<PAGE>



================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

For the quarterly period ended April 30, 1998

                                       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 May 27, 1998, there were 21,648,914  shares of the  Registrant's  common
stock, $0.001 par value per share outstanding.


================================================================================

<PAGE>

CREDENCE SYSTEMS CORPORATION

<TABLE>
<CAPTION>

                                 INDEX                                 PAGE NO.
                                 -----                                 --------
<C>      <S>                                                             <C>

PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements ...........................................  3
         Condensed Consolidated Balance Sheets ..........................  3
         Condensed Consolidated Income Statements .......................  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 ..........................................  7

PART II. OTHER INFORMATION
Item 1.  Legal Proceedings .............................................. 20
Item 2.  Changes in Securities .......................................... 20
Item 3.  Defaults Upon Senior Securities ................................ 20
Item 4.  Submission of Matters to a Vote of Securityholders ............. 20
Item 5.  Other Information .............................................. 20
Item 6.  Exhibits and Reports on Form 8-K ............................... 20

</TABLE>


<PAGE>
PART I  - FINANCIAL INFORMATION

ITEM I  - FINANCIAL STATEMENTS

                          CREDENCE SYSTEMS CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                      APRIL 30,      OCTOBER 31,
                                                        1998             1997
                                                     -----------     -----------
<S>                                                  <C>             <C>
ASSETS                                               (UNAUDITED)
Current assets:
  Cash and cash equivalents ......................   $ 65,841        $132,761
  Restricted cash ................................      5,012          10,002
  Short-term investments .........................     78,313          35,013
  Accounts receivable, net .......................     60,770          55,246
  Inventories ....................................     52,723          42,125
  Other current assets ...........................     13,900          13,001
                                                     --------        --------
    Total current assets .........................    276,559         288,148
Long-term investments ............................     27,980           8,561
Property and equipment, net ......................     45,930          43,050
Other assets .....................................     19,466          18,382
                                                     --------        --------
    Total assets .................................   $369,935        $358,141
                                                     ========        ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable ...............................   $ 12,935        $ 13,182
  Accrued liabilities ............................     24,343          20,346
  Income taxes payable ...........................      4,331           4,284
                                                     --------        --------
    Total current liabilities ....................     41,609          37,812
Convertible subordinated notes ...................    115,000         115,000
Minority interest ................................        312             418
Stockholders' equity .............................    213,014         204,911
                                                     --------        --------
    Total liabilities and stockholders' equity....   $369,935        $358,141
                                                     ========        ========
</TABLE>




                             See accompanying notes.


<PAGE>

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

                                           THREE MONTHS ENDED      SIX MONTHS ENDED
                                                APRIL 30,              APRIL 30,
                                          -------------------    -------------------
                                            1998       1997        1998       1997
                                          --------   --------    --------   --------
<S>                                       <C>        <C>         <C>        <C>
Net sales ............................... $ 74,660   $ 43,355    $157,035   $ 83,616
Cost of goods sold ......................   31,664     18,374      67,102     37,813
                                          --------   --------    --------   --------
Gross margin ............................   42,996     24,981      89,933     45,803
Operating expenses:
   Research and development .............   12,233      8,953      25,724     17,759
   Selling, general and administrative ..   17,931     11,989      38,239     23,420
                                          --------   --------    --------   --------
       Total operating expenses .........   30,164     20,942      63,963     41,179
                                          --------   --------    --------   --------
Operating income ........................   12,832      4,039      25,970      4,624
Interest income and other expenses, net .      200        874       1,158      1,901
                                          --------   --------    --------   --------
Income before income taxes ..............   13,032      4,913      27,128      6,525
Income taxes ............................    4,290      1,627       9,224      2,185
Minority interest .......................      (45)        --         (74)        --
                                          --------   --------    --------   --------
Net income .............................. $  8,787   $  3,286    $ 17,978   $  4,340
                                          ========   ========    ========   ========
Net income per share:
    Basic ............................... $   0.41   $   0.15    $   0.83   $   0.20
                                          ========   ========    ========   ========
    Diluted ............................. $   0.40   $   0.15    $   0.81   $   0.20
                                          ========   ========    ========   ========
Number of shares used in computing per
 share amount:
    Basic ...............................   21,634     21,833      21,731     21,783
                                          ========   ========    ========   ========
    Diluted .............................   22,146     22,265      22,257     22,242
                                          ========   ========    ========   ========
</TABLE>










                             See accompanying notes.

<PAGE>
                          CREDENCE SYSTEMS CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                 (IN THOUSANDS)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                   SIX MONTHS ENDED
                                                                       APRIL 30,
                                                                 ---------------------
                                                                    1998        1997
                                                                 ---------   ---------
<S>                                                              <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income .................................................. $ 17,978    $  4,340
   Adjustments to reconcile net income to net cash
     provided by operating activities:
     Depreciation and amortization .............................    8,405       5,784
     (Gain) on disposal of property and equipment ..............       (7)        (18)
     Minority interest .........................................       74          --
     Changes in operating assets and liabilities:
        Restricted cash, accounts receivable,
          inventories and other current assets .................  (15,955)        988
        Accounts payable, accrued liabilities and
          income taxes payable .................................    4,566      (6,468)
                                                                 --------    --------
            Net cash provided by operating activities ..........   15,061       4,626
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of available-for-sale securities .................. (103,387)    (22,907)
   Maturities of available-for-sale short-term investments .....   34,668      29,503
   Sales of available-for-sale securities ......................    6,000       3,112
   Acquisition of property and equipment .......................   (5,390)     (5,018)
   Other assets ................................................   (3,048)     (1,533)
   Proceeds from sale of property and equipment ................       --         240
                                                                 --------    --------
         Net cash (used for) provided by investing activities ..  (71,157)      3,397
CASH FLOWS FROM FINANCING ACTIVITIES:
   Issuance of common stock ....................................    1,971         829
   Repurchase of common stock ..................................  (12,795)         --
                                                                 --------    --------
         Net cash (used for) provided by financing activities ..  (10,824)        829
                                                                 --------    --------
Net increase (decrease) in cash and cash equivalents ...........  (66,920)      8,852
Cash and cash equivalents at beginning of period ...............  132,761      48,649
                                                                 --------    --------
Cash and cash equivalents at end of period ..................... $ 65,841    $ 57,501
                                                                 ========    ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Interest paid ............................................... $  3,103    $      1
   Income taxes paid ........................................... $  8,187    $    972
NONCASH INVESTING ACTIVITIES:
   Net transfers of inventory to property and equipment ........ $  3,924    $  5,588
NONCASH FINANCING ACTIVITIES:
   Income tax benefit from stock option exercises .............. $    949    $    149
</TABLE>

                            See accompanying notes.


<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   QUARTERLY FINANCIAL STATEMENTS

     The condensed  consolidated  financial statements and related notes for the
six  months  ended  April  30,  1998 and  1997 are  unaudited  but  include  all
adjustments  (consisting  solely of normal recurring  adjustments) which are, in
the opinion of management,  necessary for a fair  presentation  of the financial
position and results of operations of the Company for the interim  periods.  The
results of operations  for the three and six months ended April 30, 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,  1997 included in the Annual
Report  on Form  10-K  and  the  additional  risk  factors,  including,  without
limitation,   risks  relating  to  fluctuations  in  operating  results,   rapid
technological  change,  importance  of  timely  product  introduction,  risks of
delays,  limited system sales, backlog,  cyclicality of semiconductor  industry,
expansion  of  operations,  management  of growth,  sole or  limited  sources of
supply, reliance on subcontractors,  highly competitive industry,  dependence on
key  customers,  lengthy sales cycle,  dependence on key  personnel,  management
changes,  international sales, proprietary rights, acquisitions,  future capital
needs and  volatility  of stock price,  as set forth in this  Report.  Any party
interested in reviewing these 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):
<TABLE>
<CAPTION>
                                              April 30,     October 31,
                                                1998           1997
                                              ---------     -----------
         <S>                                  <C>             <C>
         Raw materials ...................... $ 26,881        $ 24,862
         Work-in-process ....................   21,501          14,173
         Finished goods .....................    4,341           3,090
                                              --------        --------
                                              $ 52,723        $ 42,125
                                              ========        ========
</TABLE>

3.   NET INCOME PER SHARE

     The Company has adopted Statement of Financial  Accounting Standards No.128
"Earnings  Per Share" (SFAS 128)  beginning in the first quarter of fiscal 1998.
Accordingly,  net income per share  (basic) is based upon the  weighted  average
number of common  shares  outstanding  during the  period.  Net income per share
(diluted)  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 per share (diluted). Options to
purchase 756,132 shares at an average price of $29.63 per share were outstanding
at April 30, 1998 but were not included in the  computation of diluted  earnings
per share  because the  options'  exercise  price was  greater  than the average
market  price  of  the  common  shares  and,  therefore,  the  effect  would  be
antidilutive. All earnings per share amounts for all periods have been presented
and where necessary, restated to conform to SFAS 128 requirements. The following
table sets forth the  computation of basic and dilutive net income per share (in
thousands):


<PAGE>
<TABLE>
<CAPTION>
                                         Three Months Ended    Six Months Ended
                                             April 30,             April 30,
                                         ------------------   ------------------
                                           1998      1997       1998      1997
                                          -------   -------   -------   -------
<S>                                       <C>       <C>       <C>       <C>
Numerator:
  Numerator for basic and diluted
  earnings per share - net income ....... $ 8,787   $ 3,286   $17,978   $ 4,340
                                          -------   -------   -------   -------
Denominator:
  Denominator for basic earnings
  per share - weighted-average shares ...  21,634    21,833    21,731    21,783
Effect of dilutive securities-employee
  stock options .........................     512       432       526       459
                                          -------    ------   -------   -------
Denominator for diluted earnings per
  share - adjusted weighted-average
  shares and assumed conversions ........  22,146    22,265    22,257    22,242
                                          -------   -------   -------   -------
Basic earnings per share ................ $  0.41   $  0.15   $  0.83   $  0.20
                                          =======   =======   =======   =======
Diluted earnings per share .............. $  0.40   $  0.15   $  0.81   $  0.20
                                          =======   =======   =======   =======
</TABLE>

4.   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.

5.   COMMITMENTS

     The Company currently has an agreement with Summit Design, Inc. to purchase
product licenses through 1999. The remaining  commitment under this agreement as
of April 30, 1998 is approximately  $5 million.  Restricted cash represents cash
in escrow related to the remaining purchase commitments under this agreement.

6.   SUBSEQUENT EVENTS

     On June 1, 1998 the Company purchased from Heuristic Physics  Laboratories,
Inc.  ("HPL") certain assets and assumed certain  liabilities  relating to their
memory test business for $8.0 million.


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 the section  entitled "Risk Factors"  below,  and
elsewhere in this  report.  The Company  undertakes  no  obligation  to publicly
release the result of any revisions to these  forward-looking  statements  which
may be made to  reflect  events or  circumstances  after  the date  hereof or to
reflect the occurrence of unanticipated events.

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




<PAGE>
<TABLE>
<CAPTION>
                                        Three Months Ended     Six Months Ended
                                             April 30,              April 30,
                                        ------------------     -----------------
                                          1998       1997       1998       1997
                                         ------     ------     ------    ------
<S>                                       <C>        <C>        <C>       <C>
Net sales .............................   100.0%     100.0%     100.0%    100.0%
Cost of goods sold ....................    42.4       42.4       42.7      45.2
                                          -----      -----      -----     -----
Gross margin ..........................    57.6       57.6       57.3      54.8
Operating expenses
   Research and development ...........    16.4       20.7       16.4      21.2
   Selling, general and administrative.    24.0       27.6       24.4      28.0
                                          -----      -----      -----     -----
      Operating expenses ..............    40.4       48.3       40.8      49.2
                                          -----      -----      -----     -----
Operating income ......................    17.2        9.3       16.5       5.6
Interest income and other expenses, net     0.3        2.0        0.7       2.2
                                          -----      -----      -----     -----
Income before income taxes ............    17.5       11.3       17.2       7.8
Income taxes ..........................     5.7        3.7        5.8       2.6
                                          -----      -----      -----     -----
Net income ............................    11.8%       7.6%      11.4%      5.2%
                                          =====      =====      =====     =====

</TABLE>

RESULTS OF OPERATIONS

NET SALES

     Net sales  consist of revenues  from  systems  sales,  spare  parts  sales,
maintenance  contracts and software sales.  Net sales were $74.7 million for the
second  quarter  and $157.0  million  for the first six  months of fiscal  1998,
representing  an increase of 72.2% and 87.8%  respectively,  over the comparable
periods  of  fiscal  1997.  These  increases  were due  primarily  to  increased
worldwide demand for semiconductor automatic test equipment, particularly in the
Asia Pacific region.  International net sales accounted for approximately  80.0%
and 74.0%, respectively, of the total net sales for the second quarter and first
six  months  of  fiscal  1998,   compared  to  approximately  71.0%  and  73.0%,
respectively, for the comparable periods a year ago. The Company's international
sales of its products and spare parts and its service  revenues are  denominated
primarily in United States dollars.  The increase in international  net sales in
the  second  quarter  and for the  first  six  months  of  fiscal  1998 over the
comparable  periods of fiscal 1997 was due to higher demand in Taiwan  partially
offset by a decrease  in demand in Europe.  The  Company  believes  that its net
sales  for the  short  term will be lower on a  sequential  basis  than in prior
periods.

GROSS MARGIN

     The  Company's  gross margin has been and will continue to be affected by a
variety of factors, including manufacturing efficiencies, pricing by competitors
or suppliers,  new product introductions,  product sales mix, production volume,
customization and  reconfiguration of systems,  international and domestic sales
mix and field service margins. Gross margin was 57.6% for the second quarter and
57.3% for the first six  months of  fiscal  1998,  compared  with  57.6% for the
second  quarter  and 54.8% for the first six months of fiscal  1997.  The slight
increase in gross  margin as a percent of sales for the first six months of 1998
over the first six month of fiscal 1997 was due to increases  in the  efficiency
of the production process, as well as higher  manufacturing and shipping volumes
which  spread fixed  production  costs over a greater  number of systems.  Gross
margins  in the first six months of 1997 was  negatively  impacted  by  reserves
taken  for  slow  moving  inventory   resulting  from  accelerated  new  product
introductions.



<PAGE>

RESEARCH AND DEVELOPMENT

     Research and development  expenses were $12.2 million in the second quarter
of fiscal  1998,  an increase  of $3.3  million or 36.6% over the same period of
fiscal 1997.  Research and development  expenses were $25.7 million in the first
six months of fiscal  1998,  an increase of $8.0  million or 44.9% over the same
period in fiscal  1997.  This  increase,  in  absolute  dollars,  reflected  the
Company's continued  development work on new products and product  enhancements.
As a percentage of net sales,  research and development  expenses were 16.4% for
the second quarter and for the first six months of fiscal 1998,  down from 20.7%
in the second  quarter  and 21.2% for the first six months of fiscal  1997.  The
decrease  in  these  expenses  as a  percentage  of net  sales  is  attributable
primarily to the significant increase in net sales in the second quarter and the
first six  months of fiscal  1998 as  compared  with the  comparable  periods of
fiscal 1997.  The Company  currently  intends to continue to invest  significant
resources  in the  development  of new  products  and  enhancements  of existing
products  for the  foreseeable  future.  Currently  the  Company  expects  these
expenses to decrease  slightly in absolute  dollars for the  remainder of fiscal
1998.

SELLING, GENERAL AND ADMINISTRATIVE

     Selling,  general and  administrative  expenses  were $17.9  million in the
second  quarter of fiscal 1998,  representing  an $5.9 million or 49.6% increase
from the comparable period of fiscal 1997.  Selling,  general and administrative
expenses  were $38.2 million in the first six months of fiscal 1998, an increase
of $14.8 million or 63.3% over the same period in fiscal 1997. The increase from
the prior period is primarily  due to  increased  commissions  payable on higher
sales and higher  marketing,  sales,  and  administrative  overhead  expenses to
support the Company's  increased  business levels. As a percentage of net sales,
selling,  general and administrative  expenses were 24.0% for the second quarter
and 24.4% for the first six  months  of fiscal  1998,  compared  with  27.6% and
28.0%, respectively, for the corresponding periods in fiscal 1997. This decrease
as a  percentage  of net  sales is  attributable  primarily  to the  significant
increase  in net sales in the second  quarter  and first half of fiscal  1998 as
compared  with the  comparable  periods of fiscal  1997.  Currently  the Company
expects selling, general and administrative expenses for the remainder of fiscal
1998 to decrease slightly in absolute dollars.

INTEREST INCOME AND OTHER EXPENSES, NET

     The  Company  generated  net  interest  income and other  expenses  of $0.2
million  for the second  quarter  and $1.2  million  for the first six months of
fiscal 1998,  compared to $0.9 million and $1.9 million,  respectively,  for the
corresponding  periods of fiscal 1997. The decreases in net interest  income and
other  expenses  over prior periods were  primarily  due to lower  interest rate
earned on the purchase of  additional  tax exempt  securities  and lower average
investment balances.

INCOME TAXES

     The Company's  provision for income taxes for the second  quarter and first
six months of fiscal 1998 and 1997 is computed based on the projected annualized
effective  tax  rate  of  34.0%  and  33.5%  respectfully,   applied  to  fiscal
year-to-date  book income.  The projected  effective tax rate for fiscal 1998 is
expected  to be less than the  combined  federal  and state  statutory  rate due
primarily to the projected benefit of the Company's foreign sales corporation.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash  provided  by  operating  activities  was $15.1  million  and $4.6
million for the six months ended April 30, 1998 and 1997, respectively. Net cash
flows  provided by operating  activities for the six months ended April 30, 1998
were primarily from net income of $18.0 million,  depreciation  and amortization
of $8.4 million and a net increase in accounts payable, accrued liabilities, and
income  taxes  payable of $4.6  million,  partially  offset by a net increase in
restricted cash,  accounts  receivable,  inventories and other current assets of
$16.0 million.

<PAGE>

Investing  activities  used $71.2  million and provided $3.4 million for the six
months ended April 30, 1998 and 1997,  respectively.  In the first six months of
fiscal  1998,  the  Company  experienced  a net  increase  of $62.7  million  in
short-term  and  long-term  investments  while also  purchasing  $5.4 million of
property and equipment.  Net cash used by financing activities was $10.8 million
and  provided  $0.8  million  for the six months  ended April 30, 1998 and 1997,
respectively.  The use of cash in the  first  six  months  of  fiscal  1998  was
primarily due to the Company  repurchasing 500,000 of its shares of common stock
at a cost of approximately  $12.8 million.  The purpose of the repurchase was to
offset potential future dilution resulting from increases in the Company's stock
option plan and employee stock purchase plan.

     As of April 30,  1998,  the Company had  working  capital of  approximately
$235.0  million,  including cash and short-term  investments of $149.2  million,
$60.8  million of accounts  receivable  and $52.7  million of  inventories.  The
Company  expects  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  subject the Company to increased  risks,
including  uncollectability  of receivables  and write-offs of both hardware and
software  inventories,  which could  materially  adversely  affect the Company's
business,   financial  condition  and  results  of  operations.   Total  current
liabilities  of $37.8 million as of October 31, 1997  increased to $41.6 million
as of April 30, 1998.  The $3.8 million  increase was due primarily to increases
in accrued liabilities by $4.0 million, offset by a decrease in accounts payable
of $0.2 million.

     The Company's principal sources of liquidity as of April 30, 1998 consisted
of  approximately  $65.8  million  of  cash  and  cash  equivalents,  short-term
investments  of $78.3  million and $20.0 million  available  under the Company's
unsecured working capital line of credit expiring on July 24, 1998. In addition,
the Company has $28.0 million of available-for-sale  investments,  classified as
long-term. As of April 30, 1998, no amounts were outstanding under the unsecured
line of credit.  Additionally,  as of April 30, 1998,  the Company has operating
leases for facilities and test and other equipment totaling  approximately $46.0
million.

     The  Company is  currently  in the  process of  assessing  and  testing the
software  components of its products for year 2000 compliance.  The Company does
not believe that its products contain  undetected  errors or defects  associated
with year 2000 date  functions that may result in material costs to the Company,
including repair costs and costs incurred in litigation due to any such defects,
however,  there can be no  assurance  that such  errors or defects do not exist.
Although the Company is not aware of any material  operational issues associated
with preparing its internal systems for the year 2000, there can be no assurance
that the Company will not experience serious unanticipated negative consequences
and/or  material costs caused by undetected  errors or defects in the technology
used in its internal  operating  systems,  which are composed  predominately  of
third party software and hardware technology.

     Many commentators have stated that a significant  amount of litigation will
arise out of year 2000 compliance issues. Because of the unprecedented nature of
such  litigation,  there  can be no  assurance  that  the  Company  will  not be
materially adversely affected by claims related to year 2000 compliance.


RISK FACTORS

     The Company's  results of operations  are affected by a variety of factors,
including the following:

Fluctuations in Operating Results

     The Company's  operating results have in the past fluctuated  significantly
and will in the future fluctuate significantly, due to a variety of factors. The
Company's  operating  performance  from the first quarter of fiscal 1993 through
the third quarter of fiscal 1996 produced sequential  quarter-to-quarter  growth
in both net sales and net


<PAGE>

income,  culminating  in net  sales of $67.2  million  and net  income  of $11.5
million for the third  fiscal  quarter of 1996.  The Company  then  reported two
consecutive  quarters of decreasing net sales and  decreasing  net income,  with
fourth  quarter of fiscal 1996 net sales of $44.2 million and net income of $4.3
million,  and first quarter of fiscal 1997 sales of $40.2 million and net income
of $1.0 million.  During the subsequent four consecutive  fiscal quarters,  from
the second  quarter of fiscal 1997 through the first quarter of fiscal 1998, the
Company's  net sales and net income  increased  sequentially,  excluding the net
loss reported in the third fiscal quarter of 1997 due to a pre-tax charge for in
process  research and development  related to an  acquisition.  With the charge,
results  for the third  quarter  of  fiscal  1997  reflected  a net loss of $0.9
million.  Without the charge,  third  quarter  fiscal 1997 net income would have
been $4.4 million.  At the peak of this four quarter  period ending in the first
quarter of 1998,  net sales for the first quarter  reached $82.4 million and net
income reached $9.2 million. In the second quarter of fiscal 1998, net sales and
net income  decreased from the first quarter of 1998. The decreases prior to the
fourth  quarter of fiscal 1997 were due primarily to a  significant  weakness in
the ATE market  which  materially  adversely  affected the  Company's  business,
financial condition and results of operations and several other companies in the
semiconductor  equipment  industry.  The ATE  industry  returned  to a  capacity
expansion  mode in fiscal 1997,  resulting in  sequential  increases in revenues
during the  second,  third,  and fourth  quarters  of fiscal  1997 and the first
quarter of fiscal 1998.  However in the second quarter of fiscal 1998, net sales
decreased 9% from the prior quarter due to an industry  slowdown and the Company
believes  that in the short term its net sales and net income,  if any,  will be
lower  sequentially  than in prior periods.  There can be no assurance they will
not continue to decrease in subsequent quarters.  Other factors that have caused
and will continue to cause the Company's results to fluctuate include the timing
of new product  announcements  and  releases by the Company or its  competitors,
market  acceptance  of new  products  and  enhanced  versions  of the  Company's
products,  manufacturing  inefficiencies  associated  with  the  start up of new
products,  changes in pricing or payment  terms and cycles by the  Company,  its
competitors,  customers or  suppliers,  manufacturing  capacity,  the ability to
volume produce systems and meet customer  requirements,  inventory  obsolescence
and writeoffs,  patterns of capital spending by customers, delays, cancellations
or reschedulings of orders due to customer financial  difficulties or otherwise,
changes in  overhead  absorption  levels due to changes in the number of systems
manufactured,  the timing and shipment of orders,  availability  of  components,
subassemblies and services, expenses associated with acquisitions and alliances,
product  discounts,   customization  and  reconfiguration  of  systems,  product
reliability,  the  proportion of direct sales and sales  through third  parties,
including distributors and original equipment manufacturers, the mix of products
sold, the length of manufacturing and sales cycles,  cyclicality or downturns in
the  semiconductor  market and the markets  served by the  Company's  customers,
natural disasters,  political and economic  instability,  regulatory changes and
outbreaks of hostilities.  The Company  presently  intends to introduce many new
products and product enhancements in the future, which will affect its operating
results, financial condition and business. The Company's gross margins on system
sales have varied  significantly,  and will continue to vary significantly based
on a variety  of  factors,  including  manufacturing  efficiencies,  pricing  by
competitors or suppliers,  product sales mix,  reserves,  production volume, new
product  introductions,  product reliability,  the rate of capacity utilization,
customization and  reconfiguration of systems,  international and domestic sales
mix and field service margins. In addition,  new and enhanced products typically
have lower gross  margins in the early  stages of  commercial  introduction  and
production.  While the Company has recorded and  continues to record  allowances
for  estimated  sales  returns  and  uncollectible  accounts,  there  can  be no
assurance that such estimates regarding allowances will be adequate.

Limited Systems Sales; Backlog

     The Company derives a substantial portion of its net sales from the sale of
a relatively small number of systems that typically range in price from $350,000
to $3.6 million,  excluding the EPRO memory products,  for which the price range
is typically  below $50,000.  As a result,  the timing of recognition of revenue
from a single  transaction could have a significant  impact on the Company's net
sales and operating results for a particular period. The Company's net sales and
operating results for a particular period could be materially adversely affected
if an  anticipated  order for even one system is not  received in time to permit
shipment during that period. The Company's backlog at the beginning of a quarter
typically does not include all orders  necessary to achieve the Company's  sales
objectives  for that  quarter.  In  addition,  orders in backlog  are subject to
cancellation,  delay,


<PAGE>

deferral  or   rescheduling   by  a  customer  with  limited  or  no  penalties.
Consequently,  the Company's net sales and operating  results for a quarter have
in the past and will in the future depend upon the Company  obtaining orders for
systems  to be  shipped  in  the  same  quarter  that  the  order  is  received.
Furthermore,  products generating most of the Company's net sales continue to be
shipped  near the end of each  quarter.  Accordingly,  the failure to receive an
anticipated  order or a delay or  rescheduling  in a shipment  near the end of a
particular  period due,  for  example,  to an order  cancellation,  a delay by a
customer, manufacturing, technical, reliability or other difficulties, including
difficulties  relating to customization and  reconfiguration of systems, a delay
in the  supply  of  components,  subassemblies  or  services  or a delay  due to
competitive or economic  factors,  may cause net sales in a particular period to
fall significantly below the Company's expectations, which could have a material
adverse effect upon the Company's  business,  financial  condition or results of
operations.  The relatively long manufacturing  cycle of many of its testers has
caused and could  continue  to cause  future  shipments  of such  products to be
delayed from one quarter to the next,  which could  materially  adversely affect
the  Company's   business,   financial   condition  or  results  of  operations.
Furthermore, announcements by the Company or its competitors of new products and
technologies could cause customers to defer or cancel purchases of the Company's
existing  systems,  which  could  also  have a  material  adverse  effect on the
Company's business,  financial condition or results of operations. The impact of
these and other  factors on the  Company's  sales and  operating  results in any
future period cannot be forecasted  with  certainty.  In addition,  the 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 the  Company  to  reduce  its  significant  fixed  expenses  in a
particular  period if the Company's net sales goals for such period are not met.
Accordingly,  there can be no assurance  that the Company will be  profitable or
that it will not sustain losses in future  periods.  Due to all of the foregoing
factors,  it is likely  that in some  future  quarter  the  Company's  operating
results will be below the  expectations of public market analysts and investors.
In such  event,  the  price of the  Company's  Common  Stock  may be  materially
adversely affected.

Cyclicality of Semiconductor Industry

     The Company's business and results of operations depend in significant part
upon the capital  expenditures of manufacturers of semiconductors  and companies
which  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.   Historically   and  recently,   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  manufactured  and marketed by
the Company.  The Company  believes  that the markets for newer  generations  of
semiconductors will also be subject to similar fluctuations.  The Company has in
the past experienced  shipment delays,  delays in commitments and purchase order
restructurings  by  several  of its  customers  and  anticipates  that  this may
continue to occur in the future. Accordingly,  the Company can give no assurance
that it will be able to achieve or maintain  its current or prior level of sales
or rate of growth.  Through the first three  quarters of 1997, the Company's net
sales,  gross  margins  and net income were  significantly  below the net sales,
gross  margins and net income,  respectively,  of the  comparable  prior  year's
quarterly results.  In the fourth quarter of 1997 and the first quarter of 1998,
the  Company's net sales and net income were  significantly  above the net sales
and net  income of the  fourth  quarter  of 1996 and the first  quarter of 1997,
respectively.  However,  in the second quarter of fiscal 1998, net sales and net
income  decreased  over the first quarter of fiscal 1998,  the Company  believes
they will decrease further in the short term, and there can be no assurance that
they will not  decrease  from  prior  quarter  or prior  year  amounts in future
quarters.  The Company  anticipates 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,
any factor adversely affecting the semiconductor industry or particular segments
within the semiconductor  industry may adversely affect the Company's  business,
financial  condition  or  results  of  operations.  Therefore,  there  can be no
assurance  that  the  Company's  operating  results  will  not  continue  to  be
materially  adversely  affected if downturns  or slowdowns in the


<PAGE>

semiconductor  industry continue or occur again in the future. Company net sales
to the Asia Pacific region accounted for  approximately  68%, 63%, 66%, 58%, and
45% of total net sales in the second  quarter and first half of fiscal 1998, and
fiscal years 1997,  1996, and 1995, and thus are subject to the risk of economic
instability in that region that might materially adversely affect the demand for
the Company's products.  The current 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 ATE which the Company sells.  This
industry  slowdown  has had and may  continue  to have an adverse  impact on the
Company's product backlog, balance sheet and results of operations.

Management of Fluctuations in Operating Results

     The  Company  has over  the  last  several  years  experienced  significant
fluctuations  in its  operating  results.  Since  1993,  the Company has overall
significantly  increased the scale of its operations to support  increased sales
levels and has expanded its operations to address  critical  infrastructure  and
other requirements,  including the hiring of additional  personnel,  significant
investments in research and  development  to support  product  development,  the
March 1995  acquisition of EPRO, the Company's  establishment of a joint venture
with Innotech,  Inc.,  the Company's  acquisition in July 1997 of the assets and
certain  liabilities of Test Systems  Strategies,  Inc. ("TSSI"),  the Company's
acquisition  in August 1997 of a software  product  line from Zycad  Corporation
("Zycad")  and the June 1998  acquisition  of assets and  assumption  of certain
liabilities from Heuristics Physics  Laboratories,  Inc. ("HPL").  However,  the
Company has during certain historical periods,  as discussed above,  experienced
revenue  declines and reductions in its  operations.  These  fluctuations in the
Company's  sales  and  operations  have  placed  a  considerable  strain  on its
management,   financial,   manufacturing  and  other  resources.   In  order  to
effectively  deal with the  changes  brought  on by the  cyclical  nature of the
industry,  the Company has 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 the  Company's  business.
There can be no  assurance  that any  existing  or new  systems,  procedures  or
controls will be adequate to support fluctuations in the Company's operations or
that its systems,  procedures  and controls  will be  designed,  implemented  or
improved  in a cost  effective  and timely  manner.  Any  failure to  implement,
improve and expand or  contract  such  systems,  procedures  and  controls in an
efficient  manner at a pace consistent with the Company's  business could have a
material  adverse  effect on the  Company's  business,  financial  condition  or
results of operations.

Expansion of Operations

     Currently,  the Company is devoting and will continue to devote significant
resources to the development of new products and technologies.  During 1998, the
Company is  conducting  evaluations  of these new products and will  continue to
invest  significant   additional  resources  in  plant  and  equipment,   leased
facilities,  inventory,  personnel and other costs, to begin or prepare to begin
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, there can be no assurance that
gross profit margin and inventory  levels will not be adversely  impacted in the
future by start-up costs associated with the initial production and installation
of these new product lines.  These  start-up costs include,  but are not limited
to, additional manufacturing overhead, additional inventory and warranty reserve
requirements and the creation 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  increase the risk of
inventory  write-offs.  Additionally,  there can be no assurance  that operating
expenses will not increase,  relative to sales, as a result of adding additional
marketing  and  administrative  personnel,  among  other  costs,  to support the
Company's additional products. If the Company is unable to achieve significantly
increased  net  sales  or its  sales  fall  below  expectations,  the  Company's
operating  results  will  be  materially  adversely  affected.  There  can be no
assurance  that net sales will  increase or remain at recent  levels or that any
new products will be successfully commercialized.


<PAGE>

Limited Sources of Supply; Reliance on Subcontractors

     Certain   components,   subassemblies   and  services   necessary  for  the
manufacture  of the  Company's  testers  are  obtained  from a limited  group of
suppliers.  The Company does not maintain  long-term supply agreements with most
of its vendors and purchases most of its components  and  subassemblies  through
individual  purchase  orders.  The  manufacture  of  certain  of  the  Company's
components and subassemblies is an extremely  complex process.  The Company also
relies on outside vendors to manufacture  certain  components and  subassemblies
and to provide  certain  services.  The Company  has  recently  experienced  and
continues to experience significant reliability, quality and timeliness problems
with several critical  components.  In addition,  the Company and certain of its
subcontractors  periodically  experience  significant  shortages  and  delays in
delivery of various components and subassemblies. There can be no assurance that
these or other  problems  will not continue to occur in the future with these or
the Company's other suppliers or outside subcontractors.  The Company's reliance
on  a  limited  group  of  suppliers  and  the  Company's  reliance  on  outside
subcontractors  involve several risks, including a potential 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  has delayed
and could continue to delay shipments of the Company's  systems and could have a
material  adverse  effect on the  Company's  business,  financial  condition  or
results of operations.  Any continuing  inability to obtain  adequate  yields or
timely  deliveries or any other  circumstance  that would require the Company to
seek alternative sources of supply or to manufacture such components  internally
could  have a  material  adverse  effect on the  Company's  business,  financial
condition or results of operations. Such delays, shortages and disruptions would
also damage relationships with current and prospective customers and could allow
competitors to penetrate such customer accounts.  There can be no assurance that
the  Company's  internal  manufacturing  capacity and that of its  suppliers and
subcontractors will be sufficient to meet customer requirements.

Highly Competitive Industry

     The automatic test  equipment  ("ATE")  industry is intensely  competitive.
Because of the  substantial  investment  required  to develop  test  application
software  and  interfaces,  the  Company  believes  that  once  a  semiconductor
manufacturer  has selected a particular ATE vendor's tester,  the  semiconductor
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.  The  inability of the Company to penetrate  any large
ATE  customer  or achieve  significant  sales to any ATE  customer  could have a
material  adverse  effect on the  Company's  business,  financial  condition  or
results of operations.

     The Company faces substantial  competition  throughout the world, primarily
from ATE manufacturers  located in the United States,  Europe and Japan, as well
as several of the Company's  customers.  Many of the Company's  competitors have
substantially  greater  financial  and  other  resources  with  which to  pursue
engineering,  manufacturing,  marketing  and  distribution  of  their  products.
Certain of the Company's  competitors have recently  introduced or announced new
products with certain performance or price  characteristics equal or superior to
certain products currently offered by the Company.  The Company believes that if
the ATE  industry  continues  to  consolidate  through  strategic  alliances  or
acquisitions,   the  Company  will  continue  to  face  significant   additional
competition  from larger  competitors that may offer more complete product lines
and services  than the Company.  The  Company's  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  the  Company's
competitors  could  continue  to cause a  decline  in  sales  or loss of  market
acceptance of the Company's existing products.  Moreover,  increased competitive
pressure could continue to lead to intensified  price-based  competition,  which

<PAGE>

could materially adversely affect the Company's business, financial condition or
results of operations.  The Company has  experienced and continues to experience
significant price competition in the sale of all of its testers. In addition, at
the  end  of  a  product   life  cycle  and  as   competitors   introduce   more
technologically  advanced  products,  pricing  pressures  typically  become more
intense as the Company has  experienced  with sales of its older  products.  The
Company believes that to be competitive,  it must continue to expend significant
financial  resources  in order to,  among  other  items,  invest in new  product
development  and  enhancements  and to  maintain  customer  service  and support
centers  worldwide.  There can be no assurance  that the Company 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 and new  product
introductions and enhancements and related software tools. The Company's ability
to be  competitive  in this  market  will  depend in  significant  part upon its
ability to successfully develop and introduce new hardware and software products
and  enhancements  and related  software tools with greater features on a timely
and cost-effective  basis,  including the products under development acquired in
the EPRO  merger and the TSSI,  Zycad and HPL  product  line  acquisitions.  The
Company's  customers  require  testers and  software  products  with  additional
features and higher performance and other capabilities. The Company is therefore
required to enhance  the  performance  and other  capabilities  of its  existing
systems and software  products and related  software  tools.  Any success by the
Company in  developing  new and enhanced  systems and software  products and new
features to its existing systems and software products depends upon a variety of
factors, including product selection, timely and efficient completion of product
design,  implementation of manufacturing  and assembly  processes and coding and
debugging of software,  product  performance  and  reliability  in the field and
effective sales and marketing.  Because new product development commitments must
be made well in advance of sales,  new product  decisions must  anticipate  both
future demand and the  availability of technology to satisfy that demand.  There
can  be  no  assurance  that  the  Company  will  be  successful  in  selecting,
developing,  manufacturing  and marketing new hardware and software  products or
enhancements  and  related  software  tools.  The  inability  of the  Company 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 the Company's  business,  financial  condition or results of operations.  New
product or technology  introductions by the Company's  competitors could cause a
decline  in  sales  or loss  of  market  acceptance  of the  Company's  existing
products.  In addition,  new product  introductions by the Company may cause the
Company's  customers to curtail  purchases  of the older  products and delay new
product purchases.  Any decline in demand for the Company's hardware or software
products,  compared  to the  demand  anticipated  by the  Company,  could have a
materially  adverse  affect on the Company's  business,  financial  condition or
results of operations.

<PAGE>

     Significant  delays  can occur  between  a  system's  introduction  and the
commencement by the Company of volume production of such system. The Company has
in the past  experienced and continues to experience  significant  delays in the
introduction,  volume  production  and sales of its systems and related  feature
enhancements,   including  new  models  within  the  digital,  mixed-signal  and
non-volatile  memory  product  lines,  due to  technical,  manufacturing,  parts
shortages,  component  reliability  and other  difficulties  and may continue to
experience  similar delays in the future. As a result,  certain of the Company's
significant customers have experienced significant delays in receiving and using
certain of the Company's  testers in production.  There can be no assurance that
these or additional  difficulties  will not continue to arise in the future with
respect  to the  Company's  systems  or that  such  delays  will not  materially
adversely affect customer relationships and future sales. Moreover, there can be
no assurance  that the Company will not  encounter  these or other  difficulties
that could  delay  future  introductions  or volume  production  or sales of its
systems or enhancements and related software tools. The Company has incurred and
may   continue  to  incur   substantial   unanticipated   costs  to  ensure  the
functionality  and  reliability of its testers and to increase  feature sets. If
the Company's systems continue to have  reliability,  quality or other problems,
or  the  market  perceives  certain  of the  Company's  products  to be  feature
deficient,  reduced orders,  higher  manufacturing  costs,  delays in collecting
accounts  receivable  and higher  service,  support and  warranty  expenses,  or
inventory write-offs,  among other items, could result. The Company's failure to
have a competitive  tester and related software tools available when required by
a semiconductor  manufacturer could make it substantially more difficult for the
Company to sell testers to that  manufacturer for a number of years. The Company
believes that the continued acceptance,  volume production,  timely delivery and
customer satisfaction of its newer digital, mixed signal and non-volatile memory
testers are of critical importance to its future financial results. As a result,
an inability to correct any  technical,  reliability,  parts  shortages or other
difficulties  associated  with the Company's  systems or to manufacture and ship
the  Company's  systems on a timely basis to meet  customer  requirements  could
damage relationships with current and prospective customers and would materially
adversely  affect the  Company's  business,  financial  condition  or results of
operations.

Customer Concentration; Lengthy Sales Cycle

     One customer (a distributor in the Asia Pacific Region)  accounted for 40%,
34%, 30%, 25% and 17% of the Company's net sales in the second quarter of fiscal
1998 and in the first half of fiscal 1998 and fiscal years 1997,  1996 and 1995,
respectively.  Another  customer  accounted for 11% of net sales in fiscal 1995.
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 the Company's  products,  continued
slowdowns in the semiconductor  industry or in other industries that manufacture
products  utilizing  semiconductors,   could  materially  adversely  affect  the
Company's business,  financial condition or results of operations. The Company's
ability to maintain or  increase  its sales  levels in the future will depend in
significant  part  upon its  ability  to obtain  orders  from  existing  and new
customers and to manufacture  systems on a timely and cost-effective  basis, the
financial condition and success of its customers,  general economic  conditions,
and the Company's ability to meet increasingly  stringent  customer  performance
and other  requirements and shipment  delivery dates.  There can be no assurance
that the Company will be able to maintain or increase the level of its net sales
in the future or that the Company will be able to retain  existing  customers or
attract new ones.

     Sales of the Company's systems depend in significant part upon the decision
of a semiconductor  manufacturer  to develop and  manufacture new  semiconductor
devices  or to  increase  manufacturing  capacity.  As a  result,  sales  of the
Company's  testers are subject to a variety of factors  outside of the Company's
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,
the  Company's  systems have lengthy  sales cycles  during which the Company may
expend  substantial funds and management effort to secure a sale and subject the
Company to a number of significant risks.

Acquisitions

     The  Company  has  developed  in  significant   part  through  mergers  and
acquisitions  of other  companies and  businesses.  Prior to its initial  public
offering in 1993, the Company acquired two companies and the semiconductor  test
division of Tektronix,  Inc. In 1995, the Company acquired EPRO, a memory tester
company.  In July 1997,  the Company  acquired  the assets and  assumed  certain

<PAGE>

liabilities of TSSI and, in August 1997,  acquired the fault simulation and test
program  development  products  from Zycad.  In June 1998 the  Company  acquired
certain assets and assumed  certain  liabilities of HPL. The Company  intends in
the future to pursue  additional  acquisitions of  complementary  product lines,
technologies and businesses. Any future acquisitions by the Company could result
in potentially  dilutive issuances of equity securities,  the incurrence of debt
and contingent liabilities, expenditures and reserves, and amortization expenses
related to goodwill and other  intangible  assets (which may exceed the benefits
actually derived from the acquisitions), which could materially adversely affect
the  Company's  business,  financial  condition  or results of  operations.  The
Company's  charge for  in-process  research and  development  for the TSSI asset
acquisition  accounted for the Company's net loss for the third quarter of 1997.
In addition,  acquisitions involve numerous other risks,  including difficulties
in the assimilation of the operations,  personnel,  technologies and products of
the acquired  companies,  the  diversion of  management's  attention  from other
business  concerns,  risks of  entering  markets in which the  Company has no or
limited direct prior experience,  and the potential loss of key employees of the
acquired  company.  From  time to time,  the  Company  has  engaged  in and will
continue  to engage in  discussions  with  third  parties  concerning  potential
acquisitions of product lines,  technologies  and businesses.  In the event that
such an  acquisition  does occur,  however,  there can be no assurance as to the
effect  thereof on the  Company's  business,  financial  condition or results of
operations.

Dependence on Key Personnel

     The Company's future operating  results depend in significant part upon the
continued service of its key personnel,  none of whom are bound by an employment
or non-competition agreement. The Company's future operating results also depend
in significant part upon its ability to attract and retain qualified management,
manufacturing,  technical,  engineering  and  marketing  and sales  and  support
personnel.  Competition  for such  personnel  is  intense,  and  there can be no
assurance  that the Company will be successful  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 the
Company to hire such  personnel  over time.  The loss of any key  employee,  the
failure of any key  employee to perform in his or her current  position,  or the
Company's  inability to attract and retain skilled employees,  as needed,  could
materially  adversely  affect the  Company's  business,  financial  condition or
results of operations.

International Sales

     International  sales accounted for approximately 80%, 74%, 70%, 67% and 55%
of total net sales for the  second  quarter  and first  half of fiscal  1998 and
fiscal  years  1997,  1996 and  1995,  respectively.  As a result,  the  Company
anticipates that international  sales will continue to account for a significant
portion of total net sales in the foreseeable future.  These international sales
will continue to be subject to certain  risks,  including  changes in regulatory
requirements, tariffs and other barriers, political and economic instability, an
outbreak  of  hostilities,   integration  of  foreign   operations  of  acquired
businesses,  foreign  currency  exchange rate  fluctuations,  difficulties  with
distributors, joint venture partners, original equipment manufacturers,  foreign
subsidiaries and branch operations, potentially adverse tax consequences and the
possibility of difficulty in accounts receivable collection. The Company is also
subject  to  the  risks  associated  with  the  imposition  of  legislation  and
regulations  relating to the import or export of  semiconductor  equipment.  The
Company  cannot  predict  whether  quotas,  duties,  taxes or other  charges  or
restrictions  will be implemented by the United States or any other country upon
the importation or exportation of the Company's  products in the future.  Any of
these  factors or the  adoption of  restrictive  policies  could have a material
adverse  effect on the  Company's  business,  financial  condition or results of
operations.  Company  net  sales  to  the  Asia  Pacific  region  accounted  for
approximately  68%,  66%,  66%,  58% and 45% of total  net  sales in the  second
quarter and first half of fiscal 1998 and fiscal years 1997, 1996, and 1995, and
thus are subject to the risk of economic  instability  in that region that might
materially adversely affect the demand for the Company's products.  Countries in
the Asia Pacific region,  including Japan, have recently experienced  weaknesses
in their currency,  banking and equity markets. These weaknesses could adversely
affect demand for the Company's products, the availability and supply of product
components to the Company, and ultimately the Company's  consolidated results of
operations.  The current 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 ATE which the Company sells. This industry slowdown
has had  and may  continue to have an adverse  impact on the  Company's  product
backlog, balance sheet and results of operations.

<PAGE>

Importance of Japanese Market

     To date,  the  Company  has made  limited  sales of its systems to Japanese
semiconductor  manufacturers.   The  Japanese  semiconductor  market  is  large,
represents a substantial percentage of the worldwide semiconductor manufacturing
capacity,  and is difficult for foreign companies to penetrate.  The Company may
be at a competitive  disadvantage with respect to Japanese semiconductor capital
equipment  suppliers  that have  been  engaged  for some  time in  collaborative
efforts with Japanese semiconductor manufacturers. The Company believes that the
Japanese  companies with which it competes have a competitive  advantage because
of their  dominance of the Japanese market  segment.  The Company  believes that
increased  penetration  of the Japanese  market is  important  to its  financial
results  and intends to continue  to invest  significant  resources  in Japan in
order to meet this objective.  As part of its strategy to penetrate the Japanese
market,  the  Company  entered  into a joint  venture  agreement  with  Innotech
Corporation,  a local distributor of its products, and set up a local subsidiary
in Japan.  The Company  believes  that  Innotech is an important  element of its
strategy to increase its  presence in Japan.  If Innotech is not  successful  in
selling such systems or such agreement is terminated,  the Company's strategy to
increase product sales into the Japanese market would be adversely affected.  In
addition, in recent years, Japanese  semiconductor  manufacturers  substantially
reduced  their  level of capital  spending  on new  fabrication  facilities  and
equipment,  thereby  increasing  competitive  pressures in the  Japanese  market
segment.  There can be no assurance,  however,  that the Company will be able to
achieve  significant  sales to, or will be able to compete  successfully in, the
Japanese semiconductor market segment.

Proprietary Rights

     The Company  attempts to protect its  intellectual  property rights through
patents,  copyrights,  trademarks,  trade secrets and other measures,  including
confidentiality  agreements.  There can be no  assurance  that  others  will not
independently  develop  substantially  equivalent  proprietary  information  and
techniques  or otherwise  gain access to the  Company's  trade secrets and other
intellectual property rights or disclose such technology or that the Company can
meaningfully  protect its trade secrets or other  intellectual  property rights.
There  can be no  assurance  that  patents  owned  by the  Company  will  not be
invalidated,  deemed  unenforceable,  circumvented  or  challenged,  or that the
rights granted thereunder will provide competitive  advantages to the Company or
that any of the Company's  pending or future patent  applications will be issued
with claims of the scope sought by the Company,  if at all.  Furthermore,  there
can be no assurance that others will not develop similar products, duplicate the
Company's  products  or design  around  the  patents  owned by the  Company.  In
addition,  there can be no assurance that foreign intellectual  property laws or
the  Company's  agreements  will  protect the  Company's  intellectual  property
rights. Failure to protect the Company's intellectual property rights could have
a material adverse effect upon the Company's  business,  financial  condition or
results of operations. The Company has been involved in extensive, expensive and
time-consuming  reviews  of,  and  litigation  concerning,  patent  infringement
claims. In addition, the Company has at times been notified of other claims that
it may be infringing intellectual property rights possessed by third parties and
expects to continue to receive notice of such claims in the future.

     The European patent  application  relating to one of the  proprietary  CMOS
stabilization  methods  owned by the  Company was  abandoned  by the prior owner
after the  European  patent  examiner  cited  prior art.  This prior art was not
referenced in the corresponding United States patent application. Based upon its
review to date of the cited prior art and the  European  examiner's  objections,
and in part upon the  advice of  outside  patent  counsel  to the  Company,  the
Company believes that such prior art is unlikely to affect the validity or scope
of the claims of the United States issued patent.

     This prior art may,  however,  render invalid or  significantly  narrow the
scope of certain claims set forth in the United States patent  covering  another
of the Company's  proprietary CMOS stabilization  methods. The European examiner
referred to this prior art in the corresponding European patent application. The
European  application  was approved,  but with  narrower  claims than the United
States  patent.  This prior art was not referenced in the  corresponding  United
States patent.  Based in part upon the advice of outside patent counsel,  and on
the Company's  review of its current  products,  the Company  believes that this
patent will  continue to be valuable to the Company in  preventing  imitation of
the Company's  products  covered by this patent.  Additionally,  in mid-1992,  a
third party  suggested  that  certain  claims set forth in this patent  might be
invalid as a result of other alleged prior art. The Company  believes,  based in
part upon the advice of outside  patent  counsel,  that the prior art alleged by
the third party is less relevant  than the prior art  referenced by the European
examiner.  However,  there can be no  assurance  that any of the  aforementioned
prior  art or other  prior  art will not be  successfully  asserted  and used to

<PAGE>

invalidate or narrow the scope of any claim of the United States  patents or any
other patents or other patent applications of the Company.

     On November 13, 1997,  the Company  requested  the United States Patent and
Trademark  Office to re-examine the subject United States patent in light of the
two prior art  references.  On  January 7, 1998,  the United  States  Patent and
Trademark Office responded by granting the Company's request for re-examination.
The case is presently pending in the United States Patent and Trademark Office.

     Certain of the Company's  customers have received  notices of  infringement
from Jerome  Lemelson  alleging that the manufacture of  semiconductor  products
and/or  the  equipment  used to  manufacture  semiconductor  products  infringes
certain patents issued to such person. The Company was notified by a customer in
1990 and a different  customer in late 1994 that the Company may be obligated to
defend or settle  claims that the  Company's  products  infringe  such  person's
patents,  and,  in the event it is  subsequently  determined  that the  customer
infringes such person's  patents,  such customer  intends to seek  reimbursement
from the  Company  for  damages  and  other  related  expenses.  There can be no
assurance  that the Company will be  successful  in defending  current or future
patent  infringement  claims  or  claims  for  indemnification   resulting  from
infringement  claims. An award of damages,  injunctive relief or expenditures by
the Company of significant amounts in defending any such action could materially
adversely  affect the  Company's  business,  financial  condition  or results of
operations,  regardless  of the outcome of any  litigation.  With respect to any
claims,  the  Company  may seek to  obtain a license  under  the  third  party's
intellectual property rights. There can be no assurance, however, that a license
will be available on reasonable  terms or at all. The Company  could decide,  in
the  alternative,  to continue to resort to litigation to challenge such claims.
Such challenges have been and could continue to be extremely  expensive and time
consuming,  and  could  materially  adversely  affect  the  Company's  business,
financial  condition or results of operations,  regardless of the outcome of any
litigation.

Future Capital Needs

     The  development and  manufacture of new ATE systems and  enhancements  are
highly  capital  intensive.  In order to be  competitive,  the Company 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. The Company expects that
cash on  hand  and  cash  equivalents,  including  restricted  cash,  short-term
investments,  funds  available under its bank line of credit,  anticipated  cash
flow from operations and equipment lease arrangements will satisfy its financing
requirements for at least the next 12 months.

Year 2000 Compliance

     Many currently  installed  computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning with the year
2000,  these  date  code  fields  may  need  to  accept  four-digit  entries  to
distinguish  21st century dates from 20th century dates.  As a result,  computer
systems  and/or  software  used by many  companies  will need to be  upgraded to
comply  with such  "Year  2000"  requirements.  Significant  uncertainty  exists
concerning the potential effects associated with such compliance. The Company is
currently in the process of assessing and testing the software components of its
products  for year  2000  compliance.  The  Company  does not  believe  that its
products  contain  undetected  errors or defects  associated with year 2000 date
functions  that may result in material  costs to the Company,  including  repair
costs and costs incurred in litigation due to any such defects,  however,  there
can be no assurance that such errors or defects do not exist.  Many commentators
have stated that a significant  amount of litigation will arise out of year 2000
compliance issues. Because of the unprecedented nature of such litigation, there
can be no assurance that the Company will not be materially  adversely  affected
by claims related to year 2000 compliance.

     Although  the  Company  is not  aware of any  material  operational  issues
associated with preparing its internal  systems for the year 2000,  there can be
no assurance that the Company will not experience serious unanticipated negative
consequences and/or material costs caused by undetected errors or defects in the
technology  used  in  its  internal  operating   systems,   which  are  composed
predominately of third party software and hardware technology.

<PAGE>

Volatility of Stock Price

     The Company  believes that factors such as  announcements  of  developments
related to the  Company's  business,  fluctuations  in the  Company's  financial
results,  general  conditions or developments in the  semiconductor  and capital
equipment industry and the general economy,  sales of the Company's Common Stock
into the marketplace, announcements of technological innovations or new products
or  enhancements by the Company or its  competitors,  developments in patents or
other intellectual property rights,  developments in the Company's relationships
with its 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  cause the price of the
Company's Common Stock to fluctuate, perhaps substantially.  In recent years the
stock  market in  general,  and the market  for  shares of small  capitalization
stocks in  particular,  including the Company,  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 the  Company's
Common Stock  ranged from a high of $55.00 to a low of $13.75.  In the first six
months of fiscal 1998, the price of the Company's Common Stock has ranged from a
high of $35.25 to a low of  $18.13.  There can be no  assurance  that the market
price of the Company's Common Stock will not continue to experience  significant
fluctuations  in the future,  including  fluctuations  that are unrelated to the
Company's performance.

Leverage

     In connection  with the sale in September 1997 of Convertible  Subordinated
Notes due 2002, the Company incurred $115 million of indebtedness which resulted
in a ratio of  long-term  debt to total  capitalization  at October  31, 1997 of
approximately 36%. As a result of this indebtedness, the Company's principal and
interest  obligations  has  increased  substantially.  The  degree  to which the
Company is leveraged could materially  adversely affect the Company's ability to
obtain financing for working  capital,  acquisitions or other purposes and could
make it more  vulnerable to industry  downturns and competitive  pressures.  The
Company's  ability to meet its debt service  obligations  will be dependent upon
the Company's future performance,  which will be subject to financial,  business
and other  factors  affecting the  operations of the Company,  many of which are
beyond its control.

Effects of Certain Anti-Takeover Provisions

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


<PAGE>

PART II.  - OTHER INFORMATION

Item 1. Legal Proceedings

     None

Item 2. Changes in Securities

     None

Item 3. Defaults upon Senior Securities

     None

Item 4. Submission of Matters to a Vote of Securityholders

     The following  proposals were voted upon by the Company's  stockholders  at
the Annual Meeting of Stockholders held on March 26, 1998:

1.   The  following  persons  were duly  elected as  directors of the Company to
     serve for a three-year term ending upon the year 2000 Annual  Stockholders'
     Meeting or until their successors are elected and qualified:
<TABLE>
<CAPTION>
                                           Votes For            Votes Withheld
                                           ----------           --------------
     <S>                                   <C>                      <C>
     Jos. C. Henkens ....................  20,427,773               20,942
     William G. Howard, Jr ..............  20,414,423               34,292
</TABLE>

2.   A proposal  to amend the  Company's  1993 Stock  Option  Plan (the  "Option
     Plan") to increase the maximum number of shares of Common Stock  authorized
     for issuance  over the term of the Option Plan from  4,125,001 to 4,625,001
     shares was approved as follows:

                In Favor                  Opposed                Withheld
               ----------                ---------               --------
               11,303,376                6,346,065                101,073

3.   A proposal to amend the Company's the Option Plan to implement an automatic
     share increase feature pursuant to which the number of shares available for
     issuance  under the Option  Plan will  automatically  increase on the first
     trading day of each fiscal year,  subject to a formulated cap, was approved
     as follows:

                In Favor                  Opposed                 Withheld
               ----------                ---------                --------
               11,195,030                6,450,246                 105,238

4.   A proposal to ratify the  election  of Ernst & Young LLP, as the  Company's
     independent  auditors  for the fiscal  year  ending  October  31,  1998 was
     approved as follows:

                In Favor                  Opposed                 Withheld
               ----------                ---------                --------
               20,335,613                   95,099                  18,003


Item 5. Other Information

     None

Item 6. Exhibits and Reports on Form 8-K

     (a) See Exhibit Index on page 22.

     (b)  A  report  on Form 8-K was  filed  on  February  23,  1998,  reporting
          earnings for first Quarter of fiscal 1998.


<PAGE>

                                   SIGNATURES

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


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



         June 10, 1998                  /s/ DENNIS P. WOLF
      -------------------       ------------------------------------
             Date                       Dennis P. Wolf
                                        Senior Vice President,
                                        Chief Financial Officer




<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                                                    PAGE
-------                                                                   ----
<C>      <S>                                                               <C>

 2.11    Asset Purchase Agreement, dated as of June 1, 1998,
         between Credence Systems Corporation, a Delaware corporation
         and Yervant David Lepejian and Lawrence Kraus, as authorized 
         representatives of all of the shareholders of Heuristic Physics
         Laboratories, Inc., a California corporation.  The Company
         shall furnish supplementally a copy of any omitted schedules
         to the Commission upon request.                                   23

10.26    Lease Agreement between the Company and Pacific Realty
         Associates, L.P., dated April 10, 1998.                           54

27.1     EDGAR Financial Data Schedule                                     89


</TABLE>