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 July 31, 1999
                                                        OR

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

For the transition period from          to

                         Commission file number 0-22366

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


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


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

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

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

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

     At  September 8, 1999,  there were  21,722,791  shares of the  Registrant's
common stock, $0.001 par value per share, outstanding.


<PAGE>

CREDENCE SYSTEMS CORPORATION

                           INDEX                                        PAGE NO.



PART I.    FINANCIAL INFORMATION
Item 1.    Financial Statements.....................................      3
           Condensed Consolidated Balance Sheets....................      3
           Condensed Consolidated Statements of Operations..........      4
           Condensed Consolidated Statements of Cash Flows..........      5
           Notes to Condensed Consolidated Financial Statements.....      6
Item 2.    Management's Discussion and Analysis of Financial
           Condition and Results of Operations......................      8

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


                                       2
<PAGE>

PART I  - FINANCIAL INFORMATION

Item I  - Financial Statements

                          CREDENCE SYSTEMS CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

<TABLE>
<CAPTION>

                                                 July 31,         October 31,
                                                   1999             1998a
                                              --------------     --------------
<S>                                           <C>                 <C>
ASSETS                                       (unaudited)
Current assets:
  Cash and cash equivalents................   $  66,066          $  48,391
  Restricted cash..........................         -                2,400
  Short-term investments...................      52,810             62,777
  Accounts receivable, net.................      47,091             33,901
  Inventories..............................      35,822             37,406
  Other current assets.....................      27,115             40,676
                                            --------------     ---------------
    Total current assets...................     228,904            225,551
Long-term investments......................      26,381             20,357
Property and equipment, net................      42,396             41,764
Other assets...............................      16,055             18,517
                                            ==============     ===============
    Total assets...........................     $313,736           $306,189
                                            ==============     ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................  $   20,616          $   8,090
  Accrued liabilities.......................      24,495             26,978
  Income taxes payable......................       5,291              5,877
    Total current liabilities...............      50,402             40,945
Convertible Subordinated Notes..............      96,610            115,000
Minority interest...........................         175                227
Stockholders' equity........................     166,549            150,017
                                             ==============     ===============
    Total liabilities and stockholders' equity...$313,736           $306,189
                                             ==============     ===============
</TABLE>

                             See accompanying notes.

a)  Derived  from  the  audited  consolidated  balance  sheet  included  in  the
    Company's Form 10-K for the year ended October 31, 1998.


                                       3
<PAGE>


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

                                                                  Three Months Ended          Nine Months Ended
                                                                      July 31,                    July 31,
                                                               ----------------------      --------------------

                                                                   1999         1998         1999         1998
                                                                ---------     --------     --------      -------
<S>                                                             <C>            <C>         <C>            <C>

Net sales ..................................................   $  52,378    $  37,322    $ 116,968    $ 194,357
Cost of goods sold .........................................      24,826       16,901       59,103       84,003
Cost of goods sold - restructure and other .................        --         20,952         --         20,952
                                                               ---------    ---------    ---------    ---------
Gross margin ...............................................      27,552         (531)      57,865       89,402
Operating expenses:
   Research and development ................................       9,631       11,569       27,780       37,293
   Selling, general and administrative .....................      14,184       13,987       40,287       52,226
   Special charges .........................................        --         23,224        6,231       23,224
                                                               ---------    ---------    ---------    ---------
       Total operating expenses ............................      23,815       48,780       74,298      112,743
                                                               ---------    ---------    ---------    ---------
Operating income (loss) ....................................       3,737      (49,311)     (16,433)     (23,341)
Interest and other income (expenses), net ..................          (6)          (7)         (67)       1,151
                                                               ---------    ---------    ---------    ---------
Income (loss) before income tax provision (benefit) ........       3,731      (49,318)     (16,500)     (22,190)
Income tax provision (benefit) .............................       1,352      (15,682)      (5,948)      (6,458)
Minority interest (benefit) ................................          15          (50)         (31)        (124)
                                                               =========    =========    =========    =========
Net income (loss) before extraordinary items ...............       2,364      (33,586)     (10,521)     (15,608)
                                                               =========    =========    =========    =========
Gain on extinguishment of debt (net of taxes of $275 & $926)         488         --          1,646         --
                                                               ---------    ---------    ---------    ---------
Net income (loss) ..........................................   $   2,852    $ (33,586)   $  (8,875)   $ (15,608)
                                                               =========    =========    =========    =========
Net income (loss) per share
    Basic  (before extraordinary items) ....................   $    0.11    $   (1.55)   $   (0.51)   $   (0.72)
    Basic  (extraordinary items) ...........................   $    0.02         --      $    0.08         --
                                                               ---------    ---------    ---------    ---------
    Basic ..................................................   $    0.13    $   (1.55)   $   (0.43)   $   (0.72)
                                                               =========    =========    =========    =========
    Diluted  (before extraordinary items) ..................   $    0.11    $   (1.55)   $   (0.51)   $   (0.72)
    Diluted  (extraordinary items) .........................   $    0.02         --      $    0.08         --
                                                               ---------    ---------    ---------    ---------
    Diluted ................................................   $    0.13    $   (1.55)   $   (0.43)   $   (0.72)
                                                               =========    =========    =========    =========
Number of shares used in computing per share amount
    Basic ..................................................      21,257       21,674       20,874       21,726
                                                               =========    =========    =========    =========
    Diluted ................................................      22,116       21,674       20,874       21,726
                                                               =========    =========    =========    =========
</TABLE>



                             See accompanying notes.

                                       4
<PAGE>

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

                                                                                         Nine Months Ended July 31,
                                                                                        ---------------------------
                                                                                           1999        1998
<S>                                                                                        <C>        <C>
                                                                                        ---------    ---------
Cash flows from operating activities:
   Net (loss) ......................................................................   $  (8,875)   $ (15,608)
   Adjustments to reconcile net (loss) to net cash provided by operating activities:
      Depreciation and amortization ................................................      15,248       12,838
      Special charges ..............................................................       6,231       44,177
      Loss on disposal of property and equipment ...................................         333          149
         Deferred income taxes .....................................................        --        (11,512)
      Gain on extinguishment of debt ...............................................      (2,572)        --
      Minority interest ............................................................         (31)         124
      Changes in operating assets and liabilities:
         Restricted cash, accounts receivable, inventories and other current assets        1,701      (23,503)
         Accounts payable, accrued liabilities and income taxes payable ............       9,362        4,157
                                                                                       ---------    ---------
            Net cash provided by operating activities ..............................      21,397       10,822
Cash flows from investing activities:
   Purchases of available-for-sale securities ......................................     (69,114)    (135,080)
   Maturities of available-for-sale short-term securities ..........................      17,489       63,644
   Sales of available-for-sale securities ..........................................      55,568       11,977
   Acquisition of property and equipment ...........................................     (13,939)      (8,319)
   Other assets ....................................................................      (1,734)     (10,498)
                                                                                       ---------    ---------
         Net cash (used in) investing activities ...................................     (11,730)     (78,276)
Cash flows from financing activities:
   Issuance of common stock ........................................................       6,977        3,109
   Other ...........................................................................         (21)        --
    Issuance (purchase) of treasury stock ..........................................       1,052      (12,795)
                                                                                       ---------    ---------
         Net cash provided by (used in) financing activities .......................       8,008       (9,686)
                                                                                       ---------    ---------
Net increase (decrease) in cash and cash equivalents ...............................      17,675      (77,140)
Cash and cash equivalents at beginning of period ...................................      48,391      132,761
                                                                                       =========    =========
Cash and cash equivalents at end of period .........................................   $  66,066    $  55,621
                                                                                       =========    =========
Supplemental disclosures of cash flow information:
   Interest paid ...................................................................   $   3,018    $   3,103
   Income taxes refunded ...........................................................   $  19,357    $    --
   Income taxes paid ...............................................................   $    --      $  12,492
Non-cash investing activities:
   Net transfers of inventory to property and equipment ............................   $   2,654    $   7,427
Non-cash financing activities:
   Income tax benefit from stock option exercises ..................................   $   1,923    $     970
   Issuance of treasury stock for convertible subordinated notes ...................   $  15,433    $    --
   Exchange of convertible subordinated notes for common stock plus issuance costs..   $ (18,005)   $    --

</TABLE>

                             See accompanying notes.

                                       5
<PAGE>


              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.   Quarterly Financial Statements
     ------------------------------

     The condensed  consolidated  financial statements and related notes for the
periods ended July 31, 1999 and 1998 are  unaudited but include all  adjustments
(consisting solely of normal recurring adjustments) which are, in the opinion of
management,  necessary for a fair  presentation  of the  financial  position and
results of  operations  of the Company for the interim  periods.  The results of
operations  for the  periods  ended July 31,  1999 and 1998 are not  necessarily
indicative of the operating results to be expected for the full fiscal year. The
information  included  in this  report  should be read in  conjunction  with the
Company's audited  consolidated  financial  statements and notes thereto for the
fiscal year ended October 31, 1998 included in the Company's  most recent Annual
Report  on Form  10-K and the  additional  risk  factors  contained  herein  and
therein,  including,  without limitation,  risks relating to fluctuations in our
quarterly net sales and  operating  results,  limited  systems  sales,  backlog,
cyclicality of the  semiconductor  industry,  management of  fluctuations in our
operating  results,  expansion of our product lines,  limited sources of supply,
reliance on our subcontractors, highly competitive industry, rapid technological
change,  importance  of timely  product  introduction,  customer  concentration,
lengthy sales cycle,  risks associated with  acquisitions,  changes in financial
accounting  standards and  accounting  estimates,  dependence on key  personnel,
transition in our executive management, international sales, proprietary rights,
future capital needs, leverage,  year 2000 readiness disclosure,  and volatility
of our stock price and effects of certain anti-takeover provisions, as set forth
in this Report.  Any party  interested in reviewing a free copy of the Form 10-K
or the Company's other publicly  available  documents  should write to the Chief
Financial Officer of the Company.

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


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

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

                                              July 31,            October 31,
                                               1999                 1998
                                           -----------            -----------
                                             (unaudited)
              Raw materials                    $ 11,205             $  9,860
              Work-in-process                    19,095               21,609
              Finished goods                      5,522                5,937
                                            =============        =============
                                               $ 35,822              $37,406
                                            =============        =============

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

     Net income (loss) per basic share is based upon the weighted average number
of common shares  outstanding  during the period.  Net income (loss) per diluted
share is based upon the weighted average number of common and dilutive potential
common  shares  outstanding   during  the  period.  The  Company's   Convertible
Subordinated  Notes are not dilutive  potential common shares and,  accordingly,
were  excluded  from the  calculation  of net income  (loss) per diluted  share.
Options to purchase approximately 2,568,705 shares at an average price of $22.72
per share were  outstanding  at July 31,  1999.  Options are not included in the
computation of diluted net loss per share because  options are  antidilutive  in
periods when the Company incurs a net loss.



                                       6
<PAGE>

3.   Net Income (Loss) Per Share (continued)
     ---------------------------------------
<TABLE>
<CAPTION>

                                                               Three Months Ended              Nine Months Ended
                                                                    July 31,                       July 31,
                                                          -----------------------------  ------------------------------
                                                             1999             1998          1999             1998
                                                          ------------    -------------  ------------    --------------
<S>                                                        <C>              <C>             <C>           <C>

 Numerator:                                                         (in thousands, except per share amounts)
   Numerator for basic and diluted net income (loss)
   per share-net income (loss)                             $  2,852       $  (33,586)     $ (8,875)      $  (15,608)
                                                          ------------    ------------   ------------    ------------

 Denominator:
   Denominator for basic net income (loss)
   per share-weighted-average shares                         21,257          21,674         20,874          21,726

 Effect of dilutive securities-employee stock options           859             -              -               -
                                                          ------------    ------------   ------------    ------------

 Denominator for diluted earnings per share-adjusted
 weighted-average shares and assumed conversions             22,116          21,674         20,874          21,726
                                                          ------------    ------------   ------------    ------------
Basic net income (loss) per share$                             0.13        $  (1.55)      $  (0.43)       $  (0.72)
                                                          ============    ============   ============    ============
   Diluted net income (loss) per share                    $    0.13        $  (1.55)     $   (0.43)       $  (0.72)
                                                          ============    =============  ============    ==============
</TABLE>

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

     As  of  November  1,  1998  the  Company  adopted  Statement  of  Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS
130 established new rules for the reporting and display of comprehensive  income
(loss) and its components  including unrealized gains or losses on the Company's
available-for-sale  securities and foreign currency translation adjustments. For
the periods  ended July 31, 1999 and 1998,  total  comprehensive  income  (loss)
amounted to:
<TABLE>
<CAPTION>

                                                                Three Months Ended              Nine Months Ended
                                                                     July 31,                       July 31,
                                                            ----------------------------  ------------------------------
                                                               1999            1998           1999             1998
                                                            ------------   -------------   ------------    --------------
                                                                                  (in thousands)
<S>                                                          <C>             <C>             <C>             <C>

Net income (loss)                                            $ 2,852        $ (33,586)      $ (8,875)      $ (15,608)
  Other comprehensive income, net of tax:
    Foreign currency translation adjustment                        1              (18)            47             (98)

     Unrealized gain (loss) on available-for-sale securities    (799)            (131)          (369)             70
                                                            ------------   -------------   ------------    --------------
  Other comprehensive income (loss)                             (798)            (149)          (322)             (28)

                                                             $ 2,054         $ (33,735)      $ (9,197)      $ (15,636)
Total comprehensive income (loss)                           ============   =============   ============    ==============
</TABLE>


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

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



                                       7
<PAGE>

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

     During  the  third  fiscal  quarter  of  1999,  the  Company   recorded  an
extraordinary  gain of $ 488,000,  net of tax of  $275,000  on the  exchange  of
275,000  shares of the Company's  common stock held in treasury for an aggregate
of  $9,350,000  of its 5 1/4%  Convertible  Subordinated  Notes  due  2002  (the
"Notes"). For the nine month period ended July 31, 1999, the Company recorded an
extraordinary  gain of  $1,646,000,  net of tax of $926,000  on the  exchange of
603,000  shares of the Company's  common stock held in treasury for an aggregate
of $18.4 of its Notes.  The  Company may engage in similar  transactions  in the
future.

     For the nine month period ended July 31, 1999, the Company recorded special
charges of $6.2 million. These charges were primarily from costs relating to the
disposal of excess facilities and severance. As of July 31, 1999,  approximately
$2.4 million in accrued  liabilities related to special charges recorded in 1998
and  1999  remained  on the  Company's  balance  sheet,  representing  rent  and
settlement costs on excess  facilities.  These amounts will be paid out over the
next six months.

     In the third quarter of fiscal 1998, the Company  recorded  restructure and
other  costs  totaling  $39.4  million.  These  charges  were the  result of the
Company's  response to a major downturn in the business  outlook for the ATE and
related  semiconductor and semiconductor  equipment  industries which took place
during the period. Also in the third capital fiscal quarter of 1998, the Company
recognized  approximately  $4.8  million of  acquired  in-process  research  and
development  expense  related to the  acquisition  of certain assets and assumed
liabilities of Heuristic Physics Laboratories, Inc.

     As of July 31,  1999,  approximately  $2.4  million in accrued  liabilities
related to special  charges  recorded in 1998 and 1999 remained on the Company's
balance  sheet,  representing  rent and settlement  costs on excess  facilities.
These amounts will be paid out over the next six months.

7.     Subsequent Event - Acquisition of Opmaxx, Inc.
       ----------------------------------------------

     On July 20,  1999 the Company  announced  that it would be  exercising  its
right to acquire Opmaxx,  Inc. Opmaxx provides solutions for integrating design,
test and manufacturing of analog/mixed  signal systems.  The acquisition will be
accounted for in the fourth fiscal quarter of 1999 under the purchase  method of
accounting.  The acquisition was closed in September 1999 for approximately $8.0
million in cash and assumed liabilities.

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

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


                                       8
<PAGE>

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

<TABLE>
<CAPTION>

                                                                   Three Months Ended            Nine Months Ended
                                                                        July 31,                      July 31,
                                                               ---------------------------   ---------------------------
                                                                  1999           1998           1999           1998
                                                               ------------   ------------   ------------   ------------
                                                                        unaudited                    unaudited
<S>                                                             <C>              <C>           <C>              <C>

       Net sales.............................................     100.0%          100.0%        100.0%          100.0%
       Cost of goods sold....................................      47.4%           45.3%         50.5%           43.2%
          Cost of goods sold - restructure and other.........       -              56.1%          -              10.8%
                                                               ------------    ------------  ------------    ------------
       Gross margin..........................................      52.6%           (1.4%)        49.5%           46.0%
       Operating expenses
          Research and development...........................      18.4%           31.0%         23.8%           19.2%
          Selling, general, and administrative...............      27.1%           37.5%         34.4%           26.9%
          Special charges....................................       -              62.3%          5.3%           11.9%
                                                               ----------------------------------------------------------
             Total operating expenses........................      45.5%          130.8%         63.5%           58.0%

       Operating income (loss)...............................       7.1%         (132.2%)       (14.1%)         (12.0%)
       Interest and other income (expenses), net.............      (0.0)%           0.0%         (0.0%)           0.6%
                                                               ----------------------------  ----------------------------
       Income (loss) before income taxes.....................       7.1 %        (132.2%)       (14.1%)         (11.4%)
       Income taxes provision (benefit)......................       2.6%          (42.2%)        (5.1 %)         (3.3%)
       Minority interest.....................................       0.0%           (0.0%)        (0.0%)          (0.1%)
                                                                                                 %)
                                                               ----------------------------  ----------------------------
       Net income (loss) before extraordinary items..........       4.5%          (90.0%)        (9.0%)          (8.0%)
                                                               ============================  ============================

       Gain on extinguishment of debt........................       0.9%            -             1.4%            -

                                                               ------------    ------------  ------------    ------------
       Net income (loss).....................................       5.4%          (90.0%)        (7.6%)          (8.0%)
                                                               ============================  ============================
</TABLE>


                                       9
<PAGE>


RESULTS OF OPERATIONS

NET SALES

     Net sales consist of revenues from systems sales, spare parts,  maintenance
contracts and software products principally in the semiconductor  automatic test
equipment market ("ATE").  Net sales were $52.4 million for the third quarter of
fiscal  1999,  representing  an  increase  of 40.0%  from the net sales of $37.3
million in the comparable  period of fiscal 1998. The increase was due primarily
to an improvement in the overall  health of the  semiconductor  industry and the
backend capital equipment sector specifically.  The Company experienced improved
overall demand from  integrated  device  manufacturers  as well as contract test
house  customers.  Net sales were $117  million for the nine month  period ended
July 31, 1999  compared to $194.4  million for the  comparable  period of fiscal
1998.  The  decline  in net sales of $77.4  million,  or 40% for the nine  month
period,  was due  primarily  to higher  demands  for ATE in the first and second
quarters of fiscal 1998.  International  net sales  accounted for  approximately
63.7% and 69.5% of the total net sales for the third  quarter and nine months of
fiscal 1999, compared to approximately 61% and 72% for the comparable periods in
1998. The Company's  international net sales are denominated primarily in United
States dollars.

GROSS MARGIN

     The  Company's  gross margin has been and will continue to be affected by a
variety of factors, including manufacturing efficiencies, pricing by competitors
and suppliers, new product introductions,  product sales mix, production volume,
customization and reconfiguration requirements, international and domestic sales
mix and field  service  margins.  The gross  margin  was 52.6% and 49.5% for the
third  quarter and nine month  periods of fiscal 1999,  compared  with 54.7% and
56.8% (without the  restructuring  charge) for the comparable  periods of fiscal
1998.  The  decrease  in gross  margin  as a  percent  of sales was due to lower
average  selling  prices,  changes  in the mix of  products  sold,  and  product
development  delays which the Company believes will continue to adversely affect
gross margins through at least the end of the current fiscal year.

RESEARCH AND DEVELOPMENT

     Research and  development  ("R&D")  expenses were $9.6 million in the third
quarter of fiscal 1999,  a decrease of $2.0 million or 17.0% from $11.6  million
in the same period of fiscal 1998.  R&D expenses were $27.8 million in the first
nine  months of fiscal  1999,  a decrease  of $9.5  million or 25% from the same
period in fiscal 1998. R&D expenses decreased due to lower headcount and related
expenses,  outside services and project related expenses.  The Company currently
intends to  continue  to invest  significant  resources  in the  development  of
derivative  products and enhancements for the foreseeable  future.  Accordingly,
the Company  expects  these  expenses  to  increase in absolute  dollars for the
remainder of fiscal 1999.

SELLING, GENERAL AND ADMINISTRATIVE

     Selling, general and administrative expenses ("SG&A") were $14.2 million in
the third  quarter of fiscal 1999 compared to $14.0 million in the third quarter
of fiscal 1998. SG&A expenses  increased due to commission  expenses  associated
with higher revenues offset in part by lower headcount and related expenses.  As
a percentage  of net sales,  SG&A  expenses  were 27.1% for the third quarter of
fiscal 1999,  compared with 37.5% for the  corresponding  period in fiscal 1998.
SG&A  expenses  were $40.3  million in the first nine months of fiscal  1999,  a
decrease  of $11.9  million  or 23% from the same  period  in fiscal  1998.  The
Company  expects SG&A  expenses for the  remainder of fiscal 1999 to increase in
absolute  dollars.  Increases  expected in the remainder of fiscal 1999 include,
but are not  necessarily  limited to, the costs of  installing a new MIS system,
increases in salaries of current employees and the costs of moving the Company's
primary Oregon operations into a new facility.

                                       10
<PAGE>

SPECIAL CHARGES AND EXTRAORDINARY ITEM

     During  the  third  fiscal  quarter  of  1999,  the  Company   recorded  an
extraordinary  gain of $ 488,000,  net of tax of  $275,000  on the  exchange  of
275,000  shares of the Company's  common stock held in treasury for an aggregate
of $9,350,000 of its Notes.  For the nine month period ended July 31, 1999,  the
Company recorded an extraordinary gain of $1,646,000,  net of tax of $926,000 on
the exchange of 603,000  shares of the  Company's  common stock held in treasury
for an  aggregate  of $18.4 of its  Notes.  The  Company  may  engage in similar
transactions in the future.

     For the nine month period ended July 31, 1999, the Company recorded special
charges of $6.2 million. These charges were primarily from costs relating to the
disposal of excess facilities and severance. As of July 31, 1999,  approximately
$2.4 million in accrued  liabilities related to special charges recorded in 1998
and  1999  remained  on the  Company's  balance  sheet,  representing  rent  and
settlement costs on excess  facilities.  These amounts will be paid out over the
next six months.

     In the third quarter of fiscal 1998, the Company  recorded  restructure and
other  costs  totaling  $39.4  million.  These  charges  were the  result of the
Company's  reaction to a major downturn in the business  outlook for the ATE and
related  semiconductor and semiconductor  equipment  industries which took place
during  the  period.  Also in the third  fiscal  quarter  of 1998,  the  Company
recognized  approximately  $4.8  million of  acquired  in-process  research  and
development  expense  related to the  acquisition  of certain assets and assumed
liabilities of Heuristic Physics Laboratories, Inc.

     As of July 31,  1999,  approximately  $2.4  million in accrued  liabilities
related to special  charges  recorded in 1998 and 1999 remained on the Company's
balance  sheet,  representing  rent and settlement  costs on excess  facilities.
These amounts will be paid out over the next six months.

INTEREST AND OTHER INCOME EXPENSES, NET

     Net interest and other expenses for the third fiscal quarter of 1999 was at
$6,000,  down from $7,000 as of the third fiscal  quarter of 1998.  For the nine
month periods ended July 31, 1999 and 1998,  the net interest and other expenses
were  $67,000 and income of $1.2  million,  respectively.  Overall  expenses are
attributable to the disposal of fixed assets.

     INCOME  TAXES The  Company's  income tax  benefit  is based on a  projected
effective tax rate.

     The  projected  effective tax rate for the first nine months of fiscal 1999
was 36% compared to 29% for the first nine months of fiscal 1998.  Excluding the
impact of in-process research and development,  the Company's effective tax rate
for the first nine months of fiscal 1998 was 34%.

     Realization of a portion of the net deferred tax assets at July 31, 1999 is
dependent on the  Company's  ability to generate  approximately  $42,000,000  of
future taxable income.  Management believes that it is more likely than not that
the assets may be realized based on current profitability. However, there can be
no  assurance  that the Company  will meet its  expectations  of future  income.
Management  evaluates the realizability of the deferred tax assets quarterly and
assesses the need for additional valuation allowances.

Year 2000 Readiness disclosure

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

                                       11
<PAGE>

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

     The Awareness phase consisted of defining the Year 2000 problem and gaining
executive level support and sponsorship for addressing it. We established a Year
2000 program team and created an overall strategy.  During the Assessment phase,
we  inventoried  all internal  systems,  products and supply chain  partners and
prioritized each for renovation.  We believe we have completed a majority of the
Awareness  and  Assessment  phases;  however,  we will continue to work in these
areas as we complete our assessment of existing  supply chain partners and enter
into  new  supply  chain  relationships  in the  ordinary  course  of  business.
Renovation consists of converting,  replacing,  upgrading or eliminating systems
that have Year 2000  problems.  We have  begun  Renovation  on  mission-critical
systems  and  have  completed  all but two  systems  as of July  31,  1999.  The
remaining   mission-critical   systems  are  now  scheduled  for  completion  of
renovation  by October  1999.  Validation  involves  ensuring  that hardware and
software  fixes will work  properly in 1999 and beyond and can occur both before
and after  implementation.  We began the Validation  phase in late 1998 and will
continue  through  October,  1999 to allow for thorough  testing before the Year
2000.  Implementation  is the  installation  of Year  2000  ready  hardware  and
software components in a live environment.

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

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

     Although it is difficult for us to estimate the total costs of implementing
the Plan,  our current  estimate is that such costs will be  approximately  $2.5
million through October 1999 and beyond.  However,  although we believe that our
estimates are  reasonable,  we cannot be certain,  for the reasons stated in the
next paragraph,  that the actual costs of implementing  the Plan will not differ
materially  from the estimated  costs.  We have incurred costs of  approximately
$1.6 million  through July 31, 1999 in  connection  with the Plan. A significant
portion of total Year 2000 project  expenses is  represented  by existing  staff
that  have  been  redeployed  to  this  project.  We do  not  believe  that  the
redeployment  of  existing  staff  will have a  material  adverse  effect on our
business,  results  of  operations  or  financial  position.  Nor  do we  expect
incremental  expenses  related  to the Year 2000  project to  materially  impact
operating results in any one period.

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

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

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

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

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

                                       12
<PAGE>

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

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

INTRODUCTION OF THE EURO

     To date the  introduction  and the use of the Euro has not had nor does the
Company expect it to have a material  adverse effect on our business,  financial
condition  or  results  of   operations   principally   because  the   Company's
international revenues are denominated primarily in United States dollars.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash  provided by operating  activities  was $21.4 million for the nine
months  ended  July 31,  1999.  This  cash flow from  operating  activities  was
primarily  attributable to net income before  depreciation  and amortization and
special  charges of  approximately  $12.6  million,  income tax refunds of $19.4
million,  offset by cash used for net changes in the remaining  operating assets
and liabilities.

     Net cash used in investing activities was $11.7 million for the nine months
ended  July 31,  1999.  Cash flow used in  investing  activities  was  primarily
attributable  to  purchases of property and  equipment  of  approximately  $13.9
million,  and net  maturities  and  sales of  available-for-sale  securities  of
approximately $3.9 million.

     Net cash  provided by  financing  activities  was $8.0 million for the nine
months  ended July 31,  1999.  The cash  provided by  financing  activities  was
primarily  attributable  to treasury stock and common stock issued in accordance
with the Company's employee stock option and stock purchase plans.

     The Company  recorded  non-cash  transactions  during the nine month period
ended July 31, 1999 for the exchange of 603,000  shares of the Company's  Common
Stock held in treasury  for an aggregate  of $18.4  million of its Notes.  These
transactions resulted in extraordinary gains of $1.6 million, net of tax of $0.9
million, as well as an increase in paid-in capital of $15.4 million.

     As of July 31, 1999, the Company had working capital of approximately  $179
million including cash and short-term investments of $119 million, $47.1 million
of accounts receivable and $35.8 million of inventories. The Company expects its
accounts  receivable to continue to represent a  significant  portion of working
capital.  The Company believes that because of the relatively long manufacturing
cycles of many of its testers and the new  products it has and plans to continue
to  introduce,  investments  in  inventories  will also  continue to represent a
significant  portion of working  capital.  Significant  investments  in accounts
receivable  and  inventories  will  continue to subject the Company to increased
risks which could materially adversely affect the Company's business,  financial
condition and results of operations.  Total current liabilities of $40.9 million
as of October 31, 1998  increased  to $50.4  million for the nine months  ending
July 31, 1999.

     The Company's  principal sources of liquidity as of July 31, 1999 consisted
of  approximately  $ 66.1  million  of cash  and  cash  equivalents,  short-term
investments  of $52.8  million and $20  million  available  under the  Company's
unsecured  working  capital line of credit  expiring July 22, 2000. In addition,
the Company has $26.4  million of available  for sale  securities  classified as
long-term.  As of July 31, 1999, no amounts were outstanding under the unsecured
line of credit.  Additionally,  as of July 31, 1999,  the Company had  operating
lease  commitments  for  facilities  and  test  and  other  equipment   totaling
approximately $ 42.3 million.

                                       13
<PAGE>

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

<TABLE>
<CAPTION>

                                       1999          2000          2001          2002          2003       Thereafter
<S>                                    <C>           <C>           <C>           <C>           <C>          <C>
   Cash Equivalents
            Fixed rate                $ 66,066        -             -             -             -            -
            Average rate                  4.85%       -             -             -             -            -
   Short term investments
            Fixed rate                $ 52,810        -             -             -             -            -
            Average rate                  5.58%       -             -             -             -            -
   Long term investments
            Fixed rate                $     -      $ 16,354     $ 10,027          -             -            -
            Average rate                    -          5.36%        5.32%         -             -            -
                                    ------------  ------------  -------------- -----------  --------- -------------

   Total investment securities        $ 118,876    $ 16,354        10,027         -             -            -
   Average rate                            5.19%       5.36%         5.32%        -             -            -

   Long term debt
            Fixed rate                      -         -             -       $ 96,610            -            -
            Average rate                    -         -             -           5.25%           -            -
</TABLE>


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

     The Company has no current  cash flow  exposure due to rate changes for its
$96.6 million Convertible Subordinated Notes. The Company has a $20 million line
of credit under which it can borrow either at the bank's prime rate or the LIBOR
rate.  As of July 31,  1999,  the  Company had no  borrowings  under its line of
credit.

RISK FACTORS

Fluctuations in Our Quarterly Net Sales and Operating Results

<TABLE>
<CAPTION>
                              1996                           1997                          1998                     1999
                   Q1     Q2      Q3     Q4       Q1     Q2     Q3     Q4       Q1     Q2     Q3     Q4       Q1     Q2     Q3
<S>                <C>    <C>     <C>    <C>      <C>    <C>    <C>    <C>      <C>    <C>    <C>    <C>      <C>    <C>    <C>
Net Sales          61.00  66.40   67.20  44.20    40.30  43.40  51.08  69.39    82.40  74.60  37.30  22.40    26.5   38.1   54.2
Net Income (loss)  10.50  11.50   11.60   4.30     1.05   3.28  -0.90   7.25    9.20    8.80 -33.60 -10.70    -6.6   -5.2   3.5

</TABLE>


                                       14
<PAGE>

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

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

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

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

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

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

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

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

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

     o    expenses associated with acquisitions and alliances;

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

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

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

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

     o    manufacturing inefficiencies;

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

     o    hardware and software product sales mix;

     o    inventory write-downs;

     o    production volume;

     o    new product introductions;

     o    product reliability;

     o    absorption levels and the rate of capacity utilization;

     o    customization and reconfiguration of systems;

     o    international and domestic sales mix and field service margins;

     o    facility relocations and consolidations.

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

                                       15
<PAGE>

     We cannot forecast with any certainty the impact of these and other factors
on our sales and operating results in any future period.  In addition,  our need
for continued significant  expenditures for research and development,  marketing
and other expenses for new products,  capital equipment  purchases and worldwide
training and customer  service and support,  among other  factors,  will make it
difficult for us to reduce our significant fixed expenses in a particular period
if we don't meet our net sales goals for that period.  As a result, we cannot be
certain  that we will  continue  to be  profitable  or that we will not  sustain
losses in the future. As a result, the price of our common stock may continue to
be materially adversely affected.

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

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

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

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

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

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

                                       16
<PAGE>

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

     We have over the last several years experienced significant fluctuations in
our operating  results.  In fiscal 1998, we generated net sales of $82.4 million
for the first  quarter and $22.4 million for the fourth  quarter,  a decrease of
73% in our net sales  within one fiscal  year.  For the third  quarter of fiscal
1999,  the net sales were $52.4  million.  Since 1993,  except for  cost-cutting
efforts during the past two years, we have overall  significantly  increased the
scale of our operations in general to support  periods of increased sales levels
and expanded product offerings and have expanded  operations to address critical
infrastructure  and other  requirements,  including  the  hiring  of  additional
personnel,  significant  investments in R&D to support product development,  our
establishment  of  a  joint  venture  with  Innotech  Corporation  and  numerous
acquisitions. However, in the past, and particularly in the three quarters ended
October 31, 1998 and to some extent this fiscal year as discussed above, we have
experienced significant revenue declines and reductions in our operations. These
fluctuations  in our sales and operations  have placed a considerable  strain on
our  management,  financial,  manufacturing  and  other  resources.  In order to
effectively  deal with the  changes  brought  on by the  cyclical  nature of the
industry,  we have been  required to  implement  and improve a variety of highly
flexible operating, financial and other systems, procedures and controls capable
of expanding or contracting consistent with our business.  However, we cannot be
certain  that any  existing  or new  systems,  procedures  or  controls  will be
adequate  to  support  fluctuations  in our  operations  or  that  our  systems,
procedures  and  controls  will be  cost-effective  or  timely.  Any  failure to
implement,  improve and expand or contract such systems, procedures and controls
efficiently  and at a pace  consistent  with our business  could have a material
adverse  effect  on  our  business,  financial  condition  and  our  results  of
operations.

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

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

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

     We obtain certain components,  subassemblies and services necessary for the
manufacture of our testers from a limited group of suppliers. We do not maintain
long-term supply agreements with most of our vendors and we purchase most of our
components and subassemblies through individual purchase orders. The manufacture
of certain of our components and  subassemblies is an extremely complex process.
We  also  rely  on  outside  vendors  to  manufacture   certain  components  and
subassemblies and to provide certain services.  We have recently experienced and
continue to experience significant reliability,  quality and timeliness problems
with several critical components  including certain custom integrated  circuits.
In  addition,  we and  certain  of our  subcontractors  periodically  experience
significant   shortages  and  delays  in  delivery  of  various  components  and
subassemblies.  We cannot  be  certain  that  these or other  problems  will not
continue to occur in the future with our  suppliers  or outside  subcontractors.
Our  reliance  on a limited  group of  suppliers  and on outside  subcontractors
involves  several risks,  including an inability to obtain an adequate supply of
required  components,  subassemblies  and services and reduced  control over the
price, timely delivery, reliability and quality of components, subassemblies and
services.  Shortages,  delays,  disruptions or  terminations  of the sources for
these  components  and  subassemblies  have delayed and could  continue to delay
shipments of our systems and new products and could  continue to have a material
adverse  effect on our business,  financial  condition or results of operations.

                                       17
<PAGE>

Our continuing  inability to obtain adequate yields or timely  deliveries or any
other  circumstance that would require us to seek alternative  sources of supply
or to manufacture such components  internally could also have a material adverse
effect on our  business,  financial  condition  or results of  operations.  Such
delays,  shortages and disruptions would also damage  relationships with current
and  prospective  customers and have and could continue to allow  competitors to
penetrate  such  customer  accounts.  We cannot  be  certain  that our  internal
manufacturing  capacity  or that of our  suppliers  and  subcontractors  will be
sufficient to meet customer requirements.

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

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

     We face substantial  competition  throughout the world,  primarily from ATE
manufacturers located in the United States, Europe and Japan, as well as several
of our customers.  Many competitors  have  substantially  greater  financial and
other resources with which to pursue engineering,  manufacturing,  marketing and
distribution of their products.  Certain competitors have recently introduced or
announced new products with certain performance or price  characteristics  equal
or superior to certain  products we  currently  offer.  These  competitors  have
recently  introduced  products that compete  directly  against our products.  We
believe that if the ATE  industry  continues to  consolidate  through  strategic
alliances  or  acquisitions,  we will  continue to face  significant  additional
competition  from larger  competitors  that may offer product lines and services
more  complete  than  ours.  Our  competitors  are  continuing  to  improve  the
performance   of  their   current   products  and  to  introduce  new  products,
enhancements  and new  technologies  that provide improved cost of ownership and
performance characteristics.  New product introductions by our competitors could
cause a  decline  in our  sales or loss of  market  acceptance  of our  existing
products.

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

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

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

     o    product selection;
     o    timely and efficient completion of product design;
     o    implementation of manufacturing and assembly processes;
     o    successful coding and debugging of software;
     o    product performance;
     o    reliability in the field; and
     o    effective sales and marketing.

                                       18
<PAGE>

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

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

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

     One customer,  Spirox Corporation (a distributor in Taiwan),  accounted for
42%,  34%,  30% and 25% of our net sales in the first nine months of fiscal 1999
and fiscal years 1998, 1997, and 1996, respectively. Consequently, our business,
financial  condition  and results of operations  could be  materially  adversely
affected  by the  loss of or any  reduction  in  orders  by  this  or any  other
significant customer,  including losses or reductions due to continuing or other
technical,  manufacturing or reliability problems with our products or continued
slow-downs in the semiconductor industry or in other industries that manufacture
products  utilizing  semiconductors.  Our ability to maintain or increase  sales
levels will depend upon:

     o    our ability to obtain orders from existing and new customers;
     o    our  ability to  manufacture  systems  on a timely and  cost-effective
          basis;
     o    our  ability to  complete  the  development  of our new  hardware  and
          software products;
     o    our customers' financial condition and success;
     o    general economic conditions; and
     o    our ability to meet increasingly  stringent  customer  performance and
          other requirements and shipment delivery dates.

                                       19
<PAGE>

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

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

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

     In addition, acquisitions involve numerous other risks, including:

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

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

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

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

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

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

     We prepare our  financial  statements  to conform with  generally  accepted
accounting  principles  ("GAAP").  GAAP are  subject  to  interpretation  by the
American Institute of Certified Public  Accountants,  the SEC and various bodies
formed to interpret  and create  appropriate  accounting  policies.  A change in
those policies can have a significant  effect on our reported  results,  and may
even  affect  our  reporting  of  transactions  completed  before  a  change  is
announced.  Accounting  policies  affecting  many other aspects of our business,
including  rules  relating to purchase and  pooling-of-interests  accounting for
business  combinations,  employee stock purchase plans and stock options grants,
have recently  been revised or are under  review.  Changes to those rules or the
questioning  of  current  practices  may have a material  adverse  effect on our
reported financial results or on the way we conduct our business.

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

                                       20
<PAGE>

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

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

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

     On July 31, 1999 the Company announced the appointment of Graham J. Siddall
as  the  new  President  and  Chief  Executive   Officer  of  Credence   Systems
Corporation.  Mr.  Siddall  joins  the  Company  from  KLA-Tencor  where  he was
Executive  Vice  President  of the  Wafer  Inspection  Group.  The  Company  has
experienced  several  transitions  in executive  management in recent years.  In
conjunction with the departure in December 1998 of our former chairman and chief
executive officer, our Board of Directors appointed David A. Ranhoff,  executive
vice president,  and Dennis P. Wolf,  executive vice president,  chief financial
officer and secretary,  jointly to the office of the  president.  The Board also
named a new chairman,  Dr. William  Howard,  Jr., and began the search for a new
chief  executive  officer which  culminated in the  appointment of Mr.  Siddall.
These   transitions  have  placed   significant   demands  on  our  operational,
administrative  and financial  staff and we  anticipate  that these demands will
continue in the near term. We cannot be certain that such  transitions  will not
have a material adverse effect on our business,  financial condition and results
of  operations,  or on the way we are perceived by the market or on the price of
our common stock.

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

     International  sales accounted for approximately 64%, 70%, 69%, 70% and 67%
of our total net sales for the third  quarter  and first  nine  months of fiscal
1999 and  fiscal  years  1998,  1997 and 1996,  respectively.  As a  result,  we
anticipate that  international  sales will continue to account for a significant
portion of our total net sales in the foreseeable  future.  These  international
sales will continue to be subject to certain risks, including:

     o    changes in regulatory requirements;

     o    tariffs and other barriers;

     o    political and economic instability;

     o    an outbreak of hostilities;

     o    integration of foreign operations of acquired businesses;

     o    foreign currency exchange rate fluctuations;

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

     o    potentially adverse tax consequences; and

     o    the possibility of difficulty in accounts receivable collection.

     We are also subject to the risks associated with the imposition of domestic
and  foreign  legislation  and  regulations  relating to the import or export of
semiconductor  equipment. We cannot predict whether the import and export of our
products  will  be  subject  to  quotas,  duties,  taxes  or  other  charges  or
restrictions  imposed by the United  States or any other  country in the future.
Any of these  factors  or the  adoption  of  restrictive  policies  could have a
material  adverse  effect on our  business,  financial  condition  or results of
operations.  Net sales to the Asia Pacific  region  accounted for  approximately
62%, 60%, 66% and 58% of our total net sales for the first nine months of fiscal
1999 and for the  fiscal  years  1998,  1997 and 1996,  and thus  demand for our
products is subject to the risk of economic instability in that region and could
continue to be  materially  adversely  affected.  Countries  in the Asia Pacific

                                       21
<PAGE>

region, including Korea and Japan, have recently experienced weaknesses in their
currency,  banking  and equity  markets.  These  weaknesses  could  continue  to
adversely  affect demand for our products,  the  availability  and supply of our
product  components,  and our  consolidated  results of operations.  The current
Asian  financial  crisis  has  contributed  to a  widespread  uncertainty  and a
slowdown in the  semiconductor  industry.  This slowdown has resulted in reduced
spending on semiconductor capital equipment, including ATE, and has had, and may
continue to have,  a material  adverse  effect on our product  backlog,  balance
sheet and results of operations.

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

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

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

     In July, 1998, inTEST IP Corporation ("inTEST") alleged in writing that one
of our products is purportedly  infringing a patent held by inTEST.  We may also
be  obligated  to other  third  parties  relating  to this  allegation.  We have
completed  initial  investigation  into  the  allegation.  Based  in part on the
opinion of outside  counsel,  we believe  we have  meritorious  defenses  to the
claims.  However,  we cannot be  certain of success  in  defending  this  patent
infringement  claim or claims for  indemnification  resulting from  infringement
claims.

     Certain of our  customers  have received  notices from Mr. Jerome  Lemelson
alleging that the  manufacture of  semiconductor  products  and/or the equipment
used to manufacture  semiconductor  products infringes certain patents issued to
Mr. Lemelson. We were notified by a customer in 1990 and by a different customer
in late 1994 that we may be  obligated  to  defend  or  settle  claims  that our
products infringe Mr. Lemelson's patents,  and that if it is determined that the
customer  infringes  Mr.  Lemelson's  patents,  such  customer  intends  to seek
indemnification  from us for damages  and other  related  expenses.  We have not
received further communications from such customers regarding these matters.

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

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

     Developing and  manufacturing  new ATE systems and  enhancements  is highly
capital  intensive.  In  order  to be  competitive,  we  must  make  significant
investments in capital equipment,  expansion of operations,  systems, procedures
and controls,  research and development and worldwide training, customer service
and  support,  among many  other  items.  We may be unable to obtain  additional
financing in the future on acceptable  terms,  or at all. In connection with our
issuance in September 1997 of  convertible  promissory  notes (the "Notes"),  we
currently have outstanding $96.6 million of such Notes which resulted in a ratio

                                       22
<PAGE>

of  long-term  debt  to  total  long-term  capitalization  at July  31,  1999 of
approximately  37%. As a result,  our  principal  and interest  obligations  are
substantial.  The degree to which we are leveraged  could  materially  adversely
affect our ability to obtain  financing  for working  capital,  acquisitions  or
other purposes and could make our business more vulnerable to industry downturns
and competitive pressures.  Our ability to meet debt service obligations will be
dependent  upon our future  performance,  which  will be  subject to  financial,
business and other factors  affecting our  operations,  many of which are beyond
our control.  If we raise  additional  funds by issuing equity  securities,  our
stockholders could be significantly diluted. We may exchange Notes for shares of
our common stock or may  refinance or exchange the Notes,  which may also dilute
our  stockholders and may make it difficult for us to obtain  additional  future
financing, if needed.

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

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

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

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

     The Awareness phase consisted of defining the Year 2000 problem and gaining
executive level support and sponsorship for addressing it. We established a Year
2000 program team and created an overall strategy.  During the Assessment phase,
we  inventoried  all internal  systems,  products and supply chain  partners and
prioritized each for renovation.  We believe we have completed a majority of the
Awareness  and  Assessment  phases;  however,  we will continue to work in these
areas as we complete our assessment of existing  supply chain partners and enter
into  new  supply  chain  relationships  in the  ordinary  course  of  business.
Renovation consists of converting,  replacing,  upgrading or eliminating systems
that have Year 2000  problems.  We have  begun  renovation  on  mission-critical
systems and have  completed all but two systems by July 31, 1999.  The remaining
two  mission-critical  systems are now scheduled for completion of renovation by
October 1999. Validation involves ensuring that hardware and software fixes will
work  properly  in  1999  and  beyond  and  can  occur  both  before  and  after
implementation.  We began the  Validation  phase in late 1998 and will  continue
through  June  1999  to  allow  for  thorough  testing  before  the  Year  2000.
Implementation  is the  installation  of Year 2000 ready  hardware  and software
components in a live environment.

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


                                       23
<PAGE>

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

     Although it is difficult for us to estimate the total costs of implementing
the Plan,  our current  estimate is that such costs will be  approximately  $2.5
million through October 1999 and beyond.  However,  although we believe that our
estimates are  reasonable,  we cannot be certain,  for the reasons stated in the
next paragraph,  that the actual costs of implementing  the Plan will not differ
materially  from the estimated  costs.  We have incurred costs of  approximately
$1.6 million  through July 31, 1999 in  connection  with the Plan. A significant
portion of total Year 2000 project  expenses is  represented  by existing  staff
that  have  been  redeployed  to  this  project.  We do  not  believe  that  the
redeployment  of  existing  staff  will have a  material  adverse  effect on our
business,  results  of  operations  or  financial  position.  Nor  do we  expect
incremental  expenses  related  to the Year 2000  project to  materially  impact
operating results in any one period.

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

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


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

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

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

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

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

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

     We believe that factors such as  announcements  of developments  related to
our business,  fluctuations  in our  financial  results,  general  conditions or
developments in the semiconductor and capital equipment industry and the general
economy,   sales  or  purchases   of  our  common  stock  in  the   marketplace,
announcements of our  technological  innovations or new products or enhancements
or those of our  competitors,  developments  in  patents  or other  intellectual
property rights, developments in our relationships with customers and suppliers,
or a  shortfall  or changes in  revenue,  gross  margins  or  earnings  or other
financial  results from analysts'  expectations or an outbreak of hostilities or
natural  disasters,  could  continue  to cause the price of our common  stock to
fluctuate,  perhaps substantially.  In recent years the stock market in general,
and the market  for  shares of small  capitalization  companies  in  particular,
including ours, have experienced  extreme price  fluctuations,  which have often
been unrelated to the operating performance of affected companies.  For example,
in fiscal 1997,  the price of our common stock ranged from a high of $55.00 to a
low of $13.75.  In fiscal 1998, the price of our common stock ranged from a high
of $35.25 to a low of $9.31 and during the first nine months of fiscal 1999, the
price of our common stock  ranged from a high of $42.44 to a low of $13.69.  The
market   price  of  our  common   stock  is  likely  to  continue  to  fluctuate
significantly   in  the  future,   including   fluctuations   unrelated  to  our
performance.

                                       24
<PAGE>

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

     Certain   provisions   of  our  Amended   and   Restated   Certificate   of
Incorporation,  shareholders  rights plan, equity incentive plans, Bylaws and of
Delaware law may discourage certain transactions involving a change in corporate
control.  In addition to the foregoing,  our classified board of directors,  the
shareholdings  of our  officers,  directors  and persons or entities that may be
deemed affiliates,  the adoption of a shareholder rights plan and the ability of
our Board of Directors to issue "blank check"  preferred  stock without  further
stockholder approval could have the effect of delaying,  deferring or preventing
a third party to acquire us and may adversely affect the voting and other rights
of holders of our common stock.


                                       25
<PAGE>

PART II.  - OTHER INFORMATION

Item 1.  Legal Proceedings
         None
Item 2.  Changes in Securities
         None
Item 3.  Defaults upon Senior Securities
         None
Item 4.  Submission of Matters to a Vote of Securityholders
         None
Item 5.  Other Information

     (a)  The  acquisition  of Opmaxx,  Inc.  was closed in  September  1999 for
          approximately  $8.0  million  in cash  and  assumed  liabilities.  The
          acquisition will be accounted for in the fourth fiscal quarter of 1999
          under the purchase method of accounting.

     (b)  On July 31, 1999 the Company  announced the  appointment  of Graham J.
          Siddall as the new President and Chief  Executive  Officer of Credence
          Systems  Corporation.  Mr.  Siddall joins the Company from  KLA-Tencor
          where he was Executive Vice President of the Wafer Inspection Group.

Item 6. Exhibits and Reports on Form 8-K

     (a)  See Exhibit Index on page 28.

     (b)  The Company  filed a report on Form 8-K on August 26,  1999  reporting
          its financial results for the third quarter of fiscal year 1999.

     (c)  The Company filed a report on Form 8-K on July 22, 1999  reporting the
          planned acquisition of Opmaxx, Inc.


                                       26
<PAGE>

                                   SIGNATURES

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


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



         Sept. 10, 1999                           /S/ DENNIS P. WOLF
 ---------------------------           -----------------------------------------
           Date                                    Dennis P. Wolf
                                       Dennis P. Wolf, Executive Vice President,
                                       Chief Financial Officer and Secretary


                                       27
<PAGE>

EXHIBIT INDEX

   Exhibit
   Number

   10.4   Amendment to Loan Agreement dated July 23, 1999 between Silicon Valley
          Bank and Credence Systems Corporation.

   10.5   Employment Agreement by and between the Company and Graham J. Siddall

   27.2   EDGAR Financial Data Schedule

                                       28
<PAGE>