<PAGE>

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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                               -----------------

                                   FORM 10-K

                               -----------------

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 [NO FEE REQUIRED]

   For the fiscal year ended October 31, 2001

                                      OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

    For the transition period from ______________ to ________________

                                    0-22366
                           (Commission file number)

                               -----------------

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

                               -----------------

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

                 215 Fourier Avenue,              94539
                 Fremont, California           (Zip Code)
                (Address of principal
                  executive office)

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

          Securities registered pursuant to Section 12(b) of the Act:

                 Title of each class    Name of each exchange on
                        None                which registered
                                                  None

          Securities registered pursuant to Section 12(g) of the Act:

                        Common Stock, $0.001 par value
                        Preferred Stock Purchase Rights

                               -----------------

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

   Indicate by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

   The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of January 3, 2002 was approximately $1,260,833,000 (based upon
the closing price for shares of the Registrant's common stock as reported by
the Nasdaq National Market for the last trading date prior to that date).
Shares of common stock held by each officer, director and holder of 5% or more
of the outstanding common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

   On January 3, 2002, approximately 60,326,952 shares of the Registrant's
common stock, $0.001 par value, were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the Registrant's Proxy Statement for the 2001 Annual Meeting of
Stockholders to be held on March 20, 2002 are incorporated by reference into
Part III.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<PAGE>

                                    PART I

Item 1.  Business

   Credence Systems Corporation designs, manufactures, sells and services
engineering validation test and automatic test equipment, or ATE, used for
testing semiconductor integrated circuits, or ICs. We also develop, license and
distribute software products that provide automation solutions in the design
and test flow fields. We serve a broad spectrum of the semiconductor industry's
testing needs through a wide range of products that test digital logic,
mixed-signal, system-on-a-chip, radio frequency, volatile, static and
non-volatile memory semiconductors. We utilize our proprietary technologies to
design products which are intended to provide a lower total cost of ownership
than many competing products currently available while meeting the increasingly
demanding performance requirements of today's engineering validation test and
ATE markets. Our hardware products are designed to test semiconductors at two
stages of their lifecycle; first, at the prototype stage and second, as they
are produced in high volume. Our software products enable design and test
engineers to develop and trouble shoot production test programs prior to
fabrication of the device prototype. Collectively, our customers include major
semiconductor manufacturers, fabless design houses, foundries and assembly and
test services companies.

   We were incorporated in California in March 1982 to succeed to the business
of a sole proprietorship and were reincorporated in Delaware in October 1993.
"Credence" or the "Company", "we," us" and "our" refers to Credence Systems
Corporation and our subsidiaries. Our principal executive offices are located
at 215 Fourier Avenue, Fremont, CA 94539, and our telephone number is (510)
657-7400. Our worldwide website address is www.credence.com. "Credence Systems
Corporation," "Credence," "IMS" "Fluence," "SC," "ValStar," "Quartet," "Quartet
One," " Electra," "Vanguard," "Wavebridge," "MemBIST," "TDS," "TDX," "Triton,"
"EPRO," "BOST," "MemBOST," "Kalos," "DUO," "TMT," "MVNA," "Opmaxx,"
"DirectTest" and "Virtual Test" are our trademarks. This Annual Report on Form
10-K also includes trademarks of other companies. "Matrix Test" is a trademark
of Amkor Technology, Inc.

Background

   The semiconductor industry's successful production of increasingly smaller,
faster and more sophisticated ICs has made semiconductor devices available for
a wide range of applications. This trend, together with a continual drive to
reduce production costs, has resulted in reduced average selling prices and
semiconductor content growth in almost all appliances ranging from dishwashers
to automobiles, cell phones to PDAs and laptops to servers. At the same time
semiconductors have emerged as the building blocks of the communications,
internet and telephony infrastructures. It has become increasingly important
for semiconductor manufacturers to seek ways to reduce manufacturing costs
while improving their time to volume production and profit.

   The process of designing and manufacturing integrated circuits is complex
and capital-intensive, involving stages of design, prototype manufacture,
engineering validation test of the prototypes, device manufacture and
production test. Each stage in this process has come under pressure as
integrated circuits have increased in complexity and speed. At the design
stage, advances in electronic design automation, or EDA, software have allowed
design engineers to work with integrated circuit designs at increasingly higher
levels of abstraction, permitting engineers to design significantly more
complex integrated circuits in less time. The ability to design more complex
and capable circuits, together with advances in manufacturing processes, has
resulted in an approximate doubling of chip speed and complexity every two
years. However, as integrated circuits have become more complex and as device
manufacturers have increasingly sought ways to introduce products to market
more rapidly, critical limitations have become increasingly apparent in the
integrated circuit design-to-production process flow.

   Today, IC design and manufacturing is, to a large extent, a serial process
that crosses organizational, functional and often geographical boundaries. In
general, a design has to be complete before prototypes can be

                                      1

<PAGE>

built; prototypes have to be built before they can be tested; and prototypes
have to be production-ready before production test software can be debugged and
refined. Production test software can take significant time to debug and
refine, so the need to wait until a physical part has been produced to perform
that process delays an integrated circuit's introduction to the market. Even
then, test failures can raise the question of whether the integrated circuit
itself is flawed, or the test has an error. In addition, an IC's design may be
so sophisticated that some or all of its functionality cannot effectively be
tested. Designs that are discovered to be un-testable when produced require
another iteration of the integrated circuit process flow. These challenges are
further exacerbated within semiconductor manufacturers by traditional
organizational boundaries where design responsibilities end at pre-silicon
verification and ownership is transferred to test engineering to create
suitable test programs to uncover faults that may occur in production and by
the increased level of outsourcing which physically separates the design and
test functions. Additionally, the process and technology used to develop and
debug production test programs has often been inefficient and inadequate.

   The equipment used in the engineering validation test stage has often been
unable to effectively verify and characterize increasingly complex ICs. To
perform specialized tests on prototypes, engineers turned to ATE machines to
verify and characterize prototypes. However, ATE machines are designed for
volume production testing and in many cases lack the flexibility or versatility
to efficiently test whether, and within what limits, a given part works, or
efficiently analyze why it fails to work.

   Production Testing is a principal element in the cost structure of
semiconductors. Purchasers of production testers--ATE--now examine more
carefully the total cost of ownership of ATE comprising of the initial purchase
price of the tester, as well as the tester's reliability, flexibility, size,
power and air conditioning requirements, upgradeability, maintenance costs and
spare parts.

   As assembly and packaging have become increasingly expensive compared with
the cost of the semiconductor die, so that their costs may exceed the cost of
the die itself, semiconductor manufacturers continue to shift performance
testing increasingly toward wafer probe. By subjecting devices to performance
testing earlier, defective die are detected and eliminated before assembly and
packaging costs are incurred. This trend has imposed new demands on ATE. Wafer
probe testing, where production testing may now occur, requires that the device
under test be located in close physical proximity to the measuring circuits of
the tester in order to minimize potential signal distortions that can
negatively impact testing yields. Smaller testers can more easily be placed in
close physical proximity to the circuits. In addition, wafer probe test
typically occurs in a clean room where potential contaminants must be
continually removed and temperatures kept constant. These special maintenance
requirements make clean rooms expensive to operate. Smaller testers occupy less
floor space and therefore assist in reducing clean room costs. In addition,
smaller testers that consume less power generally have reduced air conditioning
requirements.

   There are two dominant process technologies used to develop the ICs used in
ATE, emitter-coupled logic, ECL, and complementary metal oxide semiconductor,
CMOS. Although CMOS technology allows higher functionality per chip and
requires less power to operate, ATE based exclusively on CMOS technology has
been limited by the inability of CMOS to meet the timing and measurement
demands of semiconductor testing. Historically, although the speed of CMOS was
acceptable, its timing stability was not. This problem results from the
tendency of CMOS circuits to experience timing drift as a function of
temperature and voltage variation during tests. To fully benefit from the
economic and other advantages of CMOS technology, the challenge has been to
control this drift characteristic in order to produce semiconductors for ATE
that meet the performance requirements of semiconductor testing.

   These technical, economic and market trends have created a significant need
for an integrated design to production test flow that includes Built in Self
Test, or BIST, circuitry, specialized engineering validation test products and
high performance, cost effective ATE. Additionally, the market is requiring
solutions that enable engineers to develop and debug production test software
and ATE interface equipment, or fixtures, in parallel with the design and
validation of integrated circuit prototypes to increase the process parallelism
and improve device time to market.

                                      2

<PAGE>

The Credence Solution and Strategy

   We provide high performance IC engineering validation test systems that
address the engineering and production test requirements of increasingly
complex devices. Our engineering validation test systems test logic devices,
mixed-signal devices that combine both analog and digital functionality and
memory devices. Our engineering validation test systems can also be used to
test selected functions of highly integrated, or system-on-chip, devices. By
keeping pace with the industry's advances in speed and pin count requirements,
our solutions enable customers to reduce the time required for verification,
characterization and failure analysis. This generally results in lower cost of
design, reduced time-to-market and increased competitiveness for the companies
designing today's increasingly complex integrated circuits. Our validation
systems give engineers a more flexible and cost-effective way to verify and
characterize prototype integrated circuits and to perform failure analysis.
Each validation system integrates the functions of a variety of individual test
instruments into a single system consisting of both hardware and software that
offers increased verification and characterization performance with significant
cost savings. Our engineering validation test technology allows our systems to
send and receive data from an integrated circuit at the same speeds the circuit
will experience in actual use. As a result, design and test engineers can
better identify failures, assess areas of concern, run rapid diagnostic
sequences to pinpoint the causes of failure and identify changes needed to
correct design errors or weaknesses.

   We have developed proprietary CMOS stabilization methods that minimize the
drift characteristic of CMOS and enable us to produce ATE production test
systems that are smaller and require less power than those based upon ECL
technology. These testers are intended to provide a lower total cost of
ownership than many competing products currently available while meeting the
performance demands of today's ATE market. CMOS technology allows the circuits
used in our testers to be reduced, or scaled down in size as IC process
technology improves. This scalability feature enables us to develop and
manufacture smaller, higher performance circuits for use in our testers at what
we believe to be a lower cost, and with a potentially shorter development
cycle, than traditional process technologies.

   We believe our software solutions enable test engineers to develop, refine
and debug production test software early in the integrated circuit design and
production process, even before a prototype of the integrated circuit is
produced. By allowing production test programs to be developed and debugged
while the integrated circuit is being designed and validated, our software can
significantly reduce the time required to introduce integrated circuits to
market.

   Our objective is to be the leading supplier of design through production
test solutions. This includes high performance IC engineering validation test
systems, cost-effective ATE for production testing of ICs used in high volume
applications, and software solutions and other innovations to decrease the
cycle time from circuit design to high volume manufacturing. Our business
strategy incorporates the following key elements:

  .  Maintain Technology Leadership.  We believe that our proprietary CMOS
     stabilization technology enables the development of ATE that is designed
     to meet the performance and cost of ownership requirements of
     semiconductor manufacturers and assembly and test services companies. In
     addition, we believe the scalability of this technology will allow us to
     offer new products and enhancements in a potentially shorter time and at a
     lower cost than many of our competitors that base their products on
     traditional less-scalable architecture.

  .  Provide Innovative Solutions to Test Increasingly Complex Devices.  We
     currently intend to keep pace with rapid advances in integrated circuit
     design and test by introducing new engineering validation test systems and
     related software designed to test higher speed and higher pin count
     devices. We intend to continually enhance our existing systems to add
     valuable features and functions that meet our customers' evolving needs.

  .  Lower Total Cost of Ownership.  We seek to provide ATE to our customers at
     a lower total cost of ownership than many competing products currently
     available while meeting the performance requirements of our customers. We
     believe that the system price, reliability, flexibility, size, power and

                                      3

<PAGE>

     air conditioning requirements, upgradeability and maintenance costs,
     including spare parts, of our testers enable our customers to more cost
     effectively test ICs.

  .  Provide Integrated Design to Production Test Solutions to Reduce
     Time-to-Market.  We believe that our customers require increasing levels
     of sophisticated software tools to integrate the design to production test
     flow, assist in the utilization of ATE and minimize time-to-market. We
     currently are focusing our software efforts on internal development and
     acquisition of companies or businesses that develop such tools. Through
     our acquisition of Fluence Technology, Inc., or Fluence, and Integrated
     Measurement Systems, Inc., or IMS, we have acquired automatic test program
     development software, or TDS, and TDX product lines, analog design,
     optimization and fault analysis technology and BIST products. In addition,
     through the acquisition of certain assets of Heuristics Physics Labs, we
     obtained memory BIST and related in-process software products. The
     acquisition of IMS added Virtual Test Software designed to develop and
     debug test programs and model the tester and test environment. We believe
     these acquisitions, and our new software product lines that integrate
     design and test, will enable us to capitalize on the Design-for-Test, or
     DFT, market.

  .  Target Diverse, High-Volume Markets.  Our products target the testing of
     digital logic, analog mixed-signal, system-on-a-chip, or SoC, memory and
     radio frequency devices that are used in a broad range of growing end-user
     market segments. Our products are designed to test semiconductors that are
     manufactured in high volume and are used in a variety of applications such
     as automobiles, appliances, personal computers, personal communications
     products, networking products, digital televisions and multimedia hardware
     and communications infrastructure.

  .  Leverage Relationships with Industry Leaders to Enhance Market
     Position.  We currently intend to continue to build close working
     relationship with integrated circuit manufacturers, EDA software vendors
     and ATE machine vendors to enhance our market position. Working closely
     with integrated circuit manufacturers helps us anticipate their needs and
     incorporate specific value-added functionality into our products. We
     believe our relationships with leading EDA software vendors allow us to
     design and offer products that can access the device models created with
     EDA software and effectively use this data to perform validation tests and
     debug and refine production test programs. Our relationships with several
     leading ATE vendors strengthen our ability to develop ATE machine
     simulations, and we believe these relationships have led to increased
     customer acceptance of our TDS and virtual test software products.

  .  Worldwide Technical Support and Customer Service.  As semiconductor
     manufacturers expand their operations worldwide, they require that their
     test suppliers have the capability to provide global support, service and
     training. To meet this requirement, we utilize a combination of direct
     sales, service and support personnel and a broad network of independent
     distributors located in close proximity to major customer sites. We and
     our distributors currently maintain locations throughout the world to
     service and support our customers.

Products

   We currently offer a wide variety of products that test digital logic,
analog, mixed-signal, SoC, dynamic random access memory, or DRAM, static random
access memory, non-volatile memory and radio frequency wireless ICs. Digital
logic semiconductors produce discrete on and off logical sequences that control
functions, store data, retrieve data and move and manipulate data at high rates
of speed. Analog semiconductors control external functions such as sound,
graphics, and motor controls by producing continuous varying voltage or
current. When these analog functions are combined onto a digital integrated
circuit, the resulting device is considered a mixed-signal device. DRAM loses
data without power while non-volatile memory semiconductors retain their data
when the power is turned off. RF wireless IC's are the devices that receive,
transmit and convert radio frequency signals typically used in cellular
telephones.

   Our CMOS-based ATE products--the SC, and Quartet series--are designed to
test high speed devices used in applications such as networking and personal
computing as well as multimedia, digital television, high-definition

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television and personal communications. Our memory product line, the Kalos
Series, tests non-volatile memory, or NVM, devices, including ROM, EPROM,
EEPROM and Flash memories, which are used in high volume applications in the
consumer, automotive and telecommunications markets.

   During fiscal 2001 we acquired Dimensions Consulting, Inc. ("DCI"), the
principal assets of Rich Rabkin & Associates, Inc. ("Rabkin") and IMS. DCI
specializes in providing interface solutions for the semiconductor test and
development market through ATE board design and test socket systems. Rabkin
specializes in providing interface solutions and test head positioning devices
for the semiconductor test market through its patented solution for high
parallel memory testing. DCI and Rabkin were integrated into our Memory
Products Division to offer test solutions that we believe increase
manufacturing efficiencies and provide faster time to market for our customers.
IMS designs, manufactures, markets and services high-performance engineering
validation test systems. These systems are used to test, at the prototype
stage, complex digital, mixed-signal and memory devices. In addition, IMS
develops, markets and supports a line of virtual test software that we believe
enables design and test engineers to develop and debug production test software
prior to fabricating the prototype of the actual device. During fiscal 2001, we
merged our wholly-owned subsidiary, Fluence, into IMS.

   During fiscal 2000 we acquired TMT, Inc. ("TMT"), Modulations Instruments,
Inc. ("MI"), and NewMillennia Solutions, Inc. ("NMS"). The TMT product line
includes the ASL 1000, targeted at testing analog function ICs, and the RFx,
targeted at testing RF wireless ICs. During fiscal 2000 we introduced the ASL
2000 targeted at testing many analog devices in a multisite mode as well as
providing significant expansion capability for our customers in the future. MI
provides test solutions for the design and manufacturing of RF semiconductor
and wireless infrastructure component markets. MI holds proprietary
intellectual property for performing S-Parameter measurements using complex
modulated signals. Our Modulated Vector Network Analyzer ("MVNA") Technology
allows accurate measurement of devices stimulated with signals matching their
end-use operating environment.

   During fiscal 1999, our wholly-owned subsidiary, Fluence, acquired Opmaxx,
Inc. The Opmaxx products are targeted at analog and mixed signal design and
test applications.

   During fiscal 1998, we introduced the Quartet series. The Quartet system is
compatible with Duo, and provides the enhanced capabilities required to test
consumer mixed signal products with 200 MHZ I/O 20 bit analog and video input
and output. Quartet directly addresses the cost sensitive needs of consumer
related system-on-a-chip, or SoC, devices.

   Introduced in 1997, the Kalos Flash memory test system is a highly
integrated parallel systems that provides multi-site testing and is designed to
lower the overall cost of test.

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<PAGE>

   The following table sets forth our current product offerings, their features
and examples of typical devices tested by each product. Included in some of the
basic features are the anticipated cycle speed in megahertz, timing accuracy in
either picoseconds (ps) or nanoseconds (ns), the number and characteristics of
the pins and the density, in megabits(Mb), of the device that can be tested:

<TABLE>
<CAPTION>
   Product       Series      Models       Market and Basic Features            Typical Devices Tested
-------------------------------------------------------------------------------------------------------------
<C>            <S>         <C>         <C>                              <C>
Digital        SC          SC312       ATE:                             Microcontrollers, ASSPs, DSPs
                           SC Micro    50-100 MHz                       and FPGAs
                                       64-304 Pins
                                       + 350-500 ps accuracy
               ----------------------------------------------------------------------------------------------
               IMS         500 330 550 Engineering validation test:     Microprocessors, ASICs, Multi-
                Vanguard               Up to 1GHz                       Chip Modules
                                       + 200 ps accuracy
                                       6-512 Pins
-------------------------------------------------------------------------------------------------------------
Mixed-Signal   Quartet     One         ATE:                             Multimedia devices, mass
                                       512 digital pins                 storage, DSPs, ASICs, Datacom
                                       200 MHz                          and specialty devices, mobile
                                       + 175 ps accuracy                communication devices, complex
                                       Analog, Video, Audio, RF         audio devices
               ----------------------------------------------------------------------------------------------
               IMS Electra Electra,    Engineering validation test:     Cable Modems, Sonet/ATM,
                           Electra MX  16-576 digital pins              System-on-a-Chip (SoC)
                                       400 MHz Digital
                                       2.4GHz Analog
-------------------------------------------------------------------------------------------------------------
Memory         KALOS       Kalos       ATE:                             Flash memories, EEPROM,
 Products                  Kalos xw    50 MHz                           EPROM, Microcontrollers and
                           Kalos xp    256 Mb                           NVM ASICs
                           Personal    + 1ns
                            Kalos
               ----------------------------------------------------------------------------------------------
               IMS Orion   Orion       Engineering validation test:     SRAM, DRAM, Rambus
                                       200MHz
                                       48-80 Pins
                                       1 Gbit fail memory
-------------------------------------------------------------------------------------------------------------
Analog Test    ASL         ASL 1000    ATE:                             Analog or Linear IC such as
 Products                              Up to 19 analog instruments with battery power management IC.
                                       32 14MHz digital pins            Traditional linear devices such as
                                                                        Op-Amps, comparators and
                                                                        regulators.
               ----------------------------------------------------------------------------------------------
               ASL         ASL 2000    ATE:                             Personal communications, A/D
                                       Up to 32 analog instruments with and D/A converters as well as
                                       expansion for up to 64 pins of   multi-site test of traditional linear
                                       digital and DSP instruments.     devices.
-------------------------------------------------------------------------------------------------------------
Radio          RFx         RFx         ATE:                             Wireless communications IC
 Frequency                             Up to 8 ports of 6GHz RF with    such as Power amplifiers (PA),
 (RF) Wireless                         Analog and digital instruments.  Low Noise Amplifiers, Mixers
                                                                        and synthesizers and Bluetooth
                                                                        RF front-ends.
-------------------------------------------------------------------------------------------------------------
Workcell       Triton      Memory      ATE:                             ROM, EEPROM, EPROM, and
                                       Kalos tester integrated into 8"  Flash memories
                                       wafer prober, without extending
                                       outside the prober perimeter
-------------------------------------------------------------------------------------------------------------
</TABLE>

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<TABLE>
<CAPTION>
Product    Series      Models         Market and Basic Features              Typical Devices
-----------------------------------------------------------------------------------------------------
<C>      <S>         <C>         <C>                                 <C>
Software TDS tools   Design to   Generates tester specific files     Tools apply to digital logic
                      Test       from simulation (EDA) files.        circuits
                                 Verifies timing specification
         --------------------------------------------------------------------------------------------
         TDX tools   Design for  Verifies test vector quality.       Tools apply to digital logic
                      Test       Supports design for test strategies devices
         --------------------------------------------------------------------------------------------
         IMS Virtual VTS         Accelerates the development and     Tools apply to digital logic
          Test                   debug of test programs              devices
          Software
         --------------------------------------------------------------------------------------------
         Opmaxx      Design Maxx Design verification and             Tools apply to analog and mixed-
                                 sensitivity analysis evaluation     signal devices
                                 and optimization
         --------------------------------------------------------------------------------------------
         Opmaxx      BISTMaxx    BIST generation for digital,        Tools apply to analog, high-
                                 analog and mixed-signal devices     speed digital and mixed-signal
                                                                     devices
-----------------------------------------------------------------------------------------------------
</TABLE>

  Digital Products

   SC.  In fiscal 1997, we expanded the SC series by introducing and shipping
the SC 312, which runs at a higher speed (100 MHz) and has improved accuracy
over its predecessor, the SC 212. The SC Micro is a cost-reduced version of the
SC 312. This system offers our customers a full capability test system at a
price currently below $2,000 per digital pin channel. This per channel price
has previously been available only in test systems with reduced
functionality-requiring users to compromise the quality of their device
testing. The SC Micro retains the customer's test quality while lowering its
test costs. The purchase price of these testers typically ranges from $350,000
to $850,000 depending upon configuration.

   IMS Vanguard.  The IMS Vanguard, our flagship engineering validation test
product introduced by IMS in 1999, can send and receive data from integrated
circuits under test at up to 1 GHz and accounted for the majority of logic
family sales in 2000. The logic engineering validation test system family
includes the Vanguard 500, 330 and most recently introduced 550. The Vanguard
systems sell for between $0.7 million and $2.3 million, depending on the
configuration.

  Mixed-Signal Products

   Quartet.  Quartet is our high performance mixed-signal product series. The
Quartet One was introduced in 1998 and started shipping in early fiscal 1999.
Quartet builds on the Duo series by addressing the needs of device
manufacturers serving the consumer mixed-signal, or CMS, marketplace. CMS
devices combine the power of digital processors with CD quality audio,
broadcast video and wireless communications onto a single, cost sensitive SoC.
The Quartet One, the first of the Quartet series, addresses all four of these
requirements in an integrated, ready for volume production package. With 200
MHz digital, 20 bit audio, 300 MHz video and 6GHz RF, Quartet One is designed
to meet the demands of the most complex SoC devices. With typical system prices
between $750,000 and $2,000,000 depending on configuration, the Quartet
provides a low cost of test required by the CMS market.

   IMS Electra.  Our mixed-signal engineering validation test systems are used
by customers to verify the designs of complex integrated circuits containing
both digital and analog functionality. These mixed-signal integrated circuits
are used in applications such as cable modems and to implement Sonet and ATM
technologies in high-speed networks. The IMS Electra is also used to test
selected functions of highly-integrated, or system-on-chip, designs. Depending
on the configuration, the system can send and receive data from integrated
circuits under test at up to 200 MHz. Our Electra series includes the Electra,
which can test mixed-signal integrated

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circuits with up to 224 pins, and the Electra MX, which can test mixed-signal
integrated circuits with up to 576 pins. Our Electra series systems sell for
between $300,000 and $2,100,000.

  Memory Products

   KALOS.  Introduced in November 1997, the Kalos is a highly integrated,
parallel system designed to test flash memory. Running at 50 MHz, it provides
multi-site testing and is designed to lower the customer's cost of test. The
Kalos features a unique tester-on-a-card architecture, which places all test
functions for each site on a single card and thus reduces floor space and power
consumption while increasing performance. The typical purchase price of the
Kalos ranges from $400,000 to $800,000 depending on configuration.

   KALOS xp.  Introduced in fiscal 1999, the Kalos xp is based upon the Kalos
tester. The Kalos xp features a wider, 96 pin test site enabling testing of
high pin count NVM and flash memory core microcontroller devices. Kalos xp
provides up to eight site-in-parallel test capabilities in a small footprint
tester package.

   KALOS xw.  Introduced in fiscal 2000, the Kalos xw is based upon the Kalos
tester and features twice as many test sites as the Kalos or the Kalos xp, 32
or 16, respectively.

   Personal KALOS.  Personal Kalos is a desktop engineering version of the
high-throughput Kalos tester. The typical price for a Personal Kalos ranges
from $100,000 to $120,000 depending on configuration.

   IMS ORION.  The IMS Orion is used by our customers to verify the designs of
the most common types of memory integrated circuits, including complex SRAMs
and DRAMs. The Orion will send and receive data from integrated circuits under
test at speeds up to 200 MHz/400 Mbs. Depending on the configuration, these
memory validation systems sell for between $400,000 and $600,000.

  Analog Test Products

   The acquisition of TMT in fiscal 2000 extended the market that we serve to
include analog dominant ICs that are made up of traditional analog function
blocks such as amplifiers, regulators, switches and converters. The ASL product
line tests these traditional devices either as individual ICs or as larger
function ICs such as battery power management devices in portable electronics
devices.

   ASL 1000.  The ASL 1000 was introduced in fiscal 1996. This system is highly
configurable and targeted at testing the traditional analog building block ICs.
As the traditional analog or linear device manufactures move to more efficient
manufacturing, the multi-site test capability of the ASL 1000 has proven to be
very effective at reducing their cost of test. The purchase price of the ASL
1000 ranges from $100,000 to $250,000 and is highly dependant on configuration.

   ASL 2000.  Introduced in fiscal 2000, the ASL 2000 is an extension of the
ASL 1000 featuring an increased number of instruments, expansion to increased
digital capability, and DSP based mixed signal test. The ASL 2000 is capable of
testing more complex devices and more devices in parallel and targets a wide
range of ICs used in personal communications. The purchase price of the ASL
2000 ranges from $150,000 to $350,000 and is highly dependant on configuration.

  RF Wireless Test Products

   Our RF wireless test products provide tools to IC manufacturers for use in
characterization and production test of high performance, cost sensitive RF
devices.

   RFx.  The RFx, a product acquired through the TMT acquisition, was first
introduced in fiscal 1998 and provides a significantly better cost of test
advantage over many competitors. This system is made up of

                                      8

<PAGE>

specialized RF test instruments combined with the analog instrumentation of the
ASL product line. The RF instruments are capable of testing up to 6GHz in
either the scalar or vector method of testing RF parameters. The RFx is
targeted at cost effective testing of RF front-end devices that are typically
manufactured in Gallium Arsenide (GaAs), Bi-polar or Bi-CMOS technology. The
devices, Power Amplifiers (PA), Low Noise Amplifiers (LNA), Synthesizers,
Mixers and Switches and combinations of these (Base band chips), are used in
both digital and analog cell phones. The purchase price of the RFx typically
ranges from $450,000 to $750,000 depending on configuration.

  Workcell Products

   In 1996, we established the Workcell product group. A Workcell enhances
manufacturing productivity by integrating previously distinct equipment into a
single, highly efficient tool. In fiscal 1997, we introduced our sophisticated
Triton series of wafer test systems. Triton Memory--the industry's first suite
of Workcell wafer test solutions--features a production-worthy wafer prober
integrated with a robust NVM ATE test system.

   Triton Memory.  Leveraging our tester-on-a-card architecture, Triton Memory
tests as many as 16 sites in parallel at speeds of 50 MHz. All functions
required to test a Flash memory device appear on one card. An inherently
parallel, high-performance system that improves throughput rates, the Triton
Memory tests each device asynchronously from one another--while embedded within
an 8" wafer prober. The tester is an integral part of the prober's structure,
minimizing independent vibrations associated with current interface concepts.
The typical price of a Triton memory ranges from $450,000 to $1,300,000
depending on configuration.

   Matrix Test(TM).  The Matrix Test was introduced in fiscal 1999 in
conjunction with Amkor Technology and FICO BV. The Matrix Test process is a
zero-footprint in-line flash memory test system and it integrates a Kalos
non-volatile memory test system with a Fico strip-based test handler to improve
the test process. This integrated solution is able to test a strip of flash
memory devices without singulating the parts, or separating them from the strip.

   DCI.  DCI offers comprehensive interface solutions for the semiconductor
test and development market including bench, application, demo, high
performance and ATE boards, engineering sockets and high performance
contactors. DCI provides one source for design, fabrication and assembly.

  Software Products

   Our software products provide tools to IC manufacturers to help create
detailed tests to ensure product quality and shorten time-to-market.

   TDS.  The TDS product line consists primarily of Converter, Conditioner, and
WaveBridge products. Converters take waveform data from simulator-specific
representations into an industry-standard representation. Conditioners modify
waveform data to enable it to fit specific tester environments. WaveBridge
modules generate the actual test programs. Converters are available to support
most commonly used simulators, and WaveBridge modules are available for a
variety of ATE models. Other programs that analyze waveform data and provide
other design-to-test functions are also included in the TDS product line.

   TDX.  The TDX product line allows the design engineer to verify complex
designs with full timing accuracy, device stress testing ("Iddq"), pattern
generation, scan generation and testability analysis.

   IMS Virtual Test Software.  To address the need for shorter test development
times, we provide software for test engineers, called Virtual Test Software,
that accelerates the development and debug of a test program, creates a model
of the test environment, develops and tests fixtures and documents the entire
test process. Our Virtual Test Software simulates the ATE environment which
enables test engineers to develop and debug test programs in parallel with the
design, prototype manufacture and engineering validation test processes. With

                                      9

<PAGE>

Virtual Test Software, test engineers begin test development work before device
design is completed. Through the use of tester modeling and simulation, both
the test itself and the testability of the design can be verified on a
workstation before first prototypes devices are delivered. software generates
built-in self-test logic for designs that use embedded memories.

   Opmaxx.  The Opmaxx product line provides a set of software tools for
testing digital, analog and mixed signal devices, as well as designing them for
testability. DesignMaxx provides analog design optimization, verification, and
sensitivity analysis. BISTMaxx generates built-in self-test for analog/mixed
signal device functionality both on-chip and off-chip.

Customers, Markets and Applications

   We target digital logic, analog, mixed-signal, dynamic random access memory,
non-volatile memory device, RF and SoC manufacturers that serve a broad range
of growing end-user market segments. Our customers design, manufacture and test
semiconductors in high volume for use in applications such as automobiles,
appliances, personal computers, personal communications products, networking
products, digital televisions and multimedia hardware.

   In addition to marketing our products to major semiconductor manufacturers,
we have developed relationships with numerous assembly and test services
companies. Semiconductor manufacturers and fabless semiconductor companies
utilize these subcontractors as a means of lowering their fixed production
costs, thus minimizing the effects of cyclicality inherent in the semiconductor
industry. As a result, these assembly and test services companies have become
an increasingly important segment of the ATE market.

   We believe that our success depends in large part upon the success of our
major customers. The loss of, or any reduction in, orders by a significant
customer (including the potential for reductions in orders by assembly and test
services companies which that customer may utilize), including reductions due
to market, economic or competitive condition in the semiconductor industry or
in other industries that manufacture products utilizing semiconductors has
materially adversely affected, and may continue to materially adversely affect
our business, financial condition or results of operations. Our ability to
increase sales in the future will depend in part upon our ability to obtain
orders from new customers as well as upon the financial condition and success
of our customers and the general global economy. There can be no assurance that
our sales will not decrease in the future or that we will be able to retain
existing customers or to attract new ones.

   For information on our geographic data and major customers, see Note 4 to
the Consolidated Financial Statements included elsewhere herein. Our
international sales are primarily denominated in United States dollars. We
anticipate that our international business will continue to account for a
significant portion of net sales in the foreseeable future.

   We schedule production of our systems based upon order backlog and order
forecast. We include in our backlog only those customer orders for systems
(including upgrades) for which we have accepted purchase orders and assigned
shipment dates in approximately the following six months. Substantially all of
our orders are subject to cancellation or rescheduling by the customer with
limited or no penalties. Our backlog at any particular date may not necessarily
be representative of actual sales for any succeeding period due to orders
received for systems to be shipped in the same quarter, possible changes in
system delivery schedules, cancellation of orders and potential delays in
system shipments. As of October 31, 2001, our order backlog for systems,
exclusive of orders for software, spare parts, service and support, was
approximately $33.5 million plus an additional $20.5 million of deferred
revenue under SAB 101, as compared with $309.5 million of order backlog as of
October 31, 2000. We believe it is probable that order cancellations and
customer-requested shipment delays will continue to occur in the future.

                                      10

<PAGE>

Sales, Service and Support

   We currently market and sell our products in the United States principally
through our direct sales organization, with direct sales employees and
representatives in over 14 locations. Outside the United States, we utilize
both direct sales employees and a broad network of distributors, with direct
sales employees and distributors in over 18 countries. Excluding the impact of
SAB 101, shipments through distributors represented approximately 44%, 54%, and
47% of net sales during fiscal years 2001, 2000, and 1999, respectively.

   We and our distributors have sales and support centers located in the United
States, Europe, Israel, and throughout Asia from which both direct Credence
personnel and independent sales and service representatives sell and support
our products. We believe that field support is critical to our customers.
Support encompasses many of the components of the total cost of ownership for
test equipment. We seek to develop long-term relationships with major customers
through extensive support consisting of teams of professional sales,
applications, training and service personnel. These personnel are located in
close physical proximity to key customer sites in order to provide the required
support in a timely fashion. The sales process includes consultations with
customers to help them purchase the most cost-effective equipment for their
needs, to help develop custom test programs to optimize production throughput,
to assist in long-term self-sufficiency through training of customer test
engineering personnel and to provide the service capacity and preventive
maintenance to reduce downtime for customers' systems. Customer support
includes field personnel and in-house applications personnel who work closely
with design engineering groups to modify existing equipment to meet the latest
performance requirements.

   In fiscal 2000 we purchased our European distribution companies from their
owner-managers. These subsidiaries provide sales, support and services to our
customers in Europe and Israel.

   In Japan a wholly-owned subsidiary provides sales and service to our
customers. In addition, we have a relationship with Innotech Corporation, a
distributor of our products in Japan. In 1997, we formed a joint venture with
Innotech to engage in the customization and manufacture of ATE products for
sale by both companies. In March 1996, we established a service and support
subsidiary in Korea. We also have a relationship with Itek, Inc., a distributor
of our products in Korea.

   We have an agreement with a captive leasing company. In addition to leasing
and financing activities, we also provide certain remarketing services to
customers. We have issued a guaranty in favor of a bank with respect to certain
obligations of the leasing company to the bank. Under this agreement, the
leasing company agreed to grant to us a security interest to secure the
obligations of the leasing company as a result of any payments by us pursuant
to the guaranty. At October 31, 2001 and 2000, the maximum allowable debt of
the leasing company subject to this guaranty, $8,750,000 and $4,750,000,
respectively, was outstanding.

   Our standard policy is to warrant our new systems against defects in design,
materials and workmanship for one year for parts and labor. We offer customers
additional support after the warranty period in the form of maintenance
contracts for specified time periods. Such contracts include various options
such as board replacement, priority response, planned preventive maintenance,
scheduled one-on-one training, daily on-site support and monthly system and
performance analysis.

Research and Development

   The engineering validation test and ATE markets are subject to rapid
technological change and new product introductions. Our ability to be
competitive in this market will depend in significant part upon our ability to
successfully develop and introduce new products, enhancements and related
software tools on a timely and cost-effective basis. This will enable customers
to integrate such products into their operations as they begin volume
manufacturing of the next generation of semiconductors.

                                      11

<PAGE>

   We have pursued a technology acquisition strategy to complement our internal
research and development efforts, including:

  .  in 1988, we completed the acquisition of Axiom Technology Corporation,
     which added mixed-signal testing capability;

  .  in 1989, we completed the acquisition of ASIX Systems Corporation, which
     added one of our proprietary CMOS stabilization methods;

  .  in 1990, we acquired the STS Division of Tektronix Inc., which added a
     second proprietary CMOS stabilization method;

  .  in 1993, we acquired various patents from Tektronix;

  .  in March 1995, we acquired EPRO, which added non-volatile memory testing
     capability;

  .  in July 1997, we acquired, through our subsidiary Fluence, specified
     assets and assumed specified liabilities of Test Systems Strategies, Inc.,
     a wholly owned subsidiary of Summit Design, Inc.;

  .  in August 1997, we acquired through Test Systems Strategies fault
     simulation and test program development products of Zycad;

  .  in June 1998, we purchased specified assets from Heuristics Physics Labs
     (HPL) which added memory BIST design and test applications capability;

  .  in September 1999, we acquired Opmaxx through Fluence, which added analog
     design optimization and fault analysis technology and BIST products;

  .  in May 2000, we acquired TMT, which added lower-end analog and mixed
     signal testing capability, particularly in the communications segment;

  .  in August 2000, we acquired MI, which added radio frequency test
     technology;

  .  in October 2000, we acquired NMS, which provides test strategies and
     products including native test environments and targeted design for test
     techniques;

  .  in January 2001, we acquired DCI, which provides interface solutions for
     the semiconductor test and development market through ATE board designs
     and test socket systems;

  .  in February 2001, we acquired the principal assets of Rabkin, which
     provides interface solutions and test head positioning devices for the
     semiconductor test market through patented solutions for high parallel
     memory testing;

  .  in August 2001, we acquired IMS, which designs, manufactures, markets and
     services high-performance integrated circuit engineering validation test
     systems. These systems are used to test, at the prototype stage, complex
     digital, mixed-signal and memory devices; and

  .  during fiscal 2001, we merged our wholly-owned subsidiary, Fluence, into
     IMS.

   Each of the CMOS stabilization methods we acquired provides a different
solution to the tendency of CMOS to experience timing drift as a function of
temperature and voltage variation. The first proprietary solution uses a timing
phase detection circuit combined with a voltage control mechanism to compensate
for thermal, voltage and process drift. The second uses a unique combination of
counters and heating circuits to provide stability through thermal means. These
methods allow our CMOS-based ICs to achieve the timing repeatability necessary
to meet the performance requirements of ATE and to realize the economic and
other advantages of CMOS technology over ECL technology. CMOS circuits use less
space than those based on ECL as the circuits require less power and can be
more closely packed together. In addition to these acquired stabilization
methods, we have also developed and continue to develop new and/or improved
stabilization techniques for our tester products.

                                      12

<PAGE>

   During 1998, we enhanced our Duo/Quartet product line with new capabilities
including high performance audio testing, testing of analog circuitry for
wireless communication applications and higher performance digital testing.
These features enable single insertion SoC testing capability and resulted in
the Quartet product line that was introduced in 1999. We will continue to focus
research and development efforts on the Quartet product line to ensure ensuring
that our products have the ability to efficiently test state-off-the-art
customer devices which combine analog, high speed digital logic, and memory on
a single circuit.

   Our ongoing research and development efforts also include focusing on
increased cycle speed, accuracy and pin counts of our testers. In addition, we
are working on a software development program that is intended to provide for
upward compatibility through our products. We will also continue to focus
efforts on providing software solutions which allow more rapid, cost-effective
development of ATE test programs which reduce time-to-market of customer
integrated circuit designs. We currently intend to continue to invest
significant resources in the development of new products and enhancements for
the foreseeable future.

   Research and development expenses were $86.4 million in fiscal 2001, $77.9
million in fiscal 2000, (excluding $11.8 million charged for acquired
in-process research and development or "IPR&D") and $45.3 million in fiscal
1999, (excluding a $0.9 million charge for acquired IPR&D).

Proprietary Rights

   We currently hold 112 United States patents, which expire over time through
July 2020. In addition, we currently have 26 foreign patents, which expire over
time through January 2014. The two United States patents, acquired from ASIX
and Tektronix underlying our proprietary CMOS stabilization methods expire in
February 2007 and December 2007, respectively.

   In 1993, we granted a license to Tektronix with respect to patents obtained
in the acquisition of the STS Division of Textronix, and certain other
intellectual property rights, the Tektronix Rights, including a patent covering
one of our proprietary CMOS stabilization technologies, that were assigned to
us by Tektronix in 1993. Tektronix has a worldwide, perpetual, irrevocable,
non-exclusive, royalty free, fully-paid, sublicensable and transferable license
to the Tektronix Rights. Tektronix may not grant rights under the Tektronix
Rights to make, use, sell or otherwise distribute ATE for testing ICs to any
entity other than a Tektronix joint venture affiliate and to a
successor-in-interest to Tektronix. Tektronix may not grant or assign such
rights to any other party that is a Credence competitor. In addition, Tektronix
may not knowingly sell components incorporating the Tektronix Rights to any
other party. We and Tektronix have granted to each other a worldwide,
perpetual, irrevocable, non-exclusive, royalty free, fully-paid, sublicensable
and transferable license to all improvements, enhancements, modifications or
derivative works created before August 1996, or the Improvements, of
intellectual property that was licensed or assigned pursuant to a Technology
Agreement dated December 31, 1990, as amended on August 12, 1993, including the
Tektronix Rights, to make, use and sell ATE for testing ICs. Tektronix's
license to the Improvements is subject to the same restrictions as its license
to the Tektronix Rights.

   We attempt to protect our intellectual property rights through patents,
copyrights, trademarks and maintenance of trade secrets and other measures.
There can be no assurance that others will not independently develop equivalent
intellectual property or that we can meaningfully protect our intellectual
property. There can be no assurance that any patent we own will not be
invalidated, circumvented or challenged, that the rights granted thereunder
will provide competitive advantages to us or that any of our pending patent
applications will be issued. Furthermore, there can be no assurance that others
will not develop similar products, duplicate our products or design around the
patents owned by us. In addition, litigation has been and may continue to be
necessary to enforce our patents and other intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. For additional information with respect to our intellectual
property, review the information set forth under "Risk Factors--If the
protection of proprietary rights is inadequate, our business could be harmed"
and "--Our business may be harmed if we are found to infringe proprietary
rights of others."

                                      13

<PAGE>

Manufacturing and Suppliers

   Our manufacturing objective is to produce engineering validation test
systems and ATE that conforms to our customers' requirements at the lowest
commercially practical manufacturing cost. We rely on outside vendors to
manufacture certain components and subassemblies including several custom
integrated circuits. We seek to manage our inventory levels through agreements
with both suppliers and subcontractors that provide just-in-time delivery of
these components and subassemblies. We assemble these components and
subassemblies to create finished testers in the configuration specified by our
customers. In general, we use standard components and prefabricated parts
available from numerous suppliers. However, some components and subassemblies
necessary for the manufacture of our testers are obtained from a sole supplier
or a limited group of suppliers and we are in the process of qualifying a
second source for some of those components. There can be no assurance that such
alternative source will be qualified or available. Our reliance on a sole or a
limited group of suppliers and on outside subcontractors involves certain
risks, including a potential inability to obtain an adequate supply of required
components, and reduced control over pricing and timely delivery of components.
See "Risk Factors--There are limitations on our ability to find the supplies
and services necessary to run our business."

Competition

   The ATE industry is intensely competitive. We face substantial competition
throughout the world, primarily from ATE manufacturers located in the United
States, Europe and Japan, as well as from some of our customers. Our
competitors in the digital semiconductor testing market include:

  .  Advantest Corporation;

  .  Ando Electric Co. Ltd.;

  .  LTX Corporation;

  .  Schlumberger Ltd.;

  .  Agilent Technologies, Inc.; and

  .  Teradyne, Inc.

In the mixed-signal and analog semiconductor testing market our competitors
  include:

  .  Teradyne, Inc.

  .  LTX;

  .  Agilent;

  .  Schlumberger;

  .  Advantest;

  .  SZ Systems; and

  .  Eagle Test Systems.

In the non-volatile memory testing market our competitors include:

  .  Teradyne;

  .  Nextest, Inc.;

  .  Agilent; and

  .  Advantest.

In the dynamic random access memory testing market our competitors include:

  .  Mosaid.

                                      14

<PAGE>

In the RF wireless device testing market our competitors include:

  .  Teradyne;

  .  Advantest;

  .  LTX;

  .  Agilent;

  .  Eagle Test Systems;

  .  Roos Instruments; and

  .  Rohde and Schwarz.

IMS's principal competitors in the software design to test market are:

  .  Simutest, Inc.; and

  .  in-house applications developed by companies in the semiconductor industry.

The competitors in the software design for test and BIST market place include:

  .  Mentor Graphics, Inc.; and

  .  LogicVision, Inc.

   In addition to the competitors listed above, we face competition from
various start-up companies in our markets. The principal elements of
competition in our markets and the basis upon which our customers select
engineering validation testers and ATE include throughput, tools for reducing
customer product time-to-market, product performance and total cost of
ownership. We believe that we compete favorably with respect to these factors.
See "Risk Factors--The ATE industry is intensely competitive which can
adversely affect our revenue growth."

Employees

   As of October 31, 2001, we had a total of 1,310 permanent employees and 61
temporary or contract employees. Of this total, 289 are engaged in
manufacturing, 360 are in research and development, 87 in applications, 382 in
sales, marketing and service, and 184 in general administration. There are 69
employees in our IMS Design and Test Software division, primarily engaged in
the development, sales and marketing of software products. Our employees are
highly skilled, and we believe our future results of operations will depend in
large part on our ability to attract and retain such employees. None of our
employees are represented by a labor union, and we have not experienced any
work stoppages. We consider our employee relations to be good.

                                      15

<PAGE>

                                 RISK FACTORS

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



                                    [CHART]
<TABLE>
<CAPTION>

<S>                    <C>              <C>                 <C>

                      1999              2000               2001
                   Q1 Q2 Q3 Q4     Q1  Q2  Q3  Q4     Q1    Q2    Q3    Q4
Net Sales          37 51 67 97    136 178 221 222    136  75.6  52.8    37
Net Income (loss)  (7)(4) 5 11     (6) 38  43  45     14 (36.5)(15.6) (59.3)

</TABLE>



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

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

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

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

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

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

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

  .  supply constraints;

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

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

  .  expenses associated with acquisitions and alliances;

                                      16

<PAGE>

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

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

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

  .  our ability to attract and retain qualified employees in a competitive
     market.

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

  .  manufacturing inefficiencies;

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

  .  hardware and software product sales mix;

  .  inventory write-downs;

  .  manufacturing volumes;

  .  new product introductions;

  .  product reliability;

  .  absorption levels and the rate of capacity utilization;

  .  customization and reconfiguration of systems;

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

  .  facility relocations and closures.

   New and enhanced products typically have lower gross margins in the early
stages of commercial introduction and production. Although we have recorded and
continue to record accounts receivable allowances, product warranty costs, and
deferred revenue, we cannot be certain that our estimates will be adequate.

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

  .  research and development;

  .  support costs for the distribution channels;

  .  marketing and other expenses for new products;

  .  capital equipment purchases and world-wide training; and

  .  customer support and service.

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

                                      17

<PAGE>

Significant delays can occur between the time we introduce a system and the
time we are able to produce that system in volume.

   We have in the past experienced significant delays in the introduction,
volume production and sales of our new systems and related feature
enhancements. In the past, we experienced significant delays in the
introduction of our ValStar 2000 and Kalos series testers as well as certain
enhancements to our existing testers. These delays have been primarily related
to our inability to successfully complete product hardware and software
engineering within the time frame originally anticipated, including design
errors and redesigns of ICs. As a result, some customers have experienced
significant delays in receiving and using our testers in production. In
addition, under the new revenue recognition policy that is in accordance with
Staff Accounting Bulletin 101 ("SAB 101"), we will be deferring revenue for
transactions that involve newly introduced products or when customers specify
acceptance criteria that cannot be demonstrated prior to the shipment. This
will result in a delay in the recognition of revenue as compared to the
historic norm of generally recognizing revenue upon shipment. We currently
anticipate introducing several new systems in fiscal 2002. Delays in
introducing a product or delays in our ability to obtain customer acceptance,
if they occur in the future, will delay the recognition of revenue and gross
profit by us. We cannot be certain that these or additional difficulties will
not continue to arise or that delays will not continue to materially adversely
affect customer relationships and future sales. Moreover, we cannot be certain
that we will not encounter these or other difficulties that could delay future
introductions or volume production or sales of our systems or enhancements and
related software tools. In the past, we have incurred and we may continue to
incur substantial unanticipated costs to ensure the functionality and
reliability of our testers and to increase feature sets. If our systems have
reliability, quality or other problems, or the market perceives our products to
be feature deficient, we may suffer reduced orders, higher manufacturing costs,
delays in collecting accounts receivable and higher service, support and
warranty expenses, and/or inventory write-offs, among other effects. Our
failure to have a competitive tester and related software tools available when
required by a customer could make it substantially more difficult for us to
sell testers to that customer for a number of years. We believe that the
continued acceptance, volume production, timely delivery and customer
satisfaction of our newer digital, mixed signal and non-volatile memory testers
are of critical importance to our future financial results. As a result, our
inability to correct any technical, reliability, parts shortages or other
difficulties associated with our systems or to manufacture and ship the systems
on a timely basis to meet customer requirements could damage our relationships
with current and prospective customers and would continue to materially
adversely affect our business, financial condition and results of operations.

The ATE market is subject to rapid technological change.

   Our ability to compete in the ATE market depends upon our ability to
successfully develop and introduce new hardware and software products and
enhancements and related software tools with 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. Therefore, it is necessary for us to enhance the performance and
other capabilities of our existing systems and software products and related
software tools, or develop new systems and software products and related
software tools, to adequately address these requirements. Any success we may
have in developing new and enhanced systems and software products and new
features to our existing systems and software products will depend upon a
variety of factors, including:

  .  product selection;

  .  timely and efficient completion of product design;

  .  implementation of manufacturing and assembly processes;

  .  successful coding and debugging of software;

  .  product performance;

  .  reliability in the field; and

  .  effective sales and marketing.

                                      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. In addition,
weakness in demand may have caused integrated device manufacturers ("IDM") to
pull testing back in-house versus using outsource test houses. Because less of
our market share is from the IDMs, this trend may reduce the demand for our
products. Any decline in demand for our hardware or software products could
have a materially adverse effect on our business, financial condition or
results of operations.

We have a limited backlog and obtain most of our net sales from a relatively
few number of system sales transactions, which can result in fluctuations of
quarterly results.

   Other than certain memory products and software products, for which the
price range is typically below $50,000, we obtain most of our net sales from
the sale of a relatively few number of systems that typically range in price
from $200,000 to $2.0 million. This has resulted and could continue to result
in our net sales and operating results for a particular period being
significantly impacted by the timing of recognition of revenue from a single
transaction. Our net sales and operating results for a particular period could
also be materially adversely affected if an anticipated order from just one
customer is not received in time to permit shipment during that period. Backlog
at the beginning of a quarter typically does not include all orders necessary
to achieve our sales objectives for that quarter. Orders in backlog are subject
to cancellation, delay, deferral or rescheduling by customers with limited or
no penalties. In fiscal 2001, we experienced customer-requested shipment delays
and order cancellations, and we believe it is probable that orders will be
canceled in the future. Consequently, our quarterly net sales and operating
results have in the past and will in the future, depend upon our obtaining
orders for systems to be shipped in the same quarter in which the order is
received.

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

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

The semiconductor industry has been cyclical.

   Revenue growth has slowed in the test and assembly sector of the
semiconductor equipment industry during what we believe is a cyclical downturn
in the industry. There is uncertainty as to if and when the next cyclical
growth phase will occur. Our belief regarding the downturn is based on weakened
order activity, order cancellation activity, and customer-requested shipment
delays from our existing backlog. This business weakness

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is worldwide but we see it in particular with customers in Asia. Until such
time as we return to a growth period, we expect a continuing weakness in order
activity and therefore expect that the January 31, 2002 fiscal quarter's
revenue will be flat or declining from the levels we experienced during the
fourth quarter of fiscal 2001 and revenues may continue to decline throughout
fiscal 2002. We reduced our worldwide workforce during fiscal 2001 by
approximately 23%, or about 400 people. We took a charge related to this
reduction in force of approximately $2.0 million in our second fiscal quarter,
$1.0 million in our third fiscal quarter and another $0.2 million in the fourth
fiscal quarter of 2001. Additionally, remaining employees were required to take
time off in the second, third and fourth quarters of fiscal 2001, as well as
the first quarter of fiscal 2002. Other initiatives, including a domestic pay
cut, a four day work week for most manufacturing and some operating employees,
the consolidation and reorganization of certain functions and operations, and
the curtailment of discretionary expenses, were also implemented. If we
continue to reduce our workforce, it may adversely impact our ability to
respond rapidly to any renewed growth opportunities in the future.

   With the dramatic decline in revenue during this downturn, we continue to
monitor our inventory levels in light of product development changes and a
possible eventual upturn. We recorded a charge of $45.0 million in the second
fiscal quarter of 2001 and a charge of $38.0 million in the fourth fiscal
quarter of 2001 for the write-down of excess inventories. We may be required to
take additional charges for excess and obsolete inventory if the industry
downturn causes further reductions to our current inventory valuations or
changes our current product development plans.

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

   We have experienced shipment delays, delays in commitments and restructured
purchase orders by customers and we expect this activity to continue.
Accordingly, we cannot be certain that we will be able to achieve or maintain
our current or prior level of sales or rate of growth. In addition, sales are
expected to be sequentially flat or down in the next fiscal quarter and
possibly in the upcoming quarters. We anticipate that a significant portion of
new orders may depend upon demand from semiconductor device manufacturers
building or expanding fabrication facilities and new device testing
requirements that are not addressable by currently installed test equipment,
and there can be no assurance that such demand will develop to a significant
degree, or at all. In addition, our business, financial condition or results of
operations may be adversely affected by any factor adversely affecting the
semiconductor industry in general or particular segments within the
semiconductor industry. For example, both the 1997/1998 Asian financial crisis
and the current economic downturn have contributed to widespread uncertainty
and a slowdown in the semiconductor industry. This slowdown in the
semiconductor industry resulted in reduced spending for semiconductor capital
equipment, including ATE which we sell. This industry slowdown had, and similar
slowdowns may in the future have, a material adverse effect on our product
backlog, balance sheet, financial condition and results of operations.
Therefore, there can be no assurance that our operating results will not be
materially adversely affected if downturns or slowdowns in the semiconductor
industry occur again in the future.

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

   In the fourth fiscal quarter of fiscal 2001, our net sales fell 73% from
those recorded in the first quarter of fiscal 2001. In fiscal 2000, we
generated revenue of $136.3 million in the first quarter and $221.7 million in
the fourth quarter, an increase of 63%. In fiscal 1999, we generated revenue of
$37.7 million in the first quarter and

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<PAGE>

$97.0 million in the fourth quarter, an increase of 157%. Since 1993, except
for the current cost-cutting efforts and those during fiscal 1998 and the first
half of fiscal 1999, we have overall significantly increased the scale of our
operations in general to support periods of generally increased sales levels
and expanded product offerings and have expanded operations to address critical
infrastructure and other requirements, including the hiring of additional
personnel, significant investments in research and development to support
product development, acquisition of the new facilities in Oregon, further
investments in our ERP system and numerous acquisitions. These fluctuations in
our sales and operations have placed and are continuing to place a considerable
strain on our management, financial, manufacturing and other resources. In
order to effectively deal with the changes brought on by the cyclical nature of
the industry, we have been required to implement and improve a variety of
highly flexible operating, financial and other systems, procedures and controls
capable of expanding, or contracting consistent with our business. However, we
cannot be certain that any existing or new systems, procedures or controls,
including our ERP system, will be adequate to support fluctuations in our
operations or that our systems, procedures and controls will be cost-effective
or timely. Any failure to implement, improve and expand or contract such
systems, procedures and controls efficiently and at a pace consistent with our
business could have a material adverse effect on our business, financial
condition or results of operations.

We are expanding and intend to continue the expansion of our product lines.

   We are currently devoting and intend to continue to devote significant
resources to the development, production and commercialization of new products
and technologies. During fiscal 2001 we have primarily introduced products that
are either evolutions or derivatives of existing products. Under the new
revenue recognition policy that is in accordance with SAB 101, we will be
deferring revenue for transactions that involve newly introduced products or
when customers specify acceptance criteria that cannot be demonstrated prior to
the shipment. This will result in a delay in the recognition of revenue as
compared to the historic norm of recognizing revenue upon shipment. Product
introduction delays, if they occur in the future, will delay the recognition of
revenue and gross profit by us. In fiscal 2002, we currently anticipate
introducing new products as well as evolutions and derivatives of current
products. In late fiscal 1999 and into 2000, we shipped three major new
products. We invested and continue to invest significant resources in plant and
equipment, leased facilities, inventory, personnel and other costs to begin or
prepare to increase production of these products. A significant portion of
these investments will provide the marketing, administration and after-sales
service and support required for these new hardware and software products.
Accordingly, we cannot be certain that gross profit margin and inventory levels
will not be adversely impacted by delays in new product introductions or
start-up costs associated with the initial production and installation of these
new product lines. We also cannot be certain that we can manufacture these
systems per the time and quantity required by our customers. The start-up costs
include additional manufacturing overhead, additional inventory and warranty
reserve requirements and the enhancement of after-sales service and support
organizations. In addition, the increases in inventory on hand for new product
development and customer support requirements have increased and will continue
to increase the risk of inventory write-offs. We cannot be certain that our net
sales will increase or remain at historical levels or that any new products
will be successfully commercialized or contribute to revenue growth or that any
of our additional costs will be covered.

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

   We obtain certain components, subassemblies and services necessary for the
manufacture of our testers from a limited group of suppliers. We do not
maintain long-term supply agreements with most of our vendors and we purchase
most of our components and subassemblies through individual purchase orders.
The manufacture of certain of our components and subassemblies is an extremely
complex process. We also rely on outside vendors to manufacture certain
components and subassemblies and to provide certain services. We have
experienced and continue to experience significant reliability, quality and
timeliness problems with several critical components including certain custom
integrated circuits. We cannot be certain that these or other problems will not
continue to occur in the future with our suppliers or outside subcontractors.
Our reliance on a limited group of suppliers and on outside subcontractors
involves several risks, including an inability to obtain an

                                      21

<PAGE>

adequate supply of required components, subassemblies and services and reduced
control over the price, timely delivery, reliability and quality of components,
subassemblies and services. Shortages, delays, disruptions or terminations of
the sources for these components and subassemblies have delayed and could
continue to delay shipments of our systems and new products and could continue
to have a material adverse effect on our business. Our continuing inability to
obtain adequate yields or timely deliveries or any other circumstance that
would require us to seek alternative sources of supply or to manufacture such
components internally could also have a material adverse effect on our
business, financial condition or results of operations. Such delays, shortages
and disruptions would also damage relationships with current and prospective
customers and have and could continue to allow competitors to penetrate our
customer accounts. We cannot be certain that our internal manufacturing
capacity or that of our suppliers and subcontractors will be sufficient to meet
customer requirements.

The ATE industry is intensely competitive which can adversely affect our
revenue growth.

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

   We face substantial competition from ATE manufacturers throughout the world,
as well as several of our customers. We do not currently compete in the testing
of high-end microprocessors, linear ICs or DRAMs. Moreover, a substantial
portion of our net sales is derived from sales of mixed-signal testers. Many
competitors have substantially greater financial and other resources with which
to pursue engineering, manufacturing, marketing and distribution of their
products. Certain competitors have introduced or announced new products with
certain performance or price characteristics equal or superior to products we
currently offer. These competitors have introduced products that compete
directly against our products. We believe that if the ATE industry continues to
consolidate through strategic alliances or acquisitions, we will continue to
face significant additional competition from larger competitors that may offer
product lines and services more complete than ours. Our competitors are
continuing to improve the performance of their current products and to
introduce new products, enhancements and new technologies that provide improved
cost of ownership and performance characteristics. New product introductions by
our competitors could cause a decline in our sales or loss of market acceptance
of our existing products.

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

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

   We must develop and deliver customized hardware and software to meet our
customers' specific test requirements. The market requires us to manufacture
these systems on a timely basis. Our test equipment may fail to meet our
customers' technical or cost requirements and may be replaced by competitive
equipment or an alternative technology solution. Our inability to meet such
hardware and software requirements could impact our ability to recognize
revenue on the related equipment. Our inability to provide a test system that
meets requested

                                      22

<PAGE>

performance criteria when required by a device manufacturer would severely
damage our reputation with that customer. This loss of reputation may make it
substantially more difficult for us to sell test systems to that manufacturer
for a number of years.

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

   Spirox Corporation, a distributor in Taiwan that sells to end-user customers
in Taiwan and China, accounted for approximately 13%, 42%, and 30% of our net
sales in fiscal years 2001, 2000 and 1999, respectively. Our agreement with
Spirox can be terminated for any reason on 90 days prior written notice. The
semiconductor industry is highly concentrated, and a small number of
semiconductor device manufacturers and contract assemblers account for a
substantial portion of the purchases of semiconductor test equipment generally,
including our test equipment. Our top ten end user customers have recently
accounted for a substantial portion of our net sales. Consequently, our
business, financial condition and results of operations could be materially
adversely affected by the loss of or any reduction in orders by Spirox, any
termination of the Spirox relationship, or any other significant customer,
including the potential for reductions in orders by assembly and tester service
companies which that customer may utilize or reductions due to continuing or
other technical, manufacturing or reliability problems with our products or
continued slow-downs in the semiconductor industry or in other industries that
manufacture products utilizing semiconductors. Our ability to maintain or
increase sales levels will depend upon:

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

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

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

  .  our customers' financial condition and success;

  .  general economic conditions; and

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

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

   Sales of our systems depend in part upon the decision of semiconductor
manufacturers to develop and manufacture new semiconductor devices or to
increase manufacturing capacity. As a result, sales of our products are subject
to a variety of factors we cannot control. The decision to purchase our
products generally involves a significant commitment of capital, with the
attendant delays frequently associated with significant capital expenditures.
For these and other reasons, our systems have lengthy sales cycles during which
we may expend substantial funds and management effort to secure a sale,
subjecting us to a number of significant risks. 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.

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

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

                                      23

<PAGE>

   In addition, acquisitions involve numerous other risks, including:

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

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

  .  increased complexity and costs associated with internal management
     structures;

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

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

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

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

   We prepare our financial statements to conform with generally accepted
accounting principles, or GAAP. GAAP are subject to interpretation by the
American Institute of Certified Public Accountants, the SEC and various bodies
formed to interpret and create appropriate accounting policies. A change in
those policies can have a significant effect on our reported results and may
even affect our reporting of transactions completed before a change is
announced. Accounting rules affecting many aspects of our business, including
rules relating to purchase and pooling-of-interests accounting for business
combinations, in-process research and development charges, asset impairment,
revenue recognition, employee stock purchase plans and stock option grants have
recently been revised or are currently under review. Changes to those rules or
current interpretation of those rules may have a material adverse effect on our
reported financial results or on the way we conduct our business. For example,
in the fourth quarter of fiscal 2001, we implemented SAB 101. Adoption of SAB
101 required us to restate our quarterly results for the seven fiscal quarters
ended July 31, 2001 (see Notes 1 and 13 of the Notes to the Consolidated
Financial Statements for further discussion). In addition, the preparation of
our financial statements in accordance with GAAP requires that we make
estimates and assumptions that affect the recorded amounts of assets and
liabilities, disclosure of those assets and liabilities at the date of the
financial statements and the recorded amounts of expenses during the reporting
period. A change in the facts and circumstances surrounding those estimates
could result in a change to our estimates and could impact our future operating
results.

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

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

Our international business exposes us to additional risks.

   International sales accounted for approximately 61%, 74%, and 55% of our
total net sales for fiscal 2001, 2000 and 1999, respectively. As a result, we
anticipate that international sales will continue to account for a significant
portion of our total net sales in the foreseeable future. These international
sales will continue to be subject to certain risks, including:

  .  changes in regulatory requirements;

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<PAGE>

  .  tariffs and other barriers;

  .  political and economic instability;

  .  an outbreak of hostilities;

  .  integration and management of foreign operations of acquired businesses;

  .  foreign currency exchange rate fluctuations;

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

  .  potentially adverse tax consequences; and

  .  the 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 and software products. 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 38%, 66%, and 47% of our total net sales in fiscal 2001, 2000 and
1999, respectively, and thus demand for our products is subject to the risk of
economic instability in that region and could continue to be materially
adversely affected. Countries in the Asia-Pacific region, including Korea and
Japan, have experienced weaknesses in their currency, banking and equity
markets in the recent past. These weaknesses could continue to adversely affect
demand for our products, the availability and supply of our product components
and our consolidated results of operations. The 1997/1998 Asian financial
crisis contributed to widespread uncertainty and a slowdown in the
semiconductor industry. This slowdown resulted in reduced spending on
semiconductor capital equipment, including ATE, and has had, and may in the
future have, a material adverse effect on our product backlog, balance sheet
and results of operations. Further, many of our customers in the Asia-Pacific
region built up capacity in ATE during fiscal 2000 in anticipation of a steep
ramp up in wafer fabrication. However, this steep ramp up in output has not
fully materialized leaving some customers with excess capacity.

   Two end-user customers headquartered in Europe accounted for approximately
13% and 11% respectively, of our net sales in fiscal 2001 and one end-user
customer headquartered in Taiwan accounted for 17% of our net sales in fiscal
2000.

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

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

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

                                      25

<PAGE>

have entered will protect our intellectual property rights. Inability or
failure to protect our intellectual property rights could have a material
adverse effect upon our business, financial condition and results of
operations. We have been involved in extensive, expensive and time-consuming
reviews of, and litigation concerning, patent infringement claims.

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

   We have at times been notified that we may be infringing intellectual
property rights of third parties and we have litigated patent infringement
claims in the past. We expect to continue to receive notice of such claims in
the future. In July 1998, inTEST alleged in writing that certain of our
products are infringing a patent held by inTEST. We have since then engaged in
sporadic discussions with inTEST concerning this matter. On December 15, 2000,
inTEST filed a complaint in the U.S. District Court for the District of
Delaware against us, alleging infringement of inTEST U.S. patent number
4,589,815 and seeking damages and injunctive relief. In April 2001, we were
served with the complaint and since that date discovery has commenced. We may
also be obligated to other third parties relating to this allegation. We
currently intend to vigorously defend ourselves against this claim and we
believe we have meritorious defenses to the claims. However, we cannot be
certain of success in defending this patent infringement claim or claims for
indemnification resulting from infringement claims.

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

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

A variety of factors may cause the price of our stock to be volatile.

   In recent years, the stock market in general, and the market for shares of
high-tech companies in particular, including ours, have experienced extreme
price fluctuations, which have often been unrelated to the operating
performance of affected companies. For example, in fiscal 2000, the price of
our common stock has ranged from a closing high of $74.59 to a closing low of
$16.13. In fiscal 2001 and through December 2001, the price of our common stock
has ranged from a closing high of $29.50 to a closing low of $11.26. The market
price of our common stock is likely to continue to fluctuate significantly in
the future, including fluctuations unrelated to our performance. We believe
that fluctuations of our stock price may be caused by a variety of factors,
including:

  .  announcements of developments related to our business;

  .  fluctuations in our financial results;

  .  general conditions in the stock market or around the world, terrorism, or
     developments in the semiconductor and capital equipment industry and the
     general economy;

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

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<PAGE>

  .  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;

  .  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; or

  .  acquisition or merger activity and the success in implementing such
     acquisitions or other business combinations.

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

   The recent terrorist attacks in the United States, the U.S. retaliation for
these attacks and the related decline in consumer confidence and continued
economic weakness have had a substantial adverse impact on the economy. If
consumer confidence does not recover, our revenues and profitability may be
adversely impacted in the first fiscal quarter of 2002 and beyond.

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

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

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

Item 2.  Properties

   We maintain our corporate headquarters in Fremont, California. This leased
facility, comprised of four buildings totaling 165,600 square feet, contains
corporate administration, sales, marketing, applications, engineering, local
customer support and memory products manufacturing. Approximately 26,000 square
feet of one of the buildings has been subleased until February 2005 when the
lease on this facility expires.

   Our digital and mixed signal manufacturing facilities, as well as additional
administration, marketing, applications, engineering and customer support
functions, are located in a 180,000 square foot facility, comprised of two
buildings in Hillsboro, Oregon. This property is on approximately twenty-nine
acres of land and was purchased during fiscal 2000. In addition, the Company
purchased approximately eighteen acres of land less than a mile from the
Hillsboro facility. The IMS facilities, which also house our software business,
are located in a 90,000 square foot facility in Beaverton, Oregon. The lease on
this building expires in February 2004. We maintain various remote sales and
service offices in the United States including approximately 27,000 square feet
in Austin, Texas and 26,000 square feet in Colorado Springs, Colorado. We also
lease various smaller facilities worldwide for our sales offices and an IMS
European manufacturing and design center.

                                      27

<PAGE>

Item 3.  Legal Proceedings

   In July 1998, we received a written allegation from inTEST IP Corp., or with
its patent licensee inTEST Corporation, inTEST, that we were infringing on a
patent held by inTEST. We have since then engaged in sporadic discussions with
inTEST concerning this matter. On December 15, 2000, inTEST filed a complaint
in the U.S. District Court for the District of Delaware against us, alleging
infringement of inTEST U.S. patent number 4,589,815 and seeking damages and
injunctive relief. In April 2001 we were served with the complaint and since
that date discovery has commenced. In addition to direct costs and diversion of
resources which may result, we may be obligated to indemnify third parties for
costs related to this allegation. We are involved in other various claims
arising in the ordinary course of business, none of which, in the opinion of
management, if determined adversely against us, will have a material adverse
effect on our business, financial condition or results of operations.

Item 4.  Submission of Matters to a Vote of Securityholders

   None.

                                      28

<PAGE>

                     EXECUTIVE OFFICERS AND KEY EMPLOYEES

   Our executive officers and key employees and their ages and positions as of
December 31, 2001, are as follows:

<TABLE>
<CAPTION>
     Name             Age                           Position
     ----             ---                           --------
<S>                   <C> <C>
Executive Officers
Dr. Graham J. Siddall 55  Chairman of the Board and Chief Executive Officer
David A. Ranhoff..... 46  President and Chief Operating Officer
Keith L. Barnes...... 50  Executive Vice President; President and CEO of IMS
John R. Detwiler..... 41  Senior Vice President, Chief Financial Officer, and Secretary
Fred Hall............ 52  Senior Vice President, Human Resources

Key Employees
George W. DeGeer..... 55  Senior Vice President & GM, Consumer Mixed Signal Division
Bart Freedman........ 44  Senior Vice President, Worldwide Field Operations
Gary Smith........... 55  Vice President & GM, Industrial, Communications and
                            Entertainment Test Division
Paul Sakamoto........ 47  Vice President & GM, Memory Products Division
Debra Moberly........ 47  Vice President, Operations
Glyn Davies.......... 39  Vice President, Corporate Marketing
Byron Milstead....... 45  Vice President and General Counsel
Sheila Franzen....... 31  Vice President, Information Technology
W. Barry Baril....... 50  Corporate Chief Technology Officer
</TABLE>

   Dr. Graham J. Siddall has served as the Chairman of the Board and Chief
Executive Officer since August 2001 and prior to that was our President, Chief
Executive Officer and a Director from July 1999 to August 2001. His current
term as a Director ends in 2002. Dr. Siddall joined us from KLA-Tencor where he
had been Executive Vice President of the Wafer Inspection Group from May 1997
to May 1999. From December 1995 until May 1997, he served as Executive Vice
President and chief operating officer of Tencor Instruments, Inc. Previously
Dr. Siddall served as Senior Vice President for the Tencor Wafer Inspection
Division from November 1994 to December 1995. He joined Tencor as a vice
president in 1988. Prior to joining Tencor, Dr. Siddall served in a number of
key roles at GCA Corporation, Hewlett Packard Laboratories and Rank Taylor
Hobson.

   David A. Ranhoff has served as President and Chief Operating Officer since
August 2001 and prior to that he was our Executive Vice President and Chief
Operating Officer since November 1999. Mr. Ranhoff was Executive Vice
President, Sales and Marketing from January 1997 to November 1999 and was named
to the Office of the President from December 1998 until July 1999. Mr. Ranhoff
served as Senior Vice President Sales and Marketing from July 1996 to January
1997, as Senior Vice President, Sales, Marketing and Service from July 1995 to
June 1996, as Senior Vice President, Sales and Service from August 1993 to July
1995 and as Vice President, Sales from January 1993 to August 1993. He served
as Vice President, European Operations from July 1990 to December 1992. From
March 1988 to June 1990, Mr. Ranhoff served as Managing Director of European
Operations of the Company and as National Sales Manager from July 1985 to March
1988. Prior to joining the Company, Mr. Ranhoff served for eight years in
various sales and management positions for GenRad, Inc.

   Keith L. Barnes has served as the President and Chief Executive Officer of
our subsidiary, IMS, and as our Executive Vice President since the acquisition
of IMS in August 2001. Prior to that Mr. Barnes was appointed Chairman of the
Board of IMS in October 2000 and Chief Executive Officer of IMS in May 1995 and
served in these positions until August 2001. Mr. Barnes is a director of
Clarity Visual Systems, Inc., a privately held manufacturer of digital visual
messaging solutions.

                                      29

<PAGE>

   John R. Detwiler has served as our Senior Vice President, Chief Financial
Officer and Secretary since February 2001. Prior to that he was interim Chief
Financial Officer and Secretary from December 2000 to February 2001. Prior to
that he served as Vice President, Corporate Controller from April 1999 to
December 2000. Mr. Detwiler joined us from Silicon Wireless, Ltd., a start-up
in the wireless infrastructure products business, where he was the Vice
President of Finance from April 1998 to March 1999. From August 1992 to March
1998, Mr. Detwiler was at Madge Networks N.V., a developer and manufacturer of
LAN and WAN equipment, where he was the Senior Director of Finance. Prior to
Madge, Mr. Detwiler held positions of increasing responsibility in the audit
and consulting practices of Price Waterhouse LLP in Denver CO, Saudi Arabia and
London.

   Fred Hall has served as Senior Vice President, Human Resources since October
2001. Prior to that he was the Chief Financial Officer, Secretary and Treasurer
of IMS from 1998 to October 2001. Mr. Hall was Vice President, Finance and CFO
of Naiad Technologies, Inc., a bio-technology start-up company from 1997 until
joining IMS in 1998. From October 1994 until 1997, Mr. Hall served as Vice
President, CFO, Treasurer and Assistant Secretary for CFI ProServices, Inc., a
provider of integrated, PC-based software for financial institutions. From June
1992 until October 1994, Mr. Hall served as Vice President, Finance and CFO,
Secretary and Treasurer of Itronix Corporation, a manufacturer of hand held
computers.

   George W. DeGeer has served as Senior Vice President & GM, of the Consumer
Mixed Signal Division since December 1998. Prior to that Mr. DeGeer was Senior
Vice President, Operations from August, 1996 to December 1998, as Senior Vice
President, Manufacturing, from January 1995 to August, 1996, as Vice President,
Manufacturing from October 1993 to January 1995, as Director of Manufacturing,
from July 1992 to October 1993, and as Vista Manufacturing Manager from January
1991 to July 1992. Prior to joining the Company, Mr. DeGeer held various
manufacturing management positions at Tektronix for more than twenty years.

   Bart Freedman has served as Senior Vice President, Worldwide Field
Operations since August 2001 and prior to that was the Vice President,
Worldwide Field Operations from January 2000 to August 2001. From October 1996
to January 2000, he was our Vice President of Asian Operations. From 1994 to
1996, Mr. Freedman served as Vice President of North American Sales for
Schlumberger. From 1985 to 1994, Mr. Freedman held a variety of senior level
positions at Tektronix, Inc., including U.S. Regional Sales Manager for the
Semiconductor Test Systems Division that we bought in December 1990. From 1980
through 1985, Mr. Freedman was a design engineer and applications manager for
Teradyne, Inc.

   Gary Smith has served as Vice President & GM, of the Industrial,
Communications and Entertainment Test Division since April 2001. Prior to this
position, Mr. Smith was the Vice President of the Low Cost Performance Line
since December 1998. Prior to that Mr. Smith was Marketing Director for the
ValStar and SC Series products from February 1996 to December 1998. Prior to
joining Credence, from September 1985 to February 1996 Mr. Smith has held
various senior management positions in sales, marketing, and operations at
Schlumberger Technologies, Inc.

   Paul Sakamoto has served as Vice President & GM, of the Memory Products
Division since November 1998. Prior to this position, Mr. Sakamoto served as
the Vice President of the North American Sales organization from February 1997
to November 1998. He was Vice President of the Customer Marketing function and
Vice President of Digital Product Marketing between February 1995 and February
1997. Prior to joining Credence, Mr. Sakamoto held various sales and
engineering positions including Vice President of Sales at Micro Component
Technology, Director of Sales Development at Megatest Corporation and six years
of experience at Intel Corporation. Mr. Sakamoto has over 22 years of
experience in the semiconductor and semiconductor equipment industry.

   Debra Moberly has served as Vice President, Operations since December 1998.
Prior to that Ms. Moberly was Vice President, Manufacturing from February 1996
to December 1998, as Director, Marketing Operations

                                      30

<PAGE>

from December 1994 to February 1996, and Director, Materials from May 1993 to
December 1994. Ms. Moberly joined the Company in January 1991 as Manufacturing
Manager, joining the Company from Tektronix where she held various positions of
increasing responsibility in the manufacturing function for more than seventeen
years.

   Glyn Davies has served as Vice President, Corporate Marketing since joining
the Company in October 2000. Prior to joining Credence, Mr. Davies held various
roles through a 10 year career at KLA-Tencor, most recently serving as the
Senior Director of Business Development in the Yield Management Software
Division. Prior to joining KLA-Tencor, Mr. Davies held various marketing and
applications engineering positions including marketing manger at Optical
Specialties, Inc. and product manager at Cambridge Instruments. Mr. Davies has
over 16 years of experience in the semiconductor equipment industry.

   Byron Milstead has served as Vice President and General Counsel since
November 2000. Prior to that Mr. Milstead was a partner with the Portland
Oregon law firm of Ater Wynne LLP. Prior to joining Ater Wynne LLP in 1996, Mr.
Milstead was an associate and partner in the Portland Oregon office of Bogle &
Gates PLLC. Mr. Milstead has practiced law since 1982.

   Sheila Franzen has served as Vice President, Information Technology since
July 2001. Prior to that, Ms. Franzen was our Director of the Enterprise
Applications department at Credence. From 1997 through 2000, Ms. Franzen worked
for Nike, Inc. and held various management positions, most recently the Global
Apparel Manufacturing IT Manager. From 1992 through 1997, Ms. Franzen held
positions of increasing responsibility in application development and project
management at Hewlett-Packard Company.

   W. Barry Baril has served as the Corporate Chief Technology Officer since
August 2001. Prior to that Mr. Baril was the Chief Technology Officer of IMS
from 1998 to August 2001. Mr. Baril is a founder of that company and had been
the Vice President of Engineering since the company's inception in 1983.

   Officers serve at the discretion of the Board of Directors, until their
successors are appointed. There are no family relationships among our executive
officers or directors.

                                      31

<PAGE>

                                    PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

   Our common stock is traded on the Nasdaq National Market under the symbol
CMOS. The Board of Directors authorized the split of our common stock on a
two-for-one basis for shareholders of record on May 1, 2000, the resulting
shares from the stock split were distributed on May 17, 2000. This common stock
split was effected through a common stock dividend. All references to share and
per-share data for all periods presented have been adjusted to give effect to
this two-for-one stock split. High and low closing stock prices for the last
two fiscal years were:

<TABLE>
<CAPTION>
                                                       2001          2000
                                                   ------------- -------------
 Quarter Ended                                      High   Low    High   Low
 -------------                                     ------ ------ ------ ------
 <S>                                               <C>    <C>    <C>    <C>
 January 31....................................... $30.88 $15.50 $49.44 $22.22
 April 30.........................................  27.50  17.13  74.59  43.91
 July 31..........................................  26.73  19.24  74.38  42.00
 October 31.......................................  21.95  10.95  59.00  16.13
</TABLE>

   There were approximately 231 stockholders of record at December 7, 2001. To
date, we have not declared or paid any cash dividends on its common stock. We
do not anticipate paying any dividends on our common stock in the foreseeable
future.

Item 6.  Selected Financial Data

   The comparability of the following selected financial data is affected by a
variety of factors, and this data is qualified by reference to and should be
read in conjunction with the consolidated financial statements and notes
thereto elsewhere in this Annual Report on Form 10-K and the Management's
Discussion and Analysis of Financial Condition and Results of Operations. In
August 2001, we acquired Integrated Measurement Systems in a transaction
accounted for as a pooling of interests. All disclosures have been restated as
of the earliest period presented to reflect the combined operations of the
companies (See Notes 2 and 13 of the Consolidated Financial Statements for
further discussion).

<TABLE>
<CAPTION>
                                                                            Year Ended October 31,
                                                                -----------------------------------------------
                                                                  2001       2000     1999     1998      1997
                                                                ---------  -------- -------- --------  --------
                                                                   (in thousands, except per share amounts)
<S>                                                             <C>        <C>      <C>      <C>       <C>
Consolidated Statement of Operations Data:
    Net sales.................................................. $ 301,718  $757,351 $253,253 $253,500  $250,942
    Operating income (loss)....................................  (172,942)  225,550    3,361  (47,159)   22,136
    Income (loss) before taxes.................................  (155,587)  241,277    4,456  (45,097)   26,235
    Net income (loss) before extraordinary items...............   (98,682)  152,035    3,126  (29,613)   15,898
    Net income (loss) before cumulative effect of accounting
     change (a)................................................   (98,676)  152,035    4,772  (29,613)   15,898
    Net income (loss)..........................................   (98,676)  120,510    4,772  (29,613)   15,898
    Net income (loss) per basic share.......................... $   (1.65) $   2.18 $   0.10 $  (0.59) $   0.32
    Net income (loss) per diluted share........................ $   (1.65) $   2.00 $   0.10 $  (0.59) $   0.31
Consolidated Balance Sheet Data:
    Working capital............................................ $ 323,946  $426,515 $188,954 $220,014  $296,059
    Total assets...............................................   757,419   983,437  428,799  369,603   423,664
    Long-term debt.............................................        --        --   96,610  115,363   115,152
    Retained earnings..........................................    98,752   197,428   76,919   72,147   112,043
    Stockholders' equity.......................................   680,940   767,875  243,228  203,559   262,344
</TABLE>
--------
(a) Effective November 1, 1999, the Company changed its method of accounting
    for systems revenue based on guidance provided in SEC Staff Accounting
    Bulletin No. 101, "Revenue Recognition in Financial Statements.", (SAB
    101). The restatement for SAB 101 has been reflected in the above table for
    fiscal year 2000 and 2001.

                                      32

<PAGE>

Quarterly 2001

<TABLE>
<CAPTION>
                                                              2001 Quarter Ended
                                                  ------------------------------------------
                                                  January 31, April 30, July 31,  October 31,
                                                  ----------- --------- --------  -----------
                                                   (in thousands, except per share amounts)
                                                                  (unaudited)
<S>                                               <C>         <C>       <C>       <C>
Net sales........................................  $136,311   $ 75,639  $ 52,781   $ 36,987
Gross margin.....................................    77,117     (3,459)   23,521    (24,273)
Research and development.........................    22,514     21,104    21,888     20,942
Selling, general and administrative..............    32,559     28,089    22,798     20,727
Amortization of purchased intangible assets......     5,179      6,114     5,987      5,875
Special charges..................................        --      3,343     2,820     25,909
Operating income (loss)..........................    16,865    (62,109)  (29,972)   (97,726)
Income (loss) before taxes.......................    21,437    (56,957)  (25,509)   (94,558)
Net income (loss)................................    13,595    (36,494)  (15,621)   (60,156)
Net income (loss) per basic share................  $   0.23   $  (0.61) $  (0.26)  $  (1.00)
Net income (loss) per diluted share..............  $   0.22   $  (0.61) $  (0.26)  $  (1.00)
</TABLE>

Quarterly 2000

<TABLE>
<CAPTION>
                                                              2000 Quarter Ended
                                                  ------------------------------------------
                                                  January 31, April 30, July 31, October 31,
                                                  ----------- --------- -------- -----------
                                                   (in thousands, except per share amounts)
                                                                 (unaudited)
<S>                                               <C>         <C>       <C>      <C>
Net sales........................................  $136,253   $178,140  $221,266  $221,692
Gross margin.....................................    80,080    105,821   133,962   135,534
Research and development.........................    16,182     19,327    22,086    20,351
Selling, general and administrative..............    24,823     30,733    35,484    38,700
Amortization of purchased intangible assets......        --         --     3,360     7,007
Acquired in-process research and development.....        --         --     8,282     3,512
Operating income.................................    39,075     55,761    64,750    65,964
Income before taxes..............................    40,043     59,017    71,023    71,194
Net income before cumulative effect of accounting
  change(a)......................................    25,870     38,104    43,047    45,014
Net income (loss)................................    (5,655)    38,104    43,047    45,014
Net income per basic share before accounting
  change.........................................  $   0.51   $   0.69  $   0.76  $   0.77
Net income (loss) per basic share................  $  (0.11)  $   0.69  $   0.76  $   0.77
Net income (loss) per diluted share before
  accounting change..............................  $   0.47   $   0.63  $   0.68  $   0.71
Net income (loss) per diluted share..............  $  (0.11)  $   0.63  $   0.68  $   0.71
</TABLE>
--------
(a) Effective November 1, 1999, the Company changed its method of accounting
    for systems revenue based on guidance provided in SEC Staff Accounting
    Bulletin No. 101, "Revenue Recognition in Financial Statements.", (SAB 101).

Item 7.  Management's Discussion and Analysis of Financial Condition and
     Results of Operations

Overview

   In addition to the historical information contained in this document, the
discussion in this Annual Report on Form 10-K contains forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
that involve risks and uncertainties, such as statements of the Company's
plans, objectives, expectations and intentions. The cautionary

                                      33

<PAGE>

statements made in this Annual Report on Form 10-K should be read as being
applicable to all related forward-looking statements whenever they appear in
this Annual Report on Form 10-K. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include those discussed below as well as those cautionary
statements and other factors set forth in "Risk Factors" and elsewhere herein.

   Revenue has declined in fiscal 2001 in the test and assembly sector of the
semiconductor equipment industry during what we believe is a severe cyclical
downturn in the industry. There is uncertainty as to if and when the next
cyclical growth phase will occur. Until such time as we return to a growth
period, we expect a continuing decline in orders and therefore expect that the
January 31, 2002 fiscal quarter's revenue will be flat or down from those
recorded in the fiscal fourth quarter of 2001 and may continue to decline
throughout fiscal 2002.

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

Critical Accounting Policies and Estimates

   We historically recognized revenue on the sale of semiconductor
manufacturing equipment upon shipment. We changed our revenue recognition
policy based on guidance provided in SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). In August 2001, we
acquired IMS using the pooling-of-interests accounting method (see Note 2 of
the Consolidated Financial Statements for further discussion). Because IMS had
already adopted SAB 101 in the IMS' fiscal year ended December 31, 2000, we
elected to conform our revenue recognition practices to IMS. Accordingly, we
elected to adopt SAB 101 effective November 1, 1999, (i.e., fiscal 2000).

   In accordance with guidance provided in SAB 101, we recorded a non-cash
charge of $31.5 million (after reduction for income taxes of $17.8 million), or
($0.51) per diluted share, to reflect the cumulative effect of the accounting
change as of the beginning of fiscal 2000. As a result of the adoption of SAB
101, the increase to net income for fiscal year 2000 was $1.3 million or $0.02
per basic share and $0.02 per diluted share. This amount is comprised of
equipment that was shipped to certain customers and previously recorded as
revenue, but had not been accepted as of October 31, 1999.

   Under SAB 101, we recognize revenue on the sale of semiconductor
manufacturing equipment when title and risk of loss have passed to the
customer, there is persuasive evidence of an arrangement, delivery has occurred
or services have been rendered, the sales price is fixed or determinable,
collectibility is reasonably assured and customer acceptance criteria have been
successfully demonstrated. Product revenue is recognized upon shipment when the
product is classified as mature and the customer acceptance criteria can be
demonstrated prior to shipment. Revenue related to the fair value of the
installation obligation is recognized upon completion

                                      34

<PAGE>

of the installation. Products are classified as mature after several different
customers have accepted similar systems. For sales of new products or when the
customer acceptance criteria cannot be demonstrated prior to shipment, revenue
and the related cost of goods sold are deferred until customer acceptance.

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

   With the dramatic decline in revenue during fiscal 2001, we continue to
monitor our inventory levels in light of product development changes and
expectations of an eventual market upturn. We recorded a charge of
$45.0 million in the second fiscal quarter of 2001 and a charge of $38.0
million in the fourth fiscal quarter of 2001 for the write-down of excess
inventories. We may be required to take additional charges for excess and
obsolete inventory if the industry downturn causes further reductions to our
current inventory valuations or changes our current product development plans.
We evaluate our inventory levels and valuations based on our estimates and
forecasts of the next cyclical industry upturn. These forecasts require us to
estimate our ability to sell current and future products in the next industry
upturn and compare those estimates with our current inventory levels. If these
forecasts or estimates change, or our product roadmaps change, then we would
need to adjust our assessment of the inventory valuations. At October 31, 2001,
approximately 43% and 23% of the inventory balances are for the Quartet mixed
signal and Kalos memory product families, respectively.

   During industry downturns, certain of our customers have difficulty with
their cash flows. For certain customers, typically those with whom we have
long-term relationships, we may grant extended payment terms. We review, with
assistance from our sales distribution partners, the ability of our customers
to pay the indebtedness they incur with us. Certain of our receivables have due
dates in excess of 90 days and we have a history of successfully collecting
these extended payment term receivables.We provide an allowance for doubtful
accounts for all specific receivables that we judge to be unlikely for
collection. In addition, we record a reserve based on the size and age of all
receivable balances against which we have not established a specific reserves.
These estimated allowances are periodically reviewed, analyzing the customer's
payment history and information regarding customer's credit worthiness known to
us.

   Realization of the net deferred tax assets is dependent on our ability to
generate approximately $70,000,000 of future taxable income. Management
believes that it is more likely than not that the assets will be realized,
based on forecasted income. However, there can be no assurance that we will
meet our expectations of future income. Management will evaluate the
realizability of the deferred tax assets on a quarterly basis and assess the
need for additional valuation allowances.

Results of Operations

   In August 2001, we completed a merger with IMS, issuing approximately 7.2
million shares of common stock in exchange for all of the outstanding common
stock of IMS. In addition, outstanding options to purchase IMS common stock
were converted into options to purchase approximately 2.1 million shares of
Credence common stock. This transaction was accounted for as a pooling of
interests and, therefore, all prior period consolidated financial statements
presented, and the consolidated financial statements as of October 31, 2001 and
for the year then ended, were restated as if the merger took place at the
beginning of such periods.

   IMS had a calendar fiscal year and, accordingly, the IMS statement of
operations for the years ended December 31, 1999 and 2000 have been combined
with the our statement of operations for the fiscal years ended October 31,
1999 and 2000, respectively. In order to conform IMS's year end to our fiscal
year end, the

                                      35

<PAGE>

consolidated statement of operations for fiscal 2001 includes the results of
operations of IMS for two months (May and June 2001) in the consolidated
results of operations in each of the quarters ended April 30, 2001 and July 31,
2001. Accordingly, our fiscal first quarter includes the IMS results of
operations for the three month period ended March 31, 2001, the second fiscal
quarter includes the IMS results of operations for the three month period ended
June 30, 2001, the third fiscal quarter includes the IMS results of operations
for the three month period ended July 31, 2001, and the fourth fiscal quarter
includes the IMS results of operations for the three months period ended
October 31, 2001.

   The following table sets forth certain operating data as a percentage of net
sales for the fiscal years indicated:

<TABLE>
<CAPTION>
                                                         Fiscal Years Ended
                                                            October 31,
                                                         -----------------
                                                         2001    2000  1999
                                                         ----    ----  ----
       <S>                                               <C>     <C>   <C>
       Net sales........................................ 100%    100%  100%
       Cost of goods sold--on net sales.................  48      40    46
       Cost of goods sold--special charges..............  28      --    --
                                                         ---     ---   ---
          Gross margin..................................  24      60    54
                                                         ---     ---   ---
       Operating expenses:
          Research and development......................  29      10    18
          Selling, general and administrative...........  34      17    31
          Amortization of purchased intangible assets...   8       1     1
          In-process research and development...........  --       2    --
          Special charges...............................  10      --     3
                                                         ---     ---   ---
              Total operating expenses..................  81      30    53
                                                         ---     ---   ---
       Operating income (loss).......................... (57)%    30%    1%
                                                         ---     ---   ---
       Cumulative effect of change in accounting
         principle, net of tax..........................  --      (4)%  --
       Net income (loss)................................ (33)%    16%    2%
</TABLE>

  2001 vs. 2000

   Net sales.  Net sales consist of revenues from the sale of systems,
upgrades, spare parts, maintenance contracts and software. Net sales decreased
60.2% to $301.7 million in fiscal 2001 from $757.4 million in fiscal 2000. Our
net sales decreased from $136.3 million in the first quarter of fiscal 2000 to
$37.0 million in the fourth quarter of fiscal 2001. During fiscal 2001, our net
sales have declined due to what we believe is a cyclical downturn in the
semiconductor industry that is in sharp contrast to the quarterly increases in
fiscal 2000.

   International net sales accounted for approximately 61% and 74% of total net
sales in fiscal 2001 and 1999, respectively. Our net sales to the Asia Pacific
region accounted for approximately 38% and 66% of total net sales in fiscal
2001 and 2000, respectively, and thus are subject to the risk of economic
instability in that region that materially adversely affected the demand for
our products in 1998. Capital markets in Korea and other areas of Asia have
been highly volatile, resulting in economic instabilities. These instabilities
may reoccur which could materially adversely affect demand for our products.

   Our net sales by product line in fiscal 2001 and 2000 consisted of:

<TABLE>
<CAPTION>
                                                            2001 2000
                                                            ---- ----
          <S>                                               <C>  <C>
          Mixed-Signal.....................................  61%  74%
          Logic............................................   4   11
          Memory...........................................  19    8
          Service and software.............................  16    7
                                                            ---  ---
             Total......................................... 100% 100%
                                                            ===  ===
</TABLE>

                                      36

<PAGE>

   The increase in the memory percentage of net sales is attributable
principally to sales of the Kalos product line. Revenues from software were not
material to our operations in fiscal 2001 and 2000, representing less than 4%
of our net sales in each respective period.

   Gross Margin.  Our gross margin as a percentage of net sales decreased to
24.2% in fiscal 2001 from 60.1% in fiscal 2000. The decrease in 2001 is
principally the result of the $83 million write down of excess inventories
recorded during the year. These charges were recorded as a result of our
response to a major downturn in the business outlook for the ATE and related
semiconductor and semiconductor equipment industries in 2001. Excluding the
write down of excess inventories, our gross margin as a percentage of sales
would have been 51.7% in fiscal 2001. The lower gross margin excluding the
effect of the write down is primarily attributed to lower manufacturing
absorption resulting from the lower business levels in 2001 as well as lower
average selling prices during fiscal 2001.

   Research and Development.  Research and development expenses as a percentage
of net sales were 28.7% and 10.3%, in fiscal 2001 and fiscal 2000,
respectively. R&D expenses increased in absolute dollars to $86.4 million in
fiscal 2001 from $77.9 million in fiscal 2000, reflecting higher investments in
the development of new products, and enhancements of existing product lines.
The higher level of spending in fiscal 2001 reflects the acquisitions of TMT
and MI in fiscal 2000 as well as increases in internal R&D project expenses. We
currently intend to continue to invest significant resources in the development
of new products and enhancements for the foreseeable future and would expect
R&D expenses to be higher in absolute dollars in fiscal 2002 than those
recorded in fiscal 2001.

   Selling, General and Administrative.  Selling, general and administrative,
or SG&A, expenses decreased to $104.2 million in fiscal 2001 from $129.7
million in fiscal 2000, a decrease of 20%. The lower spending in 2001 in
absolute dollars was primarily due to lower headcount and commission expenses,
salary reductions, and periodic Company shutdowns during fiscal 2001. As a
percentage of net sales, SG&A expenses were 34.5% in 2001 compared to 17.1% in
fiscal 2000, reflecting the decrease in business levels. We expect SG&A
expenses for fiscal 2002 to be flat or higher in absolute dollars than those
recorded in fiscal 2001.

   Amortization of Purchased Intangible Assets.  Amortization of purchased
intangible asset expenses increased to $23.2 million in fiscal 2001 from $10.4
million in fiscal 2000, an increase of 123%. In January and February 2001, we
purchased DCI and the assets of the Rabkin Group for approximately $13.5
million. These acquisitions have resulted in approximately $0.8 million in
quarterly charges for amortization of purchased intangible assets. In May 2000,
we purchased TMT for approximately $80.0 million, in August 2000 we purchased
MI for approximately $20.5 million and Credence Europa for approximately $8.4
million, and in October 2000 we purchased NMS for approximately $11.3 million.
These acquisitions have resulted in approximately $2.8 million, $1.1 million,
$0.4 million, and $0.7 million, respectively, in quarterly charges for
amortization of purchased intangible assets.

   Our management made certain assessments with respect to the determination of
all identifiable assets to be used in the business as well as research and
development activities as of the acquisition date. Each of these activities was
evaluated by both interviews and data analysis to determine our state of
development and related fair value. The purchased intangibles consist of
developed technology, assembled workforce, customer relationships, trade names
and trademarks, patents, and goodwill and they typically have estimated useful
lives of three to ten years.

   Intangible purchased assets are generally evaluated on a market-by-market
basis in making a determination as to whether such assets are impaired or the
estimated useful lives are still appropriate. In conjunction with an
independent consultant we periodically review our long-lived assets (including
goodwill) for impairment based on estimated future discounted cash flows
attributable to the assets. In the event such cash flows are not expected to be
sufficient to recover the recorded value of the assets, the assets are written
down to their estimated fair values.

                                      37

<PAGE>

   Special Charges.  In the second quarter of fiscal 2001 we recorded a charge
of approximately $2.0 million for severance payments and asset disposals
associated with headcount reductions we implemented in February 2001. These
charges were recorded as a result of our response to a major downturn in the
business outlook for the ATE and related semiconductor and semiconductor
equipment industries in 2001. In the third quarter of fiscal 2001 we recorded a
further $1.0 million for severance payments and asset disposals associated with
headcount reductions we implemented in May and August 2001. In the fourth
quarter of fiscal 2001 we recorded an additional $0.2 million for headcount
reductions. We have reduced headcount by more than 400 people during the fiscal
year across all functional areas. Severance payments have been distributed
during the year and the remaining accruals at October 31, 2001 are not
significant.

   In the second and third quarters of fiscal 2001 we recorded charges of
approximately $3.2 million related to fees and expenses associated with the
acquisition of IMS. An additional $16.9 million was recorded in the fourth
quarter for the closing of the IMS transaction and the integration of its
operations with Credence and our subsidiary, Fluence. This charge included the
write-down of $2.3 million of goodwill and purchased technology intangible
assets of Opmaxx. The impairment was recorded based on product decisions for
the newly combined operations of Fluence and IMS. The elements of the IMS
acquisition charges are as follows (in thousands):

<TABLE>
<S>                                                                                    <C>
Fees and expenses (investment banking, legal, accounting, D&O insurance, travel, etc.) $ 9,951
Write-down of tangible and intangible assets..........................................   7,501
Lease and liability accruals..........................................................   1,390
Employee termination benefits.........................................................   1,272
                                                                                       -------
                                                                                       $20,114
                                                                                       =======
</TABLE>

   In the fourth quarter of fiscal 2001 we recorded a $6.6 million charge for
the impairment of the remaining intangible assets associated with the
acquisition of NMS in October 2000. This impairment was based on significant
NMS employee turnover in fiscal 2001 as well as a change in the technological
direction of the remaining research and development project that originated in
NMS.

   In the fourth quarter of fiscal 2001 we recorded a $2.3 million charge for
the abandonment of the former TMT facility in Sunnyvale, California as these
operations were integrated into our Fremont, California facilities. This charge
consisted of $1.8 in estimated future rental payments to be paid through
February 2005 and $0.5 million for asset and leasehold improvement write-downs.

   Interest Income.  We generated interest income of $19.3 million and $19.9
million in fiscal 2001 and 2000, respectively. The slight decline in fiscal
2001 was primarily due to lower average interest rates in fiscal 2001 when
compared to fiscal 2000.

   Interest and Other Expenses.  Interest and other expenses decreased to $2.0
million from $4.2 million in fiscal 2001 from fiscal 2000, primarily due to
lower interest expenses on the convertible subordinated notes that were
redeemed in September 2000.

   Income Tax.  Our effective tax benefit rate was 37% for fiscal 2001. The
effective tax benefit rate was less than the combined federal and state
statutory rate primarily due to non-deductible goodwill amortization. The
effective tax rate for fiscal 2000 of 37% was lower than the combined federal
and state statutory rate due to benefits of our foreign sales subsidiary,
partially offset by non-deductible in-process research and development expenses
and non-deductible goodwill amortization.

   Realization of the net deferred tax assets is dependent on our ability to
generate approximately $70,000,000 of future taxable income. Management
believes that it is more likely than not that the assets will be realized,
based on forecasted income. However, there can be no assurance that we will
meet our expectations of future income. Management will evaluate the
realizability of the deferred tax assets on a quarterly basis and assess the
need for additional valuation allowances. At October 31, 2001 the net deferred
tax assets were $48.6 million.

                                      38

<PAGE>

   Goodwill and Other Intangible Assets.  At October 31, 2001 and 2000, the
goodwill and other intangible assets represented 11% and 10% of total assets,
respectively, and 12% and 13% of stockholders' equity, respectively. These
assets principally arose from the acquisition of DCI and asset purchase of
Rabkin in fiscal 2001 and the acquisitions of TMT, MI, NMS, and Credence Europa
in fiscal 2000. The estimated useful lives of these assets range from three to
ten years. Goodwill and intangible assets are generally evaluated on an
individual acquisition, market, or product basis whenever events or changes in
circumstances indicate that such assets are impaired or the estimated useful
lives are no longer appropriate. Periodically, the Company reviews its
long-lived assets (including goodwill) for impairment based on estimated future
discounted cash flows attributable to the assets. In the event such cash flows
are not expected to be sufficient to recover the recorded value of the assets,
the assets are written down to their estimated fair values. In the fourth
quarter of fiscal 2001 the Company recorded a $6.6 million charge for the
impairment of the remaining intangible assets associated with the acquisition
of NMS in October 2000. This impairment was based on significant NMS employee
turnover in fiscal 2001 as well as a change in the technological direction of
the remaining research and development project that originated in NMS. In
conjunction with the acquisition of IMS in August 2001, the Company's
subsidiary, Fluence was merged with IMS. The integration of Fluence with IMS
resulted in the write-down of $2.3 million of the goodwill and purchased
technology intangible assets of Opmaxx. This impairment was based on product
decisions for the newly combined operations of Fluence and IMS.

  2000 vs. 1999

   Net Sales.  Net sales increased 199% to $757.4 million in fiscal 2000 from
$253.3 million in fiscal 1999. Our net sales increased from $37.7 million in
the first quarter of fiscal 1999, reaching $97.0 million in the fourth fiscal
quarter of 1999 and then rose to $221.7 million for the fourth fiscal quarter
of 2000. During fiscal 2000, our net sales improved each sequential quarter
because of three principal factors:

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

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

  .  the increased sales of two major products that were recently launched: the
     Quartet high-performance mixed signal tester and the Kalos memory tester.

   These factors plus the acquisition of the TMT product lines in May 2000
resulted in our experiencing increasing net sales activity through fiscal 1999
and 2000. The improved worldwide demand for semiconductor ATE has led to
customers purchasing for increased capacity and the launch of our new products
has led to some customers purchasing products with new features or capabilities.

   International net sales accounted for approximately 74% and 55% of total net
sales in fiscal 2000 and 1999, respectively. Our net sales to the Asia Pacific
region accounted for approximately 66% and 46% of total net sales in fiscal
2000 and 1999, respectively, and thus are subject to the risk of economic
instability in that region that materially adversely affected the demand for
our products in 1998. Capital markets in Korea and other areas of Asia have
been highly volatile, resulting in economic instabilities. These instabilities
may reoccur which could materially adversely affect demand for our products.

   Our net sales by product line in fiscal 2000 and 1999 consisted of:

<TABLE>
<CAPTION>
                                                            2000 1999
                                                            ---- ----
          <S>                                               <C>  <C>
          Mixed-Signal.....................................  74%  66%
          Logic............................................  11   12
          Memory...........................................   8    6
          Service and software.............................   7   16
                                                            ---  ---
             Total......................................... 100% 100%
                                                            ===  ===
</TABLE>

                                      39

<PAGE>

   The increase in the memory percentage of net sales is attributable
principally to sales derived from the Kalos product line. The increase in the
mixed-signal percentage of net sales is principally derived from the sales of
the Quartet product and the acquired TMT product lines. Revenues from software
were not material to our operations in fiscal 2000 and 1999, representing less
than 5% of net sales in each respective period.

   Gross Margin.  Our gross margin as a percentage of net sales increased to
60.1% in fiscal 2000 from 54.0% in fiscal 1999. The increase in 2000 was due
primarily to higher average selling prices during the latter half of fiscal
1999 and into fiscal 2000 as well as efficiencies caused by the higher
manufacturing volumes in 2000.

   Research and Development.  Research and development expenses as a percentage
of net sales were 10.3% and 17.9%, in fiscal 2000 and 1999, respectively. R&D
expenses increased in absolute dollars to $77.9 million in fiscal 2000 from
$45.3 million in fiscal 1999, reflecting higher investments in the development
of new products, and enhancements of existing product lines. We experienced
higher business activity levels in fiscal 2000 and these resulted in
significant internal headcount growth as well as the acquisitions of TMT, MI,
NMS, and Credence Europa during fiscal year 2000.

   Selling, General and Administrative.  Selling, general and administrative,
or SG&A, expenses increased to $129.7 million in fiscal 2000 from $77.8 million
in fiscal 1999, an increase of 66.8%. The increase in absolute dollars in
fiscal 2000 resulted primarily from much higher business activity levels. These
higher activity levels resulted in significant internal headcount growth as
well as the acquisitions of TMT, MI, NMS, and Credence Europa during fiscal
year 2000. During early fiscal 1999, we undertook a project to replace a
majority of our financial, manufacturing, distribution, planning and control
systems with the R/3 system from SAP America, Inc. This system became
operational in June 1999. In September 1999, we relocated our Oregon operations
to a newly constructed facility in Hillsboro, Oregon.

   Amortization of Purchased Intangible Assets.  Amortization of purchased
intangible asset expenses increased to $10.4 million in fiscal 2000 from $2.0
million in fiscal 1999, an increase of 417%. In May 2000, we purchased TMT for
approximately $80.0 million, in August we purchased MI for approximately $20.5
million and Credence Europa for approximately $8.4 million, and in October we
purchased NMS for approximately $11.3 million. These acquisitions resulted in
approximately $2.8 million, $1.1 million, $0.4 million, and $0.7 million,
respectively, in quarterly charges for amortization of purchased intangible
assets in fiscal year 2000. In September 1999, we purchased Opmaxx for $8.0
million. This acquisition resulted in quarterly charges for amortization of
purchased intangibles of $0.4 million.

   Our management made certain assessments with respect to the determination of
all identifiable assets to be used in the business as well as research and
development activities as of the acquisition date. Each of these activities was
evaluated by both interviews and data analysis to determine our state of
development and related fair value. The purchased intangibles consist of
developed technology, assembled workforce, customer relationships, trade names
and trademarks, patents, and goodwill and they typically have estimated useful
lives of three to ten years.

   Intangible purchased assets are generally evaluated on a market-by-market
basis in making a determination as to whether such assets are impaired or the
estimated useful lives are still appropriate. Periodically, we reviews our
long-lived assets (including goodwill) for impairment based on estimated future
discounted cash flows attributable to the assets. In the event such cash flows
are not expected to be sufficient to recover the recorded value of the assets,
the assets are written down to their estimated fair values.

   In-process Research and Development.  In May 2000, we purchased TMT for
approximately $80.0 million. In connection with this acquisition, we recognized
$8.3 million of acquired in-process research and development, or IPR&D. In
August 2000, we purchased MI for approximately $20.5 million. In connection
with this acquisition, we recognized $3.3 million of IPR&D. In October 2000, we
purchased NMS for

                                      40

<PAGE>

approximately $11.3 million. In connection with this acquisition, we recognized
$0.2 million of acquired IPR&D. In September 1999, we purchased Opmaxx for $8.0
million. In connection with this acquisition, we recognized $0.9 million of
IPR&D.

   We worked with an independent consultant to perform an allocation of the
purchase price for the TMT, MI, and NMS acquisitions to their respective
individual assets using the income approach. Our income approach utilized a
discounted future earnings methodology. Our management made certain assessments
with respect to the determination of all identifiable assets resulting from, or
to be used in, research and development activities as of the acquisition date.
Each of these activities was evaluated by both interviews and data analysis to
determine our state of development and related fair value. Our review indicated
that the IPR&D had not reached a state of technological feasibility and the
underlying technology had no alternative future use to us in other research and
development projects or otherwise. In the case of IPR&D, fair values of the
corresponding technologies were determined using an income approach, which
included a discounted future earnings methodology. Under this methodology, the
value of the in-process technology is comprised of the total present value of
the anticipated after-tax cash flows attributable to the in-process project,
discounted to net present value, taking into account the uncertainty
surrounding the successful development of the purchased IPR&D.

   The IPR&D acquired from TMT consists of products and projects related to
analog and radio frequency test products. These products and projects are aimed
at the development of the ASL 2000 product as well as further versions of the
RFx product. We estimated that these projects varied in terms of completion
from 50% to 85% completed based on research and development complexity, costs,
and time expended to date relative to the expected remaining costs and time to
reach technological feasibility. The expected completion dates of these
projects range from completed to the third quarter of fiscal 2002. The TMT
products and projects are integrated into our Industrial, Communications and
Entertainment Test Division.

   The IPR&D acquired from MI consists of products and projects related to
radio frequency test products. These products and projects are aimed at the
development of the Modulated Vector Network Analyzer instrument in various
forms. We estimated that these projects varied in terms of completion from 70%
to 84% completed based on research and development complexity, costs, and time
expended to date relative to the expected remaining costs and time to reach
technological feasibility. The expected completion dates of these projects
range from completed to late fiscal 2002. The MI products and projects are
integrated into our Industrial, Communications and Entertainment Test Division.

   The IPR&D acquired from NMS consists of products and projects related to
application specific testing products ("ASTS"). These products and projects are
aimed at the development of an ASTS tester. We estimated that these projects
were approximately 30% completed based on research and development complexity,
costs, and time expended to date relative to the expected remaining costs and
time to reach technological feasibility. In the fourth quarter of fiscal 2001
we recorded a $6.6 million charge for the impairment of the remaining goodwill
and intangible assets associated with the acquisition of NMS. This impairment
was based on significant NMS employee turnover in fiscal 2001 as well as a
change in the technological direction of the remaining research and development
project that originated in NMS.

   The IPR&D acquired from Opmaxx consists of products and projects related to
analog and mixed-signal self test. These products and projects are aimed at the
development of design verification and sensitivity analysis, design fault
coverage, test evaluation and optimization. We estimated that approximately 55%
of the research and development effort, based on time spent and complexity, had
been completed at the date of the acquisition. These projects were completed in
fiscal 2000. In the fourth quarter of fiscal 2001 we recorded a write-down of
$2.3 million of goodwill and purchased technology intangible assets from
Opmaxx. The impairment was recorded based on product decisions for the newly
combined operations of Fluence and IMS.

   Special Charges.  In the second quarter of fiscal 1999, we recorded special
charges totaling $6.2 million, of which $0.3 million was for employee severance
and $5.9 million was for abandoned facilities. These charges

                                      41

<PAGE>

were recorded as a result of our response to a major downturn in the business
outlook for the ATE and related semiconductor and semiconductor equipment
industries at that time as well as the decision to relocate our Oregon
operations from a facility in Beaverton to a newly constructed facility in
Hillsboro, Oregon.

   In the fourth quarter of fiscal 1999, we recorded special charges totaling
$1.3 million. This charge included expenses related to the Opmaxx acquisition
of $0.6 million as well as the $0.7 million write-down of certain intangible
assets from another acquisition in the integration of Opmaxx with Fluence.

   Extraordinary Gain--Extinguishment of Debt.  In fiscal 1999, we recorded a
pre-tax extraordinary gain of $2.6 million for the retirement of $18.4 million
of our convertible subordinated notes in exchange for 1,206,000 shares of our
common stock held in treasury.

   Interest Income.  We generated interest and other income of $19.9 million
and $7.4 million in fiscal 2000 and 1999, respectively. The increase in fiscal
2000 was due to higher average cash and investment balances in 2000 as compared
to 1999. These higher average balances were the result of cash received in our
secondary public offering in February 2000 offset by cash outlays for
acquisitions in the year and the purchase of our Oregon facility.

   Interest and Other Expenses.  Interest and other expenses decreased to $4.2
million in fiscal 2000 from $6.3 million in fiscal 1999, primarily due to lower
interest expense on a lower average outstanding balance of our convertible
subordinated notes.

   Income Tax.  Our effective tax rate was 37% for fiscal 2000, and the
effective tax rate for fiscal 1999 was 28%. The effective tax rate for fiscal
2000 was reduced by benefits of the Company's foreign sales subsidiary,
partially offset by non-deductible in-process research and development expenses
and non-deductible goodwill amortization. The effective tax rate for fiscal
1999 was reduced by research and development credits.

Liquidity and Capital Resources

   In fiscal 2001, net cash used by operating activities was $68.5 million.
This use of cash was primarily attributable to the earnings before depreciation
and amortization and non-cash special charges of $60.2 million offset by an
increase in net operating assets and liabilities of $117.6 million. This
increase in net operating assets was made up of declines in accounts receivable
offset by increases in inventories and decreases in the current liabilities.

   Net cash used in investing activities during fiscal 2001 was $30.7 million.
This cash was primarily used for net purchases of property and equipment of
$37.1 million and the acquisition of the intangible assets of Rabkin and DCI of
$14.2 million. This was offset by the net sale of $27.7 million in our
available-for-sale securities.

   Net cash provided by financing activities in fiscal 2001 of $6.1 million was
primarily due to common stock and treasury stock issued in accordance with our
employee stock option and stock purchase plans offset by the repurchase of
402,000 shares of common stock at a cost of $7.6 million.

   As of October 31, 2001, our principal sources of liquidity consisted of
$302.7 million in cash, cash equivalents, and available-for-sale securities,
compared with $419.0 million at October 31, 2000. Additionally, as of October
31, 2001, we have operating leases for facilities and test and other equipment
totaling approximately $15.2 million due through 2007. We expect that our
existing cash, cash equivalents and available-for-sale investment balances and
anticipated cash flow from operations will satisfy our financing requirements
in the ordinary course of business for at least the next 12 months.

   We have an agreement with a captive leasing company whereby we issued a
guaranty in favor of a bank with respect to certain obligations of the leasing
company to the bank. Under this agreement, the leasing

                                      42

<PAGE>

company agreed to grant to us a security interest to secure the obligations of
the leasing company as a result of any payments by us pursuant to the guaranty.
At October 31, 2001, the maximum allowable debt of the leasing company subject
to this guaranty of $8,750,000 was outstanding.

   We believe that because of the relatively long manufacturing cycles of many
of our testers and the new products we have introduced and plan to continue to
introduce, investments in inventories will continue to represent a significant
portion of working capital. Significant investments in accounts receivable and
inventories subject us to increased risks, and could continue to materially
adversely affect our business, financial condition and results of operations.
The semiconductor industry has historically been highly cyclical and has
experienced downturns, which have had a material adverse effect on the
semiconductor industry's demand for automatic test equipment, including
equipment manufactured and marketed by us. In addition, the automatic test
equipment industry is highly competitive and subject to rapid technological
change. It is reasonably possible that events related to the above factors may
occur in the near term which would cause a change to our estimate of the net
realizable value of receivables, inventories or other assets, and the adequacy
of costs accrued for warranty and other liabilities. See discussion of
"Critical Accounting Policies and Estimates" above.

Recent Accounting Pronouncements

   In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statements of Financial Accounting Standards No. 141, or SFAS 141, "Business
Combinations." SFAS 141 eliminates the pooling-of-interests method of
accounting for business combinations except for qualifying business
combinations that were initiated prior to July 1, 2001. In addition, SFAS 141
further clarifies the criteria to recognize intangible assets separately from
goodwill. Specifically, SFAS 141 requires that an intangible asset may be
separately recognized only if such an asset meets the contractual-legal
criterion or the separability criterion. The requirements of SFAS 141 are
effective for any business combination accounted for by the purchase method
that is completed after June 30, 2001 (i.e., the acquisition date is July 1,
2001 or after). We are currently evaluating the impact of SFAS 141 and have not
yet determined the impact that adopting SFAS 141 will have on our financial
statements. On adoption, we will be required to reassess the goodwill and
intangible assets previously recorded in acquisitions prior to July 1, 2001 to
determine if the new recognition criteria for an intangible asset to be
recognized apart from goodwill are met.

   In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 142, or SFAS 142, "Goodwill and Other Intangible Assets." Under SFAS 142,
goodwill and indefinite lived intangible assets are no longer amortized but are
reviewed annually (or more frequently if impairment indicators arise) for
impairment. For intangible assets with indefinite useful lives, the impairment
review will involve a comparison of fair value to carrying value, with any
excess of carrying value over fair value being recorded as an impairment loss.
For goodwill, the impairment test shall be a two-step process, consisting of a
comparison of the fair value of a reporting unit with its carrying amount,
including the goodwill allocated to each reporting unit. If the carrying amount
is in excess of the fair value, the implied fair value of the reporting unit
goodwill is compared to the carrying amount of the reporting unit goodwill. Any
excess of the carrying value of the reporting unit goodwill over the implied
fair value of the reporting unit goodwill will be recorded as an impairment
loss. Separable intangible assets that are deemed to have a finite life will
continue to be amortized over their useful lives (but with no maximum life).
Intangible assets with finite useful lives will continue to be reviewed for
impairment in accordance with Statements of Financial Accounting Standards No.
121, or SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The amortization provisions of SFAS 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, we
will apply the new accounting rules beginning November 1,2002 and will reassess
the useful lives of our separately recognized intangible assets in the first
quarter of fiscal 2003. We will review for impairment previously recognized
intangible assets that are deemed to have indefinite lives upon the completion
of this analysis in the first quarter of fiscal 2003. Additionally, upon the
adoption of SFAS 142, we will perform a transitional impairment review related
to the carrying value of goodwill as of November 1, 2002 by the end of the
second quarter of fiscal 2003. Because of the different transition dates for

                                      43

<PAGE>

goodwill and intangible assets acquired on or before June 30, 2001 and those
acquired after that date, pre-existing goodwill and intangibles will be
amortized during this transition period until adoption whereas new goodwill and
indefinite lived intangible assets acquired after June 30, 2001 will not. We
are currently in the process of determining our reporting units for the purpose
of applying the impairment test, analyzing how fair value will be determined
for purposes of applying SFAS 142 and quantifying the anticipated impact of
adopting the provisions of SFAS 142.

   In August, 2001, the FASB issued Statements of Financial Accounting
Standards No. 144, or SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS 144 supercedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" and
the accounting and reporting provisions of Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a
business. SFAS 144 establishes a single accounting model for assets to be
disposed of by sale whether previously held and used or newly acquired. SFAS
No. 144 retains the provisions of APB No. 30 for presentation of discontinued
operations in the income statement, but broadens the presentation to include a
component of an entity. SFAS 144 is effective for fiscal years beginning after
December 15, 2001 and the interim periods within. We are currently in the
process of determining the anticipated impact of adopting the provisions of
SFAS 144.

Item 7a.  Quantitative and Qualitative Disclosures About Market Risk

   Our exposure to market risk for changes in interest rates relates primarily
to our cash equivalents and investment portfolio. We maintain a strict
investment policy, which ensures the safety and preservation of our invested
funds by limiting default risk, market risk, and reinvestment risk. Our
investments consist primarily of commercial paper, medium term notes, asset
backed securities, U.S. Treasury notes and obligations of U.S. Government
agencies, bank certificates of deposit, auction rate preferred securities,
corporate bonds and municipal bonds. The table below presents notional amounts
and related weighted-average interest rates by year of maturity for our
investment portfolio (in thousands, except percentages).

<TABLE>
<CAPTION>

                                           Future maturities of investments held at October 31, 2001
                                Balance at --------------------------------------------------------
                                 10/31/00    2001       2002     2003     2004     2005   Thereafter
                                ---------- -------    -------  --------  -------  ------  ----------
<S>                             <C>        <C>        <C>      <C>       <C>      <C>     <C>
Cash and cash equivalents
 Fixed rate....................  $137,401  $44,309         --        --       --      --        --
 Average rate..................      6.35%    2.65%        --        --       --      --        --
Short term investments
 Fixed rate....................  $147,760       --    $96,497        --       --      --        --
 Average rate..................      6.24%      --       6.70%       --       --      --        --
Long term investments
 Fixed rate....................  $129,513       --         --  $120,141  $22,360  $4,169   $13,937
 Average rate..................      6.71%      --         --      5.63%    5.39%   6.28%     5.51%
                                 --------  -------    -------  --------  -------  ------   -------
   Total investment securities.  $414,674  $44,309    $96,497  $120,141  $22,360  $4,169   $13,937
   Average rate................      6.43%    2.65%      6.70%     5.63%    5.39%   6.28%     5.51%
Equity investments.............  $  4,291  $ 1,282         --        --       --      --        --
</TABLE>

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

                                      44

<PAGE>

  Foreign Exchange

   We generate a significant portion of our sales from sales to customers
located outside the United States, principally in Asia and to a lesser extent
Europe. International sales are made mostly to foreign distributors and some
foreign subsidiaries and are typically denominated in U.S. dollars and
occasionally are denominated in the local currency for European and Japanese
customers. The subsidiaries also incur most of their expenses in the local
currency. Accordingly, some of our foreign subsidiaries use the local currency
as their functional currency.

   We enter into foreign currency forward contracts (forward contracts) to
manage exposure related to certain foreign currency transactions. All
outstanding forward contracts at the end of the period are marked-to-market,
with unrealized gains and losses included in net income as a component of other
income, net. We may, from time to time, adjust our foreign currency hedging
positions by taking out additional contracts or by terminating or offsetting
existing forward contracts. These adjustments typically result from changes in
the underlying foreign currency exposures. Realized gains and losses on
terminated forward contracts, or on contracts that are offset, are recognized
in earnings in the period of contract termination or offset. We had outstanding
forward contracts with notional amounts totaling approximately $2.7 million and
$0.9 million at October 31, 2001 and 2000, respectively. These contracts, which
mature within 45 days of year-end, are hedges of certain foreign currency
transaction exposures in British pound sterling, Euro, Swiss francs, and
Japanese yen.

   Our international business is subject to risks typical of an international
business including, but not limited to: differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely impacted by changes in these or other
factors.

Item 8.  Financial Statements and Supplementary Data

   For the years ended October 31, 2001, 2000 and 1999.

                                      45

<PAGE>

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                             Page
                                                                                             ----
<S>                                                                                          <C>
Report of Ernst & Young LLP, Independent Auditors...........................................  47
Report of Arthur Andersen LLP, Independent Auditors.........................................  48
Consolidated Balance Sheets--October 31, 2001 and 2000......................................  49
Consolidated Statements of Operations--Years Ended October 31, 2001, 2000 and 1999..........  50
Consolidated Statements of Stockholders' Equity--Years Ended October 31, 2001, 2000 and 1999  52
Consolidated Statements of Cash Flows--Years Ended October 31, 2001, 2000 and 1999..........  53
Notes to Consolidated Financial Statements..................................................  54
</TABLE>


                                      46

<PAGE>

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Credence Systems Corporation

   We have audited the accompanying consolidated balance sheets of Credence
Systems Corporation as of October 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended October 31, 2001. Our audits also
included the financial statement schedule listed in the index at item 14(a).
These financial statements and this schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and this schedule based on our audits. We did not audit
the financial statements or schedule of Integrated Measurement Systems, Inc.,
which statements reflect total assets and net income constituting 10% and 2%,
respectively, of the related 2000 consolidated financial statement totals, and
which statements reflect net income of approximately $5.6 million related to
the 1999 consolidated net income. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for Integrated Measurement Systems, Inc. is based
solely on the report of the other auditors.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.

   In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Credence Systems
Corporation at October 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
October 31, 2001, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the information set
forth therein.

   As discussed in Note 1 to the consolidated financial statements, in 2001 the
Company changed its method of accounting for revenue recognition, which has
been reflected as of November 1, 1999, in accordance with guidance in SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."

                                          /s/  ERNST & YOUNG LLP
San Jose, California
November 21, 2001

                                      47

<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of Integrated Measurement Systems,
  Inc.:

   We have audited the accompanying consolidated balance sheets of Integrated
Measurement Systems, Inc. (an Oregon corporation) and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based upon our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Integrated
Measurement Systems, Inc. and subsidiaries as of December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States. As explained in Note 2 to
the consolidated financial statements, effective January 1, 2000, the Company
changed its method of accounting for systems revenues based on guidance
provided in the SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements."

                                          /s/  ARTHUR ANDERSEN LLP

Portland, Oregon
January 23, 2001

                                      48

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

                          CONSOLIDATED BALANCE SHEETS
                   (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                       October 31,
                                                                                   ------------------
                                                                                     2001      2000
                                     ASSETS                                        --------  --------
<S>                                                                                <C>       <C>
Current assets:
 Cash and cash equivalents........................................................ $ 44,309  $137,401
 Short-term investments...........................................................   96,497   140,162
 Accounts receivable, net of allowances of $8,235 and $7,604, respectively........   39,831   187,274
 Inventories......................................................................  123,219   113,018
 Deferred income taxes............................................................   39,955    38,006
 Income tax receivable............................................................   41,031     1,247
 Prepaid expenses and other current assets........................................    9,502    13,184
                                                                                   --------  --------
     Total current assets.........................................................  394,344   630,292
Long-term investments.............................................................  161,889   141,402
Property and equipment, net.......................................................  109,528   111,618
Goodwill from acquisitions, net of accumulated amortization of $14,364 and $4,351.   47,124    55,133
Other intangible assets, net of accumulated amortization of $33,054 and $23,280...   34,450    42,161
Other assets......................................................................   10,084     2,831
                                                                                   --------  --------
     Total assets................................................................. $757,419  $983,437
                                                                                   ========  ========

                       LIABILITY AND STOCKHOLDERS' EQUITY

Current liabilities:
 Accounts payable................................................................. $ 17,510  $ 55,659
 Accrued expenses and other liabilities...........................................   41,181    80,177
 Deferred profit..................................................................   11,707    44,075
 Income taxes payable.............................................................       --    23,866
                                                                                   --------  --------
     Total current liabilities....................................................   70,398   203,777
Other liabilities.................................................................    5,761    11,462
Minority interest.................................................................      320       323

Commitments and contingencies

Stockholders' equity:
 Preferred stock:
   Authorized shares--1,000 ($0.001 par value); no shares issued..................       --        --
 Common stock:
   Authorized shares--150,000 ($0.001 par value); issued and outstanding shares--
     61,426 in 2001 and 60,806 in 2000............................................       61        61
   Additional paid-in capital.....................................................  605,483   593,691
   Treasury stock, at cost, 1,300 shares in 2001 and 1,176 shares in 2000.........  (23,535)  (18,560)
Accumulated other comprehensive income............................................    4,854     2,097
Deferred compensation.............................................................   (4,675)   (6,842)
Retained earnings.................................................................   98,752   197,428
                                                                                   --------  --------
 Total stockholders' equity.......................................................  680,940   767,875
                                                                                   --------  --------
 Total liabilities and stockholders' equity....................................... $757,419  $983,437
                                                                                   ========  ========
</TABLE>

                            See accompanying notes.

                                      49

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                   (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                              Year Ended October 31,
                                                                          -----------------------------
                                                                            2001       2000      1999
                                                                          ---------  --------  --------
<S>                                                                       <C>        <C>       <C>
Net sales:
 Systems and upgrades.................................................... $ 252,711  $708,563  $213,709
 Service, spare parts and software.......................................    49,007    48,788    39,544
                                                                          ---------  --------  --------
   Total net sales.......................................................   301,718   757,351   253,253
Cost of goods sold--on net sales.........................................   145,789   301,954   116,401
Cost of goods sold--special charges......................................    83,023        --        --
                                                                          ---------  --------  --------
Gross margin.............................................................    72,906   455,397   136,852
Operating expenses:
 Research and development................................................    86,448    77,946    45,264
 Selling, general and administrative.....................................   104,173   129,740    77,798
 Amortization of purchased intangible assets.............................    23,155    10,367     2,006
 In-process research and development.....................................        --    11,794       858
 Special charges.........................................................    32,072        --     7,565
                                                                          ---------  --------  --------
   Total operating expenses..............................................   245,848   229,847   133,491
                                                                          ---------  --------  --------
Operating income (loss)..................................................  (172,942)  225,550     3,361
Interest income..........................................................    19,340    19,919     7,397
Interest and other (expenses), net.......................................    (1,985)   (4,192)   (6,302)
                                                                          ---------  --------  --------
Income (loss) before income tax provision (benefit)......................  (155,587)  241,277     4,456
Income tax provision (benefit)...........................................   (56,905)   89,201     1,255
                                                                          ---------  --------  --------
Income (loss) before minority interest...................................   (98,682)  152,076     3,201
Minority interest (benefit)..............................................        (6)       41        75
                                                                          ---------  --------  --------
Net income (loss) before extraordinary item..............................   (98,676)  152,035     3,126
Gain on extinguishment of debt, net of $926 taxes........................        --        --     1,646
                                                                          ---------  --------  --------
Net income (loss) before change in accounting principle.................. $ (98,676) $152,035  $  4,772
Cumulative effect of change in accounting principle, net of $17,792 taxes        --  $(31,525)       --
                                                                          ---------  --------  --------
Net income (loss)........................................................ $ (98,676) $120,510  $  4,772
                                                                          =========  ========  ========
</TABLE>

                            See accompanying notes.


                                      50

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

              CONSOLIDATED STATEMENTS OF OPERATIONS--(Continued)
                   (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                               Year Ended October 31,
                                                                             --------------------------
                                                                              2001     2000      1999
                                                                             -------  -------  --------
<S>                                                                          <C>      <C>      <C>
Net income (loss) per share
 Basic before extraordinary item and cumulative effect of accounting change. $ (1.65) $  2.75  $   0.06
 Basic extraordinary item...................................................      --       --      0.04
 Basic cumulative effect of accounting change...............................      --    (0.57)       --
                                                                             -------  -------  --------
 Basic...................................................................... $ (1.65) $  2.18  $   0.10
                                                                             =======  =======  ========
 Diluted before extraordinary item and cumulative effect of acounting change $ (1.65) $  2.51  $   0.06
 Diluted extraordinary item.................................................      --       --      0.04
 Diluted cumulative effect of accounting change.............................      --    (0.51)       --
                                                                             -------  -------  --------
 Diluted.................................................................... $ (1.65) $  2.00  $   0.10
                                                                             =======  =======  ========
Number of shares used in computing per share amounts
 Basic......................................................................  59,818   55,300    48,918
                                                                             =======  =======  ========
 Diluted....................................................................  59,818   61,892    50,168
                                                                             =======  =======  ========
Pro forma amounts assuming SAB101 is applied retroactively:
Net loss....................................................................                   $(19,436)
 Basic loss per share.......................................................                   $  (0.40)
 Diluted loss per share.....................................................                   $  (0.40)
</TABLE>


                            See accompanying notes.

                                      51

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                (in thousands)

<TABLE>
<CAPTION>


                                 Common Stock  Additional  Treasury Stock                           Accumulated      Total
                                -------------   Paid-in   ----------------  Retained    Deferred   Comprehensive Stockholders'
                                Shares  Amount  Capital   Shares   Amount   Earnings  Compensation Income (loss)    Equity
                                ------  ------ ---------- ------  --------  --------  ------------ ------------- -------------
<S>                             <C>     <C>    <C>        <C>     <C>       <C>       <C>          <C>           <C>
Balance at October 31, 1998 as
 reported...................... 43,446   $43    $112,037  (2,664) $(19,979) $ 58,157    $     --      $ (241)      $150,017
Adjustment due to pooling of
 interests.....................  6,683     7      39,431      --        --    13,990          --         114         53,542
                                ------   ---    --------  ------  --------  --------    --------      ------       --------
Balance at October 31, 1998.... 50,129   $50    $151,468  (2,664) $(19,979) $ 72,147    $     --      $ (127)      $203,559
                                ------   ---    --------  ------  --------  --------    --------      ------       --------
Issuance of common stock under
 employee equity plans.........  1,735     2      13,483      54       408        --          --          --         13,893
Exchange of treasury shares for
 convertible notes.............     --    --       6,383   1,206     9,049        --          --          --         15,432
Income tax benefit-stock plans.     --    --       6,239      --        --        --          --          --          6,239
Net income.....................     --    --          --      --        --     4,772          --          --          4,772
Unrealized loss on securities,
  net..........................     --    --          --      --        --        --          --        (705)          (705)
Currency translation
  adjustment...................     --    --          --      --        --        --          --          38             38
                                                                                                                   --------
Comprehensive income...........     --    --          --      --        --        --          --          --          4,105
                                ------   ---    --------  ------  --------  --------    --------      ------       --------
Balance at October 31, 1999.... 51,864   $52    $177,573  (1,404) $(10,522) $ 76,919    $     --      $ (794)      $243,228
                                ------   ---    --------  ------  --------  --------    --------      ------       --------
Issuance of common stock
 through public offering.......  5,290     5     288,101      --        --        --          --          --        288,106
Purchase of common stock.......    (35)   --        (555)   (405)  (12,786)       --          --          --        (13,341)
Issuance of common stock under
 employee equity plans.........    895     1      11,334     633     4,748        --          --          --         16,083
Exchange of common shares for
 convertible notes.............  2,792     3      95,417      --        --        --          --          --         95,420
Income tax benefit-stock plans.     --    --      11,101      --        --        --          --          --         11,101
Amortization of deferred
 compensation..................     --    --          --      --        --        --       3,878          --          3,878
Issuance of employee options
 from acquisitions.............     --    --      10,720      --        --        --     (10,720)         --             --
Net income.....................     --    --          --      --        --   120,509          --          --        120,509
Unrealized gain on securities,
  net..........................     --    --          --      --        --        --          --       3,313          3,313
Currency translation
  adjustment...................     --    --          --      --        --        --          --        (422)          (422)
                                                                                                                   --------
Comprehensive income...........     --    --          --      --        --        --          --          --        123,400
                                ------   ---    --------  ------  --------  --------    --------      ------       --------
Balance at October 31, 2000.... 60,806   $61    $593,691  (1,176) $(18,560) $197,428    $ (6,842)     $2,097       $767,875
                                ------   ---    --------  ------  --------  --------    --------      ------       --------
Purchase of common stock.......    (77)   (1)     (1,080)   (325)   (6,485)       --          --          --         (7,566)
Issuance of common stock under
 employee equity plans.........    697     1       9,607     201     1,510        --          --          --         11,118
Income tax benefit-stock plans.     --    --       2,230      --        --        --          --          --          2,230
Amortization of deferred
 compensation..................     --    --          --      --        --        --       3,202          --          3,202
Issuance of options to
 employees at below fair
 market value..................     --    --       1,035      --        --        --      (1,035)         --             --
Net loss.......................     --    --          --      --        --   (98,676)         --          --        (98,676)
Unrealized gain on securities,
  net..........................     --    --          --      --        --        --          --         373            373
Currency translation
  adjustment...................     --    --          --      --        --        --          --       2,384          2,384
                                                                                                                   --------
Comprehensive income (loss)....     --    --          --      --        --        --          --          --        (95,919)
                                ------   ---    --------  ------  --------  --------    --------      ------       --------
Balance at October 31, 2001.... 61,426   $61    $605,483  (1,300) $(23,535) $ 98,752    $ (4,675)     $4,854       $680,940
                                ======   ===    ========  ======  ========  ========    ========      ======       ========
</TABLE>

                            See accompanying notes.

                                      52

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                   Year Ended October 31,
                                                              -------------------------------
                                                                2001       2000       1999
                                                              ---------  ---------  ---------
<S>                                                           <C>        <C>        <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities
 Net income (loss)........................................... $ (98,676) $ 120,510  $   4,772
 Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
   Cumulative effect of accounting change....................        --     31,525         --
   Depreciation and amortization.............................    59,276     41,744     28,985
   Special non-cash charges..................................    99,588         --      7,565
   Gain from extinguishment of debt..........................        --         --     (2,572)
   Loss (gain) on disposal of property and equipment.........     1,572       (898)       328
   Deferred income taxes.....................................    (8,199)    (8,924)     1,569
   Realized net gain from investments........................    (4,487)        --         --
   Minority interest.........................................        (3)        41         75
   Changes in operating assets and liabilities:
    Restricted cash..........................................        --         --      2,400
    Accounts receivable......................................   147,443   (101,812)   (37,584)
    Inventories..............................................   (95,279)   (65,411)    (6,887)
    Prepaid expenses and other current assets................   (36,102)       424     13,571
    Accounts payable.........................................   (38,149)    31,431     15,041
    Accrued expenses and other liabilities...................   (41,506)    23,944      2,522
    Deferred revenue.........................................   (32,368)    (5,725)       185
    Income taxes payable.....................................   (21,636)    26,690      7,195
                                                              ---------  ---------  ---------
     Net cash provided by (used in) operating activities.....   (68,526)    93,539     37,165

Cash flows from investing activities
 Purchases of available-for-sale securities..................  (269,426)  (314,758)  (103,916)
 Maturities of available-for-sale securities.................    55,971     86,239     26,394
 Sales of available-for-sale securities......................   241,120     56,373     63,390
 Other liabilities...........................................    (7,253)    (3,178)     1,295
 Acquisition of property and equipment.......................   (37,052)   (68,003)   (22,954)
 Acquisition of purchased intangible assets..................   (14,185)   (65,103)    (6,757)
 Proceeds from sale of property and equipment................       163      1,969        414
                                                              ---------  ---------  ---------
     Net cash used in investing activities...................   (30,662)  (306,461)   (42,134)

Cash flows from financing activities
 Issuance of common stock....................................    11,118    304,202     13,646
 Repurchase of common stock..................................    (7,566)   (13,341)        --
 Other.......................................................     2,544       (149)      (836)
                                                              ---------  ---------  ---------
     Net cash provided by financing activities...............     6,096    290,712     12,810
                                                              ---------  ---------  ---------
Net increase (decrease) in cash and cash equivalents.........   (93,092)    77,790      7,841
Cash and cash equivalents at beginning of the period.........   137,401     59,611     51,770
                                                              ---------  ---------  ---------
Cash and cash equivalents at end of the period............... $  44,309  $ 137,401  $  59,611
                                                              =========  =========  =========
Supplemental disclosures of cash flow information:
 Interest paid............................................... $     863  $   1,785  $   5,654
 Income taxes paid (refunded)................................ $  14,336  $  62,426  $ (20,055)

Noncash investing activities:
 Income tax benefit from stock option exercises.............. $   2,230  $  11,101  $   6,239
 Paid-in capital increase--common stock for convertible
   notes.....................................................        --  $  95,420  $  15,432
 Exchange of convertible notes for common stock, net of
   discount..................................................        --  $  95,420  $  18,004
 Net transfers of inventory to property and equipment........ $   2,055  $   9,190  $   4,842
</TABLE>

                            See accompanying notes.

                                      53

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1--Organization and Summary of Significant Accounting Policies

Organization

   Credence Systems Corporation ("Credence" or the "Company") was incorporated
under the laws of the State of California in March 1982 and was reincorporated
in Delaware in October 1993. The principal business activity of the Company is
the design, development, manufacture, sale and service of integrated test
solutions throughout the design, validation and production processes for
semiconductors. As a result of acquisitions made in fiscal years 1997 through
2001, Credence is also involved in the design, development, sale and service of
software enabling design and test engineers to develop and debug production
test software prior to fabricating the prototype as well as the development of
customer test programs used by automatic test equipment. The Company has
subsidiaries in Japan engaged in sales, marketing and service of the Company's
products and a subsidiary in Korea engaged in service of the Company's
products. Also, the Company has a joint venture with Innotech Corporation in
Japan engaged in the customization, development and manufacture of product for
sale by both companies. The joint venture is 50.1% owned by the Company and is
consolidated in the financial statements. The Company also has European
subsidiaries which principally distribute, service, and support Credence
products in Europe and the Middle East. The operations of and net investment in
foreign subsidiaries are not material.

Basis of Presentation

   The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned and majority owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Certain prior year amounts in the consolidated financial statements and related
notes have been reclassified to conform to the current year's presentation.

   In August 2001, the Company completed a merger with Integrated Measurement
Systems, Inc. ("IMS"). IMS designs, manufactures, markets and services
integrated circuit validation systems and virtual test software. This
acquisition was accounted for as a pooling of interests in accordance with
Accounting Principles Board 16 ("APB 16") and therefore, the consolidated
financial statements, including the related notes, have been restated as of the
earliest period presented to include the results of operations, financial
position and cash flows of IMS (see Note 2 for further discussion).

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. All registrants are expected to
apply the accounting principles and disclosure described in SAB 101. Because
the Company has complied with generally accepted accounting principles for its
historical revenue recognition, the effect of the change in its revenue policy
resulting from SAB 101 was reported as a cumulative effect adjustment resulting
from a change in accounting principle in the first quarter of fiscal 2000.
Adoption of SAB101 required the Company to re-state the quarterly results for
the seven fiscal quarters ended July 31, 2001. Because IMS had already adopted
SAB 101 in the IMS' fiscal year ended December 31, 2000, the Company elected to
conform its revenue recognition practices to IMS. Accordingly, the Company
elected to adopt SAB 101 effective November 1, 1999, based on guidance provided
in SAB 101.

Use of Estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and

                                      54

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.

   Actual results inevitably will differ from those estimates and such
differences may be material to the financial statements. Estimates are used
for, but not limited to, the accounting for the allowance for doubtful
accounts, inventory write-downs, depreciation and amortization, product
maturity and receivable collectibility for purposes of deferred revenue,
warranty costs, restructuring costs, deferred taxes and contingencies.

   During industry downturns, certain of the Company's customers may have
difficulty with cash flows. For certain customers, typically those with whom
the Company has long-term relationships, the Company may grant extended payment
terms. The Company reviews, with assistance from its sales distribution
partners, the ability of its customers to pay for the indebtedness they incur
with the Company. Certain of the Company's receivable balances have due dates
in excess of 90 days and the Company has a history of successfully collecting
these extended payment term receivables. The Company provides an allowance for
doubtful accounts for all specific receivables that are judged to be unlikely
for collection. In addition, the Company records a reserve based on the size
and age of all receivable balances against which the Company has not
established specific reserves. These estimated allowances are periodically
reviewed, analyzing the customer's payment history and information regarding
the customer's creditworthiness known to the Company.

   With the dramatic decline in revenue during fiscal 2001, the Company
continues to monitor its inventory levels in light of product development
changes and expectations of an eventual market upturn. The Company recorded a
charge of $45.0 million in the second fiscal quarter of 2001 and a charge of
$38.0 million in the fourth fiscal quarter of 2001 for the write-down of excess
inventories. The Company may be required to take additional charges for excess
and obsolete inventory if the industry downturn causes further reductions to
its current inventory valuations or changes its current product development
plans. The Company evaluates its inventory levels and valuations based on
estimates and forecasts of the next cyclical industry upturn. These forecasts
require it to estimate its ability to sell current and future products in the
next industry upturn and compare those estimates with its current inventory
levels. If these forecasts or estimates change, or its product roadmaps change,
then the Company would need to adjust its assessment of the inventory
valuations. At October 31, 2001, approximately 43% and 23% of the inventory
balances are for the Quartet mixed signal and Kalos memory product families,
respectively.

Foreign Currency Translation

   Assets and liabilities of foreign subsidiaries, where the functional
currency is the local currency, are translated using exchange rates in effect
at the end of the period and revenues and costs are translated using average
exchange rates for the period. Gains and losses on translation into U.S.
dollars of amounts denominated in foreign currencies for those operations where
the functional currency is the local currency are not material. Transaction
gains and losses are included in net income (loss) in the accompanying
Consolidated Statements of Operations.

Revenue Recognition and Change in Accounting Principle

   The Company recognizes revenue on the sale of semiconductor manufacturing
equipment when title and risk of loss has passed to the customer, there is
persuasive evidence of an arrangement, delivery has occurred or services have
been rendered, the sales price is fixed or determinable, collectibility is
reasonably assured and customer acceptance criteria have been successfully
demonstrated. Product revenue is recognized upon shipment when the product is
classified as mature and the customer acceptance criteria can be demonstrated
prior to shipment. Revenue related to the fair value of the installation
obligation is recognized upon completion of the installation. Products are
classified as mature after several different customers have accepted similar
systems. For

                                      55

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

sales of new products or when the customer acceptance criteria cannot be
demonstrated prior to shipment, revenue and the related cost of goods sold are
deferred until customer acceptance. Revenue related to maintenance and service
contracts is recognized ratably over the duration of the contracts.

   Software license revenues including more than one product, including
maintenance and support services, are recognized using the residual method
described in Statement of Position 97-2, Software Revenue Recognition, as
amended by SOP 98-4 and SOP 98-9. For customer license arrangements meeting the
policy set forth above, fees allocated to the software license will generally
be recognized upon delivery and acceptance, while fees allocated to services
based upon vendor-specific objective evidence of fair value are recognized
ratably as the services are performed.

   Credence's products are generally subject to warranty and such estimated
costs are provided for in costs of goods sold when product revenue is
recognized. Installation and other services are not essential to the
functionality of the products as these services do not alter the products
capabilities, do not require specialized skills or tools and can be performed
by the customers or other vendors. The cost of installation is also provided
for in cost of goods sold when the installation revenue is recognized. Net
sales consist of product and service sales, less discounts and estimated
allowances.

   The Company previously recognized revenue on the sale of semiconductor
manufacturing equipment upon shipment. Accordingly, the Company changed its
revenue recognition policy based on guidance provided in SAB 101.

   In August 2001, the Company acquired IMS using the pooling-of-interests
accounting method (see Note 2 for further discussion). Because IMS had already
adopted SAB 101 in the IMS' fiscal year ended December 31, 2000, the Company
elected to conform its revenue recognition practices to IMS. Accordingly, the
Company elected to adopt SAB 101 effective November 1, 1999, based on guidance
provided in SAB 101.

   In accordance with guidance provided in SAB 101, the Company recorded a
non-cash charge of $31.5 million (after reduction for income taxes of $17.8
million), or $0.51 per diluted share, to reflect the cumulative effect of the
accounting change as of the beginning of fiscal 2000. None of this cumulative
amount was still deferred at October 31, 2001. As a result of the adoption of
SAB 101, the increase to net income for fiscal year 2000 was $1.3 million or
$0.02 per basic share and $0.02 per diluted share. This amount is comprised of
equipment that was shipped to certain customers and previously recorded as
revenue, but had not been accepted as of October 31, 1999.

   Deferred revenue on the balance sheet includes deferred revenue related to
maintenance contracts (and other undelivered services) and deferred profit
related to equipment that was shipped to certain customers and previously
recorded as revenue with associated cost of goods sold recognized but either
the customer specified acceptance criteria has not been met as of the fiscal
year end or the product is not classified as mature as of the fiscal year end
and has not been accepted by the customer. The pro forma amounts related to the
year ended October 31, 1999 presented in the fiscal 1999 statement of
operations were calculated assuming the accounting change was retroactive to
prior periods.

Derivative Instruments and Hedging Activities

   In the first quarter of fiscal 2001, the Company adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") which establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS 133
requires that

                                      56

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

an entity recognize derivatives as either assets or liabilities on the balance
sheet and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation.

   The Company designates its derivatives based upon criteria established by
SFAS 133. For a derivative designated as a fair value hedge, the gain or loss
is recognized in earnings in the period of change together with the offsetting
loss or gain on the hedged item attributed to the risk being hedged. For a
derivative designated as a cash flow hedge, the effective portion of the
derivative's gain or loss is initially reported as a component of accumulated
other comprehensive income (loss) and subsequently reclassified into earnings
when the hedged exposure affects earnings. The ineffective portion of the gain
or loss is reported in earnings immediately.

   The Company's objectives for holding derivatives are to decrease the
volatility of earnings and cash flows associated with changes in foreign
currency prices.

   The Company enters into foreign currency forward contracts (forward
contracts) to manage exposure related to certain foreign currency transactions.
All outstanding forward contracts at the end of the period are
marked-to-market, with unrealized gains and losses included in net income as a
component of other income, net. The Company may, from time to time, adjust its
foreign currency hedging positions by taking out additional contracts or by
terminating or offsetting existing forward contracts. These adjustments
typically result from changes in the underlying foreign currency exposures.
Realized gains and losses on terminated forward contracts, or on contracts that
are offset, are recognized in earnings in the period of contract termination or
offset. The Company had outstanding forward contracts with notional amounts
totaling approximately $2.7 million and $0.9 million at October 31, 2001 and
2000, respectively. These contracts, which mature within 45 days of year-end,
are hedges of certain foreign currency transaction exposures in British pound
sterling, Euro, Swiss francs, and Japanese yen. These contracts do not qualify
as effective hedges for reporting purposes. The effect on earnings for the
fiscal period presented related to the effectiveness of hedging activities was
not material. The estimated fair value of the contracts at October 31, 2001 and
2000 was negligible.

Cash, Cash Equivalents, and Short-Term Investments

   For purposes of cash flow reporting, the Company considers all highly liquid
investments with minimum yield risks and original maturity dates of three
months or less to be cash equivalents. Short-term investments consist primarily
of commercial paper, medium term notes, asset-backed securities, U.S. Treasury
notes and obligations of U.S. Government agencies, equity securities, corporate
bonds and municipal bonds carried at amortized costs adjusted to fair market
value.

   At October 31, 2001 and 2000, the Company classified all investments as
available-for-sale and reported their fair market value. Unrealized gains or
losses on available-for-sale securities, if material, are included, net of tax,
in equity until disposition. Realized gains, losses and declines in value
judged to be other-than-temporary on available-for-sale securities are included
in interest income. The cost of securities sold is based on the specific
identification method.

                                      57

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The fair market value of cash equivalents, short-term and long-term debt
investments represents the quoted market prices at the balance sheet dates.
Cash and cash equivalents are categorized as follows (in thousands):

<TABLE>
<CAPTION>
                                                           October 31,
                                                         ----------------
                                                          2001     2000
                                                         ------- --------
       <S>                                               <C>     <C>
       Money market..................................... $31,167 $ 79,547
       Commercial paper.................................   3,313   24,403
       Municipal bonds..................................      --    5,290
       Corporate bonds..................................      --    5,000
                                                         ------- --------
          Cash equivalents..............................  34,480  114,240
       Cash.............................................   9,829   23,161
                                                         ------- --------
       Cash and cash equivalents........................ $44,309 $137,401
                                                         ======= ========
</TABLE>

   The short-term investments mature in less than one year. All long-term
investments have maturities of one to five years. At October 31, 2001 and 2000,
these investments are classified as available-for-sale and are categorized as
follows (in thousands):

<TABLE>
<CAPTION>
                                                           October 31,
                                                        -----------------
                                                          2001     2000
                                                        -------- --------
      <S>                                               <C>      <C>
      Commercial paper and medium term notes........... $ 14,997 $ 15,097
      Treasury notes and obligations of U.S. Government
        agencies.......................................   43,819   45,442
      Asset backed securities..........................   23,423   35,071
      Equity securities................................    1,282    4,291
      Corporate bonds..................................  138,613  169,932
      Municipal bonds..................................   36,252   11,731
                                                        -------- --------
      Short and long term investments.................. $258,386 $281,564
                                                        ======== ========
</TABLE>

   The estimated fair value of cash, cash equivalents, short and long-term
investments classified by the maturity date listed on the security is as
follows (in thousands):

<TABLE>
<CAPTION>
                                                           October 31,
                                                        -----------------
                                                          2001     2000
                                                        -------- --------
      <S>                                               <C>      <C>
      Due within one year.............................. $140,806 $277,563
      Due within two years.............................  102,472   88,040
      Due within three years...........................   38,810   37,719
      Due after three years............................   20,607   15,643
                                                        -------- --------
      Cash, cash equivalents, short and long term
        investments.................................... $302,695 $418,965
                                                        ======== ========
</TABLE>

                                      58

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Inventories

   Inventories are stated at the lower of standard cost (which approximates
first-in, first-out cost) or market. Shipping and handling expenses for
purchased inventory items are expensed to cost of goods sold. Inventories
consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                           October 31,
                                                        -----------------
                                                          2001     2000
                                                        -------- --------
      <S>                                               <C>      <C>
      Raw materials.................................... $ 65,553 $ 45,919
      Work-in-process..................................   21,905   47,280
      Finished goods...................................   35,761   19,819
                                                        -------- --------
                                                        $123,219 $113,018
                                                        ======== ========
</TABLE>

Property and Equipment and Other Assets

   Machinery and equipment, software, furniture and fixtures and spare parts
are stated at cost and are depreciated using the straight-line method over the
assets' estimated useful lives of three to five years. Personal computer
equipment is depreciated over two years. Leasehold improvements are depreciated
using the straight-line method over the shorter of five years or the applicable
lease term. Buildings are depreciated using the straight-line method over the
assets' estimated useful lives of thirty years. Assets under capitalized leases
are amortized using the straight-line method over the shorter of the estimated
useful life of the asset or the lease term. Property and equipment consist of
the following (in thousands):

<TABLE>
<CAPTION>
                                                           October 31,
                                                        -----------------
                                                          2001     2000
                                                        -------- --------
      <S>                                               <C>      <C>
      Land............................................. $ 14,439 $  9,923
      Buildings........................................   21,500   21,500
      Machinery and equipment..........................   99,529   98,716
      Software.........................................   22,280   27,530
      Leasehold improvements...........................   17,714   14,985
      Furniture and fixtures...........................   10,593    8,966
      Spare parts......................................   33,574   31,096
                                                        -------- --------
                                                         219,629  212,716
      Less accumulated depreciation and amortization...  110,101  101,098
                                                        -------- --------
      Net property and equipment....................... $109,528 $111,618
                                                        ======== ========
</TABLE>

   Other intangible assets, excluding goodwill, consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                           October 31,
                                                         ---------------
                                                          2001    2000
                                                         ------- -------
       <S>                                               <C>     <C>
       Purchased technology............................. $52,730 $54,559
       Other intangible assets..........................  14,774  10,882
                                                         ------- -------
                                                          67,504  65,441
       Less accumulated amortization and provisions.....  33,054  23,280
                                                         ------- -------
       Other intangible assets, net..................... $34,450 $42,161
                                                         ======= =======
</TABLE>

                                      59

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Goodwill and intangible assets are amortized using the straight-line method
over the assets' estimated useful lives of three to ten years. Goodwill and
intangible assets are generally evaluated on an individual acquisition, market,
or product basis whenever events or changes in circumstances indicate that such
assets are impaired or the estimated useful lives are no longer appropriate.
Periodically, the Company reviews its long-lived assets (including goodwill)
for impairment based on estimated future discounted cash flows attributable to
the assets. In the event such cash flows are not expected to be sufficient to
recover the recorded value of the assets, the assets are written down to their
estimated fair values. No significant impairment charges were recorded in
fiscal years 1999 and 2000.

   In the fourth fiscal quarter of 2001 the Company recorded an impairment
charge of approximately $6.6 million for the write-down of the remaining
goodwill and intangible assets related to the acquisition of NMS. In
conjunction with the acquisition of IMS in August 2001, Fluence was merged with
IMS. The integration of Fluence with IMS resulted in the write-down of $2.3
million of the goodwill and purchased technology intangible assets of Opmaxx.
See Note 3 for further discussion.

Accrued Expenses and Other Liabilities

   Accrued expenses and other liabilities consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                October 31,
                                                              ---------------
                                                               2001    2000
                                                              ------- -------
  <S>                                                         <C>     <C>
  Accrued payroll and related liabilities.................... $ 9,916  20,109
  Accrued warranty...........................................   6,391  14,852
  Accrued distributor commissions............................   2,513   2,723
  Holdback payments on acquisitions..........................   1,000  14,200
  Deferred revenue...........................................   8,160   8,195
  Other accrued liabilities..................................  13,201  20,098
                                                              ------- -------
                                                              $41,181 $80,177
                                                              ======= =======
</TABLE>

                                      60

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Net Income (Loss) Per Share

   Basic net income (loss) per share is based upon the weighted average number
of common shares outstanding during the period. Diluted net income (loss) per
share is based upon the weighted average number of common shares and
dilutive-potential common shares outstanding during the period. The Company's
convertible subordinated notes are dilutive-potential common shares and,
accordingly, are included in the fiscal 2000 calculation of net income per
diluted share. For the fiscal 1999 calculation, the convertible subordinated
notes are not dilutive-potential common shares and, accordingly, are excluded
from the calculation of net income (loss) per diluted share. The following
table sets forth the computation of basic and diluted net income (loss) per
share for the fiscal years ended October 31, (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
                                                              2001      2000    1999
                                                            --------  -------- -------
<S>                                                         <C>       <C>      <C>
Numerator:
   Income (loss) available to common stockholders.......... $(98,676) $120,510 $ 4,772
   Plus income impact of assumed conversions:
       Interest on convertible notes.......................       --     3,200      --
                                                            --------  -------- -------
   Adjusted income (loss) available to common stockholders. $(98,676) $123,710   4,772
                                                            ========  ======== =======
Denominator:
   Weighted-average shares outstanding.....................   59,818    55,300  48,918
   Plus incremental shares from assumed conversions:
       Employee stock options..............................       --     4,141   1,250
       Convertible notes...................................       --     2,450      --
                                                            --------  -------- -------
   Adjusted weighted-average shares outstanding............   59,818    61,892  50,168
                                                            ========  ======== =======
Basic net income (loss) per share.......................... $  (1.65) $   2.18 $  0.10
Diluted net income (loss) per share........................ $  (1.65) $   2.00 $  0.10
</TABLE>

   During fiscal 2001, the Company excluded options to purchase 2,185,119
shares of common stock from the diluted income per share computation because
the effect is anti-dilutive in the year.

Recent Accounting Pronouncements

   In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 eliminates the pooling-of-interests method of
accounting for business combinations except for qualifying business
combinations that were initiated prior to July 1, 2001. In addition, SFAS 141
further clarifies the criteria to recognize intangible assets separately from
goodwill. Specifically, SFAS 141 requires that an intangible asset may be
separately recognized only if such an asset meets the contractual-legal
criterion or the separability criterion. The requirements of Statement 141 are
effective for any business combination accounted for by the purchase method
that is completed after June 30, 2001 (i.e., the acquisition date is July 1,
2001 or after). The Company is currently evaluating the impact of SFAS 141 and
has not yet determined the impact that adopting SFAS 141 will have on its
financial statements. On adoption, the Company will be required to reassess the
goodwill and intangible assets previously recorded in acquisitions prior to
July 1, 2001 to determine if the new recognition criteria for an intangible
asset to be recognized apart from goodwill are met.

   In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." Under SFAS 142,
goodwill and indefinite lived intangible assets are no longer amortized but are
reviewed annually (or more frequently if impairment indicators arise) for
impairment.

                                      61

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

For intangible assets with indefinite useful lives, the impairment review will
involve a comparison of fair value to carrying value, with any excess of
carrying value over fair value being recorded as an impairment loss. For
goodwill, the impairment test shall be a two-step process, consisting of a
comparison of the fair value of a reporting unit with its carrying amount,
including the goodwill allocated to each reporting unit. If the carrying amount
is in excess of the fair value, the implied fair value of the reporting unit
goodwill is compared to the carrying amount of the reporting unit goodwill. Any
excess of the carrying value of the reporting unit goodwill over the implied
fair value of the reporting unit goodwill will be recorded as an impairment
loss. Separable intangible assets that are deemed to have a finite life will
continue to be amortized over their useful lives (but with no maximum life).
Intangible assets with finite useful lives will continue to be reviewed for
impairment in accordance with Statements of Financial Accounting Standards No.
121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The amortization provisions of SFAS 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, the
Company will apply the new accounting rules beginning November 1, 2002 and will
reassess the useful lives of its separately recognized intangible assets in the
first quarter of fiscal 2003. The Company will review for impairment previously
recognized intangible assets that are deemed to have indefinite lives upon the
completion of this analysis in the first quarter of fiscal 2003. Additionally,
upon the adoption of SFAS 142, the Company will perform a transitional
impairment review related to the carrying value of goodwill as of November 1,
2002 by the end of the second quarter of fiscal 2003. Because of the different
transition dates for goodwill and intangible assets acquired on or before June
30, 2001 and those acquired after that date, pre-existing goodwill and
intangibles will be amortized during this transition period until adoption
whereas new goodwill and indefinite lived intangible assets acquired after June
30, 2001 will not. The Company is currently in the process of determining its
reporting units for the purpose of applying the impairment test, analyzing how
fair value will be determined for purposes of applying SFAS 142 and quantifying
the anticipated impact of adopting the provisions of SFAS 142.

   In August, 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of"
and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment
of a business. SFAS 144 establishes a single accounting model for assets to be
disposed of by sale whether previously held and used or newly acquired. SFAS
No. 144 retains the provisions of APB No. 30 for presentation of discontinued
operations in the income statement, but broadens the presentation to include a
component of an entity. SFAS 144 is effective for fiscal years beginning after
December 15, 2001 and the interim periods within. The Company is currently in
the process of determining the anticipated impact of adopting the provisions of
SFAS 144.

Note 2--Acquisitions

   In August 2001, the Company completed a merger with IMS, issuing
approximately 7.2 million shares of common stock in exchange for all of the
outstanding common stock of IMS. In addition, outstanding options to purchase
IMS common stock were converted into options to purchase approximately 2.1
million shares of Credence common stock. This transaction was accounted for as
a pooling of interests and, therefore, all prior period consolidated financial
statements presented, and the consolidated financial statements as of October
31, 2001 and for the year then ended, were restated as if the merger took place
at the beginning of such periods.

   IMS had a calendar fiscal year and, accordingly, the IMS statement of
operations for the years ended December 31, 1999 and 2000 have been combined
with the Credence statement of operations for the fiscal years

                                      62

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

ended October 31, 1999 and 2000, respectively. In order to conform IMS's year
end to Credence's fiscal year end, the consolidated statement of operations for
fiscal 2001 includes the results of operations of IMS for two months (May and
June 2001) included in the consolidated results of operations in each of the
quarters ended April 30, 2001 and July 31, 2001. Accordingly, Credence's fiscal
first quarter includes the IMS results of operations for the three month period
ended March 31, 2001, the second fiscal quarter includes the IMS results of
operations for the three month period ended June 30, 2001, the third fiscal
quarter includes the IMS results of operations for the three month period ended
July 31, 2001, and the fourth fiscal quarter includes the IMS results of
operations for the three months period ended October 31, 2001. See Note 13 for
further discussion and separate results of operations for the eight fiscal
quarters ended October 31, 2001.

   Separate results of operations for the years ended October 31, 2001, 2000
and 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
                                     2001                 2000                    1999
                              ------------------  -------------------- --------------------------
                              Net sales Net loss  Net sales Net income Net sales Net income (loss)
                              --------- --------  --------- ---------- --------- -----------------
<S>                           <C>       <C>       <C>       <C>        <C>       <C>
Credence..................... $250,182  $(88,210) $682,138   $117,509  $197,183       $ (809)
IMS..........................   51,536   (10,466)   75,213      3,000    56,070        5,581
                              --------  --------  --------   --------  --------       ------
Combined..................... $301,718  $(98,676) $757,351   $120,509  $253,253       $4,772
                              ========  ========  ========   ========  ========       ======
</TABLE>

   In January 2001 and February 2001, Credence acquired Dimensions Consulting,
Inc. ("DCI"), and the principal assets of Rich Rabkin & Associates, Inc.
("Rabkin"), respectively. DCI specializes in providing interface solutions for
the semiconductor test and development market through ATE board design and test
socket systems. Rabkin specializes in providing interface solutions and test
head positioning devices for the semiconductor test market through its patented
solution for high parallel memory testing. DCI and Rabkin were integrated into
the Memory Products Division to offer test solutions, which we believe increase
manufacturing efficiencies and provide faster time to market for our customers.
These transactions were accounted for as purchases and accordingly, the
accompanying financial statements include the results of operations of DCI and
Rabkin subsequent to the acquisition date. The total purchase price of $13.5
million consisted of $13.3 million paid in cash at the closing and the
cancellation of $0.2 million in existing receivables. Credence also created a
$1.5 million deferred tax liability through the accounting for the acquisition.
Additionally, the Company agreed to make payments to the employees of DCI and
Rabkin based on the attainment of performance criteria for their business and
the business of the Memory Products Division for a period of two years
following the acquisition. These payments have been recorded as compensation
expense as they have been incurred. The net tangible assets purchased were
approximately $0.8 million.

   The total purchase cost of the DCI and Rabkin acquisitions were as follows
(in thousands):

<TABLE>
      <S>                                                         <C>
      Cash paid.................................................. $13,286
      Deferred tax liability.....................................   1,491
      Cancelled receivable.......................................     214
                                                                  -------
         Total purchase cost..................................... $14,991
                                                                  =======
</TABLE>

                                      63

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The purchase price allocation is as follows (in thousands):

<TABLE>
<CAPTION>
                                                               Annual    Useful
                                                    Amount  Amortization Lives
                                                    ------- ------------ ------
 <S>                                                <C>     <C>          <C>
 Purchase Price Allocation:
    Tangible net assets............................ $   806    $   --      --
    Intangible assets acquired:
        Assembled workforce........................     545       182       3
        Developed technology.......................   2,236       559       4
        Customer lists.............................   3,347       669       5
        Goodwill...................................   8,057     1,612       5
                                                    -------    ------
           Total purchase price allocation......... $14,991    $3,022
                                                    =======    ======
</TABLE>

   A valuation of the purchased assets was undertaken to assist the Company in
determining the fair value of each identifiable intangible asset and in
allocating the purchase price among the acquired assets. The intangible assets,
consisting primarily of developed technology, assembled workforce, customer
lists and goodwill, were assigned a value of $14.2 million and are being
amortized over their estimated useful lives, ranging from three to five years.

   In May 2000, Credence acquired TMT, Inc., a company involved in the design
and manufacture of linear and mixed signal and RF test systems for high volume,
production testing of analog integrated circuits. The transaction was accounted
for as a purchase and accordingly, the accompanying financial statements
include the results of operations of TMT subsequent to the acquisition date.
The total purchase price of $80.0 million included consideration of
approximately $70.0 million in cash and the assumption of 1.2 million TMT stock
options valued at approximately $10.0 million. Additionally, Credence created a
$13.2 million deferred tax liability through the accounting for the
acquisition. The net tangible assets purchased were approximately $10.2 million.

   The total purchase cost of TMT is as follows (in thousands):

<TABLE>
      <S>                                                         <C>
      Cash paid.................................................. $69,981
      Deferred tax liability.....................................  13,217
      Assumption of TMT options..................................   9,995
                                                                  -------
         Total purchase cost..................................... $93,193
                                                                  =======
</TABLE>

   The purchase price allocation is as follows (in thousands):

<TABLE>
<CAPTION>
                                                              Annual    Useful
                                                   Amount  Amortization Lives
                                                   ------- ------------ ------
 <S>                                               <C>     <C>          <C>
 Purchase Price Allocation:
 Tangible net assets.............................. $10,167        --       --
 Deferred compensation............................   8,362   $ 3,041     2.75
 Intangible assets acquired:
    Developed technology..........................  23,498     2,350       10
    Assembled workforce...........................   1,439       480        3
    Customer relationships........................   6,052     1,513        4
    Trade name....................................   2,053       411        5
    In-process research and development...........   8,282        --       --
    Goodwill......................................  33,340     3,334       10
                                                   -------   -------
        Total purchase price allocation........... $93,193   $11,129
                                                   =======   =======
</TABLE>

                                      64

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   A valuation of the purchased assets was undertaken to assist the Company in
determining the fair value of each identifiable intangible asset and in
allocating the purchase price among the acquired assets, including the portion
of the purchase price attributed to in-process research and development
projects. Standard valuation procedures and techniques were utilized in
determining the fair value of the acquired in-process research and development.
To determine the value of the technology in the development stage, the Company
considered, among other factors, the stage of development of each project, the
time and resources needed to complete each project, expected income and
associated risks. Associated risks included the inherent difficulties and
uncertainties in completing the project and thereby achieving technological
feasibility, and the risks related to the viability of and potential changes to
future target markets. The analysis resulted in $8.3 million of the purchase
price being charged to acquired in-process research and development. The IPR&D
acquired from TMT consists of products and projects related to analog and radio
frequency test products. These products and projects are aimed at the
development of the ASL 2000 product as well as further versions of the RFx
product. The Company estimated that these projects varied in terms of
completion from 50% to 85% completed based on research and development
complexity, costs, and time expended to date relative to the expected remaining
costs and time to reach technological feasibility. The expected completion
dates of these projects range from currently completed to the third quarter of
fiscal 2002. The intangible assets, consisting primarily of developed
technology, assembled workforce, and goodwill, were assigned a value of $66.4
million and are being amortized over their estimated useful lives, ranging from
three to ten years. The TMT products and projects are integrated into our
Industrial, Communications and Entertainment Test Division.

   The deferred compensation amount represents the intrinsic value of the
unvested stock options assumed in the transaction. The useful life is the
weighted average remaining future vesting period of the unvested options.

   In August 2000, Credence acquired Modulation Instruments, Inc. ("MI"), a
company involved in the design and manufacture of radio frequency testing
products. The transaction was accounted for as a purchase and accordingly, the
accompanying financial statements include the results of operations of MI
subsequent to the acquisition date. The total purchase price of $20.5 million
was cash. Additionally, Credence created a $1.9 million deferred tax liability
through the accounting for the acquisition. The net tangible assets purchased
were approximately $1.9 million.

   The total purchase cost of MI is as follows (in thousands):

<TABLE>
      <S>                                                         <C>
      Cash paid.................................................. $20,497
      Deferred tax liability.....................................   1,903
                                                                  -------
         Total purchase cost..................................... $22,400
                                                                  =======
</TABLE>

   The purchase price allocation is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                       Annual    Useful
                                                            Amount  Amortization Lives
                                                            ------- ------------ ------
<S>                                                         <C>     <C>          <C>
Purchase Price Allocation:
   Tangible net assets..................................... $ 1,891        --      --
   Intangible assets acquired:.............................
       Developed technology................................   3,419       855       4
       Assembled workforce.................................     477       159       3
       In-process research and development.................   3,313        --      --
       Patents.............................................     862       172       5
       Goodwill............................................  12,438     3,106       4
                                                            -------    ------
          Total purchase price allocation.................. $22,400    $4,292
                                                            =======    ======
</TABLE>

                                      65

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   A valuation of the purchased assets was undertaken to assist the Company in
determining the fair value of each identifiable intangible asset and in
allocating the purchase price among the acquired assets, including the portion
of the purchase price attributed to in-process research and development
projects. Standard valuation procedures and techniques were utilized in
determining the fair value of the acquired in-process research and development.
To determine the value of the technology in the development stage, the Company
considered, among other factors, the stage of development of each project, the
time and resources needed to complete each project, expected income and
associated risks. Associated risks included the inherent difficulties and
uncertainties in completing the project and thereby achieving technological
feasibility, and the risks related to the viability of and potential changes to
future target markets. The analysis resulted in approximately $3.3 million of
the purchase price being charged to acquired in-process research and
development. The IPR&D acquired from MI consists of products and projects
related to radio frequency tests products. These products and projects are
aimed at the development of the Modulated Vector Network Analyzer instrument in
various forms. The Company estimated that these projects varied in terms of
completion from 70% to 84% completed based on research and development
complexity, costs, and time expended to date relative to the expected remaining
costs and time to reach technological feasibility. The expected completion
dates of these projects range from completed to late fiscal 2002. The
intangible assets, consisting primarily of developed technology, assembled
workforce, and goodwill, were assigned a value of $17.2 million and are being
amortized over their estimated useful lives, ranging from three to five years.
The MI products and projects are integrated into our Industrial, Communications
and Entertainment Test Division.

   In August 2000, Credence acquired its European distribution companies.
Credence Europa ("Europa") was purchased from its management team for $8.4
million in cash. Europa distributes, services and supports the Company's
products in Europe and the Middle East. The transaction was accounted for as a
purchase and accordingly, the accompanying financial statements include the
results of operations of Europa subsequent to the acquisition date. The net
tangible assets purchased were approximately $3.1 million. The intangible
assets, consisting primarily of customer relationships, assembled workforce,
and goodwill, were assigned a value of $5.3 million and are being amortized
over their estimated useful lives, ranging from three to four years.

   In October 2000, Credence acquired New Millennia Solutions, Inc. ("NMS"), a
company involved in the design and manufacture of native test environment
Rambus RDRAM memory and module test products and application specific test
products. The transaction was accounted for as a purchase and accordingly, the
accompanying financial statements include the results of operations of NMS
subsequent to the acquisition date. The total purchase price of $11.3 million
consisted of $7.3 million paid in cash at the closing and the cancellation of
$4.0 million in existing equity investments in NMS. Credence also created a
$1.9 million deferred tax liability through the accounting for the acquisition.
Additionally, the Company agreed to make payments to the employees of NMS based
on the attainment of performance criteria for this division for a period of
three years following the acquisition. No payments were accrued in fiscal 2000
or 2001. The net tangible assets purchased were approximately $2.2 million.

   The total purchase cost of the NMS merger is as follows (in thousands):

<TABLE>
      <S>                                                         <C>
      Cash paid.................................................. $11,265
      Deferred tax liability.....................................   1,881
                                                                  -------
         Total purchase cost..................................... $13,146
                                                                  =======
</TABLE>

                                      66

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The purchase price allocation is as follows (in thousands):

<TABLE>
<CAPTION>
                                                              Annual    Useful
                                                   Amount  Amortization Lives
                                                   ------- ------------ ------
 <S>                                               <C>     <C>          <C>
 Purchase Price Allocation:.......................
    Tangible net assets........................... $ 2,215        --      --
    Intangible assets acquired:...................
        Developed technology......................   4,064     1,016       4
        Assembled workforce.......................     313        78       4
        In-process research and development.......     200        --      --
        Patents...................................     324        65       5
        Goodwill..................................   6,030     1,508       4
                                                   -------    ------
           Total purchase price allocation........ $13,146    $2,667
                                                   =======    ======
</TABLE>

   A valuation of the purchased assets was undertaken to assist the Company in
determining the fair value of each identifiable intangible asset and in
allocating the purchase price among the acquired assets, including the portion
of the purchase price attributed to in-process research and development
projects. Standard valuation procedures and techniques were utilized in
determining the fair value of the acquired in-process research and development.
To determine the value of the technology in the development stage, the Company
considered, among other factors, the stage of development of each project, the
time and resources needed to complete each project, expected income and
associated risks. Associated risks included the inherent difficulties and
uncertainties in completing the project and thereby achieving technological
feasibility, and the risks related to the viability of and potential changes to
future target markets. The analysis resulted in $0.2 million of the purchase
price being charged to acquired in-process research and development. The IPR&D
acquired from NMS consists of products and projects related to application
specific testing products ("ASTS"). These products and projects are aimed at
the development of an ASTS tester. The Company estimated that these projects
were approximately 30% completed based on research and development complexity,
costs, and time expended to date relative to the expected remaining costs and
time to reach technological feasibility. The expected completion date of these
projects was the second fiscal quarter of 2001. The intangible assets,
consisting primarily of developed technology, assembled workforce, and
goodwill, were assigned a value of $10.7 million and are being amortized over
their estimated useful lives, ranging from four to five years.

   In the fourth fiscal quarter of 2001 the Company recorded an impairment
charge of approximately $6.6 million for the write-down of the remaining NMS
intangible assets. See Note 3 for further discussion.

   In September 1999, the Company purchased Opmaxx, Inc., a company involved in
the development of products related to analog and mixed signal self test, for
$8.0 million in cash and the assumption of liabilities and the assumption of
employee stock options of approximately $0.6 million. Additionally, the Company
agreed to make payments to the common shareholders of Opmaxx in an amount equal
to 10% of the net receipts from sales of the Opmaxx products from September
1999 through December 31, 2003. These payments, if any, will be an adjustment
to the acquired goodwill and be amortized over a five year period. In
connection with this acquisition, the Company recognized $0.9 million of IPR&D.
The remaining $7.7 million has been capitalized, of which $7.5 million is for
purchased technology and other intangible assets which is being amortized
ratably over their estimated useful lives, ranging from two to five years.
Opmaxx was integrated with the Company's subsidiary, Fluence Technology, Inc.

   The IPR&D acquired from Opmaxx consists of products and projects related to
analog and mixed signal self test. These products and projects are aimed at the
development of design verification and sensitivity analysis,

                                      67

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

design fault coverage, test evaluation and optimization. The Company estimated
that approximately 55% of the research and development effort, based on time
spent and complexity, had been completed at the date of the acquisition. The
first versions of these products were released in late fiscal 2000.

   In conjunction with the acquisition of IMS in August 2001, Fluence was
merged with IMS. The integration of Fluence with IMS resulted in the write-down
of $2.3 million of the goodwill and purchased technology intangible assets of
Opmaxx. This impairment was based on product decisions for the newly combined
operations of Fluence and IMS.

Note 3--Special Charges

   In the second quarter of fiscal 2001 the Company recorded a charge of $45.0
million for the write-down of excess inventory as well as a charge of
approximately $2.0 million for severance payments and asset disposals
associated with headcount reductions the Company implemented in February 2001.
These charges were recorded as a result of the Company's response to a major
downturn in the business outlook for the ATE and related semiconductor and
semiconductor equipment industries in 2001. In the third quarter of fiscal 2001
the Company recorded a further $1.0 million for severance payments and asset
disposals associated with headcount reductions the Company implemented in May
and August 2001. In the fourth quarter of fiscal 2001 the Company recorded a
further $0.2 million for headcount reductions and a further $38.0 million for
the write-down of excess inventory. The Company has reduced headcount by more
than 400 people during the fiscal year across all functional areas. Severance
payments have been distributed during the year and the remaining accruals at
October 31, 2001 are not significant.

   In the second and third quarters of fiscal 2001 the Company recorded charges
of approximately $3.2 million related to fees and expenses associated with the
acquisition of IMS. A further $16.9 million was recorded in the fourth quarter
for the closing of the IMS transaction and the integration of their operations
with Credence and Credence's subsidiary, Fluence. The elements of the IMS
acquisition charges are as follows (in thousands):

<TABLE>
      <S>                                                         <C>
      Fees and expenses (investment bankers, legal, accounting,
        D&O insurance, travel, etc.)............................. $ 9,951
      Write-down of tangible and intangible assets...............   7,501
      Lease and liability accruals...............................   1,390
      Employee termination benefits..............................   1,272
                                                                  -------
                                                                  $20,114
                                                                  =======
</TABLE>

   In the fourth quarter of fiscal 2001 the Company recorded a $6.6 million
charge for the impairment of the remaining unamortized intangible assets
associated with the acquisition of NMS in October 2000. This impairment was
based on significant NMS employee turnover in fiscal 2001 as well as a change
in the technological direction of the remaining research and development
project that originated in NMS. This write-down applies to the ATE portion of
the Company's business.

   In the fourth quarter of fiscal 2001 the Company recorded a $2.3 million
charge for the abandonment of the former TMT facility in Sunnyvale, California
as these operations were integrated into our Fremont, California facilities.
This charge consisted of $1.8 in estimated future rental payments to be paid
through February 2005 and $0.5 million for asset and leasehold improvement
disposals.

   In the second quarter of fiscal 1999, the Company recorded special charges
totaling $6.2 million, of which $0.3 million was for employee severance and
$5.9 million was for abandoned facilities. These charges were recorded as a
result of the Company's response to a major downturn in the business outlook
for the ATE and

                                      68

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

related semiconductor and semiconductor equipment industries at that time as
well as the decision to relocate the Company's Oregon operations from a
facility in Beaverton to a newly constructed facility in Hillsboro, Oregon.

   In the fourth quarter of fiscal 1999, the Company recorded special charges
totaling $1.3 million. This charge included expenses related to the Opmaxx
acquisition of $0.6 million as well as the $0.7 million write-down of certain
intangible assets from another acquisition in the integration of Opmaxx with
the Company's subsidiary Fluence Technology, Inc.

Note 4--Industry Segments and Concentration of Risks

Credit Risk, Product Line and Segment/Geographic Data

   Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of investments in cash equivalents,
short-term and long-term investments and trade receivables. The Company is
exposed to credit risks in the event of default by the financial institutions
or customers to the extent of the amount recorded on the balance sheet. See
Note 1 for a description of these investment assets at October 31, 2001 and
2000.

   The Company and its subsidiaries operate in two industry segments: the
design, development, manufacture, sale and service of ATE used in the
production of semiconductors; and, as a result of acquisitions made in fiscal
years 1997 through 1999, the design, development, sale and service of software
that assists in the development of test programs used in ATE. Revenues from
software were not material to the Company's operations in fiscal years 2001,
2000 and 1999, representing less than 5% of revenue.

   The Company's net sales by product line consisted of:

<TABLE>
<CAPTION>
                                                            Year ended October 31,
                                                            ---------------------
                                                             2001      2000  1999
                                                            ----      ----   ----
<S>                                                         <C>       <C>    <C>
Mixed Signal...............................................  61%       74%    66%
Logic......................................................   4        11     12
Memory.....................................................  19         8      6
Service and software.......................................  16         7     16
                                                            ---       ---    ---
   Total net sales......................................... 100%      100%   100%
                                                            ===       ===    ===
</TABLE>

   The Company sells its products primarily to distributors and semiconductor
manufacturers located in the United States, Asia Pacific and Europe. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. The Company maintains reserves for potential credit
losses and such losses historically have been both immaterial and within
management's expectations.

   Export sales, which are denominated in U.S. dollars and represent
substantially all of the Company's international sales, represent sales to the
Company's customers primarily throughout Asia Pacific and Europe. Sales by the
Company to customers in different geographic areas, expressed as a percentage
of revenue, for the periods ended were:

<TABLE>
<CAPTION>
                                                            Year ended October 31,
                                                            ---------------------
                                                             2001      2000  1999
                                                            ----      ----   ----
<S>                                                         <C>       <C>    <C>
Domestic...................................................  39%       26%    45%
Asia Pacific...............................................  38        66     46
Europe.....................................................  23         8      9
                                                            ---       ---    ---
   Total net sales......................................... 100%      100%   100%
                                                            ===       ===    ===
</TABLE>

                                      69

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   One customer, Spirox Corporation (a distributor in Taiwan), accounted for
13%, 42% and 30% of the Company's net sales in fiscal 2001, 2000 and 1999,
respectively. Two end-user customers headquartered in Europe accounted for 13%
and 11% of the Company's net sales respectively, in fiscal 2001. One end-user
customer headquartered in Taiwan accounted for 17% of the Company's net sales
in fiscal 2000. This concentration subjects a significant portion of the
Company's receivables and future revenues to the risks associated with doing
business in foreign countries, including political and economic instability,
currency exchange rate fluctuations and regulatory changes. Disruption of
business in Asia caused by the previously mentioned factors could have a
material impact on the Company's business, financial condition or results of
operations.

Other Risks

   The semiconductor industry has historically been cyclical and has
experienced downturns, which have had a material adverse effect on the
semiconductor industry's demand for ATE, including equipment manufactured and
marketed by the Company. Differences between the Company's forecast of market
demand for its products and actual demand could have a material effect on the
financial statements. In addition, the ATE industry is highly competitive, and
subject to rapid technological change. The Company has experienced and is
continuing to experience significant delays in the introduction of new
products. It is reasonably possible that events related to the above factors
may occur in the near term which would cause a change to the Company's estimate
of the net realizable value of receivables, inventories or other assets, and
the adequacy of costs accrued for warranty and other liabilities. Such changes
have and could continue to materially adversely affect the Company's business,
financial condition and results of operations.

   In addition, the Company relies on several suppliers and manufacturing
subcontractors to provide many of the key components and subassemblies used in
the Company's products. Some of these items are available from only one
supplier or a limited group of suppliers. Any disruption in the delivery of
these items could materially adversely affect the Company's business, financial
condition and results of operations. (See also Note 1--Use of Estimates).

Note 5--Lease Obligations and Other Commitments

   The Company leases its facilities and equipment under operating leases that
expire periodically through 2007.

   The approximate future minimum lease payments under operating leases for
facilities and equipment at October 31, 2001 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                   Lease
                                                                  Payments
                                                                  --------
      <S>                                                         <C>
      2002....................................................... $ 4,954
      2003.......................................................   5,128
      2004.......................................................   3,517
      2005.......................................................   1,461
      2006.......................................................     163
      Thereafter.................................................       0
                                                                  -------
                                                                  $15,223
                                                                  =======
</TABLE>

   Rent expense was approximately $6,610,000, $6,258,000 and $3,119,000 for the
years ended October 31, 2001, 2000, and 1999, respectively.

                                      70

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company has an agreement with a captive leasing company whereby the
Company issued a guaranty in favor of a bank with respect to certain
obligations of the leasing company to the bank. Under this agreement, the
leasing company agreed to grant to the Company a security interest to secure
the obligations of the leasing company as a result of any payments by the
Company pursuant to the guaranty. At October 31, 2001 and 2000, the maximum
allowable debt of the leasing company subject to this guaranty, $8,750,000 and
$4,750,000, respectively, was outstanding.

Note 6--Convertible Subordinated Notes

   In September 1997, the Company sold $115 million of 51/4% convertible
subordinated notes (the "Notes") due September 2002 through a private
placement. The Notes were unsecured obligations of the Company and were
subordinated to all present and future senior indebtedness of the Company. The
Notes were convertible into common stock of the Company at an initial
conversion price of $34.58 per share.

   In fiscal 1999, the Company recorded pre-tax extraordinary gains of $2.6
million for the retirement of $18.0 million of its Notes net of $0.4 million
related to issuance expenses and discount on the notes in exchange for
1,206,000 shares of the Company's common stock held in treasury.

   In September 2000 the remaining Notes were called for redemption by the
Company. Of the $95 million principal amount of Notes outstanding,
approximately $60,000 of the Notes were redeemed for cash while the remaining
Notes were converted by the holders into 2,792,421 shares of Common Stock.

Note 7--Stockholders' Equity Stock Split

   The Board of Directors authorized the split of the Company's common stock on
a two-for-one basis for shareholders of record on May 1, 2000. The resulting
shares from the stock split were distributed on May 17, 2000. This common stock
split was affected through a common stock dividend. All references to share and
per-share data for all periods presented have been adjusted to give effect to
this two-for-one stock split.

Follow-On Public Offering

   In February 2000, Credence completed a follow-on public offering of its
common stock. All 5,290,000 shares covered by Credence's Registration
Statement, including shares covered by an over-allotment option that was
exercised, were sold by Credence at a price of $57.50 per share, less an
underwriting discount of $2.875 per share. The net proceeds to the Company were
approximately $288.1 million after deducting the issuance expense of
approximately $0.9 million.

Treasury Stock and Common Stock Repurchases

   During fiscal 2001, the Company repurchased 402,000 shares of its common
stock at a cost of $7.6 million. Of the 402,000 shares, 325,000 were put into
treasury stock. In addition, the Company issued approximately 201,000 shares
that were held in treasury to employees as part of the equity compensation
plans.

   During fiscal 2000, the Company repurchased 440,000 shares of its common
stock at a cost of $13.3 million. Of the 440,000 shares, 405,000 shares were
put into treasury stock. In addition, the Company issued approximately 633,000
shares that were held in treasury to employees as part of the equity
compensation plans.

   In fiscal 1999, the Company issued approximately 54,000 shares that were
held in treasury to employees as part of the equity compensation plans.

Deferred Compensation

   The Company recorded $1.0 million of deferred compensation and additional
paid-in capital upon the issuance of certain stock options to IMS employees
before shareholder approval was obtained for the authorization of these shares.
This amount will be amortized using the straight-line method over an expected
life of four years.

                                      71

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company recorded $8.3 million of deferred compensation and additional
paid-in capital upon the assumption of the outstanding TMT options in May 2000.
The deferred compensation is being amortized using the straight-line method
over an expected life of 2.75 years.

Stock Option Plans and Stock Purchase Plan

   The Company grants options to employees and members of the Board of
Directors under the 1993 Stock Option Plan (the "1993 Plan"). The 1993 Plan is
divided into two separate components: (i) the Discretionary Option Grant
Program and (ii) the Automatic Option Grant Program. Options granted under the
Discretionary Option Grant Program will have an exercise price equal to 100% of
the fair market value of such shares on the date of grant, and a maximum term
of ten years, and are exercisable over a vesting period, generally four to five
years. Under the Automatic Option Grant Program, options are granted
automatically at periodic intervals to non-employee members of the Board at an
exercise price equal to 100% of the fair market value of the option shares on
the date of grant and a maximum term of ten years, and are exercisable over a
vesting period, generally four years.

   In August 2001, the Company completed a merger with IMS, issuing
approximately 7.2 million shares of common stock in exchange for all of the
outstanding common stock of IMS. In addition, outstanding options to purchase
IMS common stock were converted into options to purchase approximately 2.1
million shares of Credence common stock.

   On August 9, 2000, the Board of Directors authorized the Company's
Supplemental Stock Option Plan and authorized 500,000 shares for issuance. This
additional reserve of shares shall supplement the Company's 1993 Stock Option
Plan and is for issuance to individuals employed by the Company who are neither
officers of the Company nor members of the Board. On November 27, 2000 the
Board of Directors authorized an additional 500,000 shares for issuance under
the Supplemental Stock Option Plan. In addition, on November 27, 2001, the
Board of Directors authorized an additional 500,000 shares for issuance under
the Supplemental Stock Option Plan.

   On March 22, 2000, the stockholders approved an amendment to the Company's
1993 Plan that implemented an automatic share increase feature pursuant to
which the number of shares available for issuance under the 1993 Plan will
automatically increase on the first trading day of each fiscal year (the "First
Trading Day"), beginning with the 1999 fiscal year and continuing through the
fiscal year 2003, by an amount equal to three and a half percent (3.5%) of the
total number of shares outstanding on the last trading day of the immediately
preceding fiscal year, but no such annual increase is to exceed 3,000,000
shares.

   On November 5, 1998, the Compensation Committee of the Company's Board of
Directors approved a stock option repricing program pursuant to which employees
of the Company (excluding Board members and consultants) could elect to cancel
certain unexercised stock options in exchange for new stock options with an
exercise price of $17.19 per share equal to the closing price of the Company's
common stock on the Nasdaq National Market on December 14, 1998. Approximately
898,000 options were eligible for repricing, of which approximately 571,000
were repriced. The vesting schedules and expiration dates of the repriced stock
options were restarted at the new vesting commencement date of December 14,
1998.

                                      72

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   A summary of the activity under all plans, excluding the Fluence Plan, as
defined below (in thousands, except per share amounts) is as follows:

<TABLE>
<CAPTION>
                                          Options                             Weighted
                                         Available    Number of               Average
                                         for Grant     Options    Price Per   Exercise
                                        (Authorized) Outstanding    Share      Price
                                        ------------ ----------- ------------ --------
<S>                                     <C>          <C>         <C>          <C>
Balance at October 31, 1998............     2,053       5,962    $0.22-$26.67  $ 9.60
Increase in authorized shares..........     2,816          --              --      --
Options granted........................    (6,478)      6,478    $7.82-$21.78  $14.40
Options canceled.......................     2,963      (2,963)   $0.22-$26.67  $11.60
Options exercised......................        --      (1,479)   $0.22-$15.00  $ 7.40
                                           ------      ------    ------------  ------
Balance at October 31, 1999............     1,354       7,998    $0.27-$21.78  $13.14
Increase in authorized shares..........     2,547          --              --      --
Options granted........................    (3,924)      3,924    $4.98-$67.99  $31.85
Options canceled.......................       315        (315)   $1.07-$67.99  $17.58
Options exercised......................        --      (1,393)   $0.27-$22.22  $ 9.61
Options expired........................        (3)         --              --      --
                                           ------      ------    ------------  ------
Balance at October 31, 2000............       289      10,214    $0.27-$67.99  $20.32
Increase in authorized shares..........     2,337          --              --      --
Options granted........................    (4,282)      4,282    $8.61-$24.39  $17.14
Options canceled.......................     2,071      (2,071)   $0.27-$67.99  $22.51
Options exercised......................        --        (697)   $0.27-$22.22  $10.99
Options expired........................       (21)         --              --      --
                                           ------      ------    ------------  ------
Balance at October 31, 2001............       394      11,728    $1.07-$67.99  $19.16
                                           ======      ======    ============  ======
</TABLE>

   The Company has reserved for issuance approximately 12,122,000 shares of
common stock in connection with the stock option plans.

   The following table summarizes information about options outstanding and
exercisable at October 31, 2001, excluding the Fluence Plan (in thousands
except per share amounts):
<TABLE>
<CAPTION>
     Options Outstanding                                   Options Exercisable
------------------------------                           ------------------------
                                   Weighted
                                   Average      Weighted     Options     Weighted
                   Options        Remaining     Average     Currently    Average
   Range of     Outstanding at Contractual Life Exercise Exercisable net Exercise
Exercise Prices Oct. 31, 2001      (years)       Price    Oct. 31, 2001   Price
--------------- -------------- ---------------- -------- --------------- --------
<S>             <C>            <C>              <C>      <C>             <C>
$ 1.07-$16.19      5,257,246         7.87        $11.55     2,385,821     $10.15
$16.50-$21.25      4,311,638         8.56        $19.30     1,413,513     $19.77
$ 21.74-$67.99     2,159,148         8.75        $37.43       563,094     $39.67
--------------    ----------         ----        ------     ---------     ------
$ 1.07-$67.99     11,728,032         8.29        $19.16     4,362,428     $17.08
==============    ==========         ====        ======     =========     ======
</TABLE>

   These options will expire, if not exercised, at specific dates from July
2003 to October 2011.

   In 1997, the Company's subsidiary, Fluence, adopted a 1997 Stock Option Plan
(the "Fluence Plan") under which incentive stock options to purchase Fluence
common stock could be granted to employees, non-employee members of the Board
or the non-employee members of the Board of Directors of any parent or
subsidiary, and consultants and other independent advisors who provide services
to Fluence (or any parent or subsidiary). Under the Fluence Plan, options to
purchase Fluence common stock could be granted at prices no less than 85% of
their fair value on the date of grant.

                                      73

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   As of November 1, 2001 outstanding options to purchase Fluence stock were
converted into options to purchase approximately 36,000 shares of Credence
common stock. This conversion occurred as part of the merger of Fluence with
IMS.

   In 1994, the Company adopted the 1994 Employee Stock Purchase Plan, which
provides eligible employees with the opportunity to acquire shares of the
Company's common stock. The purchase price is 85% of the fair market value per
share of common stock on the date on which the purchase period begins or on the
date on which the purchase period ends, whichever is lower. Approximately
201,342, 107,718 and 250,166 shares were issued pursuant to the plan in 2001,
2000 and 1999, respectively. At October 31, 2001, approximately 529,900 shares
were reserved for issuance under the plan.

   The Company follows the intrinsic value method to account for its employee
stock options because, as discussed below, the alternative fair value
accounting requires the use of option valuation models that were not developed
for use in valuing employee stock options. Because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of the grant, no compensation expense is recognized in the
Company's financial statements.

   In calculating pro forma compensation, the fair value of each option grant
is estimated on the date of grant using the Black-Scholes options pricing
model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, the Black-Scholes model requires the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of its stock-based awards to its
employees. The fair value of each option grant is estimated assuming no
expected dividends and the following weighted-average assumptions:

<TABLE>
<CAPTION>
                                                        2001  2000  1999
                                                        ----  ----  ----
      <S>                                               <C>   <C>   <C>
      Expected life (years)............................ 6.39  6.48  3.06
      Expected stock price volatility.................. 0.78  0.77  0.72
      Risk-free interest rate.......................... 4.77% 5.06% 5.97%
</TABLE>

   The grant date weighted-average fair value of options granted during the
year was $12.35, $26.22 and $7.31 for 2001, 2000 and 1999, respectively.

   The fair value of issuances under the Employee Stock Purchase Plan is
estimated on the issuance date using the Black-Scholes model assuming no
expected dividends and the following weighted-average assumptions for issuances
made in 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                                        2001  2000  1999
                                                        ----  ----  ----
      <S>                                               <C>   <C>   <C>
      Expected life (years)............................ 0.50  0.50  0.50
      Expected stock price volatility.................. 0.85  0.89  0.76
      Risk-free interest rate.......................... 1.75% 5.47% 5.65%
</TABLE>

   The weighted-average fair value of purchase rights granted during the year
was $7.93, $13.87 and $3.42 for 2001, 2000 and 1999, respectively.

                                      74

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   For pro forma purposes, the estimated fair value of the Company's
stock-based awards to its employees is amortized over the option's vesting
period and the Employee Stock Purchase Plan's six-month purchase period. The
Company's pro forma information is as follows (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
                                                      2001       2000    1999
                                                    ---------  -------- ------
  <S>                                               <C>        <C>      <C>
  Net income (loss) as reported.................... $ (98,676) $120,510 $4,772
  Pro forma net income (loss)...................... $(129,254) $ 98,308 $  195
  Basic net income (loss) per share as reported.... $   (1.65) $   2.18 $ 0.10
  Pro forma basic net income (loss) per share...... $   (2.17) $   1.78 $ 0.00
  Diluted net income (loss) per share as reported.. $   (1.65) $   2.00 $ 0.10
  Pro forma diluted net income (loss) per share.... $   (2.17) $   1.59 $ 0.00
</TABLE>

   Because fair value pro forma disclosure is applicable only to options
granted subsequent to October 31, 1995, the pro forma effect is only fully
reflected in fiscal 2000 and 2001.

Rights Plan

   On June 1, 1998, the Company adopted the Credence Systems Corporation
Stockholder Rights Plan (the "Rights Plan"). Pursuant to the Rights Plan,
rights were distributed as a dividend at the rate of one right for each share
of Credence common stock, par value $0.001 per share ("Right") of the Company
held by stockholders of record as of the close of business on June 22, 1998.
The Rights will expire on June 22, 2008, unless redeemed or exchanged. Under
the Rights Plan, each Right initially will entitle the registered holder to buy
one unit of a share of preferred stock for $165.00. The Rights will become
exercisable only if a person or group (other than stockholders currently owning
15% of Credence common stock) acquires beneficial ownership of 15% or more of
Credence's common stock, or commences a tender offer or exchange offer upon
consummation of which such person or group would beneficially own 15% or more
of Credence's common stock.

Note 8--Employee Benefit Plans

   The Company maintains a 401(k) retirement savings plan for its full-time
domestic employees, which allows them to contribute up to 20% of their pre-tax
wages subject to IRS limits. The Company's contributions to this plan have been
$1,000,000, $1,467,000, and $350,000 in fiscal year's ended October 31, 2001,
2000, and 1999, respectively.

   The Company maintains a profit sharing plan for those domestic employees
that are not otherwise eligible for incentive-based compensation. Contributions
to this plan are subject to the discretion of the Board of Directors. The
Company made contributions of $824,000, $6,085,000 and $1,971,000 in fiscal
2001, 2000 and 1999, respectively.

   In July 1996 and July 2000, the Company implemented Executive Deferred
Compensation Plans for the purpose of providing eligible employees with a
program for deferred compensation earned during employment. The plans are
funded deferred compensation arrangements for the benefit of certain highly
compensated employees of the Company. Under the terms of the plans, eligible
employees of the Company may make voluntary contributions to the plans as a
percentage of compensation, but not in excess of limitations stated in the
plans. These contributions are invested in a variety of investment funds for
the intended use of paying plan benefits when participating employees become
eligible to receive such benefits under the terms of the plans. The Company
does not currently match employee contributions and does not intend to do so in
the near future.

                                      75

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 9--Income Taxes

   The tax provision (benefit) consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                      Year Ended October 31,
                                                    -------------------------
                                                      2001     2000     1999
                                                    --------  -------  ------
  <S>                                               <C>       <C>      <C>
  Federal:
     Current....................................... $(48,976) $84,119  $1,457
     Deferred......................................   (3,383)  (5,122)   (388)
                                                    --------  -------  ------
                                                     (52,359)  78,997   1,069
  State:
     Current.......................................       --   10,565    (145)
     Deferred......................................   (5,160)    (751)    119
                                                    --------  -------  ------
                                                      (5,160)   9,814     (26)
  Foreign:
     Current.......................................      614      390     212
                                                    --------  -------  ------
                                                    $(56,905) $89,201  $1,255
                                                    ========  =======  ======
</TABLE>

   Pre-tax income from foreign operations was approximately $1,665,000 in 2001,
$878,000 in 2000, and $997,000 in 1999.

   Reconciliation between the Company's effective tax rate (37% in 2001, 37% in
2000 and 28% in 1999) and the U.S. statutory rate of 35% is as follows (in
thousands):

<TABLE>
<CAPTION>
                                                      Year Ended October 31,
                                                    -------------------------
                                                      2001     2000     1999
                                                    --------  -------  ------
 <S>                                                <C>       <C>      <C>
 Tax computed at statutory rate.................... $(54,455) $84,448  $1,560
 State income tax (net of federal benefit).........   (6,709)   6,426     (44)
 Foreign sales corporation benefit.................        0   (6,352)      0
 Non-deductible in-process research and development        0    4,128     301
 Non-deductible goodwill amortization..............    5,223    1,523       0
 Research and development credits..................   (1,230)    (802)   (481)
 Other items.......................................      266     (170)    (81)
                                                    --------  -------  ------
                                                    $(56,905) $89,201  $1,255
                                                    ========  =======  ======
</TABLE>

   At October 31, 2001, the Company has unused net operating loss and research
tax credit carryforwards for federal income tax purposes of approximately
$7,100,000 and $194,000, respectively, which expire in 2004 through 2021.
Utilization of the net operating loss carryforwards at October 31, 2001 is
limited to approximately $1,434,000 annually under the provisions of Section
382 of the Internal Revenue Code of 1986, as amended. Utilization of the
research tax credit carryforwards is similarly limited.

                                      76

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Significant components of the Company's deferred tax assets are as follows
(in thousands):

<TABLE>
<CAPTION>
                                                                October 31,
                                                            ------------------
                                                              2001      2000
                                                            --------  --------
<S>                                                         <C>       <C>
Deferred tax assets:
Accounting for inventories................................. $ 23,540  $ 13,254
Allowance for doubtful accounts............................    3,269     3,025
Accruals not currently deductible..........................   11,614    10,204
Net operating loss carryforwards...........................    6,389     2,879
Book over tax depreciation.................................    2,160     5,392
Deferred revenue/profit/commissions........................    3,700    13,537
                                                            --------  --------
   Total deferred tax assets...............................   50,672    48,291
Valuation allowance for deferred tax assets................   (2,044)   (2,308)
                                                            --------  --------
                                                              48,628    45,983
Deferred tax liability:
Intangibles................................................  (12,204)  (17,949)
                                                            --------  --------
   Net deferred tax assets................................. $ 36,424  $ 28,034
                                                            ========  ========
</TABLE>

   There was a net decrease of $264,000 in the valuation allowance in 2001, a
net decrease of $586,000 in 2000, and a net decrease of $2,066,000 in 1999.

   Realization of the net deferred tax assets is dependent on our ability to
generate approximately $70,000,000 of future taxable income. Management
believes that it is more likely than not that the assets will be realized,
based on forecasted income. However, there can be no assurance that we will
meet our expectations of future income. Management will evaluate the
realizability of the deferred tax assets on a quarterly basis and assess the
need for additional valuation allowances.

Note 10--Contingencies

   In July 1998, the Company received a written allegation from inTEST IP
Corp., with its patent licensee inTEST Corporation, inTEST, that Credence was
infringing on a patent held by inTEST. The Company has since then engaged in
sporadic discussions with inTEST concerning this matter. On December 15, 2000,
inTEST filed a complaint in the U.S. District Court for the District of
Delaware, alleging infringement of inTEST U.S. patent number 4,589,815 and
seeking damages and injunctive relief. In April 2001 the Company was served
with the complaint. In addition to direct costs and diversion of resources
which may result, the Company may be obligated to indemnify third parties for
costs related to this allegation. The Company is involved in other 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 its business, financial condition or results of
operations.

                                      77

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 11--Accumulated Other Comprehensive Income

   Accumulated other comprehensive income and changes thereto consist of:

<TABLE>
<CAPTION>
                                                      Year Ended October 31,
                                                      ---------------------
                                                       2001    2000   1999
                                                      ------  ------  -----
    <S>                                               <C>     <C>     <C>
    Beginning balance income (loss), net of tax...... $2,097  $ (794) $(127)
    Unrealized gain (loss) on available-for-sale
      securities, net of tax.........................    373   3,313   (705)
    Currency translation adjustment, net of tax......  2,384    (422)    38
                                                      ------  ------  -----
    Ending balance income (loss), net tax of $1,102,
      $1,644, and $0, respectively................... $4,854  $2,097  $(794)
                                                      ======  ======  =====
</TABLE>

Note 12--Related Party Transactions

   Bernard V. Vonderschmitt, a director of the Company, is the founder and
chairman of Xilinx, Inc. and Dr. William G. Howard, a director of the Company,
is a director of Xilinx. For the years ended October 31, 2001, 2000, and 1999,
the Company sold approximately $536,000, $3,116,000, and $4,551,000,
respectively, of products and services to Xilinx. The amounts receivable from
Xilinx were approximately $356,000 and $1,489,000 at October 31, 2000 and 1999,
respectively (none at October 31, 2001).

   David Ranhoff, President and the Chief Operating Officer of the Company,
joined the board of directors of Micro-ASI, Inc in December 2000 and resigned
in June 2001. For the years ended October 31, 2001 and 2000, the Company sold
approximately $72,000 and $1,751,000, respectively, of products and services to
Micro-ASI (none in fiscal 1999). The amounts receivable from Micro-ASI was
approximately $1,751,000 at October 31, 2000 (none at October 31, 2001 and
1999).

   Thomas Franz, a director of the Company, is a Corporate Vice President of
Intel Corporation. For the years ended October 31, 2001, 2000 and 1999, the
Company sold approximately $18,314,000, $39,066,000 and $27,727,000, of
products and services to Intel. The amounts receivable from Intel were
approximately $9,464,000, $1,573,000, and $3,745,000 at October 31, 2001, 2000
and 1999, respectively.

   Michael Bosworth, a director of the Company, is the Executive Vice President
of the Systems Solutions Business of Cadence Design Systems. Additionally, in
certain foreign markets, Cadence employees act as sales agents for the Company.
The Company reimburses Cadence for related costs incurred on the Company's
behalf, plus an administrative fee. Cadence provides facilities for certain
domestic Company sales personnel. Charges for utilization of these facilities
have been reflected in the accompanying Consolidated Statements of Operations
as Selling, General and Administrative expense. For the years ended October 31,
2001, 2000 and 1999, the costs of the above services provided by Cadence
totaled $999,000, $535,000 and $657,000, respectively. For the year ended
October 31, 2001, the Company sold approximately $359,000 of products and
services to Cadence (none at October 31, 2000 and 1999). The amounts receivable
from Cadence were not significant.

                                      78

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 13--Selected Quarterly Financial Data (Unaudited)

   The following information provides the effect on the eight fiscal quarters
ended October 31, 2001 from the restatement for the provisions of SAB 101 and
the pooling of interests with IMS in thousands, except per share amounts (See
Note 2 for further discussion). Each share of IMS common stock outstanding was
converted into 0.90 shares of Credence common stock:

Q1 FY 2001

<TABLE>
<CAPTION>
                                                                 Effect of
                                                          As     Change in              IMS
                                                      Previously Accounting Adjusted Previously    As
                                                       Reported  Principle  Credence  Reported  Restated
                                                      ---------- ---------- -------- ---------- --------
<S>                                                   <C>        <C>        <C>      <C>        <C>
Net revenues.........................................  $123,177   $(5,388)  $117,789  $18,522   $136,311
Gross margin.........................................    70,617    (5,073)    65,544   11,573     77,117
Income (loss) before provision for income taxes and
  cumulative effect of accounting change.............    23,438    (4,849)    18,589    2,848     21,437
Net income (loss)....................................  $ 14,736   $(3,021)  $ 11,715  $ 1,880   $ 13,595
   Basic earnings per share:
       Income (loss) before cumulative effect of
         accounting change...........................  $   0.28   $ (0.06)  $   0.22  $  0.24   $   0.23
       Net income (loss).............................  $   0.28   $ (0.06)  $   0.22  $  0.24   $   0.23
   Diluted earnings per share:
       Income (loss) before cumulative effect of
         accounting change...........................  $   0.27   $ (0.06)  $   0.22  $  0.22   $   0.22
       Net income (loss).............................  $   0.27   $ (0.06)  $   0.22  $  0.22   $   0.22

Q2 FY 2001
</TABLE>
<TABLE>
<CAPTION>
                                                                 Effect of
                                                          As     Change in               IMS
                                                      Previously Accounting Adjusted  Previously    As
                                                       Reported  Principle  Credence   Reported  Restated
                                                      ---------- ---------- --------  ---------- --------
<S>                                                   <C>        <C>        <C>       <C>        <C>
Net revenues.........................................  $ 43,293   $19,881   $ 63,174   $12,465   $ 75,639
Gross margin.........................................   (24,161)   13,492    (10,669)    7,210     (3,459)
Income (loss) before provision for income taxes and
  cumulative effect of accounting change.............   (68,263)   12,665    (55,598)   (1,359)   (56,957)
Net income (loss)....................................  $(43,712)  $ 8,115   $(35,597)  $  (897)  $(36,494)
   Basic earnings per share:
       Income (loss) before cumulative effect of
         accounting change...........................  $  (0.83)  $  0.15   $  (0.68)  $ (0.11)  $  (0.61)
       Net income (loss).............................  $  (0.83)  $  0.15   $  (0.68)  $ (0.11)     (0.61)
   Diluted earnings per share:
       Income (loss) before cumulative effect of
         accounting change...........................  $  (0.83)  $  0.15   $  (0.68)  $ (0.11)  $  (0.61)
       Net income (loss).............................  $  (0.83)  $  0.15   $  (0.68)  $ (0.11)  $  (0.61)
</TABLE>

                                      79

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Q3 FY 2001

<TABLE>
<CAPTION>
                                                              Effect of
                                                       As     Change in               IMS
                                                   Previously Accounting Adjusted  Previously    As
                                                    Reported  Principle  Credence   Reported  Restated
                                                   ---------- ---------- --------  ---------- --------
                                                          in thousands, except per share amounts
<S>                                                <C>        <C>        <C>       <C>        <C>
Net revenues......................................  $ 18,762   $24,630   $ 43,392   $ 9,388   $ 52,781
Gross margin......................................     4,103    14,353     18,456     5,064     23,521
Income (loss) before provision for income taxes
  and cumulative effect of accounting change......   (36,934)   13,396    (23,538)   (1,971)   (25,509)
Net income (loss).................................  $(22,439)  $ 8,115   $(14,324)  $(1,296)  $(15,621)
   Basic earnings per share:
       Income (loss) before cumulative effect
         of accounting change.....................  $  (0.43)  $  0.15   $  (0.27)  $ (0.16)  $  (0.26)
       Net income (loss)..........................  $  (0.43)  $  0.15   $  (0.27)  $ (0.16)  $  (0.26)
   Diluted earnings per share:
       Income (loss) before cumulative effect
         of accounting change.....................  $  (0.43)  $  0.15   $  (0.27)  $ (0.16)  $  (0.26)
       Net income (loss)..........................  $  (0.43)  $  0.15   $  (0.27)  $ (0.16)  $  (0.26)
</TABLE>

Q4 FY 2001

<TABLE>
<CAPTION>
                                                              Effect of
                                                       As     Change in               IMS
                                                   Previously Accounting Adjusted  Previously    As
                                                    Reported  Principle  Credence   Reported  Restated
                                                   ---------- ---------- --------  ---------- --------
                                                          in thousands, except per share amounts
<S>                                                <C>        <C>        <C>       <C>        <C>
Net revenues......................................  $ 16,033   $ 9,793   $ 25,827   $ 11,161  $ 36,987
Gross margin......................................   (36,531)    5,334    (31,198)     6,924   (24,273)
Income (loss) before provision for income taxes
  and cumulative effect of accounting change......   (89,406)    4,970    (84,436)   (10,123)  (94,558)
Net income (loss).................................  $(53,141)  $ 3,137   $(50,004)  $(10,153) $(60,156)
   Basic earnings per share:
       Income (loss) before cumulative effect
         of accounting change.....................  $  (1.00)  $  0.06   $  (0.94)  $  (1.41) $  (1.00)
       Net income (loss)..........................  $  (1.00)  $  0.06   $  (0.94)  $  (1.41) $  (1.00)
   Diluted earnings per share:
       Income (loss) before cumulative effect
         of accounting change.....................  $  (1.00)  $  0.06   $  (0.94)  $  (1.41) $  (1.00)
       Net income (loss)..........................  $  (1.00)  $  0.06   $  (0.94)  $  (1.41) $  (1.00)
</TABLE>

                                      80

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Q1 FY 2000

<TABLE>
<CAPTION>
                                                                 Effect of
                                                          As     Change in               IMS
                                                      Previously Accounting Adjusted  Previously    As
                                                       Reported  Principle  Credence   Reported  Restated
                                                      ---------- ---------- --------  ---------- --------
                                                             in thousands, except per share amounts
<S>                                                   <C>        <C>        <C>       <C>        <C>
Net revenues.........................................  $101,768   $ 18,742  $120,510   $15,743   $136,253
Gross margin.........................................    58,745     11,667    70,412     9,668     80,080
Income (loss) before provision for income taxes and
  cumulative effect of accounting change.............    26,147     10,887    37,034     3,009     40,043
Income (loss) before cumulative effect of accounting
  change.............................................    16,862      7,022    23,884     1,986     25,870
Cumulative effect of accounting change...............        --    (24,208)  (24,208)   (7,317)   (31,525)
Net income (loss)....................................  $ 16,862   $(17,186) $   (324)  $(5,331)  $ (5,655)
   Basic earnings per share:
       Income (loss) before cumulative effect of
         accounting change...........................  $   0.38   $   0.16  $   0.54   $  0.26   $   0.51
       Net income (loss).............................  $   0.38   $  (0.39) $  (0.01)  $ (0.69)  $  (0.11)
   Diluted earnings per share:
       Income (loss) before cumulative effect of
         accounting change...........................  $   0.35   $   0.15  $   0.50   $  0.23   $   0.47
       Net income (loss).............................  $   0.35   $  (0.39) $  (0.01)  $ (0.69)  $  (0.11)
</TABLE>

Q2 FY 2000

<TABLE>
<CAPTION>
                                                                 Effect of
                                                          As     Change in              IMS
                                                      Previously Accounting Adjusted Previously    As
                                                       Reported  Principle  Credence  Reported  Restated
                                                      ---------- ---------- -------- ---------- --------
                                                            in thousands, except per share amounts
<S>                                                   <C>        <C>        <C>      <C>        <C>
Net revenues.........................................  $153,754   $  3,525  $157,279  $20,861   $178,140
Gross margin.........................................    90,958      1,773    92,731   13,090    105,821
Income (loss) before provision for income taxes and
  cumulative effect of accounting change.............    51,996      1,626    53,622    5,395     59,017
Income (loss) before cumulative effect of accounting
  change.............................................    33,494      1,049    34,543    3,561     38,104
Cumulative effect of accounting change...............        --         --        --       --         --
Net income (loss)....................................  $ 33,494   $  1,049  $ 34,543  $ 3,561   $ 38,104
   Basic earnings per share:
       Income (loss) before cumulative effect of
         accounting change...........................  $   0.70   $   0.02  $   0.72  $  0.45   $   0.69
       Net income (loss).............................  $   0.70   $   0.02  $   0.72  $  0.45   $   0.69
   Diluted earnings per share:
       Income (loss) before cumulative effect of
         accounting change...........................  $   0.63   $   0.02  $   0.65  $  0.42   $   0.63
       Net income (loss).............................  $   0.63   $   0.02  $   0.65  $  0.42   $   0.63
</TABLE>

                                      81

<PAGE>

                         CREDENCE SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Q3 FY 2000

<TABLE>
<CAPTION>
                                                                 Effect of
                                                          As     Change in              IMS
                                                      Previously Accounting Adjusted Previously    As
                                                       Reported  Principle  Credence  Reported  Restated
                                                      ---------- ---------- -------- ---------- --------
                                                            in thousands, except per share amounts
<S>                                                   <C>        <C>        <C>      <C>        <C>
Net revenues.........................................  $204,000   $(3,347)  $200,653  $20,613   $221,266
Gross margin.........................................   123,235    (2,128)   121,107   12,855    133,962
Income (loss) before provision for income taxes and
  cumulative effect of accounting change.............    68,092    (1,988)    66,104    4,919     71,023
Income (loss) before cumulative effect of accounting
  change.............................................    40,997    (1,197)    39,800    3,247     43,047
Cumulative effect of accounting change...............        --        --         --       --         --
Net income (loss)....................................  $ 40,997   $(1,197)  $ 39,800  $ 3,247   $ 43,047
   Basic earnings per share:
       Income (loss) before cumulative effect of
         accounting change...........................  $   0.82   $ (0.02)  $   0.80  $  0.41   $   0.76
       Net income (loss).............................  $   0.82   $ (0.02)  $   0.80  $  0.41   $   0.76
   Diluted earnings per share:
       Income (loss) before cumulative effect of
         accounting change...........................  $   0.74   $ (0.02)  $   0.72  $  0.38   $   0.68
       Net income (loss).............................  $   0.74   $ (0.02)  $   0.72  $  0.38   $   0.68
</TABLE>

Q4 FY 2000

<TABLE>
<CAPTION>
                                                                 Effect of
                                                          As     Change in              IMS
                                                      Previously Accounting Adjusted Previously    As
                                                       Reported  Principle  Credence  Reported  Restated
                                                      ---------- ---------- -------- ---------- --------
                                                            in thousands, except per share amounts
<S>                                                   <C>        <C>        <C>      <C>        <C>
Net revenues.........................................  $220,216   $(16,520) $203,696  $17,996   $221,692
Gross margin.........................................   134,173     (9,458)  124,715   10,819    135,534
Income (loss) before provision for income taxes and
  cumulative effect of accounting change.............    77,656     (8,771)   68,885    2,309     71,194
Income (loss) before cumulative effect of accounting
  change.............................................    49,029     (5,539)   43,490    1,524     45,014
Cumulative effect of accounting change...............        --         --        --       --         --
Net income (loss)....................................  $ 49,029   $ (5,539) $ 43,490  $ 1,524   $ 45,014
   Basic earnings per share:
       Income (loss) before cumulative effect of
         accounting change...........................  $   0.96   $  (0.11) $   0.85  $  0.19   $   0.77
       Net income (loss).............................  $   0.96   $  (0.11) $   0.85  $  0.19   $   0.77
   Diluted earnings per share:
       Income (loss) before cumulative effect of
         accounting change...........................  $   0.88   $  (0.11) $   0.78  $  0.18   $   0.71
       Net income (loss).............................  $   0.88   $  (0.11) $   0.78  $  0.18   $   0.71
</TABLE>

                                      82

<PAGE>

Item 9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

   Not applicable.

                                   PART III

Item 10.  Directors and Officers of the Registrant.

   The information required by this item relating to the Company's directors
and nominees and disclosure relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is included under the captions "Election of
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Company's Proxy Statement for the 2002 Annual Meeting of
Stockholders and is incorporated herein by reference. The information required
by this item relating to the Company's executive officers and key employees is
included under the caption "Executive Officers and Key Employees" in Part I of
this Form 10-K Annual Report.

Item 11.  Executive Compensation.

   The information required by this item is included under the caption
"Executive Compensation and Related Information" in the Company's Proxy
Statement for the 2002 Annual Meeting of Stockholders and is incorporated
herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management.

   The information required by this item is included under the caption
"Ownership of Securities" in the Company's Proxy Statement for the 2002 Annual
Meeting of Stockholders and is incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions.

   The information required by this item is included under the caption "Certain
Relationships and Related Transactions" in the Company's Proxy Statement for
the 2002 Annual Meeting of Stockholders and is incorporated herein by reference.

                                      83

<PAGE>

                                    PART IV

Item 14.  Exhibits, Financial Statement Schedule and Reports on Form 8-K.

   (a) The following documents are filed as part of the Annual Report on Form
10-K:

      1. Financial Statements.  The following Consolidated Financial Statements
   of Credence Systems Corporation are included in Item 8 of this Annual Report
   on Form 10-K:

<TABLE>
<CAPTION>
                                                                                             Page
                                                                                             ----
<S>                                                                                          <C>
Report of Ernst & Young LLP, Independent Auditors...........................................  47
Report of Arthur Andersen LLP, Independent Public Accountants...............................  48
Consolidated Balance Sheets--October 31, 2001 and 2000......................................  49
Consolidated Statements of Operations--Years Ended October 31, 2001, 2000 and 1999..........  50
Consolidated Statements of Stockholders' Equity--Years Ended October 31, 2001, 2000 and 1999  52
Consolidated Statements of Cash Flows--Years Ended October 31, 2001, 2000 and 1999..........  53
Notes to Consolidated Financial Statements..................................................  54
</TABLE>

      2. Financial Statement Schedule.  The following financial statement
   schedule of Credence Systems Corporation, for the years ended October 31,
   2001, 2000 and 1999, is filed as part of this Annual Report on Form 10-K and
   should be read in conjunction with the Consolidated Financial Statements of
   Credence Systems Corporation:

<TABLE>
<CAPTION>
                                                             Page
                                                             ----
              <S>                                            <C>
              Schedule II--Valuation and Qualifying Accounts  87
</TABLE>

       Schedules other than the one listed above have been omitted since they
       are either not required, are not applicable or the required information
       is shown in the consolidated financial statements or related notes.

      3. Exhibits.  See Exhibit Index on page 88.

   (b) Reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this Annual Report on Form 10-K. The Company filed a Current
Report on Form 8-K on August 3, 2001 announcing its acquisition of Integrated
Measurement Systems, Inc., effective August 1, 2001.

   (c) See Exhibit Index on page 88.

   (d) The following financial statement schedule of Credence Systems
Corporation, for the years ended October 31, 2001, 2000 and 1999, is filed as
part of this Annual Report on Form 10-K and should be read in conjunction with
the Consolidated Financial Statements of Credence Systems Corporation:

<TABLE>
<CAPTION>
                                                             Page
                                                             ----
              <S>                                            <C>
              Schedule II--Valuation and Qualifying Accounts  87
</TABLE>

       Schedules other than the one listed above have been omitted since they
       are either not required, are not applicable or the required information
       is shown in the consolidated financial statements or related notes.

                                      84

<PAGE>

                                  SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on
January 28, 2002.

                                          CREDENCE SYSTEMS CORPORATION
                                          (Registrant)

                                                 /s/  GRAHAM J. SIDDALL
                                          By:
                                            -----------------------------------
                                                     Graham J. Siddall
                                             Chairman of the Board of Directors
                                                and Chief Executive Officer

                                                 /s/   JOHN R. DETWILER
                                            -----------------------------------
                                                      John R. Detwiler
                                                Senior Vice President, Chief
                                              Financial Officer and Secretary
                                                  (Principal Financial and
                                                    Accounting Officer)

                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Graham Siddall and John Detwiler, and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and re-substitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Report on Form
10-K, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

          Signature                       Title                   Date
          ---------                       -----                   ----

   /s/  GRAHAM J. SIDDALL     Chairman of the Board of      January 28, 2002
-----------------------------   Directors and Chief
      Graham J. Siddall         Executive Officer

    /s/  JOHN R. DETWILER     Senior Vice President, Chief  January 28, 2002
-----------------------------   Financial Officer
      John R. Detwiler

 /s/  WILLIAM G. HOWARD, JR.  Director                      January 28, 2002
-----------------------------
   William G. Howard, Jr.

    /s/  HENK J. EVENHUIS     Director                      January 28, 2002
-----------------------------
      Henk J. Evenhuis

     /s/  JOS C. HENKENS      Director                      January 28, 2002
-----------------------------
       Jos C. Henkens

                                      85

<PAGE>

          Signature                       Title                   Date
          ---------                       -----                   ----

/s/  BERNARD V. VONDERSCHMITT Director                      January 28, 2002
-----------------------------
  Bernard V. Vonderschmitt

    /s/  JON D. TOMPKINS      Director                      January 28, 2002
-----------------------------
       Jon D. Tompkins

  /s/  MICHAEL F. BOSWORTH    Director                      January 28, 2002
-----------------------------
     Michael F. Bosworth

    /s/  THOMAS R. FRANZ      Director                      January 28, 2002
-----------------------------
       Thomas R. Franz


                                      86

<PAGE>

                                                                    Schedule II

                         CREDENCE SYSTEMS CORPORATION

                       VALUATION AND QUALIFYING ACCOUNTS
                                (in thousands)

<TABLE>
<CAPTION>
                                    Balance at                        Balance at
                                    Beginning                           End of
                                     of Year   Additions   Write-offs    Year
                                    ---------- ---------   ---------- ----------
<S>                                 <C>        <C>         <C>        <C>
Year ended October 31, 2001
   Allowance for doubtful accounts.   $7,604    $1,182       $  551     $8,235
Year ended October 31, 2000
   Allowance for doubtful account..   $3,473    $4,647       $  516     $7,604
Year ended October 31, 1999
   Allowance for doubtful accounts.   $5,822    $ (695)(a)   $1,654     $3,473
</TABLE>
--------
(a) During fiscal 1999 the Company reclassified $1,050 from the allowance for
    doubtful accounts to the other costs incurred related to the fiscal 1998
    special charges. This $1,050 was offset by $355 in additional expenses
    recorded during the year.

                                      87

<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number
------
<C>      <S>
  2.1(1) Agreement and Plan of Merger dated October 5, 1993 between Credence Systems Corporation, a
           California Corporation, and the Company.

  2.2(1) Asset Purchase Agreement dated December 31, 1990 between Tektronix, Inc. and the Company,
           including Amendment No. 1 to the Asset Purchase Agreement dated December 31, 1990.

  2.3(1) Technology Agreement between Tektronix, Inc. and the Company dated December 31, 1990.

  2.4(1) Letter Agreement between Tektronix, Inc. and the Company dated September 30, 1992.

  2.5(1) Amendment Agreement dated as of August 12, 1993 between Tektronix, Inc. and the Company.

  2.6(1) 1990 Plan of Purchase Price Adjustment Recapitalization.

  2.7(1) Letter Agreement between Tektronix, Inc. and the Company dated August 11, 1993.

  2.8(8) Agreement and Plan of Reorganization dated as of February 6, 1994 among the Registrant,
           Semiconductor Test Solutions, Inc., EPRO and the shareholders of EPRO listed therein.

 2.9(10) Asset Purchase Agreement, dated as of May 19, 1997, among Credence Systems Corporation, Test
           Systems Strategies, Inc., a Delaware corporation and wholly-owned subsidiary of Credence
           Systems Corporation, and Test Systems Strategies, Inc. an Oregon Corporation and wholly-owned
           subsidiary of Summit Design, Inc.

2.10(20) Asset Purchase Agreement, dated as of August 20, 1997, among Zycad Corporation, a Delaware
           Corporation, its wholly owned subsidiary, Attest Software and Test Systems Strategies, Inc., a
           Delaware Corporation and wholly owned subsidiary of the Company.

2.11(18) 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 Heuristics Physics Laboratories, Inc., a California
           corporation.

2.12(23) Agreement and Plan of Merger dated as of February 16, 1999, between Fluence Technology, Inc., a
           Delaware corporation and wholly-owned subsidiary of Credence Systems Corporation, and
           Opmaxx, Inc., a Delaware corporation.

2.13(23) Amendment No. 1 to the Agreement and Plan of Merger dated as of August 31, 1999, to the
           Agreement and Plan of Merger dated as of February 16, 1999, between Fluence Technology, Inc.,
           a Delaware corporation and wholly-owned subsidiary of Credence Systems Corporation and
           Opmaxx, Inc., a Delaware Corporation.

2.14(26) Agreement and Plan of Reorganization dated as of March 27, 2000, among the Company, TMT and
           Champagne Acquisition Corporation.

2.15(30) Agreement and Plan of Merger and Reorganization dated May 16, 2001, by and among the
           Company, Iguana Acquisition Corporation and Integrated Measurement Systems, Inc.

2.16(31) Amendment No. 1 to the Agreement and Plan of Merger and Reorganization, dated June 1, 2001,
           by and among the Company, Iguana Acquisition Corporation and Integrated Measurement
           Systems, Inc.

 3.1(25) Amended and Restated Certificate of Incorporation of the Company.

  3.2(1) Bylaws of the Company.

  4.1(1) Investor Rights Agreement dated October 15, 1989 by and among the Company and the investors
           listed therein, including Amendment Agreement to the Investor Rights Agreement dated June 15,
           1990, Second Amendment Agreement to the Investor Rights Agreement dated September 30, 1992
           and the Third Amendment Agreement to Investor Rights Agreement dated August 8, 1993.
</TABLE>

                                      88

<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number
 ------
<C>       <S>
   4.2(3) Fourth Amendment Agreement to the Investor Rights Agreement dated March 10, 1994.

  4.3(16) Form of Rights Agreement, dated as of June 2, 1998, by and between the Company and
            BankBoston, N.A., as Rights Agent.

  4.4(16) Form of Certificate of Designation for the Series A Junior Participating Preferred Stock of the
            Company.

  4.5(16) Form of Rights Certificate.

   4.6(7) Fifth Amendment Agreement to the Investor Rights Agreement dated May 26, 1995.

  4.7(32) Registration Rights Agreement, dated May 16, 2001, by and between the Registrant and Cadence
            Design Systems, Inc.

  10.1(1) Form of Indemnification Agreement Between the Company and each of its officers and directors.

  10.2(1) Underwriting Agreement dated October 28, 1993 by and among the Company and the underwriters
            named therein.

  10.3(3) Underwriting Agreement dated March 31, 1994 by and among the Company and the underwriters
            named therein.

  10.4(7) Underwriting Agreement dated June 14, 1995 by and among the Company and the underwriters
            named therein.

  10.5(1) Industrial Space Lease between Renco Investment Company and the Company dated August 12,
            1992 including the First Addendum dated August 14, 1992, Option to renew Lease dated
            August 14, 1992, First Amendment to Lease dated October 22, 1992 and Acceptance Agreement
            dated November 25, 1992.

  10.6(1) Indenture (lease agreement) between Pen Nom I Corporation and the Company dated April 3, 1991,
            including the First Amendment to Lease dated August 16, 1991, the Second Amendment to
            Lease dated December 10, 1991, the Third Amendment to Lease dated August 7, 1992, the
            Fourth Amendment to Lease dated October 13, 1992 and the Fifth Amendment to Lease dated
            November 15, 1993.

  10.7(1) Master Equipment Lease Agreement between the Company and Financing for Science and
            Industry, Inc. dated February 26, 1993.

  10.8(4) Leaseline Agreement between Comdisco and the Company dated July 29, 1994.

  10.9(2) Indemnification and Security Agreement between Credence Capital Corporation and the Company
            dated October 28, 1994.

 10.10(3) Stock Transfer Agreement by and among the Company, Richard Cann, Rene Verhaegen and
            Credence Europa Limited dated as of February 28, 1994.

 10.11(3) Secured Line of Credit Agreement between Credence Europa Limited and the Company dated as of
            February 28, 1994.

 10.12(6) Lease by and between the Company and The Mutual Life Insurance Company of New York dated
            June 16, 1995.

10.13(10) First Amendment to Lease by and between the Company and The Mutual Life Insurance Company
            of New York dated December 29, 1995.

10.14(11) Loan and Security Agreement between the Company and Silicon Valley Bank and Comerica Bank-
            California dated April 28, 1995, as amended.

 10.15(9) Domestic and International Master Agreement for Purchase of Equipment and Product Support
            between the Company and Comdisco, Inc., dated January 31, 1995.
10.16(11) Master Lease Purchase Agreement, Lease Purchase Closing Schedule and Lease Purchase Addendum
            No. One between Metlife Capital Corporation and the Company dated April 30, 1996.
</TABLE>

                                      89

<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number
 ------
<C>       <S>

10.17(12) Loan Agreement among Silicon Valley Bank, Bank of Hawaii and the Company, dated July 26,
            1996.

10.18(13) License Agreement between the Company and Kinetix Test Systems, LLC, dated July 31, 1996.

10.19(13) Lease Agreement between Petula Associates, Ltd and Koll Portland Associates, dba KBC
            Tigard II and the Company dated September 12, 1995.

10.20(13) Sixth Amendment to Lease by and between the Company and Pen Nom I Corporation dated
            March 10, 1995.

10.21(23) Software OEM License Agreement between the Company, Test Systems Strategies, Inc. and
            Summit Design, Inc. dated May 19, 1997.

10.22(14) Joint Venture Agreement dated June 10, 1997, between the Company and Innotech Corporation.

10.23(17) Lease Agreement between the Company and Bedford Property Investors, Inc. dated
            December 10, 1997.

10.24(18) Lease Agreement between the Company and Pacific Realty Associates, L.P., dated April 10, 1998.

10.25(19) Amendment to Loan Agreement dated July 24, 1998 between the Company, Silicon Valley Bank
            and Bank of Hawaii.

10.26(19) Non-Recourse Receivables Purchase Agreement dated May 1, 1998 between the Company and
            Silicon Valley Financial Services.

10.27(21) Amendment to Loan Agreement dated February 5, 1999 between Silicon Valley Bank, Bank of
            Hawaii and the Company.

10.28(22) Amendment to Loan Agreement dated July 23, 1999 between Silicon Valley Bank and the
            Company.

10.29(22) Employment Agreement by and between the Company and Graham J. Siddall, dated July 29, 1999.

10.30(24) Underwriting Agreement dated February 2000 by and among the Company and the Underwriters
            named therein.

10.31(25) Amendment to Graham J. Siddall Employment Agreement.

10.32(31) Amended and Restated Shareholder Agreement dated June 4, 2001 by and among the Company,
            Iguana Acquisition Corporation and Cadence Design Systems, Inc.

    10.33 Employment Agreement, dated January 15, 2002, by and between the Company and John R.
            Detwiler.

    10.34 Employment Agreement, dated January 15, 2002, by and between the Company and David A.
            Ranhoff.

    10.35 Employment Agreement, dated March 25, 1998, by and between Integrated Measurement
            Systems, Inc. and Keith L. Barnes.

    10.36 Letter Agreement, dated August 1, 2001, by and among Integrated Measurement Systems, Inc.,
            the Company and Keith L. Barnes.

    10.37 Letter Agreement, dated January 15, 2002, by and between the Company and Keith L. Barnes.

    10.38 Employment offer letter, dated October 1, 2001, by and between the Company and Fred Hall.

    10.39 Letter Agreement, dated January 15, 2002, by and between the Company and Fred Hall.

     21.1 Subsidiaries of the Company.

     23.1 Consent of Ernst & Young LLP, Independent Auditors.

     23.2 Consent of Arthur Andersen LLP, Independent Public Accountants.
</TABLE>

                                      90

<PAGE>

<TABLE>
<CAPTION>
  Exhibit
  Number
  ------
<C>          <S>
        24.1 Power of Attorney (reference is made to page 85 of this report).

    99.1(28) 1993 Stock Option Plan, as Amended and Restated through May 17, 2000.

    99.2(15) Form of Notice of Grant to be generally used in connection with the 1993 Stock Option Plan.

    99.3(15) Form of Stock Option Agreement to be generally used in connection with the 1993 Stock
               Option Plan.

    99.4(15) Addendum to the Stock Option Agreement (Special Tax Elections).

    99.5(15) Addendum to the Stock Option Agreement (Limited Stock Appreciation Rights).

    99.6(15) Addendum to the Stock Option Agreement (Change in Control).

    99.7(15) Addendum to the Stock Option Agreement (Financial Assistance).

    99.8(15) Form of Notice of Grant of Stock Option (Non-Employee Director) to be generally used in
               connection with the automatic option grant program of the 1993 Stock Option Plan.

    99.9(15) Form of Stock Option Agreement (Non-Employee Director) to be generally used in
               connection with the automatic option grant program of the 1993 Stock Option Plan.

   99.10(28) Employee Stock Purchase Plan, as Amended and Restated through May 17, 2000.

99.11(5)(10) Compensation Agreement between the Company and Jos C. Henkens, dated November 5,
               1993.

99.12(5)(10) Compensation Agreement between the Company and Wilmer R. Bottoms, dated November 5,
               1993.

99.13(5)(10) Compensation Agreement between the Company and Robert F. Kibble, dated November 5,
               1993.

99.14(5)(10) Compensation Agreement between the Company and Bernard V. Vonderschmitt, dated
               November 5, 1993.

99.15(5)(10) Compensation Agreement between the Company and Henk J. Evenhuis, dated November 4,
               1993.

   99.16(15) Form of Stock Purchase Agreement.

   99.17(15) Form of Enrollment/Change Form.

   99.18(29) Supplemental Stock Option Plan, as amended and restated through November 27, 2000.

   99.19(27) TMT, Inc. 1996 Stock Option Plan.

   99.20(27) Form of Option Assumption Agreement under TMT, Inc. 1996 Stock Option Plan.

   99.21(33) Integrated Measurement Systems, Inc. 1995 Stock Incentive Plan.

   99.22(33) Integrated Measurement Systems, Inc. 1995 Stock Incentive Plan Terms and Conditions of
               Option Grant.

   99.23(33) Integrated Measurement Systems, Inc. 1995 Stock Option Plan for Non-Employee Directors.

   99.24(33) Integrated Measurement Systems, Inc. 1995 Stock Option Plan for Non-Employee Directors
               Terms and Conditions of Option Grant.

   99.25(33) Integrated Measurement Systems, Inc. 1995 Employee Stock Purchase Plan.

   99.26(33) Integrated Measurement Systems, Inc. 1995 Employee Stock Purchase Plan Payroll
               Participation.

   99.27(33) Integrated Measurement Systems, Inc. 2000 Nonqualified Stock Option Plan.

   99.28(33) Form of Stock Option Assumption Agreement relating to Integrated Measurement Systems,
               Inc. Stock Options.
</TABLE>

                                      91

<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number
 ------
<C>       <S>
99.29(34) Fluence Technology, Inc. 1997 Stock Option Plan.

99.30(34) Fluence Technology, Inc. 1997 Stock Option Plan Form of Stock Option Agreement.

99.31(34) Opmaxx, Inc. 1997 Stock Option/Stock Issuance Plan.

99.32(34) Opmaxx, Inc. 1997 Stock Option/Stock Issuance Plan Form of Notice of Grant.

99.33(34) Form of Stock Option Assumption Agreement relating to Fluence Technology, Inc. and Opmaxx, Inc.
</TABLE>
--------
 (1) Incorporated by reference to an exhibit to the Company's Registration
     Statement on Form S-1 (Registration No. 33-68438) as amended.
 (2) Incorporated by reference to an exhibit to the Company's 1994 Annual
     Report on Form 10-K.
 (3) Incorporated by reference to an exhibit to the Company's Registration
     Statement on Form S-1 (Registration No. 33-76264) as amended.
 (4) Incorporated by reference to an exhibit to the Company's Quarterly Report
     on Form 10-Q for the quarterly period ended July 31, 1994.
 (5) Management contract or compensatory plan filed pursuant to Item 14(c).
 (6) Incorporated by reference to an exhibit to the Company's Quarterly Report
     on Form 10-Q for the quarterly period ended July 31, 1995.
 (7) Incorporated by reference to an exhibit to the Company's Registration
     Statement on Form S-3 (Registration No. 33-92802), as amended.
 (8) Incorporated by reference to an exhibit to the Company's Current Report on
     Form 8-K as filed with the Commission on March 29, 1995, as amended on May
     26, 1995.
 (9) Incorporated by reference to an exhibit to the Company's Quarterly Report
     on Form 10-Q for the quarterly period ended April 30, 1995.
(10) Incorporated by reference to an exhibit to the Company's 1995 Annual
     Report on Form 10-K.
(11) Incorporated by reference to an exhibit to the Company's Quarterly Report
     on Form 10-Q for the quarterly period ended April 30, 1996.
(12) Incorporated by reference to an exhibit to the Company's Quarterly Report
     on Form 10-Q for the quarterly period ended July 31, 1996.
(13) Incorporated by reference to an exhibit to the Company's 1996 Annual
     Report on Form 10-K.
(14) Incorporated by reference to an exhibit to the Company's Quarterly Report
     on Form 10-Q for the quarterly period ended July 31, 1997.
(15) Exhibits 99.2 through 99.9 and Exhibit 99.16 and 99.17 are incorporated
     herein by reference to identically numbered exhibits included in the
     Company's Registration Statement on Form S-8 (File No. 333-27499) declared
     effective with the Securities and Exchange Commission on May 20, 1997.
(16) Incorporated by reference to an exhibit to the Company's Current Report on
     Form 8-K as filed with the Commission on June 3, 1998.
(17) Incorporated by reference to an exhibit to the Company's Quarterly Report
     on Form 10-Q for the quarterly period ended January 31, 1998.
(18) Incorporated by reference to an exhibit to the Company's Quarterly Report
     on Form 10-Q for the quarterly period ended April 30, 1998.
(19) Incorporated by reference to an exhibit to the Company's Quarterly Report
     on Form 10-Q for the quarterly period ended July 31, 1998.
(20) Incorporated by reference to an exhibit to the Company's Annual Report on
     Form 10-K for the year ended October 31, 1997.
(21) Incorporated by reference to an exhibit to the Company's Quarterly Report
     on Form 10-Q for the quarterly period ended April 30, 1999.
(22) Incorporated by reference to an exhibit to the Company's Quarterly Report
     on Form 10-Q for the quarterly period ended July 31, 1999.
(23) Incorporated by reference to an exhibit to the Company's Annual Report on
     Form 10-K for the year ended October 31, 1999.

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<PAGE>

(24) Incorporated by reference to an exhibit to the Company's Registration
     Statement on Form S-3 (Registration Statement No. 333-95469), as amended.
(25) Incorporated by reference to an exhibit to the Company's Quarterly Report
     on Form 10-Q for the quarterly period ended April 30, 2000.
(26) Incorporated by reference to an exhibit to the Company's Current Report on
     Form 8-K as filed with the Commission on May 12, 2000.
(27) Incorporated by reference to an exhibit to the Company's Registration
     Statement on Form S-8 (File No. 333-38428), as filed with the Commission
     on June 2, 2000.
(28) Incorporated by reference to an exhibit to the Company's Registration
     Statement on Form S-8 (File No. 333-50432), as filed with the Commission
     on November 21, 2000.
(29) Incorporated by reference to an exhibit to the Company's Registration
     Statement on Form S-8 (File No. 333-58100), as filed with the Commission
     on April 2, 2001.
(30) Incorporated by reference to an exhibit to the Company's Current Report on
     Form 8-K as filed with the Commission on May 17, 2001.
(31) Incorporated by reference to an exhibit to the Company's Current Report on
     Form 8-K as filed with the Commission on June 4, 2001.
(32) Incorporated by reference to an exhibit to the Company's Registration
     Statement on Form S-4 (Registration Statement No. 333-62386), as amended.
(33) Incorporated by reference to an exhibit to the Company's Registration
     Statement on Form S-8 (File No. 333-333-69584), as filed with the
     Commission on September 18, 2001.
(34) Incorporated by reference to an exhibit to the Company's Registration
     Statement on Form S-8 (File No. 333-333-74346), as filed with the
     Commission on November 30, 2001.

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