEST concerning this matter.
On December 15, 2000, inTEST filed a complaint in the U.S. District Court for
the District of Delaware against us, alleging infringement of inTEST U.S. patent
number 4,589,815 and seeking damages and injunctive relief. To date we have not
been served with the complaint. 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.

                                       7
<PAGE>

6. Accumulated Other Comprehensive Income (Loss)

   Accumulated other comprehensive income (loss) and changes thereto consist of:

                                                           Fiscal Years Ended
                                                               October 31,
                                    Fiscal Quarter Ended   ------------------
                                      January 31, 2001       2000      1999
                                      ----------------     --------  --------
Beginning balance gain (loss)                   $2,217       $ (661)    $(241)
Unrealized gain (loss) on
available-for-sale securities                    1,925        3,158      (517)
Currency translation adjustment                    459         (280)       97
                                      ----------------     --------  --------
Total                                           $4,601       $2,217     $(661)
                                      ================     ========  ========

7. Acquisitions and Subsequent Events

     In January 2001, the Company acquired Dimensions Consulting, Inc. ("DCI").
DCI specializes in providing interface solutions for the semiconductor test and
development market through its high-performance ATE board designs and test
socket systems. DCI is based in Santa Clara, California, and has eighteen
employees. In February 2001, the Company acquired certain assets of Rich Rabkin
& Associates, Inc. ("Rabkin") for approximately $6.0 million in cash. Rabkin
specializes in providing interface solutions and test head positioning devices
for the semiconductor test market through its patented solution for high
parallel memory testing. Rabkin has six employees based in Sausalito,
California. DCI and Rabkin will be integrated into the Company's Memory Products
Division. Both acquisitions will be accounted for using the purchase method of
accounting. Based upon the Company's preliminary valuation of the fair value of
the tangible and intangible net assets acquired, it is estimated that the in-
process research and development charges for DCI and Rabkin will be less than $1
million and the ongoing charges for the amortization of intangible assets will
be approximately $1 million per quarter.

     Revenue growth has slowed in the first quarter of fiscal 2001 in the test
and assembly sector of the semiconductor equipment industry and the Company's
revenues decreased from the fourth quarter of fiscal 2000 during what the
Company now believes is a cyclical downturn in the industry. There is
uncertainty as to if and when the next cyclical growth phase will occur. In
light of these beliefs, the Company reduced its worldwide workforce by
approximately 14%, or 200 people, in February 2001. The Company will take a
charge related to this reduction in force of approximately $1 to $2 million in
its second fiscal quarter of 2001. Additionally, all remaining employees will be
required to take eight days of time off per quarter until further notice. Other
initiatives, including the consolidation and reorganization of certain functions
and operations, and the curtailment of discretionary expenses, are also being
implemented.

                                       8
<PAGE>

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

     In addition to the historical information contained in this document, the
discussion in this Report on Form 10-Q contains forward-looking statements,
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that involve
risks and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Report on
Form 10-Q should be read as being applicable to all related forward-looking
statements whenever they appear in this Report on Form 10-Q. The Company's
actual results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include those discussed below as
well as those cautionary statements and other factors set forth in "Risk
Factors" and elsewhere herein.

     Revenue growth has slowed in the first quarter of fiscal 2001 in the test
and assembly sector of the semiconductor equipment industry during what the
Company now believes is a cyclical downturn in the industry. There is
uncertainty as to if and when the next cyclical growth phase will occur. Until
such time as we return to a growth period, we expect a continuing decline in
orders and therefore expect that the April 30, 2001 fiscal quarter's revenue
will decline significantly from the levels experienced by the Company during the
first quarter of fiscal 2001. In light of that belief, the Company reduced its
worldwide workforce by approximately 14%, or 200 people. Additionally, all
remaining employees will be required to take eight days of time-off per quarter
until further notice. Other initiatives, including the consolidation and
reorganization of certain functions and operations, and the curtailment of
discretionary expenses, are also being implemented.

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


                                                             Three Months Ended
                                                                January 31,
                                                             ------------------
                                                              2001        2000
                                                             ------      ------
                                                                 Unaudited
   Net sales................................................  100.0%      100.0%
   Cost of goods sold.......................................   42.7        42.3
                                                             ------      ------
   Gross margin.............................................   57.3        57.7
   Operating expenses
    Research and development................................   16.6        13.0
    Selling, general, and administrative....................   20.9        19.0
    Amortization of purchased intangible assets.............    4.2         0.7
                                                             ------      ------
     Operating expenses.....................................   41.7        32.7
                                                             ------      ------
   Operating income.........................................   15.6        25.0
   Interest and other income, net...........................    3.4         0.7
                                                             ------      ------
   Income before income tax provision.......................   19.0        25.7
   Income tax provision.....................................    7.0         9.1
                                                             ------      ------
   Net income...............................................   12.0%       16.6%
                                                             ======      ======

RESULTS OF OPERATIONS

NET SALES

     Net sales consist of revenues from systems sales, spare parts sales,
maintenance contracts and software sales. Net sales were $123.2 million for the
first quarter of fiscal 2001, representing an increase of 21% from the net sales
of $101.8 million in the comparable period of fiscal

                                       9
<PAGE>

2000. Net sales declined 44% from the fourth quarter of fiscal 2000, when the
Company recorded $220.2 million in revenue. During fiscal years 1999 and 2000,
our net sales improved each sequential quarter because of four principal
factors:

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

     . improved business and economic conditions in Asia, particularly in
       Taiwan;

     . the increased sales of two major products: the Quartet high-performance
       mixed signal tester and the Kalos memory tester; and

     . the acquisition of the TMT, Inc. ("TMT") product lines in May 2000.

     However, revenue growth has slowed in the first quarter of fiscal 2001 in
the test and assembly sector of the semiconductor equipment industry during what
we now believe is a cyclical downturn in the industry. This belief is based on
weakening order activity, order cancellation activity, and customer-requested
shipment delays from our existing backlog, particularly with customers in Asia.

     International net sales accounted for approximately 80%, 80%, and 64% of
total net sales in the first fiscal quarter of 2001 and fiscal years 2000 and
1999, respectively. Our net sales to the Asia-Pacific region accounted for
approximately 47%, 69% and 55% of total net sales in the first fiscal quarter of
2001 and fiscal years 2000 and 1999, 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 fiscal quarter of 2001 and
fiscal years 2000 and 1999 consisted of:

                         Fiscal Quarter      Fiscal Years Ended
                         Ended January           October 31,
                                             ------------------
                            31, 2001          2000         1999
                         --------------      -----         ----
Mixed-Signal                         74%        72%          65%
Logic                                 4         12           16
Memory                               12         11            7
Service and software                 10          5           12
                         --------------      -----         ----
Total                               100%       100%         100%
                         ==============      =====         ====

     The increase in the memory percentage and the high percentage of net sales
attributable to mixed-signal products are principally derived from the sales of
the Kalos and Quartet products, respectively. Revenues from software were not
material to our operations in the first fiscal quarter of 2001 and fiscal years
2000 and 1999, representing less than 4% of our net sales in each period.

GROSS MARGIN

     Our 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 57.3% for the first quarter
of fiscal 2001, compared with 57.7% for the first quarter of fiscal 2000. We
currently expect gross margins to decline as a percentage of net sales due to
lower average selling prices in fiscal 2001 as well as higher costs caused by
under-absorption of manufacturing expenses.

RESEARCH AND DEVELOPMENT

     Research and development ("R&D") expenses were $20.5 million in the first
quarter of fiscal 2001, an increase of $7.3 million or 55% over the same period
of fiscal 2000. The higher level of spending in 2001 reflects the acquisitions
of TMT, Modulation Instrument, Inc. ("MI"), and NewMillennia Solutions, Inc.
("NMS") in fiscal 2000 as well as increases in internal R&D project expenses. As
a percentage of net sales, R&D expenses were

                                       10
<PAGE>

16.6% for the first quarter of fiscal 2001, an increase from 12.9% in the first
quarter 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. Accordingly, the Company expects these expenses to be
relatively stable in absolute dollars for the remainder of fiscal 2001.

SELLING, GENERAL AND ADMINISTRATIVE

     Selling, general and administrative expenses ("SG&A") were $25.8 million in
the first quarter of fiscal 2001, representing a $6.4 million, or 33%, increase
from the comparable period of fiscal 2000. The higher spending in 2001 was
primarily due to higher sales commissions on higher sales volumes and increased
payroll related expenses due to a higher headcount in 2001. As a percentage of
net sales, SG&A expenses were 20.9% for the first quarter of fiscal 2001,
compared with 19.0% for the corresponding period in fiscal 2000. This increase
as a percentage of net sales is primarily due to the higher headcount in 2001.
The Company expects SG&A expenses for the remainder of fiscal 2001 to decrease
in absolute dollars because we reduced our workforce in February 2001 and
instituted other cost saving measures.

AMORTIZATION OF PURCHASED INTANGIBLE ASSETS

     Amortization of purchased intangible expenses increased to $5.2 million in
the first quarter of fiscal 2001 from $0.8 million in the comparable period of
fiscal 2000, an increase of 566%. In May 2000, we purchased TMT for
approximately $80.0 million, in August we purchased MI for approximately $20.5
million and Credence Europa for approximately $8.4 million and in October we
purchased NMS for approximately $11.3 million. These acquisitions have resulted
in approximately $2.8 million, $1.1 million, $0.4 million, and $0.7 million,
respectively, in quarterly charges for amortization of purchased intangibles
assets.

INTEREST AND OTHER INCOME EXPENSES, NET

     We generated net interest and other income of $4.2 million for the first
quarter of fiscal 2001, as compared to $0.7 million for the first quarter of
fiscal 2000. The increase in fiscal 2001 was due to higher average cash and
investment balances in fiscal 2001 as compared to fiscal 2000. These higher
average balances were the result of the cash received in our secondary public
offering in February 2000 offset by cash outlays for acquisitions in fiscal 2000
and the purchase of our Hillsboro, Oregon facility. In addition, in September
2000, the remaining outstanding Convertible Subordinated Notes were called for
redemption by the Company.

INCOME TAXES

     The Company's estimated effective tax rate for the first quarter of fiscal
2001 was 37.7%, compared to 35.5% in the comparable period of fiscal 2000. The
tax rate is computed based on projected fiscal year book income or loss. The
higher estimated effective rate in fiscal 2001 is the result of non-deductible
amortization charges becoming a larger portion of the Company's estimated book
income or loss.

     Realization of the net deferred tax assets at January 31, 2001 is dependent
on the Company's ability to generate approximately $29 million in future taxable
income. Management believes that it is more likely than not that 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

     Operating activities provided net cash flows of $2.3 million and used $0.8
million for the three months ended January 31, 2001 and 2000, respectively. Net
cash flows provided by operating activities for the first quarter of

                                       11
<PAGE>

2001 were primarily due to a decrease in working capital amounts of $24.3
million, offset by net income before depreciation and amortization of $26.5
million. The decreased requirement for working capital reflects the Company's
current lower business activity levels in fiscal 2001.

     Investing activities provided net cash flows of approximately $1.4 million
and used $13.8 million in the three months ended January 31, 2001 and 2000,
respectively. For fiscal 2001, approximately $25.7 million was generated from
net sales of available-for-sale securities offset by $16.3 million for purchases
of property and equipment to support the Company's business. In addition, the
Company disbursed approximately $6.5 million for the purchase of DCI in the
first quarter of fiscal 2001.

     Financing activities used net cash flows of $4.5 million and provided $5.4
million for the three months ended January 31, 2001 and 2000, respectively. The
use of cash for the first quarter of 2001 was primarily due to the Company's
repurchase of 325,000 shares of its common stock for $6.5 million, offset by the
issuance of common stock through the Company's employee equity plans.

     As of January 31, 2001, the Company had working capital of approximately
$408.5 million, including cash and short-term investments of $225.1 million, and
accounts receivable and inventories representing $275.6 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 $119.4 million
as of January 31, 2001 decreased from $148.4 million as of October 31, 2000.

     The Company's principal sources of liquidity as of January 31, 2001
consisted of approximately $118.2 million of cash and cash equivalents, and
short-term investments of $106.8 million. In addition, the Company had $122.7
million of available-for-sale securities, classified as long-term investments at
January 31, 2001.

RECENT ACCOUNTING PRONOUNCEMENTS

     In November 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (SFAS 133). SFAS 133 requires
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
did not 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 principles and disclosure described in SAB 101. Because the
Company has complied with generally accepted accounting principles for its
historical revenue recognition, the change in its revenue policy resulting from
SAB 101 will be reported as a cumulative effect adjustment resulting from a
change in accounting principle effective November 1, 2000, in the fourth quarter
of fiscal 2001. Adoption of SAB 101 will also require the Company to re-state
the quarterly results for the three fiscal quarters ended July 31, 2001. The
Company is currently in the process of assessing SAB 101 and how it will impact
its reported revenues and income and is therefore unable to determine the impact
of SAB 101on its financial statements.

                                       12
<PAGE>

     RISK FACTORS

Our operating results may fluctuate significantly which may adversely affect our
stock price


                                    [GRAPH]

<TABLE>
<CAPTION>
                       1997   1998                   1999                 2000                 2001
                        Q4    Q1   Q2    Q3    Q4    Q1   Q2   Q3   Q4    Q1   Q2    Q3   Q4    Q1
<S>                    <C>    <C>  <C>   <C>   <C>   <C>  <C>  <C>  <C>  <C>  <C>   <C>  <C>   <C>
Net Sales               69    82   75    37    22    26   38   52   80   102  154   204  220    123
Net Income(loss)         7     9    9   (34)  (11)   (7)  (5)   3    8    17   33    41   49     15
</TABLE>

     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 several reasons,
including:

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

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

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

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

     .  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;

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

     .  supply constraints;

     .  ability to obtain adequate facilities;

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

     .  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;

     .  expenses associated with acquisitions and alliances;

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

                                       13
<PAGE>

     .  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, and product discounts;

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

     .  ability to hire and retain qualified 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:

     .  manufacturing inefficiencies;

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

     .  hardware and software product sales mix;

     .  inventory write-downs;

     .  production volumes;

     .  new product introductions;

     .  product reliability;

     .  absorption levels and the rate of capacity utilization;

     .  customization and reconfiguration of systems;

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

     .  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 allowances and price
adjustments, 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:

     .  research and development;

     .  support costs for the distribution channels;

     .  marketing and other expenses for new products;

     .  capital equipment purchases and world-wide training; and

     .  customer support and service.

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

                                       14
<PAGE>

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 $2.5 million. This has resulted 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 just one customer is not
received in time to permit shipment during that period. Backlog at the beginning
of a quarter typically does not include all orders necessary to achieve our
sales objectives for that quarter. Orders in backlog are subject to
cancellation, delay, deferral or rescheduling by customers with limited or no
penalties. In the first quarter of fiscal 2001, we have experienced customer-
requested shipment delays and order cancellations, and the Company believes it
is probable that orders will be canceled in the future. 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 in which 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

     Revenue growth has slowed in the test and assembly sector of the
semiconductor equipment industry during what we now believe is a cyclical
downturn in the industry. There is uncertainty as to if and when the next
cyclical growth phase will occur. This belief is based on weakening order
activity, order cancellation activity, and customer-requested shipment delays
from the Company's existing backlog, particularly with customers in Asia. Until
such time as we return to a growth period, we expect a continuing decline in
orders and therefore expect that the April 30, 2001 fiscal quarter's revenue
will decline significantly from the levels experienced by the Company during the
first quarter of fiscal 2001. In light of that belief, the Company reduced its
worldwide workforce by approximately 14%, or 200 people. The Company will take a
charge related to this reduction in force of approximately $1 to $2 million in
its second fiscal quarter of 2001. Additionally, all remaining employees will be
required to take eight days of time off per quarter until further notice. Other
initiatives, including the consolidation and reorganization of certain functions
and operations, and the curtailment of discretionary expenses, are also being
implemented.

     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. In addition, in the
current industry environment, sales

                                       15
<PAGE>

are expected to be sequentially down in the next fiscal quarter and possibly in
the upcoming quarters. 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 a 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.

Over the last several years we have experienced significant fluctuations in our
operating results and an increased scale of operations

     In the first quarter of fiscal 2001 our net sales fell 44% from $220.2
million in the fourth quarter of fiscal 2000 to $123.2 million as the industry
began a cyclical downturn. In fiscal 2000, we generated revenue of $101.8
million in the first quarter and $220.2 million in the fourth quarter, an
increase of 116%. 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
the current cost-cutting efforts and those during fiscal 1998 and most of fiscal
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, acquisition of the new facilities in Oregon, further
investments in our 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 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. In late fiscal 1999 and into 2000, we shipped 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 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.

                                       16
<PAGE>

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.

     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.

                                       17
<PAGE>

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:

     .  product selection;

     .  timely and efficient completion of product design;

     .  implementation of manufacturing and assembly processes;

     .  successful coding and debugging of software;

     .  product performance;

     .  reliability in the field; and

     .  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.

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

                                       18
<PAGE>

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 and customers in Taiwan for a significant portion
of our revenues and the termination of this distribution relationship would
materially adversely affect our business

     Spirox Corporation, a distributor in Taiwan that sells to end-user
customers in Taiwan and China, accounted for approximately 21%, 45%, and 39% of
our net sales in the first quarter of fiscal 2001 and fiscal years 2000 and
1999, respectively. One end-user customer headquartered in Taiwan accounted for
approximately 19% of our net sales in fiscal 2000. 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, any termination of the Spirox
relationship, or any other significant customer, including 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:

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

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

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

     .  our customers' financial condition and success;

     .  general economic conditions; and

     .  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.

                                       19
<PAGE>

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 to then current stockholders. 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:

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

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

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

     .  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 affect 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. For example, in the fourth
quarter of fiscal 2001, we will be required to implement SAB 101 (see Note 4 of
the Notes to the Condensed Consolidated Financial Statements). 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.

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 qualified personnel is intense, and we cannot ensure
success in attracting or retaining qualified 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. In December 2000, our Chief Financial
Officer resigned from his positions with the Company. In connection with his
resignation, our Board of Directors promoted John R. Detwiler to the position of
Senior Vice President of Finance, Chief Financial Officer and Secretary in
February 2001. Mr. Detwiler was formerly the Vice President, Corporate
Controller for the Company.

                                       20
<PAGE>

Our international business exposes us to additional risks

     International sales accounted for approximately 80%, 80%, and 64% of our
total net sales for the first quarter of fiscal 2001 and fiscal 2000 and 1999,
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:

     .  changes in regulatory requirements;

     .  tariffs and other barriers;

     .  political and economic instability;

     .  an outbreak of hostilities;

     .  integration of foreign operations of acquired businesses;

     .  foreign currency exchange rate fluctuations;

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

     .  potentially adverse tax consequences; and

     .  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
47%, 69%, and 55% of our total net sales in the first quarter of fiscal 2001 and
fiscal 2000 and 1999, 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 widespread uncertainty and a slowdown in the
semiconductor industry. This slowdown resulted in 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. Further, many of our customers in the Asia-Pacific region
built up capacity in ATE during fiscal 2000 in anticipation of a steep ramp up
in wafer fabrication. However, this steep ramp up in output has not fully
materialized leaving some customers with excess capacity. Therefore, it is
possible that these customers may spend less in the aggregate this year than
they did in fiscal 2000.

     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,

                                       21
<PAGE>

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 certain of our products are infringing a patent held by inTEST. We have
since then engaged in sporadic discussions with inTEST concerning this matter.
On December 15, 2000, inTEST filed a complaint in the U.S. District Court for
the District of Delaware against us, alleging infringement of inTEST U.S. patent
number 4,589,815 and seeking damages and injunctive relief. To date we have not
been served with the complaint. 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 customers intend 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.

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 and through March 14, 2001, the price of our common stock has ranged from a
closing high of $74.59 to a closing low of $16.13. 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:

     .  announcements of developments related to our business;

     .  fluctuations in our financial results;

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

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

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


                                       22
<PAGE>

     .  developments in patents or other intellectual property rights;

     .  developments in our relationships with customers and suppliers; or

     .  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.


ITEM 3  - 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. 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 consist 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 (in thousands, except percent amounts):


<TABLE>
<CAPTION>
                                     2001            2002           2003           2004            2005    Thereafter
                                   -------         -------        -------         ------          ------  -------------
<S>                                <C>             <C>            <C>            <C>             <C>      <C>
Cash Equivalents
   Fixed rate..............        $118,222             --             --             --              --            --
   Average rate............            6.05%            --             --             --              --            --
Short term investments
   Fixed rate..............        $ 94,122        $12,709             --             --              --            --
   Average rate............            6.28%          7.30%            --             --              --            --
Long term investments
   Fixed rate..............              --        $44,845        $53,201         $7,676              --        $17,005
   Average rate............              --           6.44%          5.28%          6.30%             --           5.39%
                                   ------------------------------------------------------------------------------------
Total investment securities        $212,344        $57,554        $53,201         $7,676              --        $17,005
Average rate                           6.15%          6.63%          5.28%          6.30%             --           5.39%

Equity investments                 $  5,471             --             --             --              --             --
</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.

                                       23
<PAGE>

PART II.  - OTHER INFORMATION


Item 1.  Legal Proceedings


     In July 1998, we received a written allegation from inTEST that we were
infringing on a patent held by inTEST.  We have since then engaged in sporadic
discussions with inTEST concerning this matter. On December 15, 2000, inTEST
filed a complaint in the U.S. District Court for the District of Delaware
against us, alleging infringement of inTEST U.S. patent number 4,589,815 and
seeking damages and injunctive relief. To date we have not been served with the
complaint.  In addition to direct costs and diversion of resources which may
result, we may be obligated to indemnify third parties for costs related to this
allegation.


Item 2.  Changes in Securities

         None

Item 3.  Defaults upon Senior Securities

         None

Item 4.  Submission of Matters to a Vote of Securityholders

         None

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 November 30, 2000
             reporting the results for the fourth fiscal quarter and the fiscal
             year ended October 31, 2000.

                                       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)



        March 15, 2001                        /s/ JOHN R. DETWILER
      -----------------------          ------------------------------------
             Date                                 John R. Detwiler
                                               Senior Vice President,
                                         Chief Financial Officer and Secretary

                                       25
<PAGE>

EXHIBIT INDEX


 Exhibit
 Number
 ------

         [None.]

                                       26