##### Table of Contents

---

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, 2003



OR



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



For the transition period fromto



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 ̈



Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ̈



APPLICABLE ONLY TO CORPORATE ISSUERS:



At May 22, 2003, there were approximately
63,104,455 shares of the Registrants common stock, $0.001 par value per share, outstanding.



---





---

##### Table of Contents



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 |  | 13      
|                                
|Item 3.                          |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 32      
|                                
|Item 4.                          |  | Controls and Procedures                                                               |  | 32      
|                                
|PART II.    OTHER INFORMATION    |  |                                                                                      
|                                
|Item 1.                          |  | Legal Proceedings                                                                     |  | 32      
|                                
|Item 2.                          |  | Changes in Securities                                                                 |  | 33      
|                                
|Item 3.                          |  | Defaults Upon Senior Securities                                                       |  | 33      
|                                
|Item 4.                          |  | Submission of Matters to a Vote of Security holders                                   |  | 33      
|                                
|Item 5.                          |  | Other Information                                                                     |  | 33      
|                                
|Item 6.                          |  | Exhibits and Reports on Form 8-K                                                      |  | 33      







2



---

##### Table of Contents



PART IFINANCIAL
INFORMATION



ITEM 1.FINANCIAL STATEMENTS



CREDENCE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)



|                                           |  | April 30, 2003 |         | October 31, 2002a
|------------------------------------------ |  | -------------- | ------- | -----------------
|                                           |  | (unaudited)   
|ASSETS                                     |  |                |         |                  
|Current assets:                            |  |                |         |                  
|Cash and cash equivalents                  |  | $              | 39,643  |                  
|Short-term investments                     |  |                | 60,157  |                  
|Accounts receivable, net                   |  |                | 38,741  |                  
|Inventories                                |  |                | 105,383 |                  
|Income tax receivable                      |  |                | 21,717  |                  
|Other current assets                       |  |                | 10,619  |                  
|                                           |  |                |         |                  
|Total current assets                       |  |                | 276,260 |                  
|                                          
|Long-term investments                      |  |                | 82,055  |                  
|Property and equipment, net                |  |                | 103,871 |                  
|Goodwill, net                              |  |                | 37,531  |                  
|Other intangible assets, net               |  |                | 37,723  |                  
|Other assets                               |  |                | 22,875  |                  
|                                           |  |                |         |                  
|Total assets                               |  | $              | 560,315 |                  
|                                           |  |                |         |                  
|LIABILITIES AND STOCKHOLDERS
EQUITY       |  |                |         |                  
|Current liabilities:                       |  |                |         |                  
|Accounts payable                           |  | $              | 20,178  |                  
|Accrued expenses and other liabilities     |  |                | 39,995  |                  
|Liabilities related to leased products     |  |                | 12,502  |                  
|Deferred profit                            |  |                | 1,052   |                  
|                                           |  |                |         |                  
|Total current liabilities                  |  |                | 73,727  |                  
|                                          
|Long-term liabilities  leased products    |  |                | 2,794   |                  
|Other liabilities                          |  |                | 3,622   |                  
|Stockholders equity                       |  |                | 480,172 |                  
|                                           |  |                |         |                  
|Total liabilities and stockholders equity |  | $              | 560,315 |                  
|                                           |  |                |         |                  

---

|a) |  | Derived from the audited consolidated balance sheet included in our Form 10-K for the year ended October 31, 2002.
|-- |  | ------------------------------------------------------------------------------------------------------------------



See accompanying notes.





3



---

##### Table of Contents



CREDENCE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)



|                                                    |  | Three Months Ended April 30, |         |   | Six Months Ended April 30, |  
|--------------------------------------------------- |  | ---------------------------- | ------- | - | -------------------------- | -
|                                                    |  | 2003                         |         |   | 2002                       |  
|Net sales                                           |  | $                            | 42,501  |   |                            | $
|Cost of goods sold  on net sales                   |  |                              | 27,091  |   |                            |  
|                                                    |  |                              |         |   |                            |  
|Gross margin                                        |  |                              | 15,410  |   |                            |  
|Operating expenses:                                 |  |                              |         |   |                            |  
|Research and development                            |  |                              | 19,753  |   |                            |  
|Selling, general and administrative                 |  |                              | 22,815  |   |                            |  
|Amortization of purchased intangibles               |  |                              | 2,622   |   |                            |  
|In-process research and development                 |  |                              |        |   |                            |  
|Special charges                                     |  |                              |        |   |                            |  
|                                                    |  |                              |         |   |                            |  
|Total operating expenses                            |  |                              | 45,190  |   |                            |  
|                                                    |  |                              |         |   |                            |  
|Operating income (loss)                             |  |                              | (29,780 | ) |                            |  
|Interest and other income, net                      |  |                              | 774     |   |                            |  
|                                                    |  |                              |         |   |                            |  
|Income (loss) before income tax provision           |  |                              | (29,006 | ) |                            |  
|Income tax (benefit)                                |  |                              | 115     |   |                            |  
|Minority interest (benefit)                         |  |                              | 9       |   |                            |  
|                                                    |  |                              |         |   |                            |  
|Net income (loss)                                   |  | $                            | (29,130 | ) |                            | $
|                                                    |  |                              |         |   |                            |  
|Net income (loss) per share                         |  |                              |         |   |                            |  
|Basic                                               |  | $                            | (0.46   | ) |                            | $
|                                                    |  |                              |         |   |                            |  
|Diluted                                             |  | $                            | (0.46   | ) |                            | $
|                                                    |  |                              |         |   |                            |  
|Number of shares used in computing per share amount |  |                              |         |   |                            |  
|Basic                                               |  |                              | 63,064  |   |                            |  
|                                                    |  |                              |         |   |                            |  
|Diluted                                             |  |                              | 63,064  |   |                            |  
|                                                    |  |                              |         |   |                            |  





See accompanying notes.





4



---

##### Table of Contents



CREDENCE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Increase (decrease) in cash and cash equivalents

(in thousands)

(unaudited)



|                                                                              |  | Six Months Ended April 30, |        
|----------------------------------------------------------------------------- |  | -------------------------- | -------
|                                                                              |  | 2003                       |        
|Cash flows from operating activities:                                         |  |                            |        
|Net income (loss)                                                             |  | $                          | (59,295
|Adjustments to reconcile net income to net cash used in operating
activities: |  |                            |        
|Depreciation and amortization                                                 |  |                            | 17,856 
|Non-cash charges                                                              |  |                            | 5,475  
|Loss on disposal of property and equipment                                    |  |                            | 1,015  
|Unrealized gain/loss on investment, translation adjustment                    |  |                            | (2,845 
|Minority interest                                                             |  |                            | (72    
|Changes in operating assets and liabilities:                                  |  |                            |        
|Accounts receivable, inventories and other current assets                     |  |                            | (12,969
|Accounts payable, accrued liabilities and income taxes payable                |  |                            | (2,997 
|                                                                              |  |                            |        
|Net cash provided by (used in) operating activities                           |  |                            | (53,832
|Cash flows from investing activities:                                         |  |                            |        
|Purchases of available-for-sale securities                                    |  |                            | (67,006
|Sales and maturities of available-for-sale securities                         |  |                            | 116,264
|Acquisition of property and equipment                                         |  |                            | (3,362 
|Acquisition of other assets                                                   |  |                            | (4,409 
|                                                                              |  |                            |        
|Net cash provided by (used in) investing activities                           |  |                            | 41,487 
|Cash flows from financing activities:                                         |  |                            |        
|Issuance of common & treasury stock                                           |  |                            | 1,868  
|Other                                                                         |  |                            | (72    
|                                                                              |  |                            |        
|Net cash provided by (used in) financing activities                           |  |                            | 1,796  
|Net increase (decrease) in cash and cash equivalents                          |  |                            | (10,549
|Cash and cash equivalents at beginning of period                              |  |                            | 50,192 
|                                                                              |  |                            |        
|Cash and cash equivalents at end of period                                    |  | $                          | 39,643 
|                                                                              |  |                            |        
|Supplemental disclosures of cash flow information:                            |  |                            |        
|Income taxes paid (received)                                                  |  | $                          | 2,912  
|Noncash investing activities:                                                 |  |                            |        
|Net transfers of inventory to property and equipment                          |  |                            |       
|Acquisition of Optonics using Credence common stock                           |  | $                          | (17,139
|Noncash financing activities:                                                 |  |                            |        
|Income tax benefit from stock option exercises                                |  |                            |       
|Acquisition of Optonics using Credence common stock                           |  | $                          | 17,139 



See
accompanying notes.





5



---

##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1.    Quarterly Financial Statements



The condensed consolidated financial statements and related notes for the three and six month periods ended April 30, 2003 and 2002 are unaudited but include all adjustments which are, in the opinion
of management, necessary for a fair presentation of the financial position and results of operations of Credence Systems Corporation (Credence or the Company) for the interim periods. The results of operations for the three
and six month periods ended April 30, 2003 and 2002 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, 2002 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 importance of timely product introduction, successful integration of acquisitions, 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, customer concentration, lengthy sales
cycle, changes in financial accounting standards and accounting estimates, dependence on key personnel, international sales, proprietary rights, volatility of our stock price and effects of certain anti-takeover provisions, as set forth in this
Report. Any party interested in receiving a free copy of the Form 10-K or the Companys other publicly available documents should write to the Chief Financial Officer of the Company.



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



2.    Revenue Recognition



The Company recognizes revenue on the sale of semiconductor manufacturing equipment when title and risk of
loss has passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is fixed or determinable, collectibility is reasonably assured and customer acceptance criteria
have been successfully demonstrated. Product revenue is recognized upon shipment when the product is classified as mature and the customer acceptance criteria can be demonstrated prior to shipment. Revenue related to the fair value of the
installation obligation is recognized upon completion of the installation. Products are classified as mature after several different customers have accepted similar systems. For sales of new products or when the customer acceptance criteria cannot
be demonstrated prior to shipment, revenue and the related cost of goods sold are deferred until customer acceptance. Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts. Lease revenue is
recorded in accordance with SFAS No. 13, Accounting for Leases which requires a lessor account for each lease by either the direct financing, sales-type or operating method. Revenue from sales-type leases is recognized at the net present
value of future lease payments. Revenue from operating leases is recognized over the lease period.



Deferred revenue, which is included in accrued expenses and other liabilities on the balance sheet, includes deferred revenue related to
maintenance contracts (and other undelivered services). Deferred profit is related to equipment that was shipped to certain customers, but the revenue and cost of goods sold were not recognized because either the customer specified acceptance
criteria has not been met as of the fiscal period end or the product is not classified as mature as of the fiscal period end and has not been accepted by the customer.



3.    Stock-Based Compensation



In October 2002, the FASB issued Statement No. 148 Accounting for Stock-Based
CompensationTransition and Disclosure, or SFAS 148, providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also amends the
disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, or SFAS 123, to include prominent disclosures in annual and interim financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company adopted the disclosure provisions of SFAS 148 on November 1, 2002.





6



---

##### Table of Contents



Had the
Company determined stock-based compensation costs based on the estimated fair value at the grant date for its stock options, the Companys net loss and net loss per share for the three and six months ended April 30, 2003 and 2002 respectively
would have been as follows (in thousands, except per share data):



|                                                                                                                                                                                      |  | Three Months Ended April 30, |         |   | Six Months Ended April 30, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | -------------------------- | -
|                                                                                                                                                                                      |  | 2003                         |         |   | 2002                       |  
|Net loss as reported                                                                                                                                                                  |  | $                            | (29,130 | ) |                            | $
|Stock-based employee compensation expense determined under fair value based methods for
all awards net of tax effects (0% and 36% effective tax rate for FY03 and FY02, respectively) |  |                              | 6,514   |   |                            |  
|                                                                                                                                                                                      |  |                              |         |   |                            |  
|Pro forma net loss                                                                                                                                                                    |  | $                            | (35,644 | ) |                            | $
|                                                                                                                                                                                      |  |                              |         |   |                            |  
|Basic loss per share as reported                                                                                                                                                      |  | $                            | (0.46   | ) |                            | $
|Basic loss per share pro forma                                                                                                                                                        |  | $                            | (0.57   | ) |                            | $
|Diluted loss per share as reported                                                                                                                                                    |  | $                            | (0.46   | ) |                            | $
|Diluted loss per share pro forma                                                                                                                                                      |  | $                            | (0.57   | ) |                            | $



The fair
value for these options was estimated at the grant date using a Black-Scholes option-pricing model with the following weighted average assumptions for the three and six months ended April 30, 2003 and April 30, 2002.



|                                               |  | Three Months Ended April 30, |   |  | Six Months Ended April 30, |  
|---------------------------------------------- |  | ---------------------------- | - |  | -------------------------- | -
|                                               |  | 2003                         |   |  | 2002                       |  
|Expected stock volatility                      |  | .7725                        |   |  | .7725                      |  
|Risk free interest rate                        |  | 3.6                          | % |  | 3.5                        | %
|Expected life of options after vesting (years) |  | 6.8                          |   |  | 6.6                        |  



4.    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, 2003 |         | October 31, 2002
|--------------- |  | -------------- | ------- | ----------------
|Raw materials   |  | $              | 59,382  |                 
|Work-in-process |  |                | 29,332  |                 
|Finished goods  |  |                | 16,669  |                 
|                |  |                |         |                 
|Total           |  | $              | 105,383 |                 
|                |  |                |         |                 



5.    Goodwill and Other Intangibles



Effective November 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, or SFAS 142, which was issued by the FASB in July
2001. Under this standard, the Company ceased amortizing goodwill effective November 1, 2002. In addition, on adoption, the Company reclassified certain intangibles with a net book value of $0.4 million, consisting of acquired workforce, which is no
longer defined as an acquired intangible under SFAS 142 to goodwill. Accordingly, there was no amortization of acquired workforce in acquisition costs recognized during the six months ended April 30, 2003. In fiscal 2003, goodwill also increased by
approximately $2.8 million due to the Companys acquisition of Optonics, Inc. (see Note 11 for further discussion).



In the quarter ended April 30, 2003, the Company completed the first step of the transitional goodwill impairment test and has determined
that no potential impairment exists as of April 30, 2003. The first step is a review for potential impairment, while the second step measures the amount of the impairment, if any. As a result, the Company has recognized no transitional impairment
loss in the first six months of fiscal 2003 in connection with the adoption of SFAS No. 142. However, no assurances



7



---

##### Table of Contents

can be given that future evaluations of goodwill will not result in charges as a result of future
impairment. The Company will evaluate goodwill at least on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flow.



The following table presents a reconciliation of previously
reported net loss per share to the amounts adjusted to exclude goodwill and acquired workforce amortization for the three and six months ended April 30, 2003 and 2002 (in thousands, except per share data):



|                                                         |  | Three Months Ended April 30, |         |   | Six Months Ended April 30, |  
|-------------------------------------------------------- |  | ---------------------------- | ------- | - | -------------------------- | -
|                                                         |  | 2003                         |         |   | 2002                       |  
|Net loss as reported                                     |  | $                            | (29,130 | ) |                            | $
|Goodwill amortization (net of 35% tax benefit)           |  |                              |        |   |                            |  
|Acquired workforce amortization (net of 35% tax benefit) |  |                              |        |   |                            |  
|                                                         |  |                              |         |   |                            |  
|Proforma net loss                                        |  | $                            | (29,130 | ) |                            | $
|                                                         |  |                              |         |   |                            |  
|Basic and diluted net loss per share as reported         |  | $                            | (0.46   | ) |                            | $
|Goodwill amortization                                    |  |                              |        |   |                            | $
|Acquired workforce amortization                          |  |                              |        |   |                            |  
|                                                         |  |                              |         |   |                            |  
|Basic and diluted pro forma net loss per share           |  | $                            | (0.46   | ) |                            | $
|                                                         |  |                              |         |   |                            |  



Other
intangible assets subject to amortization were as follows (in thousands):



|April 30, 2003         |  | Cost |        | Accumulated Amortization |   |         | Net
|---------------------- |  | ---- | ------ | ------------------------ | - | ------- | ---
|Purchased technology   |  | $    | 45,144 |                          | $ | (13,763 | )  
|Customer relations     |  |      | 7,702  |                          |   | (4,584  | )  
|Trademarks             |  |      | 2,053  |                          |   | (1,483  | )  
|Deferred Compensation  |  |      | 1,819  |                          |   | (152    | )  
|Patents                |  |      | 862    |                          |   | (531    | )  
|Non-compete agreements |  |      | 750    |                          |   | (94     | )  
|                       |  |      |        |                          |   |         |    
|Total                  |  | $    | 58,330 |                          | $ | (20,607 | )  
|                       |  |      |        |                          |   |         |    



|October 31, 2002     |  | Cost |        | Accumulated Amortization |   |         | Net
|-------------------- |  | ---- | ------ | ------------------------ | - | ------- | ---
|Purchased technology |  | $    | 32,153 |                          | $ | (10,970 | )  
|Customer relations   |  |      | 6,052  |                          |   | (3,677  | )  
|Trademarks           |  |      | 2,053  |                          |   | (1,247  | )  
|Patents              |  |      | 862    |                          |   | (445    | )  
|Assembled workforce  |  |      | 1,954  |                          |   | (1,527  | )  
|                     |  |      |        |                          |   |         |    
|Total                |  | $    | 43,074 |                          | $ | (17,866 | )  
|                     |  |      |        |                          |   |         |    



The
change in the intangible assets between October 31, 2002 and April 30, 2003 is due to $17.2 million of additional intangibles associated with the purchase of Optonics Inc. (see Note 11 for further discussion) and the Company reclassified $0.4
million of acquired workforce, which is no longer defined as an acquired intangible asset under SFAS 142, to goodwill.



Amortization expense for the other intangible assets was $4.2 million for the six months ended April 30, 2003, as compared to $5.2 million
for the six months ended April 30, 2002. Estimated annual amortization expense for the other intangible assets is $5.2 million for the remaining two quarters of fiscal 2003, $10.4 million for the fiscal year ending October 31, 2004, $10.4 million
for the fiscal year ending October 31, 2005, $10.4 million for the fiscal year ending October 31, 2006, and $1.3 million for the fiscal year ending October 31, 2007.



6.    Net Income (Loss) Per Share



Basic net income (loss) per share is based upon the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per share is based upon the weighted average number of common shares and dilutive-potential



8



---

##### Table of Contents

common shares outstanding during the period. The Company excluded options to purchase 62,730 shares of common stock from the diluted income
(loss) per share calculation for the fiscal quarter ended April 30, 2003 because options are anti-dilutive in periods when the Company incurs a net loss.



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



|                                                                                                    |  | Three Months Ended April 30, |         |   | Six Months Ended April 30, |  
|--------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | -------------------------- | -
|                                                                                                    |  | 2003                         |         |   | 2002                       |  
|Numerator:                                                                                          |  |                              |         |   |                            |  
|Numerator for basic and diluted net income (loss) per share-                                        |  |                              |         |   |                            |  
|net income (loss)                                                                                   |  | $                            | (29,130 | ) |                            | $
|                                                                                                    |  |                              |         |   |                            |  
|Denominator:                                                                                        |  |                              |         |   |                            |  
|Denominator for basic net income (loss) per share-                                                  |  |                              |         |   |                            |  
|Weighted-average shares                                                                             |  |                              | 63,064  |   |                            |  
|Effect of dilutive securities-employee stock options                                                |  |                              |        |   |                            |  
|                                                                                                    |  |                              |         |   |                            |  
|Denominator for diluted earnings per share-adjusted Weighted-average shares and assumed conversions |  |                              | 63,064  |   |                            |  
|                                                                                                    |  |                              |         |   |                            |  
|Basic net income (loss) per share                                                                   |  | $                            | (0.46   | ) |                            | $
|                                                                                                    |  |                              |         |   |                            |  
|Diluted net income (loss) per share                                                                 |  | $                            | (0.46   | ) |                            | $
|                                                                                                    |  |                              |         |   |                            |  



7.    Recent Accounting Pronouncements



In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 141, Business Combinations, or SFAS 141 and Statement of Financial Accounting
Standard No. 142, Goodwill and Other Intangible Assets, or SFAS 142.



SFAS 141 supersedes APB Opinion No. 16, Business Combinations, and eliminates the pooling-of-interests method of accounting for business combinations, thus requiring that all business
combinations be accounted for using the purchase method. In addition, in applying the purchase method, SFAS 141 changes the criteria for recognizing intangible assets other than goodwill and states that the following criteria should be considered in
determining the classification of intangible assets: (1) whether the intangible asset arises from contractual or other legal rights, or (2) whether the intangible asset is separable or dividable from the acquired entity and capable of being sold,
transferred, licensed, rented, or exchanged. If neither criteria is met, the intangible assets are classified as goodwill and are not amortized. The Company will apply the requirements of SFAS 141 to all business combinations initiated after June
30, 2001. The Companys purchase of Optonics during the quarter ended January 31, 2003, was subject to these requirements.



In the quarter ended April 30, 2003, the Company completed the first step of the transitional goodwill impairment test and has determined
that no potential impairment exists. The first step is a review for potential impairment, while the second step measures the amount of the impairment, if any. As a result, the Company has recognized no transitional impairment loss in the first six
month of fiscal 2003 in connection with the adoption of SFAS No. 142. However, no assurances can be given that future evaluations of goodwill will not result in charges as a result of future impairment. The Company will evaluate goodwill at least on
an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flow.



In August 2001, the FASB issued Statements of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets, or SFAS 144. SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a
business. SFAS 144 establishes a single accounting model for assets to be disposed of by sale whether previously held and used or newly acquired. SFAS No. 144 retains the provisions of APB No. 30 for presentation of discontinued operations in the
income statement, but broadens the presentation to include a component of an entity. The Company has adopted SFAS 144 effective November 1, 2002, and the adoption did not have a material impact on the Companys financial position or results of
operations.



In July 2002, the FASB approved
Statement of Financial Accounting Standards No. 146 Accounting for Costs Associated with Exit or Disposal Activities, or SFAS 146. SFAS 146 addresses the financial accounting and reporting for obligations associated with an exit
activity, including restructuring, or with a disposal of long-lived assets. Exit activities include, but are not



9



---

##### Table of Contents

limited to, eliminating or reducing product lines, terminating employees and contracts and relocating manufacturing facilities or personnel.
SFAS 146 specifies that a company will record a liability for a cost associated with an exit or disposal activity only when that liability is incurred and can be measured at fair value. Therefore, commitment to an exit plan or a plan of disposal
expresses only managements intended future actions and, therefore, does not meet the requirement for recognizing a liability and the related expense. SFAS 146 is effective prospectively for exit or disposal activities initiated after December
31, 2002. The effect of adoption of SFAS 146 is dependent on the Companys related activities subsequent to the date of adoption.



In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue
No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The Company is currently evaluating the effect that the adoption of EITF Issue No. 00-21 will have on its results of operations and financial condition.



8.    Accrued Warranty



In November 2002, the FASB issued Interpretation No. 45
 Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, or FIN 45. It requires that a liability be recorded in the guarantors balance sheet upon issuance of
a guarantee. In addition, FIN 45 requires disclosures about the guarantee that an entity has issued, including a reconciliation of changes in the entities product warranty liabilities. The initial recognition and initial measurement provisions of
FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 2002.



The Company provides reserves for the estimated costs of product warranties at the time revenue is recognized. The Company estimates the
costs of warranty obligations based on historical experience of known product failure rates, use of materials to repair or replace defective products and service delivery costs incurred in correcting product failures.



The following table represents the activity in the warranty
accrual for the six months ended April 30, 2003 (in thousands):



|Balance at October 31, 2002                                       |  | $ | 4,316  |  
|----------------------------------------------------------------- |  | - | ------ | -
|Add: Accruals for warranties issued during the period             |  |   | 2,609  |  
|Acquired pre-existing warranty obligations                        |  |   | 614    |  
|Changes in estimated liability related to pre-existing warranties |  |   | (660   | )
|Less: Warranty spending                                           |  |   | (2,273 | )
|                                                                  |  |   |        |  
|Balance at April 30, 2003                                         |  | $ | 4,606  |  
|                                                                  |  |   |        |  



9.    Contingencies and Guarantees



The Company from time to time enters into certain types of contracts that may require the Company to indemnify parties against third party claims. These contracts primarily relate to: (i) certain real
estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Companys use of the applicable premises; and (ii) certain agreements with the
Companys officers and directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship.



The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the
obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these
obligations, and no liabilities have been recorded for these obligations on its balance sheet as of April 30, 2003.



The Company had an agreement with a non-related leasing company, Credence Capital Corporation, or CCC, whereby the Company issued a
guaranty in favor of a bank with respect to certain obligations of CCC to the bank. Under this agreement, CCC agreed to grant the Company a security interest to secure the obligations of the leasing company as a result of any payments by the Company
pursuant to the guaranty. In February 2003, the Company acquired CCC and the underlying liability became a direct obligation of the Company. At April 30, 2003, this obligation was $5.0 million. See Note 11 for further discussion.



In April 2002, Reptron Electronics, Inc. a supplier of certain
electronic components to the Company, filed a complaint in the U.S. District Court for the District of Oregon, alleging that the Company had breached a contract to purchase certain components ordered by Reptron during 2000. The complaint seeks
damages of approximately $3.9 million. In November 2002, the court set trial for this action for July 15, 2003.



The Company is involved in other various claims arising in the ordinary course of business. The Company currently believes that the
ultimate amount of liability, if any, for any pending claims of any type (either alone or combined) will not materially affect its financial position, results of operations or liquidity.



10



---

##### Table of Contents



10.    
Accumulated Other Comprehensive Income (Loss)



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



|                                                                    |  | Six Months EndedApril 30, 2003 |        |   | Fiscal Year EndedOctober 31, 2002 |  
|------------------------------------------------------------------- |  | ------------------------------ | ------ | - | --------------------------------- | -
|Beginning balance, net of tax                                       |  | $                              | 3,843  |   |                                   | $
|Unrealized gain (loss) on available-for-sale securities, net of tax |  |                                | (392   | ) |                                   |  
|Currency translation adjustment, net of tax                         |  |                                | (2,453 | ) |                                   |  
|                                                                    |  |                                |        |   |                                   |  
|Ending balance, net of tax                                          |  | $                              | 998    |   |                                   | $
|                                                                    |  |                                |        |   |                                   |  



11.    Acquisitions



In December 2002, the Company completed the acquisition of certain assets of SZ Testsysteme AG and SZ Testsysteme GmbH, or SZ. The acquisition is designed to complement the Companys existing mixed-signal and wireless solutions
with a new division focused primarily on the automotive test market. The Credence-SZ division will operate with approximately 135 contracted employees from a facility located in Amerang, Germany and focus on the advanced analog, power automotive,
and communications markets. The purchase price for the assets was approximately $4.7 million in cash and the purchase price was allocated to tangible assets, primarily inventory and fixed assets. The Companys Statement of Operations for the
six months ended April 30, 2003 includes the results of operations of SZ from the date of acquisition in December, 2002.



In January 2003, the Company acquired Optonics, Inc., a company that designs and manufactures integrated systems for emission-based
optical diagnostics and failure analysis. The addition of Optonics is designed to extend the Companys product offerings in engineering validation test, design verification and diagnostics systems. The total purchase price of approximately $21
million included consideration of approximately 1.9 million freely tradeable shares or $20.1 million in Credence common stock and $0.9M in assumed Optonics stock options that were converted to options to purchase Credence shares. The net tangible
asset deficit assumed was approximately $0.5 million. The Companys Statement of Operations for the six months ended April 30, 2002 includes the results of operations of Optonics from the date of acquisition in January, 2003.



The total purchase cost of Optonics was as follows (in
thousands):



|Credence common stock                 |  | $ | 20,152
|------------------------------------- |  | - | ------
|Assumption of Optonics stock options |  |   | 894   
|                                      |  |   |       
|Total purchase cost                   |  | $ | 21,046
|                                      |  |   |       



The
purchase price allocation was as follows (dollars in thousands):



|                                    |  | Amount |        |   | Annual Amortization |   | Useful Lives (Years)
|----------------------------------- |  | ------ | ------ | - | ------------------- | - | --------------------
|Purchase Price Allocation:          |  |        |        |   |                     |   |                     
|Tangible net assets (deficit)       |  | $      | (463   | ) |                     |   |                    
|Intangible assets acquired:         |  |        |        |   |                     |   |                     
|Developed technology                |  |        | 12,990 |   |                     | $ | 2,598               
|In-process research and development |  |        | 1,510  |   |                     |   |                    
|Non-compete agreements              |  |        | 750    |   |                     |   | 375                 
|Deferred compensation               |  |        | 1,819  |   |                     |   | 606                 
|Customer relationships              |  |        | 1,650  |   |                     |   | 550                 
|Goodwill                            |  |        | 2,790  |   |                     |   |                    
|                                    |  |        |        |   |                     |   |                     
|Total purchase price allocation     |  | $      | 21,046 |   |                     | $ | 4,129               
|                                    |  |        |        |   |                     |   |                     



A
valuation of the purchased assets was undertaken to assist the Company in determining the fair value of each identifiable intangible asset and in allocating the purchase price among acquired assets, including the portion of the purchase price
attributed to in-process research and development projects. Standard valuation procedures and techniques were utilized in determining the fair value of the acquired in-process research and development. To determine the value of the technology in the
development stage, the Company considered, among other factors, the stage of development of each project, the time and resources needed to complete each project, expected income and associated risks. Associated risks included the inherent
difficulties and uncertainties in completing the project and thereby achieving technological feasibility, and the risks related to the viability of and potential changes to future target markets. The analysis resulted in $1.5 million of the purchase
price being charged to acquired in-process research and development. The IPR&D acquired from Optonics consists of features and projects related to the Emiscope II, which is the next generation Emiscope with added functionality including solid
immersion lens and



11



---

##### Table of Contents

spray cooling system. The Company estimates that these projects varied in terms of completion from 15% to 50% completed based on research and
development complexity, costs, and time expended to date relative to the expected remaining costs and time to reach technological feasibility. The intangible assets, consisting primarily of developed technology, deferred compensation, customer
relationships, non-compete agreements and goodwill, were assigned a value of $20 million and are being amortized over their estimated useful lives, ranging from two to five years.



In February 2003, the Company acquired the net assets of Credence Capital Corporation, or CCC, a non-related
leasing company for $5.5 million. The acquisition allows the Company to directly offer leasing and other financing solutions to customers seeking alternative options to acquire the Companys equipment. Contemporaneous with the transaction,
CCCs sole shareholder and an affiliate repaid indebtedness to CCC in the approximate amount of $5.2 million. The assets of CCC consisted primarily of a portfolio of leases of Credence equipment and its liabilities included indebtedness of
approximately $15.3 million associated with the lease portfolio. As a result of the acquisition, net equipment on lease associated with the lease portfolio of approximately $15.2 million is included on the condensed unaudited consolidated balance
sheet in other assets. The indebtedness associated with the lease portfolio is reported on the condensed unaudited consolidated balance sheet in liabilities related to leased products and in long-term liabilities leased products. The Company
presently intends to continue to operate CCC as a wholly-owned subsidiary to provide leasing and other financing solutions to Credence customers. The Companys Statement of Operations for the six months ended April 30, 2003 includes the results
of operations of CCC from the date of acquisition in February, 2003.



12.    Special Charges



For the quarter ended January 31, 2003, the Company recorded special charges of $1.4 million as operating expenses related to headcount reductions and facility consolidations, which the Company implemented in the quarter.
During this period, the Company reduced headcount by approximately 70 persons. The bulk of the affected employees were in SG&A and a smaller number were in R&D. Also, during the quarter, the Company completed its plans to exit the IMS
facility in Beaverton, Oregon and consolidated the remaining employees into its Hillsboro, Oregon facility



The following table illustrates the restructuring cost activity for the six-month period ended April 30, 2003 and the estimated timing of
future payouts for major restructuring categories (in thousands):



|                                    |  | Severance |        |   | Operating Leases |   |        | Other |  |   | Total |  
|----------------------------------- |  | --------- | ------ | - | ---------------- | - | ------ | ----- |  | - | ----- | -
|Balance at October 31, 2002         |  | $         | (716   | ) |                  | $ | (5,177 | )     |  | $ |      |  
|Headcount reduction                 |  |           | (1,186 | ) |                  |   |        |       |  |   | (5    | )
|Operating leases written off        |  |           |        |   |                  |   | (201   | )     |  |   |       |  
|Cash payments                       |  |           | 908    |   |                  |   | 1,263  |       |  |   | 5     |  
|                                    |  |           |        |   |                  |   |        |       |  |   |       |  
|Balance at April 30, 2003           |  | $         | (994   | ) |                  | $ | (4,115 | )     |  | $ |      |  
|                                    |  |           |        |   |                  |   |        |       |  |   |       |  
|Estimated timing of future payouts: |  |           |        |   |                  |   |        |       |  |   |       |  
|Balance of fiscal 2003              |  |           | 753    |   |                  |   | 1,724  |       |  |   |       |  
|Fiscal 2004                         |  |           | 241    |   |                  |   | 1,268  |       |  |   |       |  
|Fiscal 2005 and beyond              |  |           |        |   |                  |   | 1,123  |       |  |   |       |  
|                                    |  |           |        |   |                  |   |        |       |  |   |       |  
|Total                               |  | $         | 994    |   |                  | $ | 4,115  |       |  | $ |       |  
|                                    |  |           |        |   |                  |   |        |       |  |   |       |  



The
opening balances at October 31, 2002 in the above table are associated with headcount reductions and facility consolidations the Company implemented in the fourth quarter of fiscal 2002.



In addition to the above special charges, the Company also recorded a charge of $1.5 million in the first
quarter of fiscal 2003 for in-process research and development resulting from the purchase of Optonics Inc. in January 2003.



13.    Subsequent Events



In May 2003, the Company announced the offering of $150 million of convertible subordinated notes due in 2008. The notes will bear
interest at a rate of 1.5 percent per annum and are convertible into the companys common stock at a conversion price of $11.31 per share. The notes will be subordinate to all present and future senior debt of the Company. The initial purchaser
of the notes also is being granted an option to purchase up to an additional $30 million principal amount of the notes. The Company expects to use the net proceeds of the offering for general corporate purposes, including working capital and
potential acquisitions.



In May 2003, the Company
announced headcount reductions, office closures, and the adoption of other cost-cutting measures as part of a continuing effort to reduce expenses. The reduction of force includes the elimination of approximately 170 positions or 14 percent of the
Companys global employee base. Approximately 160 positions in the United States will be



12



---

##### Table of Contents

affected, with the remaining reduction in other locations worldwide. In the second quarter, the Company also made a decision to outsource
much of its information technology function for which the Company will incur incremental costs during the transition period. The Company estimates the above actions will result in a restructuring charge during the third quarter of fiscal 2003 in the
range of at least $3 million to $5 million.



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



This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, including statements using terminology such as may, will, expects, plans, anticipates, goals, estimates, potential, or
continue, or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include statements regarding the evaluation of goodwill, application
of certain accounting pronouncements and the evaluation of the effect of adopting certain accounting pronouncements, continuation of CCC as a wholly-owned subsidiary, operation of Credence-SZ division, use of proceeds for general corporate purposes,
restructuring charges, fluctuation of sales, gross margins and operating results, evaluation of residuals, evaluation of adequacy of remaining liabilities, outlook for future sales orders and levels, expectations that gross margins will remain at
current or lower levels, intent to invest significant resources in the development and completion of new products and product enhancements and in the increase of production of current products, acquisition and R&D expenses accounting for
significant percentage of sales, SG&A expenses remaining constant, recordation of full valuation allowance on domestic tax benefits, current cash and investment positions and and investments in inventories representing a significant portion of
working capital. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. These risks and uncertainties include, but are not limited to, those
described under the heading Risk Factors as well as risks described immediately prior to or following some forward-looking statements. All forward-looking statements and risk factors included in this document are made as of the date
hereof, based on information available to us as of the date thereof, and we assume no obligation to update any forward-looking statement or risk factors.



Revenue for the first six months of fiscal 2003 was approximately 8% higher compared to the same period in fiscal 2002. The test and
assembly sector of the semiconductor equipment industry continues to be impacted by an extraordinarily long and severe downturn. There is uncertainty as to if and when the next cyclical growth phase will occur. Until such time as we return to a
period of sustainable growth and due to continued low visibility, we maintain a cautious outlook for future orders and sales levels.



Our sales, gross margins and operating results have in the past fluctuated significantly and will, in the future, fluctuate significantly
depending upon a variety of factors. The factors that have caused and will continue to cause our results to fluctuate include cyclicality or downturns in the semiconductor market and the markets served by our customers, the timing of new product
announcements and releases by us or our competitors, market acceptance of new products and enhanced versions of our products, manufacturing inefficiencies associated with the start up of new products, changes in pricing by us, our competitors,
customers or suppliers, the ability to volume produce systems and meet customer requirements, excess and obsolete inventory, patterns of capital spending by customers, delays, cancellations or rescheduling of orders due to customer financial
difficulties or otherwise, expenses associated with acquisitions and alliances, product discounts, product reliability, the proportion of direct sales and sales through third parties, including distributors and original equipment manufacturers, the
mix of products sold, the length of manufacturing and sales cycles, natural disasters, political and economic instability, regulatory changes and outbreaks of hostilities. Due to these and additional factors, historical results and percentage
relationships discussed in this Report on Form 10-Q will not necessarily be indicative of the results of operations for any future period. For a further discussion of our business, and risk factors affecting our results of operations, please refer
to the section entitled Risk Factors included elsewhere herein.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES



Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, investments, residual values, intangible assets, income taxes, warranty obligations, restructuring, and contingencies and litigation. We
base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our
consolidated financial statements.



Revenue Recognition



13



---

##### Table of Contents



We
historically recognized revenue on the sale of semiconductor manufacturing equipment upon shipment. We changed our revenue recognition policy based on guidance provided in SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, or SAB 101, effective November 1, 1999.



Under SAB 101, we recognize revenue on the sale of semiconductor manufacturing equipment when title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred or services have
been rendered, the sales price is fixed or determinable, collectibility is reasonably assured and customer acceptance criteria have been successfully demonstrated. Product revenue is recognized upon shipment when the product is classified as mature
and the customer acceptance criteria can be demonstrated prior to shipment. Revenue related to the fair value of the installation obligation is recognized upon completion of the installation. Products are classified as mature after several different
customers have accepted similar systems. For sales of new products or when the customer acceptance criteria cannot be demonstrated prior to shipment, revenue and the related cost of goods sold are deferred until customer acceptance. Lease revenue is
recorded in accordance with FAS No. 13, Accounting for Leases which requires that a lessor account for each lease by either the direct financing, sales-type or operating method. Revenue from sales-type leases is recognized at the net present value
of future lease payments. Revenue from operating leases is recognized over the lease period.



Under the SAB 101 revenue recognition policy, we defer revenue for transactions that involve newly introduced products or when customers specify acceptance criteria that cannot be demonstrated prior to
the shipment. During fiscal 2002, we introduced several new systems and products. Revenues from sales of these new systems and products during fiscal 2003 may be deferred until the revenue recognition requirements of our revenue recognition policy
are satisfied. In the past, we experienced significant delays in the introduction and acceptance of new testers as well as certain enhancements to our existing testers. As a result, some customers have experienced significant delays in receiving and
accepting our testers in production. Delays in introducing a product or delays in our ability to obtain customer acceptance, if they occur in the future, will delay the recognition of revenue and gross profit by us.



Inventory Valuation and Residual Related to Leased Products



Due to the dramatic decline in the
semiconductor business cycle and corresponding impact on revenue since early in fiscal 2001, and continued uncertainty over any turn-around of the semiconductor equipment industry, we continue to monitor our inventory levels in light of product
development changes and expectations of an eventual market upturn. We recorded a charge of $9.4 million in the fourth quarter of fiscal 2002, and charges of $45.0 million and $38.0 million in the second and fourth quarters of fiscal 2001,
respectively, for the write-down of excess inventories. We may be required to take additional charges for excess and obsolete inventory if the industry downturn causes further reductions to our current inventory valuations or changes our current
product development plans. We evaluate our inventory levels and valuations based on our estimates and forecasts of the next cyclical industry upturn. These forecasts require us to estimate our ability to sell current and future products in the next
industry upturn and compare those estimates with our current inventory levels. If these forecasts or estimates change, or our product road maps change, then we would need to adjust our assessment of the inventory valuations. Once inventories are
written down, we carry that inventory at its reduced value until it is sold or otherwise disposed of. At April 30, 2003, approximately 29% and 12% of the net inventory balances are for our older Quartet mixed signal and Kalos non-volatile memory
product families, respectively.



Residual values
assigned to the Companys products that are leased to customers are based on their remaining useful economic life at the end of the lease terms. The amounts assigned to the residual values are evaluated periodically against technological change
and the forecasted business cycle.



Allowance for Doubtful
Accounts



Our sales and distribution
partners and we perform ongoing credit evaluations of our customers financial condition. We maintain allowances for doubtful accounts for estimated losses resulting from the inability or unwillingness of our customers to make required
payments. We record our bad debt expenses as selling, general and administrative expenses. When we become aware that a specific customer is unable to meet its financial obligations to us, such as bankruptcy or deteriorations in the customers
operating results or financial position, we record a specific allowance to reflect the level of credit risk in the customers outstanding receivable balance. In addition, we record additional allowances based on certain percentages of our aged
receivable balances. These percentages are determined by a variety of factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience. We are not able to predict changes in the financial condition
of our customers or changes in general economic conditions, and if circumstances related to our customers deteriorate, our estimates of the recoverability of our trade receivables could be materially affected and we may be required to record
additional allowances. Alternatively, if we provide more allowances than we need, we may reverse a portion of such provisions in future periods based on our actual collection experience.





14



---

##### Table of Contents



Deferred Taxes



When we prepare our consolidated financial
statements, we estimate our income taxes based on the various jurisdictions where we conduct business. This requires us to estimate our actual current tax exposure and to assess temporary differences that result from differing treatment of certain
items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we show on our consolidated balance sheet. The net deferred tax assets are reduced by a valuation allowance if, based upon weighted
available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Our net deferred tax asset balance as of April 30, 2003 was zero reflecting a full valuation allowance due to uncertainties surrounding
our ability to generate future taxable income and our corresponding ability to utilize our deferred tax assets.



Special Charges



The current accounting for restructuring costs requires us to record provisions and charges when we have a formal and committed plan. In connection with these plans, we have recorded estimated expenses for severance and
benefit costs, lease cancellations, asset write-offs and other restructuring costs. Given the significance of, and the timing of the execution of such activities, this process is complex and involves periodic reassessments of original estimates. We
continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to
record additional provisions or reverse a portion of such provisions.



Long-Lived Assets



We
evaluate the carrying value of our long-lived assets, consisting primarily of goodwill and identifiable intangible assets, and property, plant and equipment, whenever certain events or changes in circumstances indicate that the carrying amount of
these assets may not be recoverable. Such events or circumstances include, but not limited to, a prolonged industry downturn, a significant decline in our market value, or significant reductions in projected future cash flows. In assessing the
recoverability of our long-lived assets, we compare the carrying value to the undiscounted future cash flows the assets are expected to generate. If the total of the undiscounted future cash flows is less than the carrying amount of the assets, we
write down such assets based on the excess of the carrying amount over the fair value of the assets. Fair value is generally determined by calculating the discounted future cash flows using a discount rate based upon our weighted average cost of
capital. Significant judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows, including profit margins, long-term forecasts of the amounts and timing of overall
market growth and our percentage of that market, groupings of assets, discount rates and terminal growth rates. In addition, significant estimates and assumptions are required in the determination of the fair value of our tangible long-lived assets,
including replacement cost, economic obsolescence, and the value that could be realized in orderly liquidation. Changes in these estimates could have a material adverse effect on the assessment of our long-lived assets, thereby requiring us to write
down the assets.



Warranty Accrual



We provide reserves for the estimated costs of product
warranties at the time revenue is recognized. We estimate the costs of our warranty obligations based on our historical experience of known product failure rates, use of materials to repair or replace defective products and service delivery costs
incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. Should our actual experience relative to these factors differ from our estimates, we may be
required to record additional warranty reserves. Alternatively, if we provide more reserves than we need, we may reverse a portion of such provisions in future periods.



15



---

##### Table of Contents



RESULTS OF OPERATIONS



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



|                                            |  | Three Months Ended April 30, |    |  | Six Months Ended April 30, |   
|------------------------------------------- |  | ---------------------------- | -- |  | -------------------------- | --
|                                            |  | 2003                         |    |  | 2002                       |   
|Net sales                                   |  | 100.0                        | %  |  | 100.0                      | % 
|Cost of goods sold  on net sales           |  | 63.7                         |    |  | 61.5                       |   
|                                            |  |                              |    |  |                            |   
|Gross margin                                |  | 36.3                         |    |  | 38.5                       |   
|Operating expenses                          |  |                              |    |  |                            |   
|Research and development                    |  | 46.5                         |    |  | 51.9                       |   
|Selling, general and administrative         |  | 53.7                         |    |  | 58.0                       |   
|Amortization of purchased intangible assets |  | 6.2                          |    |  | 13.3                       |   
|Special charges including IPR&D             |  |                             |    |  |                           |   
|                                            |  |                              |    |  |                            |   
|Total Operating expenses                    |  | 106.4                        |    |  | 123.2                      |   
|                                            |  |                              |    |  |                            |   
|Operating income (loss)                     |  | (70.1                        | )  |  | (84.7                      | ) 
|                                            |  |                              |    |  |                            |   
|Interest and other income, net              |  | 1.9                          |    |  | 6.1                        |   
|                                            |  |                              |    |  |                            |   
|Income (loss) before income tax provision   |  | (68.2                        | )  |  | (78.6                      | ) 
|Income tax provision (benefit)              |  | 0.3                          |    |  | (27.5                      | ) 
|Minority interest (benefit)                 |  |                             |    |  | (0.9                       | ) 
|                                            |  |                              |    |  |                            |   
|Net income (loss)                           |  | (68.5                        | )% |  | (50.2                      | )%
|                                            |  |                              |    |  |                            |   



Net
sales consist of revenues from systems sales, spare parts sales, maintenance contracts and software sales. Net sales were $42.5 million for the second quarter of fiscal 2003, representing an increase of approximately 10% from the net sales of $38.7
million in the comparable period for fiscal 2002. Net sales increased approximately 16% from $36.7 million in the first quarter of fiscal 2003. Net sales increased $5.9 million, or 8%, to $79.2 million for the six months ended April 30, 2003 from
$73.3 million for the six months ended April 30, 2002. Although our net sales were higher compared to the same periods in fiscal 2002, there is uncertainty as to if and when the next growth phase will occur. As is stated in previous interim reports
and our most recent Form 10-K, we maintain a cautious outlook for future orders and sales levels.



International net sales accounted for approximately 62%, 55% and 61% of total net sales in the first six months of fiscal 2003 and fiscal
years 2002 and 2001, respectively. International net sales were 68% of total net sales in the second quarter of fiscal 2003. Our net sales to the Asia Pacific region accounted for approximately 46%, 42%, and 38% of total net sales in the first six
months of fiscal 2003 and fiscal years 2002 and 2001, respectively, and thus are subject to the risk of economic instability in that region that materially adversely affected the demand for our products in 1998 and early 1999. Capital markets in
Korea and other areas of Asia have been historically highly volatile, resulting in economic instabilities. These instabilities may reoccur which could materially adversely affect demand for our products. In addition, current geopolitical
instabilities on the Korean peninsula as well as the Severe Acute Respiratory Syndrome health risks in the Asian region may affect future orders to this region and the timing of or payment for shipment made to this region.



Our net sales by product line in the first six months of 2003
and fiscal years 2002 and 2001 consisted of:



|                         |  | Six Months Ended April 30, 2003 |      |  | Fiscal Year Ended October 31, |     
|------------------------ |  | ------------------------------- | ---- |  | ----------------------------- | ----
|                         |  |                                 | 2002 |  |                               | 2001
|Mixed-Signal             |  | 55                              | %    |  | 51                            | %   
|Logic                    |  | 4                               |      |  | 5                             |     
|Memory                   |  | 11                              |      |  | 18                            |     
|Service, software, other |  | 30                              |      |  | 26                            |     
|                         |  |                                 |      |  |                               |     
|Total                    |  | 100                             | %    |  | 100                           | %   
|                         |  |                                 |      |  |                               |     



Revenues
from software were not material to our operations in the first six months of 2003 and fiscal years 2002 and 2001, representing less than 4% of our net sales in each period.



16



---

##### Table of Contents



Gross Margin



Our gross margin has been and will continue
to be affected by a variety of factors, including manufacturing efficiencies, excess and obsolete inventory write downs, sell through of previously written down inventory, pricing by competitors or suppliers, new product introductions, product sales
mix, production volume, customization and reconfiguration of systems, international and domestic sales mix and field service margins. Our gross margin was 36.3% and 35.2% for the three and six month periods ended April 30, 2003, respectively. For
the comparable periods ended April 30, 2002 the gross margins were 38.5% and 38.3% respectively. The drop in gross margins from fiscal 2002 levels reflects the competitive pricing environment as a result of the cyclical downturn in the semiconductor
equipment industry and higher costs caused by under-absorption of manufacturing expenses. The gross margin percentage for the three months ended April 30, 2003 was favorably impacted by approximately 2.5% resulting from the sale of previously
written down inventories. However, this benefit was completely offset by further provisions for excess and obsolete inventory in separate product lines. We expect gross margins to remain at or below current levels for the foreseeable future due to
ongoing competitive pricing pressure caused by the severe and prolonged downturn in the semiconductor industry, and manufacturing inefficiencies resulting from the current low business levels.



Research and Development



Research and development, (or R&D) expenses
were $39.2 million in the first six months of fiscal 2003, a decrease of 3.2%, or $1.3 million from the same period of fiscal 2002. R&D expenses were $19.8 million in the three months ended April 30, 2003, compared to $20.0 million for the same
period in the prior fiscal year. The decrease in spending reflects restructuring actions affecting R&D taken during the fourth quarter of fiscal 2002 and first quarter of fiscal 2003 when compared to 2002 as well as the completion of evaluation
periods for several new products introduced last fiscal year. These savings are partially offset by the ongoing investment in new products and investments related to the fiscal 2003 acquisitions of Optonics and certain assets of SZ. As a percentage
of net sales, R&D expenses were 46.5% and 49.6% for the first three and six months of 2003, respectively, compared to 51.8% and 55.3% for the same periods in fiscal 2002, respectively. We currently intend to continue to invest significant
resources in the development and completion of new products and product enhancements for the foreseeable future. Accordingly, along with recent acquisitions, we anticipate that R&D expenses will remain significant in absolute dollar terms and as
a percentage of net sales for the rest of the fiscal year.



Selling, General and Administrative



Selling, general and administrative expenses (or SG&A) were $22.8 million and $43.4 million in the first three and six months of fiscal 2003, representing a decrease of $0.4 million and $0.7 million, respectively,
from the comparable periods of fiscal 2002. The lower SG&A spending in fiscal 2003 was primarily due to decreases in payroll related expenses resulting from a lower headcount and ongoing operating expense management. These reductions are
partially offset by added SG&A expenses from the Optonics and SZ acquisitions. As a percentage of net sales, SG&A expenses were 53.7% and 54.8% for the first three and six months of fiscal 2003, respectively, compared with 58.0% and 60.2%
for the same periods in fiscal 2002, respectively. We expect SG&A expenses for the rest of the fiscal year to remain constant with the first six months of fiscal 2003.



Amortization of Goodwill and Purchased Intangibles



Amortization of goodwill and purchased intangible expenses were $2.6 million and $4.2 million in the first
three and six months of fiscal 2003, respectively, compared to $5.1 million and $10.3 million for the same periods in fiscal 2002, respectively. As of November 1, 2002 we adopted Statements of Financial Accounting Standards Goodwill and Other
Intangible Assets No. 142, or SFAS 142. Under SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized, but are reviewed annually (or more frequently if impairment indicators arise) for impairment.



Special Charges and In-process Research and Development



In the first quarter of fiscal 2003, we recorded a charge of
approximately $1.4 million for severance charges, and a lease write-off that was included in operating expenses. These charges were associated with headcount reductions and the completion of the consolidation of our IMS facility in Beaverton, Oregon
into our Hillsboro, Oregon site. During the first quarter of fiscal 2003, we reduced our headcount by approximately 70 persons. The bulk of the affected employees were in SG&A and a smaller number were in R&D. See Note 12 to the Condensed
Consolidated Financial Statements.



In addition,
we also recorded a charge of $1.5 million in the first quarter of fiscal 2003 for the write-off of in-process research and development resulting from the purchase of Optonics. The charge was recorded as an operating expense.



17



---

##### Table of Contents



Interest and Other Income
Expenses, Net



We generated net interest and
other income of $0.8 million and $2.7 million for the first three and six months of fiscal 2003, respectively, as compared to $2.4 million and $5.7 million for the same periods of fiscal 2002, respectively. The decrease in fiscal 2003 was primarily
due to lower average cash and investment balances and decreasing returns on our cash investments as longer-term investments mature and are re-invested at currently lower short-term interest rates. In addition, we incurred additional interest expense
on our indebtedness associated with the lease portfolio acquired from Credence Capital Corporation, or CCC.



Income Taxes



The Company recorded an income tax provision of $0.1 million and $0.2 million for the first three and six months of fiscal 2003, respectively, as compared to a income tax benefit of $10.6 million and $21.4 million,
respectively, for the same periods of fiscal 2002. The income tax expense in 2003 consists of foreign tax on earnings and foreign withholding taxes generated from our foreign operations. During the first six months of fiscal 2002, the Companys
estimated effective tax benefit rate was 35.0%. The estimated tax benefit rate in fiscal 2002 was less than the combined federal and state statutory rate primarily due to the impact of non-deductible goodwill amortization.



We expect to record a full valuation allowance on domestic tax
benefits until we can sustain an appropriate level of profitability. Until such time, we would not expect to recognize any significant tax benefits in our results of operations.



LIQUIDITY AND CAPITAL RESOURCES



The net cash outflows from operating activities during the six months ended April 30, 2003 was $53.8 million.
The net cash flows used by operating activities for the first six months of fiscal 2003 was primarily attributable to a net loss before depreciation and amortization of $41.4 million plus the use of cash for net working capital.



Investing activities provided net cash of approximately $41.5
million in the six months ended April 30, 2003 resulting from the net sales of available-for-sale securities of $49.3 million offset by approximately $4.4 million for the acquisition of CCC and SZ net assets and property and equipment to support our
business.



Financing activities provided net cash
flows of $1.8 million for the six months ended April 30, 2003. The cash for the first six months of fiscal 2002 was provided from the issuance of common stock through our employee equity plans.



As of April 30, 2003, we had working capital of approximately
$202.5 million, including cash and short-term investments of $99.8 million, and accounts receivable and inventories totaling $144.1 million. We believe that because of the relatively long manufacturing cycles of many of our testers and the new
products we have and plan to continue to introduce, investments in inventories will also continue to represent a significant portion of our working capital. The semiconductor industry has historically been highly cyclical and has experienced
downturns, which have had a material adverse effect on the semiconductor industrys demand for automatic test equipment, including equipment manufactured and marketed by us. In addition, the automatic test equipment industry is highly
competitive and subject to rapid technological change. It is reasonably possible that events related to the above factors may occur in the near term which would cause a change to our estimate of the net realizable value of receivables, inventories
or other assets, and the adequacy of accrued liabilities. See discussion of Critical Accounting Policies and Estimates above.



Our principal sources of liquidity as of April 30, 2003 consisted of approximately $39.6 million of cash and cash equivalents, and
short-term investments of $60.2 million. In addition, we had $82.1 million of available-for-sale securities, classified as long-term investments at April 30, 2003.



We believe that our current cash and investment positions combined with the ability to borrow funds will be
sufficient to meet our anticipated business requirements for the foreseeable future, including potential acquisitions or strategic investments, capital expenditures, and working capital requirements. See Note 13 to the Condensed Consolidated
Financial Statements for a discussion of our recently announced offering of $150 million convertible subordinated notes.



In February 2003, the Company acquired the net assets of CCC, a non-related leasing company for $5.5 million. The assets of CCC consisted
primarily of a portfolio of leases of Credence equipment and its liabilities included indebtedness of approximately $15.3 million associated with the lease portfolio. The Company presently intends to continue to operate CCC as a wholly-owned
subsidiary to provide leasing and other financing solutions to Credence customers. See Note 11 to the Condensed Consolidated Financial Statements for further discussion.



The Company leases its facilities and equipment under operating leases that expire periodically through 2006
of which approximately $4.1 million have been written-off to special operating charges. See Note 12 to the Condensed Consolidated Financial



18



---

##### Table of Contents



Statements. In addition to the
lease commitments, at April 30, 2003, we have open and committed purchase orders totaling approximately $24.5 million.



The following summarizes our minimum contractual cash obligations and other commitments at April 30, 2003, and the effect of such
obligations in future periods (in thousands):



|                                                       |  | Total |        | 2003 |   | 2004   |  | 2005 |        | 2006 |   | Thereafter
|------------------------------------------------------ |  | ----- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ----------
|Contractual Obligations:                               |  |       |        |      |   |        |  |      |        |      |   |           
|Facilities and equipment operating leases              |  | $     | 10,324 |      | $ | 3,118  |  | $    | 4,169  |      | $ | 1,945     
|Liabilities related to leased products                 |  |       | 15,294 |      |   | 8,636  |  |      | 4,860  |      |   | 1,798     
|Interest on liabilities related to leased products     |  |       | 769    |      |   | 445    |  |      | 283    |      |   | 41        
|Minimum payable for information technology outsourcing |  |       | 20,573 |      |   | 3,696  |  |      | 6,784  |      |   | 6,928     
|Open purchase order commitments                        |  |       | 24,513 |      |   | 24,513 |  |      |       |      |   |          
|                                                       |  |       |        |      |   |        |  |      |        |      |   |           
|Total contractual cash and other obligations           |  | $     | 71,473 |      |   | 40,408 |  |      | 16,096 |      |   | 10,712    
|                                                       |  |       |        |      |   |        |  |      |        |      |   |           



In
December 2002, we took steps to reduce headcount by approximately 70 employees or approximately 6% of the workforce, in response to the ongoing downturn in the semiconductor equipment industry and uncertainty as to when the beginning of a
sustainable recovery may occur. In addition, during the prior quarter, we completed our plans to exit the IMS facility in Beaverton, Oregon and consolidated the remaining employees into our Hillsboro, Oregon facility. These actions resulted in
special charges of approximately $1.4 million of which the majority was paid out in cash during the first quarter 2003.



In December 2002, we completed the acquisition of certain assets of SZ located in Amerang, Germany for approximately $4.7 million in cash.
In January 2003, we acquired Optonics, Inc. headquartered in Mountain View, California for approximately $21 million in an all-stock transaction. In February 2003, we acquired the net assets of CCC for $5.5 million in cash.



RECENT ACCOUNTING PRONOUNCEMENTS



In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 141, Business Combinations, or SFAS 141 and Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, or SFAS 142.



SFAS 141 supersedes APB Opinion No. 16, Business
Combinations, and eliminates the pooling-of-interests method of accounting for business combinations, thus requiring that all business combinations be accounted for using the purchase method. In addition, in applying the purchase method, SFAS
141 changes the criteria for recognizing intangible assets other than goodwill and states that the following criteria should be considered in determining the classification of intangible assets: (1) whether the intangible asset arises from
contractual or other legal rights, or (2) whether the intangible asset is separable or dividable from the acquired entity and capable of being sold, transferred, licensed, rented, or exchanged. If neither criteria is met, the intangible assets are
classified as goodwill and are not amortized. We have applied the requirements of SFAS 141 to all business combinations initiated after June 30, 2001 including our purchase of Optonics, Inc. during the quarter ended January 31,2003.



In the quarter ended April 30, 2003, the Company completed the
first step of the transitional goodwill impairment test and has determined that no potential impairment exists as of April 30, 2003. The first step is a review for potential impairment, while the second step measures the amount of the impairment, if
any. As a result, we have recognized no transitional impairment loss in the first six month of fiscal 2003 in connection with the adoption of SFAS No. 142. However, no assurances can be given that future evaluations of goodwill will not result in
charges as a result of future impairment. We will evaluate goodwill at least on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flow.



In August 2001, the FASB issued Statements of
Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, or SFAS 144. SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of  and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. SFAS 144 establishes a single accounting model for assets to be disposed of by sale whether previously held and used or newly acquired.
SFAS No. 144 retains the provisions of APB No. 30 for presentation of discontinued operations in the income statement, but broadens the presentation to include a component of an entity. We have adopted SFAS 144 effective November 1, 2002. The
adoption did not have a material impact on the Companys financial position or results of operations.



19



---

##### Table of Contents



In July 2002,
the FASB approved Statement of Financial Accounting Standards No. 146 Accounting for Costs Associated with Exit or Disposal Activities, or SFAS 146. SFAS 146 addresses the financial accounting and reporting for obligations associated
with an exit activity, including restructuring, or with a disposal of long-lived assets. Exit activities include, but are not limited to, eliminating or reducing product lines, terminating employees and contracts and relocating manufacturing
facilities or personnel. SFAS 146 specifies that a company will record a liability for a cost associated with an exit or disposal activity only when that liability is incurred and can be measured at fair value. Therefore, commitment to an exit plan
or a plan of disposal expresses only managements intended future actions and, therefore, does not meet the requirement for recognizing a liability and the related expense. SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002. The effect of adoption of SFAS 146 is dependent on our related activities subsequent to the date of adoption.



In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue
No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. We are currently evaluating the effect that the adoption of EITF Issue No. 00-21 will have on our results of operations and financial condition.



20



---

##### Table of Contents



RISK FACTORS



Our operating results have fluctuated significantly
which has and may continue to adversely affect our stock price.



LOGO



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



| |  |  | worldwide economic conditions in the semiconductor industry in general and the capital equipment industry specifically;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



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



| |  |  | timing of new product announcements and new product releases by us or our competitors;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | market acceptance of our new products and enhanced versions of existing products;
| | - |  | ---------------------------------------------------------------------------------



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



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



| |  |  | labor and materials supply constraints;
| | - |  | ---------------------------------------



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



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



| |  |  | expenses associated with acquisitions and alliances;
| | - |  | ----------------------------------------------------



| |  |  | operating expense reductions associated with cyclical industry downturns, including costs relating to
| | - |  | -----------------------------------------------------------------------------------------------------



21



---

##### Table of Contents

facilities consolidations and related expenses;



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



| |  |  | natural disasters, political and economic instability, currency fluctuations, regulatory changes and outbreaks of hostilities and of SARS, especially in Asia;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to attract and retain qualified employees in a competitive market; and
| | - |  | ----------------------------------------------------------------------------------



| |  |  | unexpected delays in completion of our IT outsourcing project.
| | - |  | --------------------------------------------------------------



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



| |  |  | manufacturing inefficiencies;
| | - |  | -----------------------------



| |  |  | long-term pricing reductions by us and our competitors and pricing by our suppliers;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | hardware and software product sales mix;
| | - |  | ----------------------------------------



| |  |  | inventory write-downs;
| | - |  | ----------------------



| |  |  | manufacturing volumes;
| | - |  | ----------------------



| |  |  | new product introductions;
| | - |  | --------------------------



| |  |  | product reliability;
| | - |  | --------------------



| |  |  | absorption levels and the rate of capacity utilization;
| | - |  | -------------------------------------------------------



| |  |  | customization and reconfiguration of systems;
| | - |  | ---------------------------------------------



| |  |  | international and domestic sales mix and field service margins; and
| | - |  | -------------------------------------------------------------------



| |  |  | facility relocations and closures.
| | - |  | ----------------------------------



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 inventory write-downs, sales allowances, product warranty costs, and deferred revenue, we cannot be certain that our estimates will be adequate.



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



| |  |  | research and development;
| | - |  | -------------------------



| |  |  | support costs for the distribution channels;
| | - |  | --------------------------------------------



| |  |  | marketing and other expenses for new products;
| | - |  | ----------------------------------------------



| |  |  | capital equipment purchases and world-wide training; and
| | - |  | --------------------------------------------------------





22



---

##### Table of Contents



| |  |  | customer support and service.
| | - |  | -----------------------------



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



The semiconductor industry has been cyclical.



Our revenue growth has been materially adversely affected by the cyclical downturn in the semiconductor
industry and its resulting impact upon the semiconductor equipment sector. There is uncertainty as to if and when the next cyclical growth phase will occur. Our belief regarding the downturn is based on weakened order activity, order cancellation
activity, and customer-requested shipment delays from our existing backlog. This business weakness is worldwide, but we see it in particular with customers in Asia. Until such time as we return to a growth period, we expect a continuing volatility
in order activity. We anticipate revenue levels to continue to remain under pressure throughout fiscal 2003 due to the prolonged cyclical downturn and uncertainty over the start of the next cyclical growth phase. Revenues may decline thereafter due
to the uncertainty of a sustainable recovery in the semiconductor and related capital equipment industry. As a result of the cyclical downturn, in fiscal 2001 we reduced our worldwide workforce by approximately 23%, or more than 400 people. In
fiscal 2002, we reduced our worldwide workforce by 21%, or about 245 people. In the first quarter of fiscal 2003 we reduced our worldwide workforce by approximately 70 people excluding the effect of the acquisitions. We took charges related to these
reductions in force of approximately $1.2 million in the first quarter of fiscal 2003, approximately $5.7 million in the fourth quarter of fiscal 2002, and approximately $3.2 million throughout fiscal 2001. Additionally, remaining employees were
required to take time off in the second, third and fourth quarters of fiscal 2001, as well as the first quarter of fiscal 2002 and fiscal 2003. In the third quarter of fiscal 2003 we reduced our worldwide workforce by approximately 170 people. Other
initiatives, including a temporary domestic and European pay cut during 2001 and 2002, a domestic salary realignment in 2003, a four-day work week for most manufacturing and some operating employees, the consolidation and reorganization of certain
functions and operations, and the curtailment of discretionary expenses, were also implemented. If we continue to reduce our workforce or adopt additional cost-saving measures, it may adversely impact our ability to respond rapidly to any renewed
growth opportunities in the future should they occur.



As a result of the rapid and steep decline in revenue during this latest downturn, we continue to monitor our inventory levels in light of product development changes and a possible eventual upturn. We recorded a charge of $9.4
million in the fourth fiscal quarter of 2002 for the write down of excess inventories. We may be required to take additional charges for excess and obsolete inventory if this prolonged industry downturn causes further reductions to our current
inventory valuations, or changes our current product development plans.



Our business and results of operations depend largely upon the capital expenditures of manufacturers of semiconductors and companies that specialize in contract packaging and/or testing of semiconductors. This includes
manufacturers and contractors that are opening new or expanding existing fabrication facilities or upgrading existing equipment, which in turn depend upon the current and anticipated market demand for semiconductors and products incorporating
semiconductors. The semiconductor industry has been highly cyclical with recurring periods of oversupply, which often has 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.



As a result of the cyclical downturn of the semiconductor industry, we have experienced shipment delays, delays in commitments and
restructured purchase orders by customers and we expect this activity to continue. In addition, we believe that fears surrounding SARS have contributed to slower bookings in the semiconductor industry. 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 continue to be materially adversely affected by any factor materially adversely affecting the semiconductor industry in general or particular segments within the semiconductor industry.



We have a limited backlog and obtain most of our net sales from products
that typically range in price from $0.2 million to $2 million, which can result in fluctuations of quarterly results.



Other than certain memory products and software products, for which the price range is typically below $50,000, we obtain most of our net
sales from the sale of a relatively few number of systems that typically range in price from $0.2 million to $2.0 million. This has resulted and could continue to result in our net sales and operating results for a particular period being
significantly impacted by the timing of recognition of revenue from a single transaction. Our net sales and operating results for a particular period could also be materially adversely affected if an anticipated order from just one customer is not
received in time



23



---

##### Table of Contents

to permit shipment during that period. Backlog at the beginning of a quarter typically does not include all orders necessary to achieve our
sales objectives for that quarter. Orders in backlog are subject to cancellation, delay, deferral or rescheduling by customers with limited or no penalties. Throughout fiscal 2001 to the present, we have experienced customer-requested shipment
delays and order cancellations, and we believe it is probable that orders will be canceled in the future. Consequently, our quarterly net sales and operating results have in the past, and will in the future, depend upon our obtaining orders for
systems to be shipped in the same quarter in which the order is received.



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



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



We may continue to experience delays in development, introduction, production in volume, and recognition of revenue from sales of our products.



We have in the past experienced significant delays in the introduction, volume production and sales of our
new systems and related feature enhancements. In the past, we experienced significant delays in the introduction of our Octet, ValStar 2000 and Kalos series testers as well as certain enhancements to our other testers. The Octet tester was first
shipped in October 2002 and at this time there are a small number of systems in the field undergoing evaluation by customers. No revenue has been recognized on the Octet product. These delays have been primarily related to our inability to
successfully complete product hardware and software engineering within the time frame originally anticipated, including design errors and redesigns of ICs. As a result, some customers have experienced significant delays in receiving and using our
testers in production. In addition, under our revenue recognition policy that is in accordance with SAB 101, we defer revenue for transactions that involve newly introduced products or when customers specify acceptance criteria that cannot be
demonstrated prior to the shipment. This results in a delay in the recognition of revenue as compared to the historic norm of generally recognizing revenue upon shipment. We introduced several new systems and products during fiscal 2002.Revenues from sales of those new systems and products may be deferred until the revenue recognition requirements of our revenue recognition policy are satisfied. Delays in introducing a product or delays in our ability to obtain customer
acceptance, if they occur in the future, will delay the recognition of revenue and gross profit by us. We cannot be certain that these or additional difficulties will not continue to arise or that delays will not continue to materially adversely
affect customer relationships and future sales. Moreover, we cannot be certain that we will not encounter these or other difficulties that could delay future introductions or volume production or sales of our systems or enhancements and related
software tools. In the past, we have incurred and we may continue to incur substantial unanticipated costs to ensure the functionality and reliability of our testers and to increase feature sets. If our systems continue to have reliability, quality
or other problems, or the market perceives our products to be feature deficient, we may continue to suffer reduced orders, higher manufacturing costs, delays in collecting accounts receivable and higher service, support and warranty expenses, and/or
inventory write-offs, among other effects. Our failure to have a competitive tester and related software tools available when required by a customer could make it substantially more difficult for us to sell testers to that customer for a number of
years. We believe that the continued acceptance, volume production, timely delivery and customer satisfaction of our newer digital, mixed signal and non-volatile memory testers are of critical importance to our future financial results.As a
result, our inability to correct any technical, reliability, parts shortages or other difficulties associated with our systems or to manufacture and ship the systems on a timely basis to meet customer requirements could damage our relationships with
current and prospective customers and would continue to materially adversely affect our business, financial condition and results of operations.



Competition in the ATE market requires rapid technological enhancements and new products and services.



Our ability to compete in the ATE market depends upon our
ability to successfully develop and introduce new hardware and software products and enhancements and related software tools with enhanced features on a timely and cost-effective basis, including products under development internally as well as
products obtained in acquisitions. Our customers require testers and software products with additional features and higher performance and other capabilities. Therefore, it is necessary for us to enhance the performance and other capabilities of our
existing systems and software products and related software tools, or develop new systems and software products and related software tools, to adequately address these requirements. Any success we



24



---

##### Table of Contents

may have in developing new and enhanced systems and software products and new features to our existing systems and software products will
depend upon a variety of factors, including:



| |  |  | product selection;
| | - |  | ------------------



| |  |  | timely and efficient completion of product design;
| | - |  | --------------------------------------------------



| |  |  | implementation of manufacturing and assembly processes;
| | - |  | -------------------------------------------------------



| |  |  | successful coding and debugging of software;
| | - |  | --------------------------------------------



| |  |  | product performance;
| | - |  | --------------------



| |  |  | reliability in the field; and
| | - |  | -----------------------------



| |  |  | effective worldwide 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. If we introduce new products, existing customers may curtail purchases of the older products and delay new
product purchases. In addition, weakness in IC demand may cause integrated device manufacturers, or IDMs, to curtail or discontinue the outsourcing of testing to test houses, relying instead on in-house testing. Because less of our market share is
from the IDMs, this trend may reduce the demand for our products. Any decline in demand for our hardware or software products could have a materially adverse effect on our business, financial condition or results of operations.



The fluctuations in our sales and operations have placed and are continuing
to place a considerable strain on our management, financial, manufacturing and other resources.



Over the last several years we have experienced significant fluctuations in our operating results. In the first six months of fiscal 2003
our net sales increased by 8% from those recorded in the first six months of fiscal 2002; however, in fiscal 2002, our net sales fell 45.6% from those recorded in fiscal 2001 as the semiconductor industry continued in a steep cyclical downturn. In
fiscal 2002, we generated revenue of $34.6 million in the first quarter and $43.2 million in the fourth quarter an increase of 24.7%. In fiscal 2001, we generated revenue of $136.3 million in the first quarter and $37.0 million in the fourth
quarter, a decrease of 72.9%. In fiscal 2000, we generated revenue of $136.3 million in the first quarter and $221.7 million in the fourth quarter, an increase of 62.7%. Since 1993, except for the recent and current cost-cutting efforts and those
during fiscal 1998 and the first half of fiscal 1999, we have overall significantly increased the scale of our operations to support periods of generally increased sales levels and expanded product offerings and have expanded operations to address
critical infrastructure and other requirements, including the hiring of additional personnel, significant investments in research and development to support product development, acquisition of the new facilities in Oregon and California, further
investments in our ERP system and numerous acquisitions. These fluctuations in our sales and operations have placed and are continuing to place a considerable strain on our management, financial, manufacturing and other resources. In order to
effectively deal with the changes brought on by the cyclical nature of the industry, we have been required to implement and improve a variety of highly flexible operating, financial and other systems, procedures and controls capable of expanding, or
contracting consistent with our business. However, we cannot be certain that any existing or new systems, procedures or controls, including our ERP system, will be adequate to support fluctuations in our operations or that our systems, procedures
and controls will be cost-effective or timely. Any failure to implement, improve and expand or contract such systems, procedures and controls efficiently and at a pace consistent with our business could have a material adverse effect on our
business, financial condition or results of operations.



We
are continuing to invest significant resources in the expansion of our product lines and there is no certainty that our net sales will increase or remain at historical levels or that new products will contribute to revenue growth.



We are currently devoting and intend to continue to devote
significant resources to the development, production and commercialization of new products and technologies. During fiscal 2001, we primarily introduced products that are either evolutions or derivatives of existing products. During fiscal 2002, we
introduced several products that are evolutions or derivatives of existing products as well as products that are largely new. Under our revenue recognition policy adopted in accordance with SAB 101, we defer revenue for transactions that involve
newly introduced products or when customers specify



25



---

##### Table of Contents

acceptance criteria that cannot be demonstrated prior to the shipment. This results in a delay in the
recognition of revenue as compared to the historic norm of recognizing revenue upon shipment. Product introduction delays, if they occur in the future, will delay the recognition of revenue and gross profit and may result in delayed cash receipts by
us that could materially adversely affect our business, financial condition and results of operations We invested and continue to invest significant resources in plant and equipment, purchased and leased facilities, inventory, personnel and other
costs to begin or prepare to increase production of these products. A significant portion of these investments will provide the marketing, administration and after-sales service and support required for these new hardware and software products.
Accordingly, we cannot be certain that gross profit margin and inventory levels will not continue to be materially adversely affected by delays in new product introductions or start-up costs associated with the initial production and installation of
these new product lines. We also cannot be certain that we can manufacture these systems per the time and quantity required by our customers. The start-up costs include additional manufacturing overhead, additional inventory and warranty reserve
requirements and the enhancement of after-sales service and support organizations. In addition, the increases in inventory on hand for new product development and customer support requirements have increased and will continue to increase the risk of
significant inventory write-offs. We cannot be certain that our net sales will increase or remain at historical levels or that any new products will be successfully commercialized or contribute to revenue growth or that any of our additional costs
will be covered.



The ATE industry is intensely competitive
which can adversely affect our ability to maintain our current net sales and our revenue growth.



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



We face substantial competition from ATE manufacturers throughout the world, as well as several of our
customers. We do not currently compete in the production testing of high-end microprocessors, or DRAMs. Moreover, a substantial portion of our net sales is derived from sales of mixed-signal testers. Many competitors have substantially greater
financial and other resources with which to pursue engineering, manufacturing, marketing and distribution of their products. Certain competitors have introduced or announced new products with certain performance or price characteristics equal or
superior to products we currently offer. These competitors have 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 products. 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.



We may not be able to
deliver custom hardware options and software applications to satisfy specific customer needs in a timely manner.



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



26



---

##### Table of Contents



We rely on Spirox
Corporation and its customers in Taiwan for a significant portion of our revenues and the termination of this distribution relationship would materially adversely affect our business.



Spirox Corporation, a distributor in Taiwan that sells to end-user customers in Taiwan and China, accounted
for approximately 20%, 20% and 13% of our net sales in the first six months of fiscal 2003 and in fiscal years 2002 and 2001, respectively. Our agreement with Spirox has no minimum purchase commitment and can be terminated for any reason on 180 days
prior written notice. Consequently, our business, financial condition and results of operations could be materially adversely affected by the loss of or any reduction in orders by Spirox, any termination of the Spirox relationship, or any
significant Spirox customer, including the potential for reductions in orders by assembly and tester service companies which that customer may utilize or reductions due to continuing or other technical, manufacturing or reliability problems with our
products or continued slow-downs in the semiconductor industry or in other industries that manufacture products utilizing semiconductors. Our ability to maintain or increase sales levels in Taiwan will depend upon:



| |  |  | our ability with Spirox to obtain orders from existing and new customers;
| | - |  | -------------------------------------------------------------------------



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



| |  |  | our ability to timely complete the development of our new hardware and software products;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Spirox and its end-user customers financial condition and success;
| | - |  | -------------------------------------------------------------------



| |  |  | general economic conditions; and
| | - |  | --------------------------------



| |  |  | our ability to meet increasingly stringent customer performance and other requirements and shipment delivery dates.
| | - |  | -------------------------------------------------------------------------------------------------------------------



Our long and variable sales cycle depends upon factors outside of our
control and could cause us to expend significant time and resources prior to earning associated revenues.



Sales of our systems depend in part upon the decision of semiconductor manufacturers to develop and manufacture new semiconductor devices
or to increase manufacturing capacity. As a result, sales of our products are subject to a variety of factors we cannot control. The decision to purchase our products 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, including a risk that our competitors may compete for the sale, a further downturn in the economy or other economic factors causing our customers to withdraw their orders or a change in technological requirements of the customer.
As a result, our business, financial condition and results of operations would be materially adversely affected by our long and variable sales cycle and the uncertainty associated with expending substantial funds and effort with no guarantee that a
sale will be made.



When we engage in acquisitions, we will
incur a variety of costs, and the anticipated benefits of the acquisitions may never be realized.



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



In addition, acquisitions involve numerous other
risks, including:



| |  |  | difficulties assimilating the domestic and international operations, personnel, technologies, sales channels and products of the acquired companies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | diversion of our managements attention from other business concerns;
| | - |  | ---------------------------------------------------------------------



| |  |  | increased complexity and costs associated with international and domestic internal management structures;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | risks of entering markets in which we have no or limited experience; and
| | - |  | ------------------------------------------------------------------------



27



---

##### Table of Contents



| |  |  | the potential loss of key employees or key business relationships of the acquired companies.
| | - |  | --------------------------------------------------------------------------------------------



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



Changes to financial accounting standards may affect our reported results of operations.



We prepare our financial statements to conform to generally accepted accounting principles, or GAAP. GAAP are subject to interpretation by
the American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our reported results and may even affect
our reporting of transactions completed before a change is announced. Accounting rules affecting many aspects of our business, including rules relating to purchase and pooling-of-interests accounting for business combinations, asset impairment,
revenue recognition, employee stock purchase plans and stock option grants have recently been revised or are currently under review. Changes to those rules or current interpretation of those rules may have a material adverse effect on our reported
financial results or on the way we conduct our business. For example, effective November 1, 1999, we changed our method of accounting for systems revenue based on guidance provided in SAB 101. Adoption of SAB 101 required us to restate our quarterly
results for the seven fiscal quarters ended July 31, 2001 (see Note 1 of the Notes to the Consolidated Financial Statements in the Annual Report on Form 10-K for the fiscal year ended October 31, 2002 for further discussion). In addition, the
preparation of our 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.



Also, on June 29, 2001, the Financial Accounting Standards
Board (FASB) pronounced under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142) that purchased goodwill should not be amortized, but rather, it should be periodically
reviewed for impairment. Such impairment could be caused by internal factors as well as external factors beyond our control. The FASB has further determined that at the time goodwill is considered impaired an amount equal to the impairment loss
should be charged as an operating expense in the statement of operations. The timing of such an impairment (if any) of goodwill acquired in past and future transactions is uncertain and difficult to predict. Our results of operations in periods
following any such impairment could be materially adversely affected.



In addition, there has been an ongoing public debate whether employee stock option and employee stock purchase plans shares should be treated as a compensation expense and, if so, how to properly value such charges. If we
were to elect or were required to record and expense for our stock-based compensation plans using the fair value method, we could have significant compensation charges. Although we are currently not required to record any compensation expense using
the fair value method in connection with option grants that have an exercise price at or above fair market value and for shares issued under our employee stock purchase plan, it is possible that future laws or regulations will require us to treat
all stock-based compensation as a compensation expense using the fair value method. See Note 3 to the Condensed Consolidated Financial Statements for a discussion of stock-based compensation.



Our executive officers and certain key personnel are critical to our
business.



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



28



---

##### Table of Contents



Our international business
exposes us to additional risks.



International sales accounted for approximately 62%, 55%, and 61% of our total net sales for the first six months of fiscal 2003 and fiscal 2002 and 2001, respectively. We anticipate that international sales will continue to account
for a significant portion of our total net sales in the foreseeable future. These international sales will continue to be subject to certain risks, including:



| |  |  | changes in regulatory requirements;
| | - |  | -----------------------------------



| |  |  | tariffs and other barriers;
| | - |  | ---------------------------



| |  |  | political and economic instability;
| | - |  | -----------------------------------



| |  |  | the adverse effect of fears surrounding SARS on our business and sales and that of our customers, especially in Taiwan, Hong Kong and China;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an outbreak of hostilities in markets where we sell our products including Korea and Israel;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | integration and management of foreign operations of acquired businesses;
| | - |  | ------------------------------------------------------------------------



| |  |  | foreign currency exchange rate fluctuations;
| | - |  | --------------------------------------------



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



| |  |  | potentially adverse tax consequences; and
| | - |  | -----------------------------------------



| |  |  | the 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 and software products. We cannot predict whether the import and export of our products will be adversely affected by changes in or new 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 46%, 42% and 38% of our total net sales in the first six months of fiscal 2003 and fiscal years 2002 and 2001, respectively, and thus demand for our products is subject to the risk of economic instability in that region
and fears surrounding SARS and could continue to be materially adversely affected. Countries in the Asia-Pacific region, including Korea and Japan, have experienced weaknesses in their currency, banking and equity markets in the recent past. These
weaknesses could continue to adversely affect demand for our products, the availability and supply of our product components and our consolidated results of operations. Further, many of our customers in the Asia-Pacific region built up capacity in
ATE during fiscal 2000 in anticipation of a steep ramp up in wafer fabrication. However, this steep ramp up in output has not fully materialized leaving some customers with excess capacity.



Two end-user customers headquartered in Europe accounted for
approximately 13% and 11%, respectively, of our net sales in fiscal 2001 and one end-user customer headquartered in Taiwan accounted for 17% of our net sales in fiscal 2000. No single foreign end-user customer accounted for more than 10% of our net
sales in fiscal 2002 or in the first six months of 2003.



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



If the protection of proprietary rights is inadequate, our business could be harmed.



We attempt to protect our intellectual property rights through patents, copyrights, trademarks, maintenance of trade secrets and other
measures, including entering into confidentiality agreements. However, we cannot be certain that others will not independently develop substantially equivalent intellectual property or that we can meaningfully protect our intellectual property. Nor
can we be certain that our patents will not be invalidated, deemed unenforceable, circumvented or challenged, or that the rights granted thereunder will provide us with competitive advantages, or that any of our pending or future patent applications



29



---

##### Table of Contents

will be issued with claims of the scope we seek, if at all. Furthermore, we cannot be certain that others
will not develop similar products, duplicate our products or design around our patents, or that foreign intellectual property laws, or agreements into which we have entered will protect our intellectual property rights. Inability or failure to
protect our intellectual property rights could have a material adverse effect upon our business, financial condition and results of operations. In addition, from time to time we encounter disputes over rights and obligations concerning intellectual
property, including disputes with parties with whom we have licensed technologies. We cannot assume that we will prevail in any such intellectual property disputes. We have been involved in extensive, expensive and time-consuming reviews of, and
litigation concerning, patent infringement claims.



Our
business may be harmed if we are found to infringe proprietary rights of others.



We have at times been notified that we may be infringing intellectual property rights of third parties and we have litigated patent infringement claims in the past. We expect to continue to receive
notice of such claims in the future. We cannot be certain of the success in defending patent infringement claims or claims for indemnification resulting from infringement claims.



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



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



We may be materially adversely affected by legal proceedings.



We have been and may in the future be subject to various legal proceedings, including claims that involve
possible infringement of patent or other intellectual property rights of third parties. It is inherently difficult to assess the outcome of litigation matters, and there can be no assurance that we will prevail in any litigation. Any such litigation
could result in substantial cost and diversion of our efforts, which by itself could have a material adverse effect on our financial condition and operating results. Further, adverse determinations in such litigation could result in loss of our
property rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties or prevent us from manufacturing or selling our products, any of which could materially adversely affect our business, financial
condition or results of operations.



There are limitations on
our ability to find the supplies and services necessary to run our business.



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



30



---

##### Table of Contents



Terrorist attacks,
terrorist threats, geopolitical instability and government responses thereto, may negatively impact all aspects of our operations, revenues, costs and stock price.



The terrorist attacks in September 2001 in the United States and ensuing events and the resulting decline in
consumer confidence has had a material adverse effect on the economy. If consumer confidence does not recover, our revenues and profitability will continue to be adversely impacted in fiscal 2003 and beyond.



In addition, any similar future events may disrupt our
operations or those of our customers and suppliers. Our markets currently include Korea and Israel, which are experiencing instability. In addition, these events have had and may continue to have an adverse impact on the U.S. and world economy in
general and consumer confidence and spending in particular, which could harm our sales. Any of these events could increase volatility in the U.S. and world financial markets, which could harm our stock price and may limit the capital resources
available to us and our customers or suppliers. This could have a significant impact on our operating results, revenues and costs and may result in increased volatility in the market price of our common stock.



Recently enacted and proposed changes in securities laws and regulations
are likely to increase our costs.



The
Sarbanes-Oxley Act of 2002 that became law in July 2002 requires changes in some of our corporate governance and securities disclosure or compliance practices. That Act also requires the SEC to promulgate new rules on a variety of subjects, in
addition to rule proposals already made, and Nasdaq has proposed revisions to its requirements for companies that are Nasdaq-listed. We expect these developments to increase our legal compliance costs, and to make some activities more difficult,
such as stockholder approval of new option plans. We expect these developments to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur
substantially higher costs to obtain coverage. These developments could make it more difficult for us to attract and retain qualified members of our board of directors, or qualified executive officers. We are presently evaluating and monitoring
regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result.



We are subject to anti-takeover provisions that could delay or prevent an acquisition of our company.



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



31



---

##### Table of Contents



ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We maintain a strict investment policy that ensures the safety and preservation of its invested
funds by limiting default risk, market risk, and reinvestment risk. Our investments consist primarily of commercial paper, medium term notes, asset backed securities, U.S. 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 our investment portfolio (in thousands, except percent
amounts):



|                            |  | Balance at 10/31/02 |         |   | Future maturities of investments held at April 30, 2003
|--------------------------- |  | ------------------- | ------- | - | -------------------------------------------------------
|                            |  |                     | 2003    |   |                                                        
|Cash equivalents            |  |                     |         |   |                                                        
|Fixed rate                  |  | $                   | 50,192  |   |                                                        
|Average rate                |  |                     | 2.07    | % |                                                        
|Short term investments      |  |                     |         |   |                                                        
|Fixed rate                  |  | $                   | 82,223  |   |                                                        
|Average rate                |  |                     | 4.98    | % |                                                        
|Long term investments       |  |                     |         |   |                                                        
|Fixed rate                  |  | $                   | 108,231 |   |                                                        
|Average rate                |  |                     | 4.56    | % |                                                        
|                            |  |                     |         |   |                                                        
|Total investment securities |  | $                   | 240,646 |   |                                                        
|Average rate                |  |                     | 4.19    | % |                                                        
|Equity instruments          |  | $                   | 1,016   |   |                                                        



We
mitigate default risk by attempting to invest in high credit quality securities and by constantly positioning our 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 level of diversification.



ITEM 4.
CONTROLS AND PROCEDURES



Within 90 days prior to the filing date of this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective in timely alerting management to material information relating to the Company that is required to be included in our periodic filings with the Securities and Exchange
Commission. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out our evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.



PART
II.OTHER INFORMATION



Item 1.    Legal Proceedings



In April 2002, Reptron Electronics, Inc. a supplier of certain electronic components to us, filed a complaint in the U.S. District Court for the District of Oregon, alleging that we had breached a
contract to purchase certain components ordered by Reptron during 2000. The complaint seeks damages of approximately $3.9 million. In November 2002, the court set the trial for this action for July 15, 2003.



We are involved in other various claims arising in the
ordinary course of business, none of which, in the opinion of management, if determined adversely against us, will have a material adverse effect on our business, financial condition or results of operations.



32



---

##### Table of Contents



Item
2.    
Changes in Securities



None



Item 3.    
Defaults upon Senior Securities



None



Item 4.    
Submission of Matters to a Vote of Security Holders



Our stockholders voted upon the following proposals at the Annual Meeting of Stockholders held on March 19, 2003.



1. A proposal to elect one director to serve for a three-year term ending in 2006 or until a successor is
elected and qualified, was approved as follows:



Henk J. Evenhuis



For 52,862,284,
Withheld 2,401,861



2. A proposal to approve an
amendment to our 1993 Stock Option Plan which would prohibit us from repricing options granted under the 1993 Plan without the prior approval of our stockholders, amend the automatic grant program in effect for non-employee Board members 65 years of
age or older who retire from, or otherwise cease, Board service after the completion of nine or more years of service to: (i) accelerate the vesting of all options granted and (ii) allow a one-year period following cessation of Board service in
which to exercise those vested options, and establish a stock issuance program under the 1993 Plan under which we may make direct stock issuances, which issuances may not exceed ten percent of the total number of shares eligible for issuance under
the 1993 Plan and which may be fully vested or subject to vesting based on the grantees service with us or attainment of specific performance objectives, provided that a minimum of three years service shall be required if service is required
as the condition to vesting. This proposal was approved as follows:



For 26,128,444, Against 19,233,033, Abstain 1,527,200



3. A proposal to ratify the appointment of Ernst & Young LLP as our independent auditors was approved as follows:



For 50,898,336, Against 4,337,359, Abstain 28,450



Item 5.    
Other Information



Subsequent events



In May
2003, we announced the offering of $150 million of convertible subordinated notes due in 2008. The notes will bear interest at a rate of 1.5 percent per annum and are convertible into our common stock at a conversion price of $11.31 per share. The
notes will be subordinate to all our present and future senior debt. The initial purchaser of the notes also is being granted an option to purchase up to an additional $30 million principal amount of the notes. We expect to use the net proceeds of
the offering for general corporate purposes, including working capital and potential acquisitions.



In May 2003, we announced headcount reductions, office closures, and the adoption of other cost-cutting measures as part of a continuing
effort to reduce expenses. The reduction of force includes the elimination of approximately 170 positions or 14 percent of our global employee base. Approximately 160 positions in the United States will be affected, with the remaining reduction in
other locations worldwide. In the second quarter, we also made a decision to outsource much of our information technology function for which we will incur incremental costs during the transition period. We estimate the above actions will result in a
restructure charge during the third quarter of fiscal 2003 in the range of at least $3 million to $5 million.



Item 6.    
Exhibits and Reports on Form 8-K



| | (a) |  | See Exhibit Index on page 37.
| | --- |  | -----------------------------



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



None



33



---

##### Table of Contents



SIGNATURES



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



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



| |  |              |  | 
| |  | ------------ |  | 
|
| |  | May 30, 2003 |  | 
| |  | Date         |  | 





34



---

##### Table of Contents



CERTIFICATION



I, Graham J. Siddall
certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Credence Systems Corporation;
|-- |  | -----------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: May 30, 2003

/s/    GRAHAM J.
SIDDALLGraham J. Siddall, Chairman of the Board and Chief Executive Officer






35



---

##### Table of Contents



CERTIFICATION



I, John R. Detwiler,
certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Credence Systems Corporation;
|-- |  | -----------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: May 30, 2003



/s/    JOHN R.
DETWILERJohn R. Detwiler, Senior Vice President and Chief Financial Officer




36



---

##### Table of Contents



EXHIBIT
INDEX

|Exhibit Number |  |                                                                                                                          
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------
|3.1(1)         |  | Amended and Restated Certificate of Incorporation of the Company                                                         
|              
|3.2(2)         |  | Amended and Restated Bylaws of the Company, as currently in
effect                                                       
|              
|4.1(3)         |  | Form of Rights Agreement dated as of June 1, 1998 by and between the Company and
Equiserve Trust Company, N.A.           
|              
|4.2(3)         |  | Form of Certificate of Designation for the Series A Junior Participating Preferred
Stock of the Company                  
|              
|4.3(3)         |  | Form of Rights Certificate                                                                                               
|              
|10.1           |  | 1993 Stock Option Plan, as Amended and Restated through March 19,
2003                                                   
|              
|99.1           |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002   
|              
|99.2           |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Action of 2002

---

|(1) |  | Incorporated by reference to an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2000
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Incorporated by reference to an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2002
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | Incorporated by reference to an exhibit to the Companys Current Report on Form 8-K as filed with the Commission on June 3, 1998
|--- |  | --------------------------------------------------------------------------------------------------------------------------------





37