SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

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

For the quarterly period ended April 30, 1999
                                                        OR

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

For the transition period from          to

                         Commission file number 0-22366

                          CREDENCE SYSTEMS CORPORATION
             (Exact name of registrant as specified in its charter)


                 Delaware                                    94-2878499
       (State or other jurisdiction)                       (IRS  Employer
     of incorporation or organization)                   Identification No.)


    215 Fourier Ave., Fremont, California                     94539
   (Address of principal executive offices)                 (Zip Code)

        Registrant's telephone number, including area code (510) 657-7400

           ---------------------------------------------------------
               Former name, former address and former fiscal year,
                          if changed since last report.

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

     At June 8, 1999, there were 21,402,527  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......................      8

PART II.   OTHER INFORMATION
Item 1.    Legal Proceedings........................................     26
Item 2.    Changes in Securities....................................     26
Item 3.    Defaults Upon Senior Securities..........................     26
Item 4.    Submission of Matters to a Vote of Securityholders.......     26
Item 5.    Other Information........................................     26
Item 6.    Exhibits and Reports on Form 8-K.........................     26




                                       2
<PAGE>


PART I  - FINANCIAL INFORMATION

ITEM I  - FINANCIAL STATEMENTS

                          CREDENCE SYSTEMS CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

<TABLE>
<CAPTION>

                                                      April 30,      October 31,
                                                        1999            1998a
                                                     -----------     -----------
<S>                                                   <C>            <C>
ASSETS                                               (unaudited)
Current assets:
  Cash and cash equivalents ........................  $  56,694      $  48,391
  Restricted cash ..................................          -          2,400
  Short-term investments ...........................     47,236         62,777
  Accounts receivable, net .........................     34,398         33,901
  Inventories ......................................     32,277         37,406
  Other current assets .............................     30,617         40,676
                                                      ----------    -----------
    Total current assets ...........................    201,222        225,551
Long-term investments ..............................     38,989         20,357
Property and equipment, net ........................     41,549         41,764
Other assets .......................................     17,430         18,517
                                                     ===========    ===========
    Total assets ...................................   $299,190       $306,189
                                                     ===========    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable ................................. $   12,700      $   8,090
  Accrued liabilities ..............................     23,629         26,978
  Income taxes payable .............................      5,846          5,877
    Total current liabilities ......................     42,175         40,945
Convertible Subordinated Notes .....................    105,960        115,000
Minority interest ..................................        160            227
Stockholders' equity ...............................    150,895        150,017
                                                    ============    ===========
    Total liabilities and stockholders' equity .....   $299,190       $306,189
                                                    ============    ===========
</TABLE>

                             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, 1998.

                                       3
<PAGE>



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

<TABLE>
<CAPTION>
                                                                     Three Months Ended                 Six Months Ended
                                                                         April 30,                         April 30,
                                                               -------------------------------   -------------------------------
                                                                   1999              1998            1999              1998
                                                               -------------     -------------   -------------     -------------
<S>                                                               <C>             <C>             <C>               <C>

Net sales ...................................................     $ 38,100        $ 74,660        $  64,590         $ 157,035
Cost of goods sold ..........................................       19,001          31,664           34,277            67,102
                                                               -------------   -------------     -------------     -------------
Gross margin ................................................       19,099          42,996           30,313            89,933
Operating expenses:
   Research and development .................................        9,146          12,233           18,149            25,724
   Selling, general and administrative ......................       13,872          17,931           26,103            38,239
   Special Charges ..........................................        6,231             -              6,231                 -
                                                               -------------     -------------   -------------     -------------
       Total operating expenses .............................       29,249          30,164           50,483            63,963
                                                               -------------   -------------     -------------     -------------
Operating income (loss) .....................................      (10,150)         12,832          (20,170)           25,970
Interest and other income (expenses), net ...................          240             200              (61)            1,158
                                                               -------------   -------------     -------------     -------------
Income (loss) before income tax provision (benefit) .........       (9,910)         13,032          (20,231)           27,128
Income tax provision (benefit) ..............................       (3,571)          4,290           (7,300)            9,224
Minority interest ...........................................           (8)            (45)             (46)              (74)
                                                               -------------     -------------   -------------     -------------
Net income (loss) before extraordinary items ................       (6,331)          8,787          (12,885)           17,978
Gain on extinguishment of debt (net of taxes of $652) .......        1,158             -              1,158                 -
                                                               -------------     -------------   -------------     -------------
Net income (loss) ...........................................    $  (5,173)       $  8,787       $  (11,727)        $  17,978
                                                               =============     =============   =============     =============
Net income (loss) per share
    Basic  (before extraordinary items) .....................    $   (0.30)              -       $    (0.63)                -
    Basic  (extraordinary items) ............................    $    0.05               -       $     0.05                 -
                                                               -------------     -------------   -------------     -------------
    Basic ...................................................    $   (0.25)       $   0.41       $    (0.57)       $     0.83
                                                               =============     =============   =============     =============
    Diluted  (before extraordinary items) ...................    $   (0.30)              -       $    (0.63)                -
    Diluted  (extraordinary items) ..........................    $    0.05               -       $     0.05                 -
                                                               -------------     -------------   -------------     -------------
    Diluted .................................................    $   (0.25)       $   0.40       $    (0.57)       $     0.81
                                                               =============     =============   =============     =============
Number of shares used in computing per share amount
    Basic ...................................................       20,811          21,634           20,610            21,731
                                                               =============     =============   =============     =============
    Diluted .................................................       20,811          22,146           20,610            22,257
                                                               =============     =============   =============     =============
</TABLE>



                             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>

                                                                                        Six Months Ended April 30,
                                                                                        ---------------------------
                                                                                           1999           1998
                                                                                        ------------   ------------
Cash flows from operating activities:
<S>                                                                                      <C>             <C>
   Net income (loss) .................................................................   $(11,727)       $17,978
   Adjustments to reconcile net income to net cash provided by operating activities:
      Depreciation and amortization ..................................................      10,445         8,405
      Special charges ................................................................       6,231             -
      Loss on disposal of property and equipment .....................................         700            (7)
      Gain on extinguishment of debt .................................................      (1,810)            -
      Minority interest ..............................................................         (46)           74
      Changes in operating assets and liabilities:
         Restricted cash, accounts receivable, inventories and other current assets ..      14,570       (15,955)
         Accounts payable, accrued liabilities and income taxes payable ..............        (234)        4,566
                                                                                       ------------    ------------
            Net cash provided by operating activities ................................      18,129        15,061
Cash flows from investing activities:
   Purchases of available-for-sale securities ........................................     (50,336)     (103,387)
   Maturities of available-for-sale short-term securities ............................      29,757        34,668
   Sales of available-for-sale securities ............................................      17,488         6,000
   Acquisition of property and equipment .............................................     (10,068)       (5,390)
   Other assets ......................................................................      (1,635)       (3,048)
                                                                                        ------------   ------------
         Net cash (used in) investing activities .....................................     (14,794)      (71,157)
Cash flows from financing activities:
   Issuance of common stock ..........................................................       3,937         1,971
   Other .............................................................................         (21)            -
    Issuance (purchase) of treasury stock ............................................       1,052       (12,795)
                                                                                        ------------   ------------
         Net cash provided by (used in) financing activities .........................       4,968       (10,824)
Net increase (decrease) in cash and cash equivalents .................................       8,303       (66,920)
Cash and cash equivalents at beginning of period .....................................      48,391       132,761
                                                                                        ============   ============
Cash and cash equivalents at end of period ...........................................  $   56,694     $  65,841
                                                                                        ============   ============
Supplemental disclosures of cash flow information:
   Interest (paid) received ..........................................................  $   (3,108)    $   3,103
   Income taxes refunded .............................................................  $   17,227     $       -
   Income taxes paid .................................................................  $              $   8,187
                                                                                                 -
Non-cash investing activities:
   Net transfers of inventory to property and equipment ..............................  $     2,521    $   3,924
Non-cash financing activities:
   Income tax benefit from stock option exercises ....................................  $       576    $     949
   Issuance of treasury stock for convertible subordinated notes .....................  $     7,040    $       -
   Exchange of convertible subordinated notes for common stock plus issuance costs ...  $    (8,850)           -
</TABLE>

                             See accompanying notes.


                                       5
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.   Quarterly Financial Statements
     ------------------------------
       The condensed consolidated financial statements and related notes for the
periods ended April 30, 1999 and 1998 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 periods  ended  April 30, 1999 and 1998 are 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, 1998 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,  year 2000 readiness disclosure,  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
consolidated   condensed  financial   statements  requires  management  to  make
estimates  and  assumptions  that affect the amounts  reported in the  financial
statements. Actual results could differ from those estimates.


2.   Inventories
     -----------

       Inventories are stated at the lower of standard cost (which  approximates
first-in,  first-out cost) or market.  Inventories  consist of the following (in
thousands):

                                             April 30,           October 31,
                                               1999                 1998
                                           --------------       --------------
                                           (unaudited)
              Raw materials                   $  6,021             $  9,860
              Work-in-process                   19,106               21,609
              Finished goods                     7,150                5,937
                                           =============        =============
                                               $32,277              $37,406
                                           =============        =============

3.   Net Income (Loss) Per Share
     ---------------------------

       Net income  (loss) per basic  share is based  upon the  weighted  average
number of common  shares  outstanding  during the period.  Net income (loss) per
diluted share is based upon the weighted  average  number of common and dilutive
potential common shares outstanding during the period. The Company's Convertible
Subordinated  Notes are not dilutive  potential common shares and,  accordingly,
were  excluded  from the  calculation  of net income  (loss) per diluted  share.
Options to purchase approximately 2,012,000 shares at an average price of $16.79
per share were  outstanding  at April 30,  1999,  but were not  included  in the
computation of diluted net loss per share because  options are  antidilutive  in
periods when the Company incurs a net loss.


                                       6
<PAGE>


<TABLE>
<CAPTION>

                                                              Three Months Ended              Six Months Ended
                                                                   April 30,                      April 30,
                                                          ----------------------------   ----------------------------
                                                             1999            1998           1999            1998
                                                          ------------    ------------   ------------    ------------
<S>                                                       <C>             <C>            <C>             <C>
 Numerator:
   Numerator for basic and diluted net income (loss)
   per share-net income (loss)                            $  (5,173)      $   8,787      $  (11,727)     $  17,978
                                                          ------------    ------------   ------------    ------------

 Denominator:
   Denominator for basic net income (loss)
   per share-weighted-average shares                         20,811          21,634         20,610          21,731

 Effect of dilutive securities-employee stock options                           512                           526

 Denominator for diluted earnings per share-adjusted
 weighted-average shares and assumed conversions             20,811          22,146         20,610          22,257
                                                          ------------    ------------   -------------   ------------

   Basic net income (loss) per share                      $    (0.25)     $    0.41      $    (0.57)     $    0.83
                                                          ============    ============    ============   ============

   Diluted net income (loss) per share                    $    (0.25)     $    0.40      $    (0.57)     $    0.81
                                                          ============    ============    ============   ============
</TABLE>

4.     Changes in Accounting Standards
       -------------------------------

       As of  November  1,  1998 the  Company  adopted  Statement  of  Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS
130 established new rules for the reporting and display of comprehensive  income
(loss) and its components  including unrealized gains or losses on the Company's
available-for-sale  securities  and foreign  currency  translation  adjustments,
which prior to adoption were  immaterial  and were  therefore  excluded from net
income  (loss).  For the fiscal  quarters  ended April 30, 1999 and 1998,  total
comprehensive  income  (loss)  amounted to $ (5.1  million)  and $ 8.7  million,
respectively.  For the six month  periods  ended April 30, 1999 and 1998,  total
comprehensive  income  (loss)  amounted to $ (11.5  million) and $ 17.7 million,
respectively.

5.     Contingencies
       -------------

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

6.     Special Charges and Extraordinary Item
       --------------------------------------

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

       As of April 30, 1999, approximately $1.7  million in accrued  liabilities
related to special  charges  recorded in 1998 remained on the Company's  balance
sheet, primarily  representing rent on excess facilities.  These amounts will be
paid out over the next six months.

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


                                       7
<PAGE>


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


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

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

<TABLE>
<CAPTION>

                                                  Three Months Ended      Six Months Ended
                                                       April 30,               April 30,
                                                  --------------------   ------------------
                                                    1999        1998       1999        1998
                                                  ---------   --------   ---------   -------
                                                        Unaudited              Unaudited
<S>                                                  <C>       <C>         <C>        <C>
 Net sales ......................................    100.0%    100.0%      100.0%     100.0%
 Cost of goods sold .............................     49.9%     42.4%       53.1%      42.7%
                                                  ----------------------  ---------------------
 Gross margin ...................................     50.1%     57.6%       46.9%      57.3%
 Operating expenses
    Research and development ....................     24.0%     16.4%       28.1%      16.4%
    Selling, general, and administrative ........     36.4%     24.0%       40.4%      24.4%
    Special charges .............................     16.4%      -           9.6%       -
                                                  ----------------------  ---------------------
       Total operating expenses .................     76.8%     40.4%       78.1%      40.7%

 Operating income (loss) ........................    (26.7%)    17.2%      (31.2%)     16.5%
 Interest and other income (expenses), net ......      0.6%      0.3%       (0.1%)      0.7%
                                                  ----------------------  ---------------------
 Income (loss) before income taxes ..............    (26.0%)    17.5%      (31.3%)     17.3%
 Income taxes provision (benefit) ...............     (9.4%)     5.7%      (11.3%)      5.9%
 Minority interest ..............................      0.0%     (0.1%)      (0.1%)      0.0%
                                                  ----------------------  ---------------------
 Net income (loss) before extraordinary items ...    (16.6%)    11.8%      (19.9%)     11.4%
                                                  ======================  =====================

 Gain on extinguishment of debt .................      3.0%        -         1.8%         -

 Net income (loss) ..............................    (13.6%)    11.8%      (18.1%)     11.4%
                                                  ======================  =====================
</TABLE>


                                       8
<PAGE>



RESULTS OF OPERATIONS

NET SALES

       Net sales  consist of  revenues  from  systems  sales,  spare part sales,
maintenance  contracts and software sales.  Net sales were $38.1 million for the
second  quarter of fiscal  1999,  representing  a decrease of 49.0% from the net
sales of $74.7 million in the  comparable  period of fiscal 1998.  This decrease
was due primarily to a significant decline in worldwide demand for semiconductor
automatic test equipment,  particularly in the Asia Pacific region and to delays
in revenue  shipments of new  products.  International  net sales  accounted for
approximately72.4% of the total net sales for the second quarter of fiscal 1999,
compared  to  approximately  80% for  the  comparable  period  a year  ago.  The
Company's  international  sales of its  products and spare parts and its service
revenues are denominated primarily in United States dollars.

GROSS MARGIN

       The Company's gross margin has been and will continue to be affected by a
variety of factors, including manufacturing efficiencies, pricing by competitors
and suppliers, new product introductions,  product sales mix, production volume,
customization and  reconfiguration of systems,  international and domestic sales
mix and field service margins.  Gross margin was 50.1% for the second quarter of
fiscal 1999,  compared  with 57.6% for the second  quarter of fiscal  1998.  The
decrease in gross  margin as a percent of sales was due to  significantly  lower
average  selling  prices,  to  higher  costs  caused  by   under-absorption   of
manufacturing  expenses,  and to product  development  delays  which the Company
believes  will continue to adversely  affect gross margins  through at least the
end of the current fiscal year.

RESEARCH AND DEVELOPMENT

       Research and development ("R&D") expenses were $9.1 million in the second
quarter of fiscal 1999, a decrease of $3.1 million or 25.2% over the same period
of fiscal 1998.  The decrease was  primarily  due to reduced  payroll and travel
related  expenses from lower headcount as well as cutbacks in project,  software
and other  miscellaneous  expenses.  As a percentage of net sales,  R&D expenses
were 24.0% for the second  quarter of fiscal 1999, an increase from 16.4% in the
second quarter of fiscal 1998. The increase in these expenses as a percentage of
net sales is attributable  primarily to the significant decrease in net sales in
the second  quarter of fiscal 1999 as  compared  with the  comparable  period of
fiscal 1998.  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 increase
in absolute dollars for the remainder of fiscal 1999.

SELLING, GENERAL AND ADMINISTRATIVE

       Selling,  general and administrative expenses ("SG&A") were $13.9 million
in the  second  quarter of fiscal  1999,  representing  a $4.1  million or 22.6%
decrease from the comparable  period of fiscal 1998.  The spending  decline from
the prior quarter is primarily due to reduced sales  commissions  on lower sales
volume,  reduced payroll and travel related expenses from lower headcount and to
reductions in corporate and other project related  expenses.  As a percentage of
net sales,  SG&A  expenses  were 36.4% for the  second  quarter of fiscal  1999,
compared with 24.0% for the  corresponding  period in fiscal 1998. This increase
as a percentage of net sales is primarily due to the decrease in net sales.  The
Company  expects SG&A  expenses for the  remainder of fiscal 1999 to increase in
absolute  dollars.  Increases  expected in the remainder of fiscal 1999 include,
but are not  necessarily  limited to, the costs of  installing a new MIS system,
increases  in  salaries  of  existing  employees  and the  costs of  moving  the
Company's primary Oregon operations into a new facility.

                                       9
<PAGE>

SPECIAL CHARGES AND EXTRAORDINARY ITEM

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

       As of April 30, 1999,  approximately $1.7 million in accrued  liabilities
related to special  charges  recorded in 1998 remained on the Company's  balance
sheet, primarily representing rent on excess facilities.
These amounts will be paid out over the next six months.

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

INTEREST AND OTHER INCOME EXPENSES, NET

       Net interest and other  expenses  for the second  fiscal  quarter of 1999
stood at $240,000, up $40,000 from the second fiscal quarter of 1998 largely due
to the reduction of bond interest expense.

INCOME TAXES

       The Company's  estimated  effective tax rate for the first half of fiscal
1999 was 36%,  compared to 34% in the first six months of 1998.  The tax rate is
computed based on projected fiscal year to date book income or loss. Realization
of a portion of the net  deferred  tax assets at April 30, 1999 is  dependent on
the Company's  ability to generate  approximately  $34,000,000 of future taxable
income. Management believes that it is more likely than not that the assets will
be realized based on forecasted income.  However, there can be no assurance that
the  Company  will meet its  expectations  of  future  income.  Management  will
evaluate the  realizability  of the deferred tax assets quarterly and assess the
need for additional valuation allowances.

YEAR 2000 READINESS DISCLOSURE

       The "Year  2000" issue  results  from the use in  computer  hardware  and
software of two digits  rather than four digits to define the  applicable  year.
When computer  systems must process dates both before and after January 1, 2000,
two-digit year "fields" may create processing  ambiguities that can cause errors
and system failures. The results of these errors may range from minor undetected
errors to complete shutdown of an affected system.  These errors or failures may
have  limited  effects,  or the  effects  may be  widespread,  depending  on the
computer chip, system or software, and its location and function. The effects of
the Year 2000 problem are exacerbated because of the interdependence of computer
and  telecommunications  systems in the United States and  throughout the world.
Because  of this  interdependence,  the  failure  of one  system may lead to the
failure of many other systems even though the other systems are themselves "Year
2000 compliant."

       Our Board of Directors has reviewed the Year 2000 issue  generally and as
it may affect our business  activity  specifically.  We are  implementing a Year
2000 plan (the  "Plan")  which is  designed to cover all of our  activities  and
which  is  monitored  by the  Board of  Directors.  We will  modify  the Plan as
circumstances change. Under the Plan, we are using a five-phase  methodology for
addressing  the  issue.  The  phases  are  Awareness,  Assessment,   Renovation,
Validation and Implementation.

       The  Awareness  phase  consisted  of defining  the Year 2000  problem and
gaining   executive   level  support  and  sponsorship  for  addressing  it.  We
established a Year 2000 program team and created an overall strategy. During the
Assessment phase, we inventoried all internal systems, products and supply chain

                                       10
<PAGE>

partners and  prioritized  each for  renovation.  We believe we have completed a
majority of the Awareness and Assessment  phases;  however,  we will continue to
work in these areas as we complete  our  assessment  of  existing  supply  chain
partners and enter into new supply chain relationships in the ordinary course of
business. Renovation consists of converting, replacing, upgrading or eliminating
systems   that  have  Year  2000   problems.   We  have  begun   Renovation   on
mission-critical  systems and have completed all but two systems as of April 30,
1999.  The  remaining  two  mission-critical   systems  are  now  scheduled  for
completion  of renovation by October  1999.  Validation  involves  ensuring that
hardware and software  fixes will work properly in 1999 and beyond and can occur
both before and after implementation. We began the Validation phase in late 1998
and will continue through October, 1999 to allow for thorough testing before the
Year 2000.  Implementation  is the  installation of Year 2000 ready hardware and
software components in a live environment.

       The impact of Year 2000  issues on our  business  will depend not only on
corrective  actions  that we  take,  but also on the way Year  2000  issues  are
addressed by  governmental  agencies,  businesses  and other third  parties that
provide us with  services or data or receive  services or data from us, or whose
financial condition or operational capability is important to us. To reduce this
exposure,   we  have  an  ongoing   process  of   identifying   and   contacting
mission-critical  third party  vendors and other  significant  third  parties to
determine their Year 2000 plans and target dates. Risks associated with any such
third parties  located  outside the United States may be higher insofar as it is
generally  believed that non-U.S.  businesses  may not be addressing  their Year
2000  issues  on as  timely  a basis  as U.S.  businesses.  Notwithstanding  our
efforts, we cannot be certain that we,  mission-critical  third party vendors or
other significant third parties will adequately address their Year 2000 issues.

       We  are   developing   contingency   plans   in  the   event   that   we,
mission-critical  third party vendors or other significant third parties fail to
adequately address Year 2000 issues.  Such plans principally involve identifying
alternative  vendors or  internal  remediation.  We cannot  ensure that any such
plans will fully mitigate any such failures or problems.  Furthermore, there may
be certain mission-critical third parties, such as utilities,  telecommunication
companies, or material vendors for which alternative arrangements or sources are
limited or unavailable.

       Although  it  is  difficult  for  us  to  estimate  the  total  costs  of
implementing  the  Plan,  our  current  estimate  is  that  such  costs  will be
approximately $2.5 million through October 1999 and beyond. However, although we
believe that our estimates are reasonable, we cannot be certain, for the reasons
stated in the next  paragraph,  that the actual costs of  implementing  the Plan
will not differ  materially from the estimated  costs. We have incurred costs of
approximately $1.5 million through April 30, 1999 in connection with the Plan. A
significant  portion of total  Year 2000  project  expenses  is  represented  by
existing staff that have been redeployed to this project. We do not believe that
the  redeployment  of existing staff will have a material  adverse effect on our
business,  results  of  operations  or  financial  position.  Nor  do we  expect
incremental  expenses  related  to the Year 2000  project to  materially  impact
operating results in any one period.

       For a number of reasons,  we cannot  predict or  quantify  the extent and
magnitude of the Year 2000 problem as it will affect our business, either before
or for some period after January 1, 2000. Among the most important  reasons are:

     o    lack of control  over systems  used by third  parties  critical to our
          operation;

     o    dependence  on third  party  software  vendors  to  deliver  Year 2000
          upgrades in a timely manner;

     o    complexity of testing  inter-connected  networks and applications that
          depend on third party networks; and

     o    the uncertainty surrounding how others will deal with liability issues
          raised by Year 2000 related failures.

       For example, we cannot be certain that systems used by third parties will
be Year 2000 ready by January 1, 2000,  or by some  earlier  date,  so as not to
create a material disruption to our business.  Moreover,  the estimated costs of
implementing  the Plan do not take into account the costs, if any, that might be
incurred  as a result of Year  2000-related  failures  that  occur  despite  our
implementation of the Plan.

                                       11
<PAGE>

       Although we are not aware of any material  operational  issues associated
with preparing our internal systems for the Year 2000 or of material issues with
respect to the  adequacy  of  mission-critical  third party  systems,  we cannot
ensure that we will not experience material  unanticipated negative consequences
and/or material costs caused by undetected  errors or defects in such systems or
by our failure to adequately  prepare for the results of such errors or defects,
including  the  costs  of  related  litigation,  if  any.  The  impact  of  such
consequences  could have a material  adverse  effect on our business,  financial
condition or results of operations.

INTRODUCTION OF THE EURO

       To date the introduction and the use of the Euro has not had nor does the
Company expect it to have a material  adverse effect on our business,  financial
condition or results of operations.

LIQUIDITY AND CAPITAL RESOURCES

       Net cash provided by operating  activities  was $18.1 million for the six
months  ended  April 30,  1999.  This cash flow from  operating  activities  was
primarily  attributable to net income before  depreciation  and amortization and
special  charges of  approximately  $5  million,  income tax  receipts  of $17.2
million,  offset by cash used for net changes in the remaining  operating assets
and liabilities.

       Net cash used for  investing  activities  was $14.8  million  for the six
months  ended  April  30,  1999.  Cash  flow used in  investing  activities  was
primarily   attributable   to   acquisitions   of  property  and   equipment  of
approximately $10.1 million, and net purchases of available-for-sale  securities
of approximately $3.1 million.

       Net cash  provided by financing  activities  was $5.0 million for the six
months  ended  April 30,  1999.  This cash flow from  financing  activities  was
primarily  attributable  to treasury stock and common stock issued in accordance
with the Company's employee equity compensation plans.

       The Company  recorded a non-cash  transaction  during the quarter for the
exchange of 328,000 shares of the Company's common Stock held in treasury for an
aggregate of $9,040,000 of its 5 1/4% Convertible  Subordinated  Notes due 2002.
This transaction  resulted in an extraordinary gain of $1.2 million,  net of tax
of  $652,000  as well as an  increase  in  additional  paid-in  capital  of $2.1
million.

       As of April 30, 1999,  the Company had working  capital of  approximately
$159 million  including cash and short-term  investments of $104 million,  $34.4
million of accounts  receivable  and $32.3 million of  inventories.  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 $40.9 million
as of October  31, 1998  increased  to $42.2  million for the six months  ending
April 30, 1999.

       The  Company's  principal  sources  of  liquidity  as of April  30,  1999
consisted  of  approximately   $56.7  million  of  cash  and  cash  equivalents,
short-term  investments  of $47.2  million and $40 million  available  under the
Company's  unsecured  working  capital line of credit expiring July 23, 1999. In
addition,  the  Company  has $38.9  million  of  available  for sale  securities
classified as long-term. As of April 30, 1999, no amounts were outstanding under
the unsecured  line of credit.  Additionally,  as of April 30, 1999, the Company
had operating  lease  commitments  for facilities  and test and other  equipment
totaling approximately $45.8 million.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

       The  Company's  exposure to market  risk for  changes in  interest  rates
relates  primarily to the Company's  investment  portfolio  and  long-term  debt
obligations.  The Company maintains a strict investment policy which ensures the
safety and preservation of its invested funds by limiting  default risk,  market

                                       12
<PAGE>

risk, and reinvestment  risk. The Company's  investments  consists  primarily of
commercial paper, medium term notes, asset backed securities, US. Treasury notes
and  obligations of U.S.  Government  agencies,  bank  certificates  of deposit,
auction rate preferred  securities,  corporate  bonds and municipal  bonds.  The
table below  presents  notional  amounts and related  weighted-average  interest
rates by year of maturity for the Company's  investment  portfolio and long-term
debt obligations (in thousands, expect percent amounts):


<TABLE>
<CAPTION>

                                    1999        2000        2001       2002       2003      Thereafter
                                  --------    --------    --------   --------   --------    ----------
   <S>                            <C>         <C>         <C>        <C>        <C>         <C>
   Cash Equivalents
            Fixed rate            $ 56,694           -         -           -          -            -
            Average rate              4.72%          -         -           -          -            -
   Short term investments
            Fixed rate            $ 47,236           -         -           -          -            -
            Average rate              5.41%          -         -           -          -            -
   Long term investments
            Fixed rate            $      -    $ 38,989         -           -          -            -
            Average rate                 -        5.46%        -           -          -            -
                                  --------    ---------   --------   --------   --------    ----------

   Total investment securities    $103,930    $ 38,989         -           -          -            -
   Average rate                       5.05%       5.46%        -           -          -            -

   Long term debt
            Fixed rate                   -           -         -    $105,960          -            -
            Average rate                 -           -         -        5.25%         -            -
</TABLE>

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

       The Company has no current cash flow exposure due to rate changes for its
$106 million Convertible  Subordinated Notes. The Company has a $40 million line
of credit under which it can borrow either at the bank's prime rate or the LIBOR
rate.  As of April 30,  1999,  the Company had no  borrowings  under its line of
credit.

                                       13
<PAGE>

RISK FACTORS

Fluctuations in Our Quarterly Net Sales and Operating Results

<TABLE>
<CAPTION>

                                 1996                            1997                             1998                     1999
                     Q1      Q2      Q3       Q4     Q1      Q2      Q3      Q4       Q1      Q2       Q3      Q4        Q1     Q2
<S>                 <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>      <C>     <C>      <C>      <C>      <C>    <C>
Net Sales           61.00   66.40   67.20   44.20   40.30   43.40   51.08   69.39    82.40   74.60    37.30    22.40    26.5   38.1
Net Income (loss)   10.50   11.50   11.60    4.30    1.05    3.28   -0.90    7.25     9.20    8.80   -33.60   -10.70    -6.6   -5.2
</TABLE>


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

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

     o    timing of new product  announcements and new product releases by us or
          our competitors;
     o    market  acceptance  of our  new  products  and  enhanced  versions  of
          existing products;

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

     o    manufacturing  capacity and ability to volume produce systems and meet
          customer requirements;

     o    write-offs  of excess  and  obsolete  inventories,  and  uncollectible
          receivables;

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

     o    changes in overhead  absorption levels due to changes in the number of
          systems manufactured,  the timing and shipment of orders, availability
          of  components   including  custom   integrated   circuits   ("IC's"),
          subassemblies  and  services,  customization  and  reconfiguration  of
          systems and product reliability;

     o    expenses associated with acquisitions and alliance

     o    operating expense  reductions,  including costs relating to facilities
          consolidations, excess facilities and related expenses;

     o    the  proportion of our direct sales and sales  through third  parties,
          including  distributors and original equipment  manufacturers ("OEM"),
          the mix of  products  sold,  the  length  of  manufacturing  and sales
          cycles, product discounts; and

     o    natural  disasters,  political  and economic  instability,  regulatory
          changes and outbreaks of hostilities.

       We presently  are  introducing  and will  continue to introduce  many 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

                                       14
<PAGE>

gross  margins on system sales have varied  significantly,  and will continue to
vary  significantly  based on a variety of factors,  including:

     o    manufacturing inefficiencies;

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

     o    hardware and software product sales mix;

     o    inventory write-downs;

     o    production volume;

     o    new product introductions;

     o    product reliability;

     o    absorption levels and the rate of capacity utilization;

     o    customization and reconfiguration of systems;

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

     o    facility relocations and consolidations.

       New and enhanced products typically have lower gross margins in the early
stages of commercial introduction and production.  Although we have recorded and
continue  to  record  provisions  for  estimated  sales  returns,  uncollectible
accounts,  and product  warranty  costs, we cannot be certain that our estimates
will be  adequate.  We may be required to record  charges in future  quarters to
reflect, in part, the cost of additional facilities consolidation, as it occurs.

       We  cannot  forecast  with any  certainty  the  impact of these and other
factors on our sales and operating  results in any future  period.  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,  among other factors,  will
make  it  difficult  for  us to  reduce  our  significant  fixed  expenses  in a
particular  period if we don't meet our net sales  goals for that  period.  As a
result,  we cannot be certain  that we will become  profitable  again or that we
will not  continue  to sustain  losses in the  future.  We  believe  that we may
continue to incur  quarterly  net losses  through  the fourth  quarter of fiscal
1999.  As a result,  the price of our common stock may continue to be materially
adversely affected.

Limited Systems Sales; Backlog
------------------------------

       We  derive a  substantial  portion  of our net  sales  from the sale of a
relatively  small number of systems that typically  range in price from $350,000
to $3.6 million,  other than certain memory products and software products,  for
which the price range is typically below $50,000. As a result, our net sales and
operating results for a particular period could be significantly impacted by the
timing of  recognition of revenue from a single  transaction.  Our net sales and
operating  results for a particular  period could also be  materially  adversely
affected if an anticipated  order from even one customer is not received in time
to permit  shipment  during that period.  Backlog at the  beginning of a quarter
typically does not include all orders  necessary to achieve our sales objectives
for that quarter.  In addition,  orders in backlog are subject to  cancellation,
delay,  deferral or  rescheduling  by customers  with  limited or no  penalties.
Consequently, our quarterly net sales and operating results have in the past and
will in the future depend upon our obtaining orders for systems to be shipped in
the same quarter that the order is received.

       Furthermore,  we ship certain  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 testers has caused and could continue to cause future shipments of
testers  to be delayed  from one  quarter to the next,  which  could  materially
adversely  affect our business,  financial  condition or results of  operations.

                                       15
<PAGE>

Furthermore,  as we and our competitors  announce new products and technologies,
customers  may defer or cancel  purchases of our existing  systems,  which could
have a material adverse effect on our business,  financial  condition or results
of operations. We cannot forecast the impact of these and other factors on sales
and operating results.

Cyclicality of Semiconductor Industry
-------------------------------------

       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, including 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 purchase
order   restructurings   by  several   customers   and  we  expect   delays  and
restructurings may continue.  Accordingly,  we cannot be certain that we will be
able to  achieve or  maintain  our  current  or prior  level of sales or rate of
growth.  We anticipate that a significant  portion of new orders may depend upon
demand from semiconductor device manufacturers building or expanding fabrication
facilities  and new device  testing  requirements  that are not  addressable  by
currently  installed  test  equipment,  and there can be no assurance  that such
demand  will  develop to 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.  The  recent  Asian
financial  crisis has contributed to a widespread  uncertainty and a slowdown in
the  semiconductor  industry.  This slowdown in the  semiconductor  industry has
resulted in reduced  spending for  semiconductor  capital  equipment,  including
automatic test equipment ("ATE") which the Company sells. This industry slowdown
has had and may continue to have a material  adverse effect on product  backlog,
balance sheet and results of  operations.  Therefore,  there can be no assurance
that the operating results will not continue to be materially adversely affected
if downturns or slowdowns in the semiconductor  industry continue or occur again
in the future.

Management of Fluctuations in Our Operating Results
---------------------------------------------------

       We have over the last several years experienced significant  fluctuations
in our  operating  results.  In fiscal  1998,  we  generated  net sales of $82.4
million  for the first  quarter  and $22.4  million  for the fourth  quarter,  a
decrease of 73% in our net sales within one fiscal year.  For the second quarter
of fiscal  1999,  the net sales  were  $38.1  million.  Since  1993,  except for
cost-cutting  efforts during the past two years,  we have overall  significantly
increased the scale of our operations in general to support periods of 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  R&D  to  support  product
development,  our establishment of a joint venture with Innotech Corporation and
numerous  acquisitions.  However,  in the past,  and  particularly  in the three
quarters ended October 31, 1998 and to some extent this fiscal year as discussed
above, we have  experienced  significant  revenue declines and reductions in our
operations.  These  fluctuations  in our  sales  and  operations  have  placed 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 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 and our results of
operations.

                                       16
<PAGE>

Expansion of Our Product Lines
------------------------------

       We are  currently  devoting and intend to continue to devote  significant
resources to the  development  of new products and  technologies.  During fiscal
1999,  we  intend  to  evaluate  these new  products  and 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 and to
provide the marketing,  administration and after-sales  service and support,  if
any,  required to service and support these new hardware and software  products.
Accordingly,  we cannot be certain that gross profit margin and inventory levels
will not  continue to be adversely  impacted by continued  delays in new product
introductions  or start-up  costs  associated  with the initial  production  and
installation of these new product lines. These start-up costs include additional
manufacturing  overhead,  additional inventory and warranty reserve requirements
and the  enhancement  of  after-sales  service  and  support  organizations.  In
addition,  the  increases  in  inventory  on hand for new  hardware and software
product  development and customer support  requirements  have increased and will
continue to increase the risk of inventory write-offs. We cannot be certain that
operating  expenses will not increase,  relative to sales, as a result of adding
additional marketing and administrative personnel, among other costs, to support
our additional products. If we are unable to achieve significantly increased net
sales or if sales fall below  expectations,  our operating results will continue
to be  materially  adversely  affected.  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.

Limited Sources of Supply; Reliance on Our Subcontractors
---------------------------------------------------------

       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
periodically  experience 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,  financial  condition  or
results of operations.  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 such 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.

Highly Competitive Industry
---------------------------

       The ATE industry is  intensely  competitive.  Because of 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.

                                       17
<PAGE>

       We face substantial  competition throughout the world, primarily from ATE
manufacturers located in the United States, Europe and Japan, as well as several
of our customers.  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 certain  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.

Rapid Technological Change; Importance of Timely Product Introduction
---------------------------------------------------------------------

       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 the products under development that we acquired in the EPRO merger and
the  acquisition  of certain  product  lines from  Summit  Design,  Inc.,  Zycad
Corporation  and Heuristic  Physics  Laboratories,  Inc. Our  customers  require
testers and software  products with additional  features and higher  performance
and other capabilities. We are therefore required to enhance the performance and
other  capabilities  of our existing  systems and software  products and related
software tools.  Any success we may have in developing new and enhanced  systems
and software  products  and new  features to our  existing  systems and software
products will depend upon a variety of factors,  including:

     o    product selection;

     o    timely and efficient completion of product design;

     o    implementation of manufacturing and assembly processes;

     o    successful coding and debugging of software;

     o    product performance;

     o    reliability in the field; and

     o    effective sales and marketing.

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

                                       18
<PAGE>

       Significant  delays can occur  between the time we introduce a system and
the time we are able to  produce  that  system  in  volume.  We have in the past
experienced significant delays in the introduction,  volume production and sales
of  our  new  systems  and  related  feature   enhancements  and  are  currently
experiencing  significant delays in the introduction of our VS2000,  Quartet and
Kalos series testers as well as certain  enhancements to our existing SC and DUO
series  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,  certain customers have experienced  significant delays in receiving and
using certain of our testers in  production.  We cannot be certain that these or
additional  difficulties will not continue to arise or that such 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 certain of 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 semiconductor  manufacturer
could  make it  substantially  more  difficult  for us to sell  testers  to that
manufacturer  for a number of years.  We believe that the continued  acceptance,
volume  production,  timely  delivery  and  customer  satisfaction  of our newer
digital, mixed signal and non-volatile memory testers are of critical importance
to our future  financial  results.  As a result,  our  inability  to correct any
technical,  reliability,  parts shortages or other difficulties  associated with
our systems or to  manufacture  and ship the  systems on a timely  basis to meet
customer   requirements   could  damage  our  relationships   with  current  and
prospective  customers  and would  continue to materially  adversely  affect our
business, financial condition and results of operations.

Customer Concentration; Lengthy Sales Cycle
-------------------------------------------

       One customer, Spirox Corporation (a distributor in Taiwan), accounted for
43%,  34%,  30% and 25% of our net  sales in the first  half of fiscal  1999 and
fiscal years 1998,  1997, and 1996,  respectively.  Consequently,  our business,
financial  condition  and results of operations  could be  materially  adversely
affected  by the  loss of or any  reduction  in  orders  by  this  or any  other
significant customer,  including losses or reductions due to continuing or other
technical,  manufacturing or reliability problems with our products or continued
slow-downs in the semiconductor industry or in other industries that manufacture
products  utilizing  semiconductors.  Our ability to maintain or increase  sales
levels will depend  upon:

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

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

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

     o    our customers' financial condition and success;

     o    general economic conditions; and

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

       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. In addition, 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>

Risks Associated with Acquisitions
----------------------------------

       We have developed in significant part through mergers and acquisitions of
other  companies and  businesses.  We intend in the future to pursue  additional
acquisitions of complementary product lines, technologies and businesses. We may
have to issue debt or equity  securities to pay for future  acquisitions,  which
could be  dilutive.  We have also  incurred  and may  continue to incur  certain
liabilities or other expenses in connection  with  acquisitions,  which have and
could continue to materially adversely affect our business,  financial condition
and  results  of  operations.  Although  we believe  we have  accounted  for our
acquisitions  properly,  the U.S. Securities and Exchange Commission (the "SEC")
has recently been  reviewing more closely the  accounting  for  acquisitions  by
companies,  particularly  in the area of  "in-process"  research and development
costs. If we are required by the SEC to restate any charge that we recognized in
an  acquisition  so far,  that  could  result in a lesser  charge to income  and
increased  amortization expense, which could also have a material adverse effect
on our business, financial condition and results of operations.

       In addition, acquisitions involve numerous other risks, including:

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

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

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

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

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

Changes in Financial Accounting Standards and Accounting Estimates
------------------------------------------------------------------

       We prepare our financial  statements to conform with  generally  accepted
accounting  principles  ("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,  employee stock purchase plans and stock options grants,
have recently  been revised or are under  review.  Changes to those rules or the
questioning  of  current  practices  may have a material  adverse  effect on our
reported financial results or on the way we conduct our business.

       In addition,  our preparation of financial  statements in accordance with
GAAP requires that we make  estimates and  assumptions  that affect the recorded
amounts of assets and liabilities, disclosure of those assets and liabilities at
the date of the financial statements and the recorded amounts of expenses during
the reporting period. A change in the facts and circumstances  surrounding those
estimates  could result in a change to our estimates and could impact our future
operating results.

Dependence on Key Personnel
---------------------------

       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 such  personnel  is intense,  and we cannot  ensure
success in attracting or retaining such  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 such  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.

                                       20
<PAGE>

Transition in Our Executive Management
--------------------------------------

       We have experienced several transitions in executive management in recent
years. In conjunction with the departure in December 1998 of our former chairman
and chief executive officer,  our Board of Directors appointed David A. Ranhoff,
executive vice president,  and Dennis P. Wolf,  executive vice president,  chief
financial  officer and secretary,  jointly to the office of the  president.  The
Board also named a new chairman, Dr. William Howard, Jr., and began a search for
a new chief executive  officer.  Mr. Wolf joined us as senior vice president and
chief  financial  officer in March 1998 after the December 1997 departure of the
Company's  previous  chief  financial  officer.  These  transitions  have placed
significant  demands on our operational,  administrative and financial staff and
we  anticipate  that these  demands will increase in the near term. We cannot be
certain that such  transitions  will not have a material  adverse  effect on our
business,  financial  condition  and  results of  operations,  on the way we are
perceived by the market or on the price of our common stock.

International Sales
-------------------

       International  sales accounted for approximately 74%, 69%, 70% and 67% of
our total net sales for the first  half of fiscal  1999 and fiscal  years  1998,
1997 and 1996, respectively. As a result, we anticipate that international sales
will continue to account for a significant portion of our total net sales in the
foreseeable  future.  These  international  sales will continue to be subject to
certain risks, including:

     o    changes in regulatory requirements;

     o    tariffs and other barriers;

     o    political and economic instability;

     o    an outbreak of hostilities;

     o    integration of foreign operations of acquired businesses;

     o    foreign currency exchange rate fluctuations;

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

     o    potentially adverse tax consequences; and

     o    the possibility of difficulty in accounts receivable collection.

       We are also  subject  to the  risks  associated  with the  imposition  of
domestic  and  foreign  legislation  and  regulations  relating to the import or
export of  semiconductor  equipment.  We cannot  predict  whether the import and
export of our products will be subject to quotas, duties, taxes or other charges
or restrictions imposed by the United States or any other country in the future.
Any of these  factors  or the  adoption  of  restrictive  policies  could have a
material  adverse  effect on our  business,  financial  condition  or results of
operations.  Net sales to the Asia Pacific  region  accounted for  approximately
66%,  60%,  66% and 58% of our total net sales for the first half of fiscal 1999
and for the fiscal years 1998,  1997 and 1996,  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  recently  experienced  weaknesses  in their
currency,  banking  and equity  markets.  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 current
Asian  financial  crisis  has  contributed  to a  widespread  uncertainty  and a
slowdown in the  semiconductor  industry.  This slowdown has resulted in reduced
spending on semiconductor capital equipment, including ATE, and has had, and may
continue to have,  a material  adverse  effect on our product  backlog,  balance
sheet and results of operations.

       We do not expect that the  introduction and the use of the Euro will have
a material  adverse  effect on our business,  financial  condition or results of
operations.

                                       21
<PAGE>

Proprietary Rights
------------------

       We attempt to protect our  intellectual  property rights through patents,
copyrights,  trademarks,  maintenance  of  trade  secrets  and  other  measures,
including  entering  into  confidentiality  agreements.  However,  we  cannot be
certain  that others will not  independently  develop  substantially  equivalent
intellectual  property  or that we can  meaningfully  protect  our  intellectual
property. Nor can we be certain that our patents will not be invalidated, deemed
unenforceable, circumvented or challenged, or that the rights granted thereunder
will  provide  us with  competitive  advantages,  or that any of our  pending or
future patent  applications  will be issued with claims of the scope we seek, if
at all.  Furthermore,  we cannot be certain that others will not develop similar
products,  duplicate our products or design around our patents,  or that foreign
intellectual  property laws or agreements  into which we've 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.  In  addition,  we have at times been
notified that we may be infringing intellectual property rights of third parties
and we expect to continue to receive notice of such claims in the future.

       In July, 1998, inTEST IP Corporation  ("inTEST")  alleged in writing that
one of our products is  purportedly  infringing a patent held by inTEST.  We may
also be obligated to other third parties  relating to this  allegation.  We have
completed  initial  investigation  into  the  allegation.  Based  in part on the
opinion of outside  counsel,  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.

       Certain 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 were notified by a customer in 1990 and by a different customer
in late 1994 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
customer  infringes  Mr.  Lemelson's  patents,  such  customer  intends  to seek
indemnification  from us for damages  and other  related  expenses.  We have not
received further communications from such customers regarding these matters.

       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
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 litigate such claims.
Litigation on such matters may be extremely  expensive and time  consuming,  and
could materially  adversely affect our business,  financial condition or results
of operations, regardless of the outcome.

Future Capital Needs; Leverage
------------------------------

       Developing and  manufacturing  new ATE systems and enhancements is highly
capital  intensive.  In  order  to be  competitive,  we  must  make  significant
investments in capital equipment,  expansion of operations,  systems, procedures
and controls,  research and development and worldwide training, customer service
and  support,  among many  other  items.  We may be unable to obtain  additional
financing in the future on acceptable  terms,  or at all. In connection with our
issuance in September 1997 of  convertible  promissory  notes (the "Notes"),  we
currently  have  $106  million  of  indebtedness  which  resulted  in a ratio of
long-term  debt  to  total  long-term   capitalization  at  April  30,  1999  of
approximately  41%. As a result,  our  principal and interest  obligations  have
increased  substantially.  The degree to which we are leveraged could materially
adversely   affect  our  ability  to  obtain   financing  for  working  capital,
acquisitions  or other  purposes and could make our business more  vulnerable to
industry downturns and competitive  pressures.  Our ability to meet debt service
obligations will be dependent upon our future performance, which will be subject
to financial, business and other factors affecting our operations, many of which
are  beyond  our  control.  If we  raise  additional  funds  by  issuing  equity
securities,  our stockholders  could be significantly  diluted.


                                       22
<PAGE>

We may  exchange  Notes  for  shares of our  common  stock or may  refinance  or
exchange  the  Notes,  which may also  dilute our  stockholders  and may make it
difficult for us to obtain additional future financing, if needed.

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

Year 2000 Readiness Disclosure
------------------------------

       The "Year  2000" issue  results  from the use in  computer  hardware  and
software of two digits  rather than four digits to define the  applicable  year.
When computer  systems must process dates both before and after January 1, 2000,
two-digit year "fields" may create processing  ambiguities that can cause errors
and system failures. The results of these errors may range from minor undetected
errors to complete shutdown of an affected system.  These errors or failures may
have  limited  effects,  or the  effects  may be  widespread,  depending  on the
computer chip, system or software, and its location and function. The effects of
the Year 2000 problem are exacerbated because of the interdependence of computer
and  telecommunications  systems in the United States and  throughout the world.
Because  of this  interdependence,  the  failure  of one  system may lead to the
failure of many other systems even though the other systems are themselves "Year
2000 compliant."

       Our Board of Directors has reviewed the Year 2000 issue  generally and as
it may affect our business  activity  specifically.  We are  implementing a Year
2000 plan (the  "Plan")  which is  designed to cover all of our  activities  and
which  is  monitored  by the  Board of  Directors.  We will  modify  the Plan as
circumstances change. Under the Plan, we are using a five-phase  methodology for
addressing  the  issue.  The  phases  are  Awareness,  Assessment,   Renovation,
Validation and Implementation.

       The  Awareness  phase  consisted  of defining  the Year 2000  problem and
gaining   executive   level  support  and  sponsorship  for  addressing  it.  We
established a Year 2000 program team and created an overall strategy. During the
Assessment phase, we inventoried all internal systems, products and supply chain
partners and  prioritized  each for  renovation.  We believe we have completed a
majority of the Awareness and Assessment  phases;  however,  we will continue to
work in these areas as we complete  our  assessment  of  existing  supply  chain
partners and enter into new supply chain relationships in the ordinary course of
business. Renovation consists of converting, replacing, upgrading or eliminating
systems   that  have  Year  2000   problems.   We  have  begun   renovation   on
mission-critical systems and have completed for all but two systems by April 30,
1999.  The  remaining  two  mission-critical   systems  are  now  scheduled  for
completion  of renovation by October  1999.  Validation  involves  ensuring that
hardware and software  fixes will work properly in 1999 and beyond and can occur
both before and after implementation. We began the Validation phase in late 1998
and will  continue  through June 1999 to allow for thorough  testing  before the
Year 2000.  Implementation  is the  installation of Year 2000 ready hardware and
software components in a live environment.

       The impact of Year 2000  issues on our  business  will depend not only on
corrective  actions  that we  take,  but also on the way Year  2000  issues  are
addressed by  governmental  agencies,  businesses  and other third  parties that
provide us with  services or data or receive  services or data from us, or whose
financial condition or operational capability is important to us. To reduce this
exposure,   we  have  an  ongoing   process  of   identifying   and   contacting
mission-critical  third party  vendors and other  significant  third  parties to
determine their Year 2000 plans and target dates. Risks associated with any such
third parties  located  outside the United States may be higher insofar as it is
generally  believed that non-U.S.  businesses  may not be addressing  their Year
2000  issues  on as  timely  a basis  as U.S.  businesses.  Notwithstanding  our
efforts, we cannot be certain that we,  mission-critical  third party vendors or
other significant third parties will adequately address their Year 2000 issues.

       We  are   developing   contingency   plans   in  the   event   that   we,
mission-critical  third party vendors or other significant third parties fail to
adequately address Year 2000 issues.  Such plans principally involve identifying
alternative  vendors or  internal  remediation.  We cannot  ensure that any such
plans will fully mitigate any such failures or problems.  Furthermore, there may
be certain mission-critical third parties, such as utilities,  telecommunication

                                       23
<PAGE>

companies, or material vendors for which alternative arrangements or sources are
limited or unavailable.

       Although  it  is  difficult  for  us  to  estimate  the  total  costs  of
implementing  the  Plan,  our  current  estimate  is  that  such  costs  will be
approximately $2.5 million through October 1999 and beyond. However, although we
believe that our estimates are reasonable, we cannot be certain, for the reasons
stated in the next  paragraph,  that the actual costs of  implementing  the Plan
will not differ  materially from the estimated  costs. We have incurred costs of
approximately $1.5 million through April 30, 1999 in connection with the Plan. A
significant  portion of total  Year 2000  project  expenses  is  represented  by
existing staff that have been redeployed to this project. We do not believe that
the  redeployment  of existing staff will have a material  adverse effect on our
business,  results  of  operations  or  financial  position.  Nor  do we  expect
incremental  expenses  related  to the Year 2000  project to  materially  impact
operating results in any one period.

       For a number of reasons,  we cannot  predict or  quantify  the extent and
magnitude of the Year 2000 problem as it will affect our business, either before
or for some period after January 1, 2000. Among the most important  reasons are:

     o    lack of control  over systems  used by third  parties  critical to our
          operation;

     o    dependence  on third  party  software  vendors  to  deliver  Year 2000
          upgrades in a timely manner;

     o    complexity of testing  inter-connected  networks and applications that
          depend on third party networks; and

     o    the uncertainty surrounding how others will deal with liability issues
          raised by Year 2000 related failures.

       For example, we cannot be certain that systems used by third parties will
be Year 2000 ready by January 1, 2000,  or by some  earlier  date,  so as not to
create a material disruption to our business.  Moreover,  the estimated costs of
implementing  the Plan do not take into account the costs, if any, that might be
incurred  as a result of Year  2000-related  failures  that  occur  despite  our
implementation of the Plan.

       Although we are not aware of any material  operational  issues associated
with preparing our internal systems for the Year 2000 or of material issues with
respect to the  adequacy  of  mission-critical  third party  systems,  we cannot
ensure that we will not experience material  unanticipated negative consequences
and/or material costs caused by undetected  errors or defects in such systems or
by our failure to adequately  prepare for the results of such errors or defects,
including  the  costs  of  related  litigation,  if  any.  The  impact  of  such
consequences  could have a material  adverse  effect on our business,  financial
condition or results of operations.

Volatility of Our Stock Price
-----------------------------

       We believe that factors such as 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,  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,  could  continue  to cause the price of our common  stock to
fluctuate,  perhaps substantially.  In recent years the stock market in general,
and the market  for  shares of small  capitalization  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 1997,  the price of our common stock ranged from a high of $55.00 to a
low of $13.75.  In fiscal 1998, the price of our common stock ranged from a high
of $35.25 to a low of $9.31 and during the first six months of fiscal 1999,  the
price of our common stock  ranged from a high of $22.41 to a low of $20.85.  The
market   price  of  our  common   stock  is  likely  to  continue  to  fluctuate
significantly   in  the  future,   including   fluctuations   unrelated  to  our
performance.

                                       24
<PAGE>

Effects of Certain Anti-Takeover Provisions
-------------------------------------------

       Certain   provisions   of  our  Amended  and  Restated   Certificate   of
Incorporation,  shareholders  rights plan, equity incentive plans, Bylaws and of
Delaware law may discourage certain transactions involving a change in corporate
control.  In addition to the foregoing,  our classified board of directors,  the
shareholdings  of our  officers,  directors  and persons or entities that may be
deemed affiliates,  the adoption of a shareholder rights plan and the ability of
our Board of Directors to issue "blank check"  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.

                                       25
<PAGE>

PART II.  - OTHER INFORMATION

Item 1.  Legal Proceedings
         -----------------

         None

Item 2.  Changes in Securities
         ---------------------

         None

Item 3.  Defaults upon Senior Securities
         -------------------------------

         None

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

         The following  proposals were voted upon by the Company's stockholders
at the Annual Meeting of Stockholders held on March 24, 1999:

1.   A proposal to amend the Company's  1993 Stock Option Plan (the "1993 Plan")
     to (i)  increase  the  number  of shares of  common  stock  authorized  for
     issuance over the term of the 1993 Plan by an additional  1,000,000 shares,
     (ii)  increase  the maximum  number of shares of common stock for which any
     one  individual  may be granted  stock options and  separately  exercisable
     stock  appreciation  rights  over the term of the 1993  Plan  from  750,000
     shares to  1,000,000  shares  and (iii)  increase  the  number of shares of
     common  stock for which  continuing  non-employee  Board  members are to be
     granted stock options at each Annual Stockholders  Meeting,  beginning with
     the 1999 Annual Meeting, from 3,500 shares to 5,000 shares per non-employee
     Board member, was approved as follows.

          In Favor        Opposed          Abstain           Non-Vote
        11,431,068        4,191,615          67,027          2,727,934

2.   A proposal to amend the Company's  Employee  Stock  Purchase Plan that will
     increase  the  number  of  shares of common  stock  reserved  for  issuance
     thereunder by an additional 300,000 shares was approved as follows:

          In Favor        Opposed          Abstain           Non-Vote
        15,122,486         514,541           52,683          2,727,934

3.   A  proposal  to ratify  the  election  of Ernst & Young LLP as  independent
     auditors of the  Company  for the fiscal  year ending  October 31, 1999 was
     approved as follows:

          In Favor        Opposed          Abstain           Non-Vote
        18,284,117          78,665           13,262           41,600

4.   A proposal to transact such other  business as may properly come before the
     meeting or any adjournment or postponement thereof was approved as follows:

          In Favor        Opposed          Abstain           Non-Vote
         12,703,389      5,209,922         462,733            41,600

Item 5.  Other Information
         -----------------

         None

Item 6. Exhibits and Reports on Form 8-K
        --------------------------------

     (a)  See Exhibit Index on page 28.

     (b)  The Company  filed a report on Form 8-K on  February  16, 1999 and May
          18,  1999  reporting  its  financial  results for the first and second
          quarters respectively of fiscal year 1999.

     (c)  The Company  filed a report on Form 8-K on March 15,  March 18 and May
          24,  1999  in  reporting   exchange  of  Treasury  stock  for  5  1/4%
          Convertible Subordinated Notes due 2002.

                                       26
<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)



          April 11, 1999                     /S/ DENNIS P. WOLF
    -------------------------          -----------------------------------
              Date                            Dennis P. Wolf
                                       Dennis P. Wolf, Executive Vice President,
                                       Chief Financial Officer and Secretary


                                       27
<PAGE>

EXHIBIT INDEX

   Exhibit
    Number

     10.3    Amendment to Loan Agreement dated February 5, 1999 between
             Silicon Valley Bank, Bank of Hawaii and Credence Systems
             Corporation.                                                   29

     27.1    EDGAR Financial Data Schedule                                  31

    99.18    Employment Agreement by and between the Company and
             David A. Ranhoff                                               33

    99.19    Employment Agreement by and between the Company and
             Dennis P. Wolf.                                                41

    99.20    Employment Agreement by and between the Company and
             William G. Howard, Jr.                                         49


                                       28
<PAGE>