<PAGE>
===============================================================================
                                  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, 1999

                                       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

                         COMMISSION FILE NUMBER 0-22366

                          CREDENCE SYSTEMS CORPORATION

             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                DELAWARE                              94-2878499
      (STATE OR OTHER JURISDICTION                 (I.R.S. EMPLOYER
   OF INCORPORATION OR ORGANIZATION)             IDENTIFICATION NO.)

215 FOURIER AVENUE, FREMONT, CALIFORNIA                 94539
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)               (ZIP CODE)

        REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (510) 657-7400

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

 TITLE OF EACH CLASS:       NAME OF EACH EXCHANGE ON WHICH REGISTERED:
 -------------------        -----------------------------------------
         NONE                                  NONE

SECURITIES REGISTERED PURSUANT
TO SECTION 12(B) 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, 2000 was approximately $1,903,000,000 (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, 2000, approximately 22,517,384 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 2000 Annual
Meeting of Stockholders to be held on March 22, 2000 are incorporated by
reference into Part III.


===============================================================================
<PAGE>

                                     PART I

ITEM 1.     BUSINESS

         Credence Systems Corporation designs, manufactures, sells and services
automatic test equipment, or ATE, used for testing semiconductor integrated
circuits, or ICs. We also develop, license and distribute related software
products. We serve a broad spectrum of the semiconductor industry's testing
needs through a wide range of products that test digital logic, mixed-signal 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 ATE market. Our products are
primarily designed to test semiconductors that are produced in high volume. Our
customers include major semiconductor manufacturers as well as 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," "Fluence," "SC," "ValStar,"
"Quartet," "Quartet One," "Wavebridge," "MemBIST," "TDS," "TDX," "Triton,"
"EPRO," "BOST," "Kalos," "DUO," and "Opmaxx" 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

         Dramatic advances in semiconductor process technology have improved the
performance and lowered the average selling prices of semiconductors to levels
that now support their use in a wide range of office, consumer, automotive,
communications, industrial and other products. In order to maintain or improve
gross margins as semiconductor devices decline, semiconductor manufacturers are
constantly seeking ways to reduce manufacturing costs.

         Testing is a principal element in the cost structure of high volume
production of semiconductors. As a result of improved efficiencies in wafer
fabrication, test costs have become a higher percentage of the total cost of
manufacturing. This shift in cost structure has changed the traditional criteria
for selection of ATE. Although performance was the dominant factor in the
selection of ATE in the past, we believe that economic considerations
have assumed much greater importance to semiconductor manufacturers. Purchasers
of ATE now examine more carefully the total cost of ownership of ATE. Total cost
of ownership includes the initial purchase price of the tester, as well as the
tester's reliability, flexibility, size, power and air conditioning
requirements, upgradeability and maintenance costs, including spare parts.

         Traditionally, semiconductor die were minimally tested at wafer probe
and underwent rigorous performance testing to full specification only at the
completion of final packaging. Today, assembly and packaging have become
increasingly expensive compared with the cost of the die, such that their costs
may exceed the cost of the die itself. This trend has influenced semiconductor
manufacturers to shift performance testing increasingly toward wafer probe. By
subjecting devices to performance testing earlier in the manufacturing process,
defective die are detected and eliminated before assembly and packaging costs
are incurred.

         Increased facility costs and the trend toward performance testing at
wafer probe have led to the increased importance of smaller testers in the
semiconductor manufacturing process. Performance testing at wafer probe 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.

         For over 20 years, emitter-coupled logic, ECL, has been the
conventional process technology used by us and others for the ICs used in ATE
due to its speed, repeatability and precision. ECL technology, however, results
in low


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<PAGE>

functionality per chip and requires continuous power. As a result,
conventional ATE systems generally are larger, expensive and require significant
electrical power to operate.

         Another process technology commonly used in the manufacture of
semiconductors is complementary metal oxide semiconductor, or CMOS. As compared
to ECL, CMOS technology allows higher functionality for a given chip size and
requires less power to operate. Some ATE manufacturers use a combination of ECL
and CMOS to lower the cost of ATE by reducing the use of ECL.

         The production of ATE based exclusively on CMOS technology, however,
had been limited by the inability of CMOS to meet the timing and measurement
demands of semiconductor testing. 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.

THE CREDENCE SOLUTION AND STRATEGY

         We have developed proprietary CMOS stabilization methods that
minimize the drift characteristic of CMOS and enable us to produce testers 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
should result in higher performance and free space on the die for additional
functionality. This scalability feature enables us to develop and manufacture
smaller, higher performance ICs 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.

         Our objective is to be the leading supplier of cost-effective ATE for
production testing of ICs used in high volume applications. Our business
strategy incorporates the following key elements:

        - 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 our
          products on traditional less-scalable architecture.

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

        - DIVERSE, HIGH-VOLUME MARKETS. Our products target the testing of
          digital logic, mixed-signal and nonvolatile memory 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.

        - WORLDWIDE TECHNICAL SUPPORT AND CUSTOMER SERVICE. As semiconductor
          manufacturers expand their operations worldwide, they require that
          their ATE suppliers have the capability to provide global support and
          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.


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<PAGE>

        - REDUCE TIME-TO-MARKET. We believe that our customers require
          increasing levels of sophisticated software tools to assist in the
          utilization of ATE that minimizes time-to-market. We are focusing our
          software efforts on internal development of and acquisition of
          companies or businesses that develop such tools. Through Fluence, we
          have acquired the test development series, or TDS, and TDX product
          lines from Summit Design, Inc. and Zycad, respectively, and acquired
          the Analog Test and Analog BIST products of Opmaxx. In addition,
          through the acquisition of certain assets of Heuristics, we obtained
          memory BIST and related in-process software products. These
          acquisitions are expected to add market opportunities for growth in
          the future. We believe we are positioned to capitalize on the
          Design-to-Test and the Design-for-Test markets with our new software
          product lines that integrate design and test.


PRODUCTS

         We currently offer a wide variety of products that test digital logic,
mixed-signal and non-volatile memory 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. An example of
digital logic semiconductors include logic devices such as microcontrollers.
Some digital devices which store and retrieve data are memory semiconductors.
Non-volatile memory semiconductors retain their data when the power is turned
off. Mixed-signal semiconductors combine both digital and analog functions.
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.

         Our CMOS-based ATE products--the SC, Valstar, DUO 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-definitions television and personal communications. Our memory
products, Kalos Series, Delphi, EPRO 142 and BTMA test non-volatile memory, or
NVM, devices, including ROM, EPROM, EEPROM and Flash memories, are used in high
volume applications in the consumer, automotive and telecommunications markets.
During 1997, we introduced the ValStar 2000, a system which enables the testing
of very complex devices, with up to 1024 pins with high-speed requirements. Also
introduced in 1997 was the Kalos Flash memory test system, a highly integrated
parallel system that provides multi-site testing and is designed to lower the
overall cost of test.

         During fiscal 1999, we acquired Opmaxx. 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, provides the enhanced capabilities required to
test consumer mixed signal products with 200 MHz I/O 20 bit analog, video, and
radio frequency, or RF, input and output. Quartet directly addresses the cost
sensitive needs of consumer related system-on-a-chip, or SOC, devices.

         The MemBIST products, acquired from Heuristics in fiscal 1998, generate
built-in self-test logic for embedded memories.

         During fiscal 1997, we acquired two software products lines: the Test
Development Series product line in the Summit acquisition and the Test Design
expert product line in the Zycad acquisition. TDS converts simulation waveform
data and modifies it under user control to generate test programs for use on
ATE. TDX grades test vector coverage, and provides other tools that enhance
design testability.


                                       3
<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, or ps, or nanoseconds, or ns, the number and
characteristics of the pins and the density in megabits, or Mb, of the device
that can be tested:

<TABLE>

--------- ------------ --------------- --------------------------------------- ----------------------------------------------------
PRODUCT   SERIES       MODELS          BASIC FEATURES                          TYPICAL DEVICES
--------- ------------ --------------- --------------------------------------- -----------------------------------------------------
<S>       <C>          <C>             <C>                                     <C>
DIGITAL   SC           SC312           50-100 MHz                              Microcontrollers, ASSPs, DSPs and FPGAs
                       SC Micr-      64-304 Pins
                                       + 350-500 ps accuracy
                                       -
--------- ------------ --------------- --------------------------------------- -----------------------------------------------------
          ValStar      VS2000          200 MHZ                                 Microprocessors, RISC circuits, PLDs, FPGAs,
                                       + 200 ps accuracy                       ASICs, core logic and graphic chip sets
                                        384-1024 Pins
--------- ------------ --------------- --------------------------------------- -----------------------------------------------------
MIXED-    DUO          DUO             DUO-100 MHz                             Multimedia devices, mass storage, DSPs, ASICs,
SIGNAL                 DUO-SE          DUO-SE-50 MHz                           Datacom and specialty devices, mobile
                       DUO-SX          DUO-SX-200 MHz                          communication devices, complex audio devices
                       DUO-RF          DUO-RF-50-100 MHz
--------- ------------ --------------- --------------------------------------- -----------------------------------------------------
          Quartet      ONE             512 digital                             Multimedia devices, mass storage, DSPs, ASICs,
                                       200 MHz                                 Datacom and specialty devices, mobile communication
                                       + 175 ps accuracy                       devices, complex audio devices
                                        Analog, Video, Audio, RF
--------- ------------ --------------- --------------------------------------- -----------------------------------------------------
MEMORY    KALOS        Kalos           50 MHz                                  Flash memories, EEPROM, EPROM, Microcontrollers and
PRODUCTS                               256 Mb                                  NVM ASICs
                       Kalos xp        + 1ns
                       Personal Kalos
--------- ------------ --------------- --------------------------------------- -----------------------------------------------------
          BTMA         2001            Benchtop Memory Analysis and            ROM, EEPROM, EPROM, Flash and SRAM
                       2555            Verification Testers
                       2555A
                       Delphi
--------- ------------ --------------- --------------------------------------- -----------------------------------------------------
          EPRO         142/AX          10 MHz
                                       256 Mb
--------- ------------ --------------- --------------------------------------- -----------------------------------------------------
          BOST         MemBOST         "Built-Off Self-Test"                   Processors, graphics engines, network controllers,
                                       Embedded memory test                    ASIC's and other multimedia devices
                                       External solution for digital
                                       and mixed signal devices
--------- ------------ --------------- --------------------------------------- -----------------------------------------------------
WORKCELL  Triton       Memory          Kalos tester integrated into 8" wafer   ROM, EEPROM, EPROM, and Flash memories
                                       prober, without extending outside the
                                       prober perimeter
--------- ------------ --------------- --------------------------------------- -----------------------------------------------------
          Matrix Test  Memory          Kalos tester integrated with a FICO     EEPROM, EPROM, Flash memories
                                       strip handler for testing NVM devices
                                       packaged prior to singulation
--------- ------------ --------------- --------------------------------------- -----------------------------------------------------
SOFTWARE  TDS tools    Design to Test  Generates tester specific programs      Tools apply to digital logic devices
                                       Verifies timing specification
--------- ------------ --------------- --------------------------------------- -----------------------------------------------------
          TDX tools    Design to Test  Verifies test vector quality            Tools apply to digital logic devices
                                       Supports design for test strategies
--------- ------------ --------------- --------------------------------------- -----------------------------------------------------
          HPL          MemBIST         Generates BIST logic, Partitioned       Tools apply to all memory devices
                                       solutions using BIST, ATE and BOST
--------- ------------ --------------- --------------------------------------- -----------------------------------------------------
          Opmaxx       Design Maxx     Design verification and sensitivity     Tools apply to analog and mixed-signal devices
          Design       FaultMaxx       analysis, design fault coverage, test
          Test         TestMaxx        evaluation and optimization
--------- ------------ --------------- --------------------------------------- -----------------------------------------------------
          Opmaxx       BISTMaxx        BIST generation for analog and          Tools apply to analog and mixed-signal devices
          Analog                       mixed-signal devices
          BIST
--------- ------------ --------------- --------------------------------------- -----------------------------------------------------
</TABLE>


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<PAGE>

         DIGITAL PRODUCTS

         SC. The model SC 212 was first shipped in 1992 and incorporates one of
our proprietary CMOS stabilization methods. This product requires approximately
30 square feet of floor space and 4 kilowatts of power for 304 pins. 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. In 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 the SC 212. The purchase price of these testers
typically ranges from $350,000 to $850,000 depending upon configuration.

         VALSTAR. The VS2000 was introduced in 1997, and we believe it is one of
the first systems designed specifically with the desired performance cost
structure for volume production of high pin count VLSI devices. This product
offers up to 1,024 input/output, or I/O, pins at 200 MHz data rates, and
requires less than four square meters of floor space, A fully loaded system
consumes only 16 kilowatts of power, which is generally less than many
competitive systems, thus lowering operating costs. The purchase price of the VS
2000 typically ranges from $1,000,000 to $3,600,000 depending on configuration.

         MIXED-SIGNAL PRODUCTS

         QUARTET. Quartet is our new 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.

         DUO. The Duo series is our solution for high volume mixed-signal
testing. With over 450 systems in the field, Duo has become an important
component of the testing solution for both integrated device manufacturers and
the semiconductor manufacturing service companies. The typical purchase price of
the Duo ranges from $600,000 to $1,500,000 depending on configuration.

         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 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.

         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.

         BTMA. The 2001, 2555 and 2555A are NVM engineering testers focused on
the lab environment. Acquired from Heuristics in 1998, the BTMA line is designed
to be usable by design engineers and other non-test specialists to debug and
characterize NVM designs and yield problems. The BTMA software user interface
makes it a platform for this function. The purchase price for these testers
typically ranges from $50,000 to $250,000 depending on configuration.

         DELPHI. Introduced in 1999, the Delphi is an updated version of the
BTMA 2001 platform that uses a Windows NT-based work station. The purchase price
of this tester is typically $50,000 to $70,000 depending on configuration.


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         EPRO. Our EPRO memory product line includes the model 142/AX. The model
142/AX was first shipped by EPRO in 1982. The purchase price of these
non-volatile memory testers typically ranges from $30,000 to $80,000, depending
upon configuration.

         BOST. Built-Off Self-Test, or BOST, technology is a new process in
transforming the role of test from an expensive and passive device validation
procedure into a series of solutions that can shrink development cycles, reduce
costs, meet time-to-market demands and improve die yields. BOST integrates a
device specific BIST engine directly into a custom circuit on the load board.
Consulting services for BOST memory testing are currently available and pricing
is dependent 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 1997, we debuted 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 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.

         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, Iddq, pattern generation, scan Generation and
testability analysis.

         MEMBIST. MemBIST software generates built-in self-test logic for
designs that use embedded memories. The software minimizes the test time and
chip area required for self-test logic of embedded memories. Users can also
designate varying levels of detail for the diagnostic information to be produced
by the BIST logic, from simple pass/fail to topologically correct bitmaps that
can be used in failure analysis.

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

CUSTOMERS, MARKETS AND APPLICATION

         We target digital logic, mixed-signal, non-volatile memory
device and system-on-a-chip manufacturers that serve a broad range of growing
end-user market segments. Our customers manufacture semiconductors in high


                                       6
<PAGE>

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, 1999, our order backlog for systems, exclusive of
orders for spare parts and service and support, was approximately $124.5
million, as compared with $32.3 million as of October 31, 1998.

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 16 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 20 countries. Sales through
distributors represented approximately 47%, 45% and 36% of net sales during
fiscal years 1999, 1998 and 1997, 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 the equipment. We believe that field support is critical to our
customers. Support encompasses many of the components of the total cost of
ownership for ATE. We seek to develop long-term relationships with major
ATE 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 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


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<PAGE>

March 1996, we established a service and support in Korea. We also have a
relationship with Itek, Inc., a distributor of our products in Korea.

         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 ATE market is 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.

         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 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 which
            added memory BIST design and test applications capability; and

         -  in September 1999, we acquired Opmax through Fluence, which added
            analog and mixed signal BIST design and test applications
            capability.

         Each of the stabilization methods acquired by Credence 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.

         During 1998, we enhanced our Duo product line with new capabilities
including high performance audio testing, testing of analog circuitry for
wireless communication applications and embedded memory test capability. These
features enable single insertion system-on-a-chip testing capability. These
capabilities resulted in the Quartet product line which was introduced in 1999.
We will continue to focus research and development efforts on ensuring that its
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.


                                       8
<PAGE>

         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 $38.9 million in 1999, excluding
a $0.9 million charge for acquired IPR&D, $47.5 million in fiscal 1998,
excluding a $2 million charge for acquired IPR&D, and $37.4 million in fiscal
1997, excluding a $6 million charge for acquired IPR&D.

PROPRIETARY RIGHTS

         We currently hold 52 active United States patents, which expire over
time through April 2018. In addition, we currently have 16 foreign patents,
which expire over time through September 2011. 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."

MANUFACTURING AND SUPPLIERS

         Our manufacturing objective is to produce 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 that 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


                                       9
<PAGE>

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. (formerly a division of Hewlett-Packard
            Company); and

         -  Teradyne, Inc.

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

         -  Teradyne;

         -  LTX;

         -  Agilent;

         -  Schlumberger; and

         -  Advantest.

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

         -  Teradyne;

         -  Agilent; and

         -  Advantest.


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

         -  Simutest, Inc.;

         -  Integrated Measurement Systems, 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. See "Risk Factors--The ATE industry is intensely
            competitive which can adversely affect our revenue growth."

         The principal elements of competition in our markets and the basis upon
which ATE customers select testers 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.

EMPLOYEES

         As of October 31, 1999, we had a total of 713 permanent employees and
112 temporary or contract employees. Of this total, 230 are engaged in
manufacturing, 197 are in research and development, 60 in applications, 175 in
sales, marketing and service, and 101 in general administration. Fluence has 62
employees 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.


                                       10
<PAGE>


                                  RISK FACTORS

OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY WHICH MAY ADVERSELY AFFECT
OUR STOCK PRICE

                              [GRAPH APPEARS HERE]

<TABLE>
<CAPTION>

                               1997                          1998                          1999
                       Q1    Q2    Q3    Q4          Q1    Q2     Q3     Q4         Q1    Q2    Q3    Q4
<S>                    <C>   <C>   <C>   <C>         <C>   <C>    <C>    <C>        <C>   <C>   <C>   <C>

Net Sales              40    43    51    69          82    75     37     22         26    38    53    80
Net Income (loss)       1     3    (1)    7           9     9    (34)   (11)        (7)   (9)    3     8

</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 a number of
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; o supply constraints;

         -  integration into our new facilities in Oregon;

         -  the implementation of our new ERP system;

         -  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 customs ICs, subassemblies and
            services, customization and reconfiguration of our systems and
            product reliability;

         -  expenses associated with acquisitions and alliances;

         -  operating expense reductions associated with cyclical industry
            downturns, including costs relating to 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, product discounts;

         -  natural disasters, political and economic instability, regulatory
            changes and outbreaks of hostilities; and

         -  ability to hire and retain employees in a competitive market.


                                       11
<PAGE>

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

         -  hardware and software product sales mix;

         -  inventory write-downs;

         -  production 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 consolidations.

         New and enhanced products typically have lower gross margins in the
early stages of commercial introduction and production. Although we have
recorded and continue to record provisions for estimated sales returns, accounts
receivable that might not be collectible, and product warranty costs, 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;

         -  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 or that we
will not again sustain losses in the future.

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 some 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
$350,000 to $3.6 million. This has 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 even one customer is not received in time
to permit shipment during that period. Backlog at the beginning of a quarter
typically does not include all orders necessary to achieve our sales objectives
for that quarter. In addition, orders in backlog are subject to cancellation,
delay, deferral or rescheduling by customers with limited


                                       12
<PAGE>

or no penalties. Consequently, our quarterly net sales and operating results
have in the past and will in the future depend upon our obtaining orders for
systems to be shipped in the same quarter that the order is received.


         We believe that some of our customers may from time to time, place
orders with us for more systems than they will ultimately accept or for a more
rapid delivery than they will ultimately require. For this reason, our backlog
may include customer orders in excess of those actually 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 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

         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 have had a severe
effect on the semiconductor industry's demand for test equipment, including the
systems we manufacture and market. We believe that the markets for newer
generations of semiconductors will also be subject to similar fluctuations.

         We have experienced shipment delays, delays in commitments and
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. 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 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, the Asian financial crisis
contributed to widespread uncertainty and, in part, 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 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 continue to be materially adversely affected if downturns or slowdowns in
the semiconductor industry occur again in the future.

WE HAVE OVER THE LAST SEVERAL YEARS EXPERIENCED SIGNIFICANT FLUCTUATIONS IN OUR
OPERATING RESULTS AND INCREASED THE SCALE OF OPERATIONS

         In fiscal 1999, we generated revenue of $26.5 million in the first
quarter and $80.2 million in the fourth quarter, an increase of 203%. In fiscal
1998, we generated revenue of $82.4 million for the first quarter and $22.4
million for the fourth quarter, a decrease of 73%. Since 1993, except for
cost-cutting efforts during fiscal 1998 and most of 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, the new
facilities in Oregon, a new ERP system and numerous acquisitions. These
fluctuations in our sales and operations have placed and are placing 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,


                                       13
<PAGE>

procedures or controls, including our new 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 1999, we launched 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 to service and support 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 hardware and software product development and customer support
requirements have increased and will continue to increase the risk of inventory
write-offs. We cannot be certain that our net sales will increase or remain at
recent 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 recently
experienced and continue to experience significant reliability, quality and
timeliness problems with several critical components including certain custom
integrated circuits. In addition, we and certain of our subcontractors are
experiencing significant shortages and delays in delivery of various components
and subassemblies. We cannot be certain that these or other problems will not
continue to occur in the future with our suppliers or outside subcontractors.
Our reliance on a limited group of suppliers and on outside subcontractors
involves several risks, including an inability to obtain an adequate supply of
required components, subassemblies and services and reduced control over the
price, timely delivery, reliability and quality of components, subassemblies and
services. Shortages, delays, disruptions or terminations of the sources for
these components and subassemblies have delayed and could continue to delay
shipments of our systems and new products and could continue to have a material
adverse effect on our business. 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.


                                       14
<PAGE>

         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 microprocessors, linear ICs or DRAMs. Moreover, approximately
two-thirds of our net sales in fiscal 1998 and 1999 were 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 recently introduced or
announced new products with certain performance or price characteristics equal
or superior to products we currently offer. These competitors have recently
introduced products that compete directly against our products. We believe that
if the ATE industry continues to consolidate through strategic alliances or
acquisitions, we will continue to face significant additional competition from
larger competitors that may offer product lines and services more complete than
ours. Our competitors are continuing to improve the performance of their current
products and to introduce new products, enhancements and new technologies that
provide improved cost of ownership and performance characteristics. New product
introductions by our competitors could cause a decline in our sales or loss of
market acceptance of our existing products.

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

THE ATE MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE

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

         -  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.

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


                                       15
<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. We have experienced significant delays in the introduction
of our VS2000 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. 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. We have incurred and may continue to
incur substantial unanticipated costs to ensure the functionality and
reliability of our testers and to increase feature sets. If our systems continue
to have reliability, quality or other problems, or the market perceives our
products to be feature deficient, we may suffer reduced orders, higher
manufacturing costs, delays in collecting accounts receivable and higher
service, support and warranty expenses, or inventory write-offs, among other
effects. Our failure to have a competitive tester and related software tools
available when required by a semiconductor manufacturer could make it
substantially more difficult for us to sell testers to that manufacturer for a
number of years. We believe that the continued acceptance, volume production,
timely delivery and customer satisfaction of our newer digital, mixed signal and
non-volatile memory testers are of critical importance to our future financial
results. As a result, our inability to correct any technical, reliability, parts
shortages or other difficulties associated with our systems or to manufacture
and ship the systems on a timely basis to meet customer requirements could
damage our relationships with current and prospective customers and would
continue to materially adversely affect our business, financial condition and
results of operations.

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. We must be able to manufacture these
systems on a timely basis. Our test equipment may fail to meet our customers'
technical or cost requirements and may be replaced by competitive equipment or
an alternative technology solution. Our inability to meet such hardware and
software requirements could impact our ability to recognize revenue on the
related equipment. Our inability to provide a test system that meets requested
performance criteria when required by a device manufacturer would severely
damage our reputation with that customer. This loss of reputation may make it
substantially more difficult for us to sell test systems to that manufacturer
for a number of years.

WE RELY ON SPIROX CORPORATION FOR A SIGNIFICANT PORTION OF OUR REVENUES AND THE
TERMINATION OF THIS DISTRIBUTION RELATIONSHIP WOULD ADVERSELY AFFECT OUR
BUSINESS

         One distributor, Spirox Corporation, a distributor in Taiwan that sells
to end-user customers in Taiwan and China, accounted for 39%, 34% and
30% of our net sales in fiscal 1999, 1998, and 1997, respectively. 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 customers have recently accounted for
at least a majority 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 or any other significant
customer, including losses, 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 complete the development of our new hardware and
            software products;


                                       16
<PAGE>

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

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. 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.

         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;

         -  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 EFFECT 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 policies affecting many other aspects of our business,
including rules relating to purchase and pooling-of-interests accounting for
business combinations, in-process research and development charges, employee
stock purchase plans and stock option grants have recently been revised or are
under review. Changes to those rules or the questioning of current practices may
have a material adverse effect on our reported financial results or on the way
we conduct our business. In addition, our preparation of financial statements in
accordance with GAAP requires that we make estimates and assumptions that affect
the recorded amounts of assets and liabilities, disclosure of those assets and
liabilities at the date of the financial statements and the recorded amounts of
expenses during the reporting period. A change in the facts and circumstances
surrounding those estimates could result in a change to our estimates and could
impact our future operating results.


                                       17
<PAGE>

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

WE HAVE A NEW EXECUTIVE MANAGEMENT TEAM AND IF THEY ARE UNABLE TO WORK TOGETHER
EFFECTIVELY, OUR BUSINESS MAY BE HARMED

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

OUR INTERNATIONAL BUSINESS EXPOSES US TO ADDITIONAL RISKS

         International sales accounted for approximately 64%, 69% and 70% of our
total net sales for the fiscal years 1999, 1998 and 1997, 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;

         -  tariffs and other barriers;

         -  political and economic instability;

         -  an outbreak of hostilities;

         -  integration of foreign operations of acquired businesses;

         -  foreign currency exchange rate fluctuations;

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

         -  potentially adverse tax consequences; and

         -  the possibility of difficulty in accounts receivable collection.

         We are also subject to the risks associated with the imposition of
domestic and foreign legislation and regulations relating to the import or
export of semiconductor equipment. We cannot predict whether the import and
export of our products will be subject to quotas, duties, taxes or other charges
or restrictions imposed by the United States or any other country in the future.
Any of these factors or the adoption of restrictive policies could have a
material adverse effect on our business, financial condition or results of
operations. Net sales to the Asia Pacific region accounted for approximately
55%, 60% and 66% of our total net sales in the fiscal years 1999, 1998 and 1997,
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


                                       18
<PAGE>

continue to adversely affect demand for our products, the availability and
supply of our product components, and our consolidated results of operations.
The recent Asian financial crisis contributed to a 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.

         In addition, one of our major customers, Spirox Corporation, is a
Taiwanese distributor. 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 the
Company's 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 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 IP Corporation, or inTEST, alleged in writing
that one of our products is infringing a patent held by inTEST. We may also be
obligated to other third parties relating to this allegation. 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 customer intends to seek indemnification from us for damages and other
related expenses.

         We cannot be certain of success in defending current or future patent
infringement claims or claims for indemnification resulting from infringement
claims. Our business, financial condition and results of operations could be
materially adversely affected if we must pay damages to a third party or suffer
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.


                                       19
<PAGE>

OUR HIGH CAPITAL EXPENDITURES MAY REQUIRE US TO OBTAIN ADDITIONAL FINANCING
WHICH MAY NOT BE AVAILABLE ON TERMS SATISFACTORY TO US

         Developing and manufacturing new ATE systems and enhancements is highly
capital intensive. In order to be competitive, we must make significant
investments in, among other things:

         -  capital equipment;

         -  expansion of operations;

         -  systems;

         -  procedures and controls;

         -  research and development and worldwide training; and

         -  customer service and support.

         We may be unable to obtain additional financing in the future on
acceptable terms, or at all. In connection with our issuance in September 1997
of convertible promissory notes, we currently have outstanding $96.6 million of
these notes which resulted in a ratio of long-term debt to total capitalization
at October 31, 1999 of approximately 35%. As a result, our principal and
interest obligations are substantial. The degree to which we are leveraged could
materially adversely affect our ability to obtain financing for working capital,
acquisitions or other purposes and could make our business more vulnerable to
industry downturns and competitive pressures. Our ability to meet debt service
obligations will be dependent upon our future performance, which will be subject
to financial, business and other factors affecting our operations, many of which
are beyond our control. If we raise additional funds by issuing equity
securities, our stockholders could be significantly diluted. We may exchange
notes for shares of our common stock or may refinance, exchange or redeem the
notes, which may also dilute stockholders and may make it difficult for us to
obtain additional future financing, if needed.

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

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 1998, the
price of our common stock ranged from a high of $35.25 to a low of $9.31. In
fiscal 1999, the price of our common stock ranged from a high of $49.88 to a low
of $14.38. 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 or developments in the semiconductor and capital
            equipment industry and the general economy;

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

         -  announcements of our technological innovations or new products or
            enhancements or those of our competitors;

         -  developments in patents or other intellectual property rights;

         -  developments in our relationships with customers and suppliers; or

         -  a shortfall or changes in revenue, gross margins or earnings or
            other financial results from analysts' expectations or an outbreak
            of hostilities or natural disasters.


                                       20
<PAGE>

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 of 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, the
adoption of 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 three buildings totalling 142,000 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 marketing, applications, engineering and
customer support functions, are located in a 180,000 square foot facility,
comprised of two buildings in Hillsboro, Oregon. The lease covering this
facility expires in March 2014. Our software business is primarily located in a
22,000 square foot facility in Beaverton, Oregon. The lease on this building
expires in August 2002. We maintain various remote sales and service offices in
the United States.

ITEM 3.     LEGAL PROCEEDINGS

         In July 1998, we received a written allegation from in TEST Corporation
that we were infringing on a patent held by in TEST. 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 various
other claims arising in the ordinary course of business, none of which, in the
opinion of management, if determined adversely against the 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


                                       21
<PAGE>

                      EXECUTIVE OFFICERS AND KEY EMPLOYEES

         The executive officers and key employees of the Company and their ages
and positions as of January 15, 2000, are as follows:

         NAME            AGE   POSITION

Dr. William Howard, Jr..  58   Chairman
Dr. Graham J. Siddall...  53   President and Chief Executive Officer*
David A. Ranhoff........  44   Executive Vice President, Chief Operating
                               Officer*
Dennis P. Wolf..........  47   Executive Vice President, Chief Financial Officer
                               and Secretary*
George W. DeGeer........  53   Senior Vice President, Consumer Mixed Signal
                               Business Line
Gary Smith..............  53   Vice President, Low Cost Performance Business
                               Line
Paul Sakamoto...........  45   Vice President, Memory Products Business Line
John DiGirolamo.........  58   CEO and President of Fluence Technology, Inc.
Debbie Moberly..........  45   Vice President, Operations
Bart Freedman...........  42   Vice President, Worldwide Field Operations
Robert E. Huston........  58   Vice President, Test Technology
Dave O'Brien............  43   Senior Vice President, Chief Information Officer
John R. Detwiler........  39   Vice President, Corporate Controller

---------------
* Executive Officer

         DR. WILLIAM HOWARD, JR., has served as a Director of the Company
since February 1995 and as Chairman since December 1998. His current term
as Director ends in 2001. Dr. Howard has been a self-employed consultant for
various semiconductor and microelectronics companies since December 1990.
From October 1987 to December 1990, Dr. Howard was a senior fellow at the
National Academy of Engineering conducting studies of technology management.
Dr. Howard held various management positions at Motorola, Inc. between 1969 and
1987, most recently as Senior Vice President and Director of Research and
Development. Dr. Howard serves on the boards of directors of BEI Electronics,
Inc., Ramtron International, Inc. and Xilinx, Inc., as well as several private
companies.

          DR. GRAHAM J. SIDDALL has served as the President, Chief Executive
Officer and as a Director of the Company since July 1999. His current term as a
Director ends in 2002. Dr. Siddall joined Credence 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 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 along with Mr. Wolf,
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.


                                       22
<PAGE>

         DENNIS P. WOLF has served as Executive Vice President, Chief Financial
Officer and Secretary, since he joined Credence in March of 1998 and, along with
Mr. Ranhoff, was named to the Office of the President from December 1998 until
July 1999. Prior to joining Credence, Mr. Wolf was the acting Co-Chief Executive
Officer from April 1997 to September 1997 and the Senior Vice President and
Chief Financial Officer from January 1997 to March 1998 at Centigram
Communications Corporation. Prior to joining Centigram, from October 1995 to
January 1997 Mr. Wolf was Vice President and Chief Financial Officer of Pyramid
Technology and served as Vice President and Chief Financial Officer of
Dynacraft, a National Semiconductor Company, from October 1993 to October 1995.
Additionally, he had held various executive and managerial positions at Apple
Computer from 1989 to 1993.

         GEORGE W. DEGEER has served as Senior Vice President, of the Consumer
Mixed Signal Business Line since December 1998. Prior to that Mr. DeGeer was
Senior Vice President, Operations since August, 1996, 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.

         GARY SMITH has served as Vice President, of the Low Cost Performance
Business 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. Mr. Smith possesses over 30 years of
experience in engineering, and management in high technology industries.

         PAUL SAKAMOTO has served as Vice President, of the Memory Products
Business Line 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 semi-conductor and semiconductor equipment industry.

         JOHN DIGIROLAMO has served as Chief Executive Officer and President of
Fluence Technology, Inc. since October 1997. From July 1997 to October 1997, Mr.
DiGirolamo served as Vice President of Worldwide Sales and Marketing for
Fluence. Mr. DiGirolamo served as Director of Sales at Summit Design, Inc., from
May 1996 to July 1997. Mr. DiGirolamo served at the Company as Vice President,
Worldwide Sales from June 1995 to April 1996. Prior to joining the Company in
1995, Mr. DiGirolamo held a variety of senior level positions within the
industry, including a tenure at GenRad, Inc. as General Manager and Director of
Sales & Marketing for Western operations. Mr. DiGirolamo possesses over 33 years
of experience in the semiconductor equipment and test 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 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.

         ROBERT E. HUSTON has served as Vice President, Test Technology since
August 1992. From February 1983 to August 1992 Mr. Huston was a co-founder and
fellow of Trilium Corporation and was the architect of the Micromaster series of
test systems. Mr. Huston was a fellow at LTX from August 1988 to August 1992,
developing high frequency test strategies. He served in various senior
engineering positions beginning in 1967 at Fairchild working with a team to
develop the LSI test system.

         BART FREEDMAN has served as our Vice President, Worldwide Field
Operations since January 2000. 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.


                                       23
<PAGE>

         DAVID O'BRIEN has served as Senior Vice President, Chief Information
Officer since February 1999. Prior to that Mr. O'Brien was Senior Vice
President, Information Technology from February 1999 to July 1995. Mr. O'Brien
served as Senior Vice President, Marketing, from May 1994 to July 1995, as
Senior Vice President, Engineering from August 1993 to May 1994 and as Vice
President, Engineering from July 1992 to August 1993. Mr. O'Brien served as Vice
President, Beaverton Business Unit from October 1991 to July 1992; Vice
President, Marketing-Vista from August 1991 to September 1991; Vice President
Software Products from October 1990 to July 1991; Vice President, Engineering
from July 1987 to September 1990; Director of Engineering, from October 1986 to
June 1987; and Software Engineering Manager of the Company from January 1983 to
September 1986.

         JOHN R. DETWILER has served as Vice President, Corporate Controller
since April 1999. Mr. Detwiler joined Credence 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, Saudi Arabia and London.
Mr. Detwiler serves on the board of directors of Credence Capital Remarketing
Corporation.

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


                                       24
<PAGE>



                                     PART II

ITEM 5.         MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS

         The Company's common stock is traded on the Nasdaq National Market
under the symbol CMOS. High and low stock prices for the last two fiscal years
were:

<TABLE>
<CAPTION>

                                       1999                                              1998
                        ----------------------------------------   ----------------------------------------------
QUARTER ENDED                  HIGH             LOW                      HIGH                     LOW
-------------------     ---------------   ----------------------   ----------------------   ---------------------
<S>                      <C>                  <C>                   <C>                      <C>

January 31..............    $29.88             $14.38                    $35.25                   $18.13
April 30................     30.88              17.88                     34.00                    24.87
July 31.................     41.50              24.13                     28.50                    16.87
October 31..............     49.88              36.88                     20.56                     9.31
</TABLE>

         There were approximately 216 stockholders of record at December 10,
1999. To date, the Company has not declared or paid any cash dividends on its
common stock. The Company does not anticipate paying any dividends on its common
stock in the foreseeable future and, under its current credit agreements, such
payment would require prior bank approval.

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.

<TABLE>
<CAPTION>

                                                                            YEAR ENDED OCTOBER 31,

                                                --------------------------------------------------------------------------------
(in thousands, except per share amounts)            1999             1998            1997             1996            1995
                                                ---------------  --------------  --------------  ---------------  --------------
<S>                                             <C>              <C>             <C>             <C>              <C>
Consolidated Statement of Operations Data:
Net sales.......................................      $197,183        $216,803        $204,092         $238,788        $176,805
Operating income (loss).........................        (4,013)        (42,572)         15,063           54,334          43,817
Income (loss) before taxes......................        (3,752)        (41,270)         18,230           58,267          46,649
Net income (loss) before extraordinary items....        (2,455)        (26,282)         10,693           37,703          30,354
Net income (loss)...............................          (809)        (26,282)         10,693           37,703          30,354
Net income (loss) per basic share...............       $ (0.04)        $ (1.22)        $  0.49          $  1.75         $  1.50
Net income (loss) per diluted share.............       $ (0.04)        $ (1.22)        $  0.47          $  1.72         $  1.45

Consolidated Balance Sheet Data:
Working capital.................................      $166,727        $184,606        $250,336         $144,623        $126,395
Total assets....................................       340,420         306,189         358,141          233,042         186,593
Long-term debt..................................        96,610         115,000         115,000               --              --
Retained earnings...............................        57,348          58,157          94,722           84,029          46,326
Stockholders' equity............................       181,408         150,017         204,911          189,782         150,286
</TABLE>


                                       25
<PAGE>

QUARTERLY 1999

<TABLE>
<CAPTION>

                                                                                         1999 Quarter Ended
                                                                   ---------------------------------------------------------------
(in thousands, except per share amounts)                             January 31,      April 30,      July 31,       October 31,
                                                                   ----------------  ------------  -------------  ----------------
(UNAUDITED)
<S>                                                                <C>                <C>           <C>            <C>
Net sales..........................................................       $ 26,490       $38,100        $52,378           $80,215
Gross margin.......................................................         11,214        19,099         27,552            44,113
Operating income (loss)............................................        (10,020)      (10,150)         3,737            12,420
Income (loss) before taxes.........................................        (10,321)       (9,910)         3,731            12,748
Net income (loss) before extraordinary items.......................         (6,554)       (6,331)         2,364             8,066
Net income (loss)..................................................         (6,554)       (5,173)         2,852             8,066
Net income (loss) per basic share before extraordinary items.......        $ (0.32)       $(0.30)        $ 0.11            $ 0.37
Net income (loss) per basic share .................................        $ (0.32)       $(0.25)        $ 0.13            $ 0.37
Net income (loss) per diluted share before extraordinary items.....        $ (0.32)       $(0.30)        $ 0.11            $ 0.35
Net income (loss) per diluted share................................        $ (0.32)       $(0.25)        $ 0.13            $ 0.35

QUARTERLY 1998

                                                                                       1998 Quarter Ended
                                                                   --------------------------------------------------------------
(in thousands, except per share amounts)                            January 31,      April 30,       July 31,       October 31,

                                                                   ---------------  ------------  ---------------  --------------
(UNAUDITED)

Net sales..........................................................       $82,375      $ 74,660         $ 37,322         $22,446
Gross margin.......................................................        46,937        42,996             (531)          2,045
Operating income (loss)............................................        13,138        12,832          (49,311)        (19,231)
Income before taxes................................................        14,096        13,032          (49,318)        (19,080)
Net income (loss)..................................................         9,191         8,787          (33,586)        (10,674)
Net income (loss) per basic share..................................        $ 0.42        $ 0.41          $ (1.55)        $ (0.51)
Net income (loss) per diluted share................................        $ 0.41        $ 0.40          $ (1.55)        $ (0.51)
</TABLE>

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 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.


         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


                                       26
<PAGE>

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.


RESULTS OF OPERATIONS

         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,
                                                     ----------------------------------------
                                                        1999           1998          1997
                                                     -----------    -----------   -----------
<S>                                                  <C>            <C>           <C>
Net sales.......................................            100%           100%         100%
Cost of goods sold--on net sales.................            48             45           44
Cost of goods sold--special charges..............            --             13           --
                                                     -----------    -----------   -----------
  Gross margin..................................             52             42           56
                                                     -----------    -----------   -----------
Operating expenses:
  Research and development......................             20             22           18
  Selling, general and administrative...........             30             30           27
  In-process research and development...........             --              1            3
  Special charges...............................              4              9           --
                                                     -----------    -----------   -----------
       Total operating expenses.................             54             62           48
                                                     -----------    -----------   -----------
Operating income (loss).........................            (2)%          (20)%           8%
                                                     ===========    ===========   ===========
</TABLE>

         1999 VS 1998

         NET SALES. Net sales consist of revenues from the sale of systems,
upgrades, spare parts, maintenance contracts and software. Net sales declined 9%
to $197.2 million in fiscal 1999 from $216.8 million in fiscal 1998. Our net
sales increased from $26.5 million in the first quarter of fiscal 1999 to $80.2
million for the fourth quarter of fiscal 1999. This was in sharp contrast to
1998 when our net sales decreased from $82.4 million in the first quarter of
fiscal 1998 to $22.4 million for the fourth quarter of fiscal 1998. During
fiscal 1999, 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 launch of three major products: the Valstar high-performance
            digital tester, the Quartet high-performance mixed signal tester and
            the Kalos memory tester.

         These factors resulted in our experiencing increasing net sales
activity through fiscal 1999. 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 64% and 69% of
total net sales in fiscal 1999 and 1998, respectively. Our net sales to the Asia
Pacific region accounted for approximately 55% and 60% of total net sales in
fiscal 1999 and 1998, 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 or worsen, which could materially adversely affect demand for our
products.

         Our net sales by product line in fiscal 1999 and 1998 consisted of:

                                          1999         1998
                                       ------------ -----------
                                       ------------ -----------
Mixed-Signal...........................         65%        66 %
Logic..................................         16         18
Memory.................................          7          4
Service and software...................         12         12
                                       ------------ -----------
Total..................................        100%       100 %
                                       ============ ===========


                                       27
<PAGE>

         The increase in the memory percentage and the high percentage of net
sales attributable to mixed-signal products is principally derived from the
sales of the new Kalos and Quartet products. Revenues from software were not
material to our operations in fiscal 1999 and 1998, representing less than 4% of
our net sales in each period.

         GROSS MARGIN. Our gross margin as a percentage of net sales increased
to 51.7% in fiscal 1999 from 42.2% in fiscal 1998. The increase in 1999 was due
primarily to relatively low gross margins in 1998 attributable to the special
charges taken in that year. We recorded special charges to cost of goods sold in
1998 totaling $28.4 million, consisting primarily of write-offs for excess or
obsolete inventory, as more fully described below. Additionally, gross margins
were negatively impacted due to lower average selling prices caused by increased
competition in the markets the Company serves and due to inefficiencies caused
by the lower manufacturing volumes.

         RESEARCH AND DEVELOPMENT. Research and development expenses as a
percentage of net sales were 19.7% and 21.9%, in fiscal 1999 and 1998,
respectively. R&D expenses declined in absolute dollars to $38.9 million in
fiscal 1999 from $47.5 million in fiscal 1998, reflecting lower investments in
the development of new products, and enhancements of existing product lines. We
restructured our business in the third and fourth quarters of fiscal 1998 in
response to a major downturn in the business at that time. As a result of that
industry downturn, we downsized our operations including reduced headcount,
reduced and delayed projects including facility expansions and certain research
and development projects. 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 2000 than those recorded in fiscal 1999.

         SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative, or SG&A, expenses decreased to $58.7 million in fiscal 1999 from
$64.2 million in fiscal 1998, a decrease of 8.6%. The decrease in absolute
dollars in fiscal 1999 resulted primarily from our downsizing which occurred in
the latter half of fiscal 1998. We restructured our business in the third and
fourth quarters of fiscal 1998 in response to a major downturn in the business
at that time. As a result of that industry downturn, we downsized our operations
including reduced headcount, reduced and delayed projects including facility
expansions. 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. Because of these and other
investments, we anticipate that SG&A expenses will be higher in absolute dollars
in fiscal 2000 than those recorded in fiscal 1999.

         IN-PROCESS RESEARCH AND DEVELOPMENT. In September 1999, we purchased
Opmaxx, Inc. for $8.0 million in cash and the assumption of liabilities and the
conversion of employee stock options worth $0.6 million. Additionally, we 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. In connection with this acquisition, we recognized
$0.9 million of acquired in-process research and development, or IPR&D. The
remaining $7.7 million has been capitalized, of which $7.5 million is for
purchased technology and other intangible assets which will be amortized ratably
over their estimated useful lives, ranging from two to five years. Opmaxx is
being integrated with our subsidiary, Fluence Technology, Inc.

         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 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. The
significant work remaining to complete the current versions of the products was
estimated to take approximately 8 engineering person years, at a cost of
approximately $1 million and be completed by the end of fiscal 2000.


                                       28
<PAGE>

         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 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 603,000 shares of our
common stock held in treasury.

         INTEREST INCOME. We generated interest income of $6.6 million and $8.5
million in fiscal 1999 and 1998, respectively. The decrease was due to lower
average cash and investment balances in 1999 as compared to 1998. These lower
average balances were the result of our net losses in fiscal 1998 as well as
$32.8 million dispersed for the repurchase of our common stock during 1998.

         INTEREST AND OTHER EXPENSES. Interest and other expenses decreased to
$6.4 million in fiscal 1999 from $7.2 million in fiscal 1998, primarily due to
lower interest expense on a lower outstanding balance of our convertible
subordinated notes.

         INCOME TAX. Our effective tax benefit rate was 36% for fiscal 1999 and
1998. The tax benefit rate for both years was less than the combined federal and
state statutory rate primarily due to non-deductible in-process research and
development expenses.

         Realization of the net deferred tax assets is dependent on our ability
to generate approximately $40,000,000 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. A valuation allowance was established in both
fiscal 1999 and 1998 to offset a portion of the deferred tax assets attributable
to the in-process research and development. Due to the period over which these
tax benefits will be recognized, sufficient uncertainty exists regarding the
realizability of a portion of these assets to warrant a valuation allowance.
Management will evaluate the realizability of the deferred tax assets on a
quarterly basis and assess the need for additional valuation allowances.

         1998 VS 1997

         NET SALES. Net sales increased 6% to $216.8 million in fiscal 1998 from
$204.1 million in fiscal 1997; however our net sales decreased from $82.4
million in the first quarter of fiscal 1998 to $22.4 million for the fourth
quarter of fiscal 1998. The year-over-year increase over 1997 was driven
primarily by increased worldwide demand for semiconductor ATE, including our
products, during the end of calendar 1997 and including the first quarter of our
fiscal 1998. This was followed by a very significant decline in worldwide demand
for semiconductor ATE, which led to a material decline in net sales of our
products in the last three quarters of fiscal 1998. During fiscal 1998, our net
sales were also materially adversely affected by our inability to complete three
major product introductions, consisting of the ValStar high-performance digital
tester, the Quartet high-performance mixed-signal tester and the Kalos memory
tester. We believe that our existing completed products were being primarily
purchased when our customers required increased capacity and that these three
newer products, once completed, will be primarily purchased by customers seeking
increased functionality instead of or in addition to increased capacity. We
believe we will be unable to achieve a significant increase in our net sales
until either increased demand for semiconductors causes an increase in capacity
buys or until we complete our major product introductions and can generate
increased functionality buys with our newer products.

         International net sales accounted for approximately 69% and 70% of
total net sales in fiscal 1998 and 1997, respectively. Our net sales to the Asia
Pacific region accounted for approximately 60% and 66% of total net sales in
fiscal 1998 and 1997, 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


                                       29
<PAGE>

have been highly volatile, resulting in economic instabilities. These
instabilities may continue or worsen, which could continue to materially
adversely affect demand for our products.

         GROSS MARGIN. Our gross margin as a percentage of net sales decreased
to 42.2% in fiscal 1998 from 55.9% in fiscal 1997. The decrease was due
primarily to special charges taken in fiscal 1998 as a result of a significant
decrease in net sales in the last three quarters of fiscal 1998. We recorded
special charges to cost of goods sold in 1998 totaling $28.4 million, consisting
primarily of write-offs for excess or obsolete inventory, as more fully
described below. Additionally, gross margins were negatively impacted due to
lower average selling prices caused by increased competition in the markets we
serve and due to inefficiencies caused by the lower manufacturing volumes.

         RESEARCH AND DEVELOPMENT. R&D expenses as a percentage of net sales
were 21.9% and 18.3%, in fiscal 1998 and 1997, respectively. R&D expenses
increased to $47.5 million in fiscal 1998 from $37.4 million in fiscal 1997,
reflecting continued investments in the development of new products, as well as
enhancements of existing product lines.

         SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $64.2
million in fiscal 1998 from $55.7 million in fiscal 1997, an increase of 15.3%.
The increase in fiscal 1998 resulted primarily from marketing costs associated
with new product introductions and higher operating expenses associated with
acquisitions made during 1998 and the last half of fiscal 1997, partially offset
by decreases in expenditures in the latter three quarters of fiscal 1998 as we
responded to the general downturn in the semiconductor industry. During this
period of depressed revenues, 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-PROCESS RESEARCH AND DEVELOPMENT. In June 1998, the Company
purchased from Heuristics Physics Laboratories, Inc. certain assets and assumed
certain liabilities relating to their memory self test business for $8.0 million
in cash and the assumption of $0.2 million in liabilities. Additionally, the
Company agreed to make payments to the shareholder representatives of Heuristics
in an amount equal to 10% of our net sales of products derived from the assets
acquired from Heuristics' design for test division for a period of two years
following the acquisition. The amounts paid in 1999 under this arrangement were
insignificant. In connection with the Heuristics acquisition, we recognized $2.0
million of acquired in-process research and development. The remaining $6.2
million has been capitalized, of which $5.3 million is for purchased technology
and other intangible assets which will be amortized ratably over their estimated
useful lives of five years.

         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 Heuristics acquired IPR&D consists of projects related to memory
self test. These projects are aimed at the development of products that can
perform self testing of on-chip memories, self testing of off-chip memories,
automated memory test vector generation, built-in memory repair analysis and
built-in automated memory circuit repair. The Company estimated that
approximately 50% of the research and development effort, based on complexity,
had been completed at the date of the acquisition. As of October 31, 1999, the
Company has introduced memory BOST products and has largely completed
development of a memory BIST software product. The Company recorded a $0.7
million write-down of the intangible assets acquired from Heuristics in
conjunction with the integration of Opmaxx with Fluence in September 1999. This
asset write-down was made based on an assessment of the current market potential
for these products. There can be no assurance that these projects or products
will achieve technological feasibility or that the Company will be able to
successfully market these products.


                                       30
<PAGE>

         During fiscal 1997, the Company expensed $6.0 million of IPR&D
resulting from the acquisition of certain assets of Summit Design, Inc. and
Summit's wholly owned subsidiary, Test Systems Strategies, Inc. The IPR&D
associated with the Test Systems Strategies acquisition related to the
development of Standard Tester Interface Language, or STIL, tools. The STIL
development project is an ongoing program that will provide a foundation for and
be integrated into most of the Fluence software products. We believe the life of
this program will continue into the foreseeable future.

         SPECIAL CHARGES. In the third and fourth quarters of fiscal 1998, we
recorded special charges totaling $48.7 million, of which $28.4 million was
classified as cost of goods sold and the balance was classified as operating
expenses. These charges were recorded as a result of our response to a major
downturn in the current and forecasted business outlook for the ATE and related
semiconductor and semiconductor equipment industries which took place during the
period. As a result of this industry downturn, we have downsized our operations
including reducing headcount, reducing the volume of products being produced and
canceling and delaying various projects, including facilities expansions and
certain research and development projects. The impact of this downturn and these
decisions is that significant amounts of our inventories, receivables, fixed
assets, prepaid expenses, investments and purchased technologies have been
impaired and certain liabilities have been incurred. As a result, we have
written down the related assets to their net realizable values and made
provision for the estimated liabilities.

         Of the $48.7 million in charges, approximately $28.4 million was
charged as cost of goods sold, of which approximately $26.7 million was related
to write-down of excess or obsolete inventories. The elements of the charges
during fiscal 1998 are as follows (in thousands):

Write-down of inventories to net realizable value
    (including expected losses on supplier commitments)............... $26,678
Write-down of excess fixed assets to fair value.......................   7,272
Write-down of purchased technology and investments to fair value......   5,118
Write-off of prepaid and other current assets.........................   2,444
Excess facility costs.................................................   2,641
Provision for uncollectible receivables...............................   3,389
Employee termination benefits and accrued liabilities.................   1,196
                                                                      ----------
                                                                       $48,738
                                                                      ==========

         At October 31, 1998, approximately $4.8 million in accrued liabilities
related to special charges remained on our balance sheet, primarily the accrued
loss on supplier commitments of $2.4 million and approximately $1.9 million for
rent on excess facilities. The cash expenditures associated with these
obligations will occur primarily in fiscal 1999. Cash expenditures associated
with the special charges during fiscal 1998 were approximately $700,000,
relating primarily to excess facilities and to severance costs.

         INTEREST INCOME. We generated interest income of $8.5 million and $4.8
million in fiscal 1998 and 1997, respectively. The increase was due to interest
earned on significantly higher average cash and investments balances provided by
the receipt of proceeds from the convertible subordinated notes issued in late
fiscal 1997.

         INTEREST AND OTHER EXPENSES. Interest and other expenses increased to
$7.2 million in fiscal 1998 from $1.6 million in fiscal 1997, primarily due to
the interest expense on our convertible subordinated notes.

         INCOME TAX. Our effective tax benefit rate for fiscal 1998 was 36%, and
the effective tax rate for fiscal 1997 was 41%. The effective tax benefit rate
in 1998 was reduced, and the effective tax rate in 1997 was increased by
non-deductible in-process research and development expenses.

YEAR 2000 READINESS

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


                                       31
<PAGE>

Because of this interdependence, the failure of one system may lead to the
failure of many other systems, even though the other systems are themselves Year
2000 compliant.

         Our Board of Directors has reviewed the Year 2000 issue generally and
as it may affect our business activity. We implemented a Year 2000 plan which is
designed to cover all of our activities. The plan will be modified as
circumstances change and is monitored by our Board of Directors.

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

         Although it is difficult for us to estimate the total costs of
implementing the plan, our current estimate is that such costs have been
approximately $1.9 million through October 1999 and will be approximately
$200,000 additionally thereafter. However, although we believe that our
estimates are reasonable, we cannot be certain, for the reasons stated in the
next paragraph, that the actual costs of implementing the plan will not differ
materially from the estimated costs. A significant portion of total Year 2000
project expenses is represented by existing staff that have been redeployed to
this project. We do not believe that the redeployment of existing staff will
have a material adverse effect on our business, results of operations or
financial position. Nor do we expect incremental expenses related to the Year
2000 project to materially impact operating results in any one period.

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

LIQUIDITY AND CAPITAL RESOURCES

         In fiscal 1999, net cash provided by operating activities was $22.0
million. This cash flow from operating activities was primarily attributable to
net income before depreciation and amortization, extraordinary gain and special
charges of $27.7 million, income tax refunds of $20.0 million, offset by cash
used for net changes in the remaining operating assets and liabilities,
particularly accounts receivable.

         Net cash used in investing activities during fiscal 1999 was $30.5
million. This cash was primarily used for net purchases of property and
equipment of $18.0 million, $7.6 million was used to purchase other assets
including Opmaxx, Inc. and $6.6 million was used to purchase available-for-sale
securities.

         Net cash provided by financing activities in fiscal 1999 of $12.6
million was primarily due to the issuance of common stock and treasury stock in
accordance with our employee stock option and stock purchase plans. We also
recorded non-cash transactions during the year for the exchange of 603,000
shares of our common stock held in treasury for an aggregate of $18.4 million of
its convertible subordinated notes. These transactions resulted in an
extraordinary gain of $1.6 million, net of tax of $0.9 million, as well as an
increase in paid-in capital of $15.4 million.

         As of October 31, 1999, our principal sources of liquidity consisted of
$141.9 million in cash, cash equivalents, and available-for-sale securities,
compared with $133.9 million at October 31, 1998. We have $20.0 million
available under its unsecured bank line of credit expiring in July 2000. At
October 31, 1999, there were no amounts outstanding under these agreements.
Borrowings are subject to our compliance with financial and other covenants. We
have outstanding long term debt of $96.6 million consisting of convertible
subordinated notes due in September 2002. Additionally, as of October 31, 1999,
we have operating leases for facilities and test and other equipment totaling
approximately $35.8 million due through 2014. We expect that our existing cash,
cash equivalents and available-for-sale investment balances, together with our
current line of credit, net proceeds for a


                                       32
<PAGE>

public offering of our common stock in February 2000 and anticipated cash
flow from operations will satisfy its financing requirements for at least the
next 12 months.

         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. Such changes could
materially adversely affect our business, financial condition and results of
operations.


ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio and long-term debt obligations. 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 and long-term debt obligations (in thousands, except
percentages).

<TABLE>
<CAPTION>

                                1998          1999            2000            2001            2002           2003        THEREAFTER
                             -------------  ------------  --------------  --------------  ------------  ------------  --------------
<S>                           <C>           <C>           <C>             <C>            <C>            <C>            <C>
Cash equivalents
     Fixed rate..............     $42,379       $52,104              --              --            --            --              --
     Average rate............        5.04%         4.84 %            --              --            --            --              --
Restricted cash

     Fixed rate..............     $ 2,400            --              --              --            --            --              --
     Average rate............        4.11%           --              --              --            --            --              --
Short term investments

     Fixed rate..............     $62,777        $1,191         $38,583              --            --            --              --
     Average rate............        5.74%         8.11%           6.14%             --            --            --              --
Long term investments

     Fixed rate..............     $20,357            --          $3,957         $24,435        $9,517        $3,035          $9,061
     Average rate............        5.81%           --            5.24%           6.07%         6.31%         5.61%           6.76%
                             -------------  ------------  --------------  --------------  ------------  ------------  --------------
Total investment securities      $127,913       $53,295         $42,540         $24,435        $9,517        $3,035          $9,061
Average rate.................        6.76%         4.91%           6.05%           6.07%         6.31%         5.61%           6.76%

Long term debt...............    $115,000            --              --              --       $96,610            --              --
Fixed rate...................
Average rate.................        5.25%           --              --              --          5.25%           --              --
</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.

         We have no cash flow exposure due to rate changes for our $96.6 million
convertible subordinated notes. We have a $20.0 million line of credit under
which we can borrow either at the bank's prime rate or as a function of the
LIBOR rate. As of October 31, 1999, we had no borrowings under our line of
credit.


                                       33
<PAGE>

ITEM 8         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

For the years ended October 31, 1999, 1998 and 1997

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                                                             PAGE
                                                                                                             ----
<S>                                                                                                          <C>
Report of Ernst & Young LLP, Independent Auditors.......................................................      35
Consolidated Balance Sheets--October 31, 1999 and 1998 .................................................      36
Consolidated Statements of Operations--Years Ended October 31, 1999, 1998 and 1997......................      37
Consolidated Statements of Stockholders' Equity--Years Ended October 31, 1999, 1998 and 1997............      38
Consolidated Statements of Cash Flows--Years Ended October 31, 1999, 1998 and 1997......................      39
Notes to Consolidated Financial Statements..............................................................      40
</TABLE>



                                       34
<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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended October 31, 1999. 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 conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial position of
Credence Systems Corporation at October 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended October 31, 1999, in conformity with generally accepted accounting
principles. 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.

                                       /s/ ERNST & YOUNG LLP





San Jose, California
November 24, 1999


                                       35
<PAGE>


                          CREDENCE SYSTEMS CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                                                                     OCTOBER 31,
                                                                          -------------------------------
ASSETS                                                                         1999            1998
                                                                          ---------------  --------------
<S>                                                                       <C>              <C>
Current assets:
      Cash and cash equivalents.........................................         $52,104        $48,391
      Restricted cash...................................................              --          2,400
      Short-term investments............................................          39,774         62,777
      Accounts receivable, net of allowance for doubtful accounts
        of $3,216 and $5,409 in 1999 and 1998, respectively.............
      Inventories.......................................................          41,218         37,406
      Deferred income taxes.............................................          13,687         16,609
      Prepaid expenses and other current assets.........................           9,424         24,067
                                                                          ---------------  --------------
            Total current assets........................................         227,713        225,551
Long-term investments...................................................          50,005         20,357
Property and equipment, net.............................................          43,063         41,764
Other assets, net of accumulated amortization of $4,677 and $10,102 in
   1999 and 1998, respectively..........................................
                                                                                  19,639         18,517
                                                                          ---------------  --------------
            Total assets.................................................       $340,420       $306,189
                                                                          ===============  ==============

LIABILITY AND STOCKHOLDERS' EQUITY
Current liabilities:
      Accounts payable....................................................       $23,611        $ 8,090
      Accrued expenses and other liabilities..............................        31,163         26,978
      Income taxes payable................................................         6,212          5,877
                                                                           ---------------  --------------
            Total current liabilities.....................................        60,986         40,945

Convertible subordinated notes.............................................       96,610        115,000
Other liabilities..........................................................        1,134             --
Minority interest..........................................................          282            227
Commitments and contingencies
Stockholders' equity:
      Preferred stock:
            Authorized shares--1,000 ($0.001 par value); no shares issued..           --             --
      Common stock:
            Authorized shares--40,000 ($0.001 par value) issued and
            outstanding shares--22,517 in 1999 and 21,723 in 1998..........           22             21
            Additional paid-in capital.....................................      135,221        112,059
            Treasury stock, at cost, 702 shares in 1999 and 1,332 shares in
              1998.........................................................      (10,522)       (19,979)
      Accumulated other comprehensive loss.................................         (661)          (241)
      Retained earnings....................................................       57,348         58,157
                                                                            ---------------  --------------
            Total stockholders' equity.....................................      181,408        150,017
                                                                            ---------------  --------------
            Total liabilities and stockholders' equity.....................     $340,420       $306,189
                                                                            ===============  ==============
</TABLE>

                             See accompanying notes.


                                       36
<PAGE>


                          CREDENCE SYSTEMS CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                                                            YEAR ENDED OCTOBER 31,
                                                                ------------------------------------------------
                                                                    1999             1998             1997
                                                                --------------  ----------------  --------------
<S>                                                             <C>              <C>              <C>
Net sales:
         Systems and upgrades................................         $172,584         $187,887        $186,264
         Service, spare parts and software...................           24,599           28,916          17,828
                                                                --------------  ----------------  --------------
               Total net sales...............................          197,183          216,803         204,092
Cost of goods sold--on net sales.............................           95,205           97,004          89,956
Cost of goods sold--special charges..........................               --           28,352              --
                                                                --------------  ----------------  --------------
Gross margin.................................................          101,978           91,447         114,136
Operating expenses:
         Research and development............................           38,908           47,484          37,350
         Selling, general and administrative.................           58,660           64,151          55,701
         In-process research and development.................              858            1,998           6,022
         Special charges.....................................            7,565           20,386              --
                                                                --------------  ----------------  --------------
         Total operating expenses............................          105,991          134,019          99,073
                                                                --------------  ----------------  --------------
Operating income (loss)......................................           (4,013)         (42,572)         15,063

Interest income..............................................            6,631            8,497           4,769
Interest and other (expenses), net...........................           (6,370)          (7,195)         (1,602)
                                                                --------------  ----------------  --------------
Income (loss) before income tax provision (benefit) .........           (3,752)         (41,270)         18,230
Income tax provision (benefit)...............................           (1,372)         (14,785)          7,531
                                                                --------------  ----------------  --------------
Income (loss) before minority interest.......................           (2,380)         (26,485)         10,699
Minority interest (benefit)..................................               75             (203)              6
Net income (loss) before extraordinary items.................       $   (2,455)       $ (26,282)       $ 10,693
Gain on extinguishment of debt, net of $926 taxes............            1,646               --              --
                                                                --------------  ----------------  --------------
Net income (loss)............................................       $     (809)       $ (26,282)       $ 10,693
                                                                ==============  ================  ==============

Net income (loss) per share
          Basic before extraordinary item....................      $     (0.12)         $ (1.22)         $ 0.49
          Basic extraordinary item...........................      $      0.08               --              --
                                                                --------------  ----------------  --------------
          Basic .............................................      $     (0.04)         $ (1.22)         $ 0.49
                                                                ==============  ================  ==============

          Diluted before extraordinary item..................      $     (0.12)         $ (1.22)         $ 0.47
          Diluted extraordinary item.........................      $      0.08               --              --
                                                                --------------  ----------------  --------------
          Diluted............................................      $     (0.04)         $ (1.22)         $ 0.47
                                                                ==============  ================  ==============

Number of shares used in computing per share amounts
          Basic..............................................           21,088           21,533          21,865
                                                                ==============  ================  ==============
          Diluted............................................           21,088           21,533          22,512
                                                                ==============  ================  ==============
</TABLE>

                             See accompanying notes.




                                      37
<PAGE>

                          CREDENCE SYSTEMS CORPORATION

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                             COMMON STOCK             ADDITIONAL          TREASURY STOCK
                                        ------------------------       PAID-IN       ------------------------
                                           SHARES        AMOUNT        CAPITAL          SHARES       AMOUNT
                                        -----------   ----------     ------------    -----------   ------------
<S>                                     <C>           <C>            <C>             <C>           <C>
Balance at October 31, 1996 ........        21,643      $    22        $ 105,731           --             --
Issuance of common stock under
      stock option plans ...........           226           --            1,971           --             --
Issuance of common stock under
      employee purchase plan .......           112           --            1,564           --             --
Income tax benefit from stock plans           --             --              901           --             --
Net income .........................          --             --             --             --             --
                                         ---------      ---------      ---------      ---------      ---------
Balance at October 31, 1997 ........        21,981      $      22      $ 110,167           --             --
                                         ---------      ---------      ---------      ---------      ---------
Issuance of common stock under
      stock option plans ...........           141           --            1,260           --             --
Issuance of common stock under
  employee purchase plan ...........           101           --            2,172           --             --
Retirement of common stock .........          (500             (1)       (2,512)           --             --
Purchase of treasury shares ........          --             --             --          (1,332)        (19,979)
Income tax benefit from stock plans           --             --              972           --             --
Net loss ...........................          --             --             --             --             --
Currency translation adjustment ....          --             --             --             --             --
                                         ---------      ---------      ---------      ---------      ---------
Comprehensive income (loss) ........          --             --             --             --             --
                                         ---------      ---------      ---------      ---------      ---------
Balance at October 31, 1998 ........        21,723      $      21      $ 112,059         (1,332)     $ (19,979)
                                         ---------      ---------      ---------      ---------      ---------
Issuance of common stock under
      stock option plans ...........           692              1         10,659              4             61
Issuance of common stock under
      employee purchase plan .......           102           --            1,561             23            347
Exchange of treasury shares for
      convertible notes ............          --             --            6,383            603          9,049
Income tax benefit from stock plans           --             --            4,559           --             --
Net loss ...........................          --             --             --             --             --
Unrealized loss on securities ......          --             --             --             --             --
Currency translation adjustment ....          --               97             97
                                         ---------      ---------      ---------      ---------      ---------
Comprehensive income (loss) ........          --             --             --             --             --
                                         ---------      ---------      ---------      ---------      ---------
Balance at October 31, 1999 ........        22,517      $      22      $ 135,221           (702)     $ (10,522)
                                         =========      =========      =========      =========      =========


                                                     ACCUMULATED
                                                        OTHER             TOTAL
                                          RETAINED   COMPREHENSIVE    STOCKHOLDERS'
                                          EARNINGS       LOSS            EQUITY
                                        ---------- --------------- -------------------

Balance at October 31, 1996 ........     $  84,029           --        $ 189,782
Issuance of common stock under
      stock option plans ...........          --             --            1,971
Issuance of common stock under
      employee purchase plan .......          --             --            1,564
Income tax benefit from stock plans           --             --              901
Net income .........................        10,693           --           10,693
                                         ---------      ---------      ---------
Balance at October 31, 1997 ........     $  94,722           --        $ 204,911
                                         ---------      ---------      ---------
Issuance of common stock under
      stock option plans ...........          --             --            1,260
Issuance of common stock under
  employee purchase plan ...........          --                           2,172
Retirement of common stock .........       (10,283)          --          (12,796)
Purchase of treasury shares ........          --             --          (19,979)
Income tax benefit from stock plans           --             --              972
Net loss ...........................       (26,282)          --          (26,282)
Currency translation adjustment ....          --             (241)          (241)
                                         ---------      ---------      ---------
Comprehensive income (loss) ........          --             --          (26,523)
                                         ---------      ---------      ---------
Balance at October 31, 1998 ........     $  58,157      $    (241)     $ 150,017
                                         ---------      ---------      ---------
Issuance of common stock under
      stock option plans ...........          --             --           10,721
Issuance of common stock under
      employee purchase plan .......          --             --            1,908
Exchange of treasury shares for
      convertible notes ............          --             --           15,432
Income tax benefit from stock plans           --             --            4,559
Net loss ...........................          (809)          --             (809)
Unrealized loss on securities ......          --             (517)          (517)
Currency translation adjustment ....                           97             97
                                         ---------      ---------      ---------
Comprehensive income (loss) ........          --             --           (1,229)
                                         ---------      ---------      ---------
Balance at October 31, 1999 ........     $  57,348      $    (661)     $ 181,408
                                         =========      =========      =========
</TABLE>


                             See accompanying notes.



                                       38
<PAGE>


                          CREDENCE SYSTEMS CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                               YEAR ENDED OCTOBER 31,
                                                                                   ------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                                                                       1999             1998             1997
                                                                                   --------------  ----------------  --------------
<S>                                                                                <C>             <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net income (loss)...........................................................         $ (809)         $(26,282)        $10,693
     Adjustments to reconcile net income (loss) to net cash provided by
      (used in) operating activities:
        Depreciation and amortization............................................         22,693            21,146          13,984
        Acquired in-process research and development and special charges.........          8,423            50,736              --
        Gain from extinguishment of debt ........................................         (2,572)               --              --
        Loss (gain) on disposal of property and equipment........................            328               (38)            430
        Deferred income taxes....................................................          1,169           (10,504)         (3,432)
        Minority interest........................................................             75              (203)              6
        Changes in operating assets and liabilities
            Restricted cash......................................................          2,400             7,602         (10,002)
            Accounts receivable..................................................        (37,605)           17,955          (6,221)
            Inventories..........................................................         (8,654)          (31,094)        (16,440)
            Prepaid expenses and other current assets............................         14,643           (19,363)         (4,242)
            Accounts payable.....................................................         14,521            (5,292)           (660)
            Accrued expenses and other liabilities...............................          2,522             2,995           2,517
            Income taxes payable.................................................          4,894             2,565           3,654
                                                                                   --------------  ----------------  --------------
                  Net cash provided by (used in) operating activities............         22,028            10,223          (9,713)
CASH FLOWS FROM INVESTING ACTIVITIES

     Purchases of available-for-sale securities..................................        (94,307)         (152,808)        (68,983)
     Maturities of available-for-sale securities.................................         26,394            90,548          56,663
     Sales of available-for-sale securities......................................         61,268            22,700          10,673
     Other liabilities...........................................................          1,295                --              --
     Acquisition of property and equipment.......................................        (17,952)          (11,268)        (16,223)
     Acquisition of other assets.................................................         (7,615)          (15,022)         (9,201)
     Proceeds from sale of property and equipment................................            414               829           2,007
                                                                                   --------------  ----------------  --------------
                  Net cash used in investing activities..........................        (30,503)          (65,021)        (25,064)
CASH FLOWS FROM FINANCING ACTIVITIES

     Issuance of common stock....................................................         12,629             3,191           3,477
     Repurchase of common stock..................................................             --           (32,775)             --
     Issuance of 5 1/4% convertible subordinated notes...........................             --                --         115,000
     Other.......................................................................           (441)               12             412
                                                                                   --------------  ----------------  --------------
                  Net cash provided by (used in) financing activities............         12,188           (29,572)        118,889
                                                                                   --------------  ----------------  --------------
Net increase (decrease) in cash and cash equivalents.............................          3,713           (84,370)         84,112
Cash and cash equivalents at beginning of the period.............................         48,391           132,761          48,649
                                                                                   --------------  ----------------  --------------
Cash and cash equivalents at end of the period...................................       $ 52,104           $48,391        $132,761
                                                                                   ==============  ================  ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

     Interest paid...............................................................       $  5,554           $ 6,121         $     1
     Income taxes paid (refunded)................................................       $(20,010)          $11,746         $ 7,443
NONCASH INVESTING ACTIVITIES:

     Income tax benefit from stock option exercises..............................       $  4,559           $   972         $   901
     Paid-in capital increase--treasury stock for convertible notes..............       $ 15,432                --               --
     Exchange of convertible notes for treasury stock, net of discount...........       $ 18,004                --               --
     Net transfers of inventory to property and equipment........................       $  4,842           $ 9,135         $10,036
</TABLE>
                             See accompanying notes.


                                       39
<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
automatic test equipment used in the production of semiconductors. As a result
of acquisitions made in fiscal years 1997 through 1999, Credence is also
involved in the design, development, sale and service of software enabling the
development of customer test programs used by automatic test equipment. The
Company has a subsidiary 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 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.

REVENUE RECOGNITION

         Revenue and related warranty expenses are recognized upon product
shipment. Net sales consist of product and service sales, less discounts and
estimated allowances. A provision for the estimated costs to enhance the
functionality and reliability of the installed base is recorded when such
requirements become known. Revenues from service contracts are recognized
ratably over the contract period. The Company recognizes software revenue in
accordance with the American Institute of Certified Public Accountants Statement
of Position 97-2, which calls for recognizing revenue when a non-cancellable
license agreement has been signed, the software product has been shipped, there
are no uncertainties surrounding product acceptance, the fees are fixed and
determinable, and collection is considered probable. For customer license
agreements that meet the Company's revenue recognition policy, the portion
allocated to software license fees will generally be recognized in the current
period, while the portion allocated to services is recognized as the services
are performed.

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, bank certificates of deposit,
auction rate preferred securities, corporate bonds and municipal bonds carried
at amortized costs adjusted to fair market value.

         Management classifies investments as trading, available-for-sale or
held-to-maturity at the time of purchase and periodically re-evaluates such
classification. At October 31, 1999 and 1998, 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 and 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.


                                       40
<PAGE>

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

<TABLE>
<CAPTION>

                                                                             OCTOBER 31,
                                                                  -----------------------------
                                                                      1999            1998
                                                                  -------------    ------------
<S>                                                               <C>              <C>
          Money market.............................................     $20,179         $11,799
          Commercial paper.........................................       1,147          28,304
          Municipal bonds..........................................       2,079              --
          Corporate bonds..........................................      22,030           2,061
          Obligations of U.S. Government agencies..................       2,454             215
                                                                  -------------    ------------
          Cash equivalents.........................................      47,889          42,379
          Cash.....................................................       4,215           6,012
                                                                  -------------    ------------
           Cash and cash equivalents...............................     $52,104         $48,391
                                                                  =============    ============
</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, 1999 and 1998,
these investments are classified as available-for-sale and are categorized as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                                OCTOBER 31,
                                                                      -----------------------------
                                                                          1999              1998
                                                                      -------------     ------------
<S>                                                                   <C>               <C>
          Commercial paper and medium term notes....................      $      --          $28,048
          Treasury notes and obligations of U.S. Government
            agencies ..............................................           8,401            8,542
          Asset backed securities...................................         30,684           13,332
          Auction rate preferred securities.........................             --            2,060
          Certificates of deposits..................................             --            1,999
          Corporate bonds...........................................         50,694           18,345
          Municipal bonds ..........................................             --           10,808
                                                                      -------------     ------------
                                                                      -------------     ------------
                                                                            $89,779          $83,134
                                                                      =============     ============
</TABLE>

RESTRICTED CASH

         Restricted cash at October 31, 1998 represented cash in escrow related
to commitments by the Company under an agreement with Summit Design, Inc. to
purchase product licenses.

INVENTORIES

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

<TABLE>
<CAPTION>

                                                                                    OCTOBER 31,
                                                                          ------------------------------
                                                                             1999             1998
                                                                          -------------    -------------
<S>                                                                       <C>              <C>
           Raw materials...............................................         $13,772         $9,860
           Work-in-process.............................................          21,281         21,609
           Finished goods..............................................           6,165          5,937
                                                                          -------------    -------------
                                                                                $41,218        $37,406
                                                                          =============    =============
</TABLE>

PREPAID EXPENSES AND OTHER CURRENT ASSETS

         Prepaid expenses and other current assets consist of the following (in
thousands):

<TABLE>
<CAPTION>

                                                                                  OCTOBER 31,
                                                                          ------------------------------
                                                                              1999             1998
                                                                          -------------    -------------
<S>                                                                       <C>              <C>
           Prepaid and refundable income taxes..........................        $6,404          $18,682
           Prepaid expenses and other...................................         3,020            5,385
                                                                          -------------    -------------
                                                                                $9,424          $24,067
                                                                          =============    =============
</TABLE>


                                       41
<PAGE>

PROPERTY AND EQUIPMENT AND OTHER ASSETS

         Property and equipment are stated at cost and are depreciated using the
straight-line method over the assets' estimated useful lives of three to five
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,
                                                                               ------------------------------
                                                                                   1999             1998
                                                                               -------------    -------------
<S>                                                                            <C>              <C>
           Machinery and equipment...........................................      $ 48,902            $43,013
           Software..........................................................        15,948             10,223
           Leasehold improvements............................................        12,375             11,798
           Furniture and fixtures............................................         5,885              4,840
           Spare parts.......................................................        17,682             18,390
                                                                               -------------    -------------
                                                                                    100,792             88,264
           Less accumulated depreciation and amortization....................        57,729             46,500
                                                                               -------------    -------------
           Net property and equipment........................................      $ 43,063            $41,764
                                                                               =============    =============
</TABLE>

         Other assets consist primarily of purchased technologies, other
intangible assets and related rights which are amortized using the straight-line
method over the assets' estimated useful lives of three to five years.
Accumulated amortization associated with intangible assets is approximately
$4,677,000 and $10,102,000 at October 31, 1999 and 1998, respectively.

ACCRUED EXPENSES AND OTHER LIABILITIES

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

<TABLE>
<CAPTION>

                                                                                        OCTOBER 31,
                                                                               ------------------------------
                                                                                   1999             1998
                                                                               -------------    -------------
<S>                                                                                <C>              <C>
           Accrued payroll and related liabilities..............................   $  8,338         $  6,767
           Accrued warranty.....................................................      7,327            3,874
           Accrued distributor commissions......................................      2,785            1,706
           Deferred revenue.....................................................      3,351            3,065
           Accrued loss on supplier commitments.................................          --           2,400
           Customer deposit ....................................................      3,269                --
           Other accrued liabilities............................................      6,093            9,166
                                                                               -------------    -------------
                                                                                    $31,163          $26,978
                                                                               =============    =============
</TABLE>



                                       42
<PAGE>


NET INCOME (LOSS) PER SHARE

         The Company computes earnings per share in accordance with SFAS No.
128. Accordingly, 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 not dilutive-potential common
shares and, accordingly, were excluded from the calculation of diluted net
income (loss) per share. The following table sets forth the computation of basic
and diluted net income (loss) per share (in thousands, except per share
amounts):

<TABLE>
<CAPTION>

                                                                                 1999              1998               1997
                                                                            ---------------   ----------------    -------------
<S>                                                                          <C>               <C>                 <C>
Numerator:
    Numerator for basic and diluted net income (loss) per share--net
        income (loss)....................................................          $ (809)          $(26,282)         $10,693
                                                                            ===============   ================    =============
Denominator:
Denominator for basic net income (loss) per share--weighted-average
   shares................................................................          21,088             21,533           21,865
Effect of dilutive securities--employee stock options....................              --                 --              647
                                                                            ---------------   ----------------    -------------
Denominator for diluted net income (loss) per share--adjusted
   weighted-average shares and assumed exercises.........................          21,088             21,533           22,512
                                                                            ===============   ================    =============

    Basic net income (loss) per share....................................          $(0.04)           $ (1.22)           $0.49
    Diluted net income (loss) per share..................................          $(0.04)           $ (1.22)          $ 0.47
</TABLE>

RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133), which is required to be adopted
in fiscal years beginning after June 15, 1999. The Statement permits early
adoption as of the beginning of any fiscal quarter after its issuance. The
Company is currently evaluating whether to adopt the new statement earlier than
is required. SFAS 133 will require the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through earnings. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in the fair value of the hedged assets, liabilities
or firm commitments through earnings, or recognized in other comprehensive
income until the hedged item is recognized in earnings. The ineffective portion
of a derivative's change in fair value will be immediately recognized in
earnings. Adoption of SFAS 133 is not expected to have a material impact on the
Company's financial condition or results of operations.

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
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.

NOTE 2 -- ACQUISITIONS

         In July 1997, the Company, through a subsidiary, Fluence Technology,
Inc. (formerly known as Test Systems Strategies, Inc.), a Delaware corporation
("Fluence"), acquired certain assets and assumed certain liabilities from Summit
Design, Inc. and its wholly owned subsidiary, Test Systems Strategies, Inc., an
Oregon corporation, including the test development series software products
("TDS") and TSSI trademark of Test Systems Strategies, Inc, the Oregon
corporation (the "TSSI acquisition"). TDS includes tools designed to convert
gate-level simulation data from electronic design automation simulators to
programs that operate on targeted automatic test equipment ("ATE") for testing
integrated circuits characterized by the gate-level simulation data. TDS
facilitates simulation


                                       43
<PAGE>

analysis, stimulus generation, simulation rules checking,
tester resource checking, ATE test program generation, and test program
conversion. The consolidated financial statements reflect the impact of TDS
operations subsequent to the acquisition date.

         The purchase price of $7.3 million consisted of a cash payment of $7.0
million to Summit Design, Inc. and $300,000 for the assumption of liabilities.
Acquired assets and liabilities were recorded at their estimated fair market
value at the date of the acquisition. The aggregate purchase price, plus related
acquisition expenses, have been allocated to the assets and liabilities acquired
based on valuations. Amounts allocated to in-process research and development
("IPR&D") of approximately $6.0 million were written off at the acquisition
date, representing an estimated value (using risk-adjusted cash flows,
discounted at 35%) of development programs that had not yet reached
technological feasibility. Amounts allocated to developed technology, $1.0
million, and workforce in place, $0.3 million, are being amortized on a
straight-line basis over periods of six and three years, respectively.

         The IPR&D associated with the TSSI acquisition related to the
development of a standard tester interface language ("STIL"). The STIL
development project is an ongoing program that will provide a foundation for and
be integrated into most of the Fluence software products. The Company believes
the life of this program will continue into the foreseeable future.

         In June 1998, the Company purchased from Heuristics Physics
Laboratories, Inc. ("HPL") certain assets and assumed certain liabilities
relating to its memory self test business for $8.0 million in cash and the
assumption of $0.2 million in liabilities. Additionally, the Company agreed to
make payments to the shareholder representatives of HPL in an amount equal to
10% of the Company's net sales of products derived from the assets acquired from
HPL's design for test division for a period of two years following the
acquisition. The amounts paid in 1999 under this arrangement were insignificant.
In connection with the HPL acquisition, the Company recognized $2.0 million of
acquired IPR&D. The remaining $6.2 million has been capitalized, of which $5.3
million is for purchased technology and other intangible assets which will be
amortized ratably over their estimated useful lives of five years.

         The HPL acquired IPR&D consists of projects related to memory self
test. These projects are aimed at the development of products that can perform
self testing of on-chip memories, self testing of off-chip memories, automated
memory test vector generation, built-in memory repair analysis and built-in
automated memory circuit repair. The Company estimated that approximately 50% of
the research and development effort, based on complexity, had been completed at
the date of the acquisition. As of October 31, 1999 the Company has introduced
memory BOST products and has largely completed development of a memory BIST
software product. The Company recorded a $0.7 million write-down of the
intangible assets acquired from HPL in conjunction with the integration of
Opmaxx with Fluence in September 1999. This asset write-down was made based on
an assessment of the current market potential for these products.

         In September 1999, the Company purchased Opmaxx, Inc. for $8.0 million
in cash and the assumption of liabilities and the conversion 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 acquired in-process research
and development ("IPR&D"). The remaining $7.7 million has been capitalized, of
which $7.5 million is for purchased technology and other intangible assets which
will be amortized ratably over their estimated useful lives, ranging from two to
five years. Opmaxx is being 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, 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
significant work remaining to complete the current versions of the products was
estimated to take approximately 8 engineering person years, at a cost of
approximately $1 million and be completed by the end of fiscal 2000.

         There can be no assurance that the in-process projects acquired, as
noted above, will achieve technological feasibility or that the Company will be
able to successfully market products based on such technology. Should these
in-process projects fail, the value of the Company's investment in these
incomplete technologies would be


                                       44
<PAGE>

insignificant or zero. A failure to successfully develop and market self
test products could have a material adverse affect on the Company's business,
financial condition or results of operations.

NOTE 3 -- SPECIAL CHARGES

         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 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. At
October 31, 1999, approximately $1.7 million of this charge remained accrued on
the balance sheet with approximately $1.2 million scheduled to be paid in
January 2000.

     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.

         In the third and fourth quarters of fiscal 1998, the Company recorded
special charges totaling $48.7 million, of which $28.4 million were classified
as cost of goods sold and the balance was classified as operating expenses.
These charges are the result of the Company's response to a major downturn in
the business outlook for the ATE and related semiconductor and semiconductor
equipment industries which took place during the period. As a result of this
industry downturn, the Company downsized its operations, including reducing
headcount, reducing the volume of products being produced and canceling and
delaying various projects, including facilities expansions and certain research
and development projects. The impact of this downturn and these decisions was
that significant amounts of the Company's inventories, receivables, fixed
assets, prepaid expenses, investments and purchased technologies were impaired
and certain liabilities had been incurred. As a result, the Company wrote down
the related assets to their net realizable values and made provision for the
estimated liabilities.

         Of the $48.7 million in charges, approximately $28.4 million was
charged as cost of goods sold, of which approximately $26.7 million was related
to write-down of excess or obsolete inventories. The elements of the charges
during fiscal 1998 are as follows (in thousands):

<TABLE>

<S>                                                                               <C>
Write-down of inventories to net realizable value
   (including expected losses on supplier commitments)..........................      $26,678
Write-down of excess fixed assets to fair value.................................        7,272
Write-down of purchased technology and investments to fair value................        5,118
Write-off of prepaid and other current assets...................................        2,444
Excess facility costs...........................................................        2,641
Provision for uncollectible receivables.........................................        3,389
Employee termination benefits and accrued liabilities...........................        1,196
                                                                                 ---------------
                                                                                      $48,738
                                                                                 ===============
</TABLE>


         At October 31, 1998, approximately $4.8 million in accrued liabilities
related to special charges remained on the Company's balance sheet, primarily
the accrued loss on supplier commitments of $2.4 million and approximately $1.9
million for rent on excess facilities. The cash expenditures associated with
these obligations were made in fiscal 1999 and no further accruals remain at
October 31, 1999. Cash expenditures associated with the special charges during
fiscal 1998 were approximately $700,000, relating primarily to excess facilities
and to severance costs.

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,
1999 and 1998.

                                       45
<PAGE>

         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 1999 and
1998, 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 1999 and 1998, representing less
than 4% of revenue.

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

                                               1999        1998        1997
                                            -----------  ----------  ---------
Mixed Signal..............................           65%         66%      60%
Logic                                                16          18       30
Memory                                                7           4        3
Service and software......................           12          12        7
                                            -----------  ----------  ---------
Total net sales...........................          100%        100%     100%
                                            ===========  ==========  =========

         As of November 1, 1997, the Company adopted SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information."

         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:

                                                  YEAR ENDED OCTOBER 31,
                                             ----------------------------------
                                                1999        1998        1997
                                             -----------  ----------  ---------
Domestic...................................           36%         31%        30%
Asia Pacific...............................           55          60         66
Europe                                                 9           9          4
                                             -----------  ----------  ---------
Total net sales............................          100%        100%       100%
                                             ===========  ==========  =========

         One customer, Spirox Corporation (a distributor in Taiwan), accounted
for 39%, 34% and 30% of the Company's net sales in fiscal 1999, 1998 and 1997,
respectively. This subjects a significant portion of the Company's 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. At October 31, 1999 this distributor's
accounts receivable balance with the Company was approximately $21 million.
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


                                       46
<PAGE>

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.

NOTE 5 -- CREDIT FACILITIES

         The Company has a $20,000,000 unsecured bank line of credit, with
interest at the bank's prime rate (8.25% at October 31, 1999) which expires July
22, 2000. This line supports the issuance of letters of credit and foreign
exchange contracts. At October 31, 1999, the Company had no borrowings
outstanding under this line of credit. Borrowings under the line of credit are
subject to the Company's ability to meet certain financial covenants including
profitability and leverage ratios and require the Company to obtain certain bank
approvals for the payment of dividends. The Company was in compliance with all
financial covenants at October 31, 1999. There were no foreign exchange
contracts outstanding at October 31, 1999 or 1998.

NOTE 6 -- LEASE OBLIGATIONS AND OTHER COMMITMENTS

         The Company leases its facilities under operating leases that expire
periodically through 2014.

         The approximate future minimum lease payments under operating leases
for facilities and equipment at October 31, 1999 are as follows (in thousands):

                                                          LEASE PAYMENTS
                                                       -------------------
                 2000..................................      $  3,613
                 2001..................................         3,394
                 2002..................................         3,380
                 2003..................................         3,086
                 2004..................................         2,900
                 Thereafter............................        19,434
                                                       -------------------
                                                              $35,807
                                                       ===================

         Rent expense was approximately $1,918,000, $4,336,000, and $4,174,000
for the years ended October 31, 1999, 1998 and 1997, respectively.

         The Company has an agreement with a distributor whereby the Company
issued a guaranty in favor of a bank with respect to certain obligations of the
distributor to the bank. Under this agreement, the distributor agreed to grant
to the Company a security interest to secure the obligations of the distributor
as a result of any payments by the Company pursuant to the guaranty. At October
31, 1999, the maximum allowable debt of the distributor subject to this
guaranty, $1,000,000, was outstanding.

NOTE 7 -- CONVERTIBLE SUBORDINATED NOTES

     In September 1997, the Company sold $115 million of 5 1/4% convertible
subordinated notes (the "Notes") due September 2002 through a private placement.
The Notes are unsecured obligations of the Company and are subordinated to all
present and future senior indebtedness of the Company. The Notes do not provide
for a sinking fund and are redeemable at the option of the Company, in whole or
in part, at any time on or after September 20, 2000, at certain redemption
prices. Interest is payable semiannually on March 15 and September 15,
commencing March 15, 1998. The Notes are convertible into common stock of the
Company at an initial conversion price of $69.15 per share. Expenses of $3.3
million associated with the offering have been deferred and included in other
assets. Such expenses are being amortized to interest expense over the term of
the Notes. In November 1997, the Company filed a Registration Statement with the
Securities and Exchange Commission under Form S-3 to permit public secondary
trading of the Notes, and, upon conversion, the underlying common stock. Such
registration statement was declared effective in December 1997.

         In fiscal 1999, the Company recorded pre-tax extraordinary gains of
$2.6 million for the retirement of $18.0 million of its Notes and $0.4 million
related to issuance expenses and discount on the notes in exchange for 603,000
shares of the Company's common stock held in treasury. As of October 31, 1999,
the fair value of the Notes based on quotes from a major brokerage firm was
approximately $92.5 million.


                                       47
<PAGE>

NOTE 8 -- STOCKHOLDERS' EQUITY

         TREASURY STOCK AND COMMON STOCK REPURCHASES

         During fiscal 1998, the Company repurchased a total of 1.8 million
shares of its common stock at a cost of $32.8 million. Out of the total 1.8
million shares, 500,000 were canceled and retired and the balance of 1.3 million
shares were put in treasury stock.

         In fiscal 1999, the Company retired $18.4 million of its Notes in
exchange for 603,000 shares of the Company's common stock held in treasury. In
addition the Company issued approximately 27,000 shares that were held in
treasury to employees as part of the equity compensation plans.

         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 to five years.

         On March 25, 1998, the stockholders approved an amendment to the
Company's 1993 Stock Option Plan that implemented an automatic share increase
feature pursuant to which the number of shares available for issuance under the
1993 Stock Option Plan (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 two percent (2%) of the total number of shares outstanding on the last
trading day of the immediately preceding fiscal year. The 1993 Plan provides
that at the end of each First Trading Day the number of then outstanding options
under the Company's stock option plans shall not exceed fifteen percent (15%) of
the then outstanding voting shares of capital stock of the Company, together
with all then actually outstanding stock options under the Company's stock
option plans, together with all options in the reserve then available for future
grant under the Company's Stock Option Plans.

         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.


                                       48
<PAGE>


         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 AVAILABLE         NUMBER OF             PRICE                WEIGHTED
                                             FOR GRANT              SHARES                PER                 AVERAGE
                                            (AUTHORIZED)          OUTSTANDING            SHARE             EXERCISE PRICE
                                        ---------------------  ------------------ ---------------------  -------------------
<S>                                     <C>                    <C>                <C>                    <C>
Balance at October 31, 1996...........             264                1,788            $0.44 - $33.00         $ 14.29
Increase in authorized shares.........             500                   --                        --                --
Options granted.......................            (408)                 408           $19.00 - $29.50         $ 25.23
Options canceled......................             170                 (170)           $1.00 - $33.00         $ 19.11
Options exercised.....................              --                 (226)           $0.44 - $33.00        $   9.69
Options expired.......................              (2)                  --                        --                --
                                        ---------------------  ------------------ ---------------------  -------------------
Balance at October 31, 1997...........             524                1,800            $0.44 - $33.00          $16.90
Increase in authorized shares.........             500                   --                        --               --
Options granted.......................            (699)                 699           $14.50 - $29.50          $26.31
Options canceled......................             145                 (145)           $0.54 - $30.00          $19.47
Options exercised.....................              --                 (141)           $0.44 - $23.12         $  9.09
                                        ---------------------  ------------------ ---------------------  -------------------
Balance at October 31, 1998...........             470                2,213            $0.44 - $33.00          $20.20
Increase in authorized shares.........           1,408                   --                        --                --
Options granted.......................          (3,041)               3,041           $14.63 - $43.56          $29.30
Options canceled......................           1,400               (1,400)           $0.44 - $41.31          $23.55
Options exercised.....................              --                 (696)           $0.44 - $30.00          $14.61
                                        ---------------------  ------------------ ---------------------  -------------------
Balance at October 31, 1999...........             237                3,158            $0.54 - $43.56          $28.67
                                        =====================  ================== =====================  ===================
</TABLE>

         The Company has reserved for issuance approximately 3,395,000 shares of
common stock in connection with the stock option plans. At October 31, 1999,
approximately 348,000 shares were exercisable at an aggregate exercise price of
$5,890,000.

         The following table summarizes information about options outstanding
and exercisable at October 31, 1999, excluding the Fluence Plan (in thousands
except per share amounts).

<TABLE>
<CAPTION>
                             OPTIONS OUTSTANDING                                              OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------  -------------------------------------
                                                     WEIGHTED-AVG.       WEIGHTED         OPTIONS          WEIGHTED
                                OPTIONS                REMAINING         AVERAGE         CURRENTLY          AVERAGE
    RANGE OF                 OUTSTANDING AT        CONTRACTUAL LIFE      EXERCISE      EXERCISABLE AT      EXERCISE
 EXERCISE PRICES             OCT. 31, 1999              (YEARS)           PRICE        OCT. 31, 1999         PRICE
-----------------------    -------------------  ---------------------  ------------  ------------------  -----------------
<S>                        <C>                  <C>                    <C>           <C>                 <C>
      $0.54 - $13.25              170,721                 5.36           $ 9.19             103,996            $6.90
     $14.17 - $26.25            1,273,544                 8.70           $17.43             211,423            $8.13
     $26.44 - $43.56            1,713,836                 9.76           $38.96              32,090           $29.90
-----------------------    -------------------  ---------------------  ------------  ------------------  -----------------
      $0.54 - $43.56            3,158,101                 9.09           $28.67             347,509           $16.95
=======================    ===================  =====================  ============  ==================  =================
</TABLE>


         These options will expire, if not exercised, at specific dates from
October 2000 to October 2009.


                                       49
<PAGE>


         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 can be granted at prices no less than 85% of their
fair value on the date of grant. Generally, options granted are immediately
exercisable and the resulting shares issued to employees under the Fluence Plan
are subject to certain repurchase rights by Fluence, at the discretion of
Fluence, upon the individual's cessation of service prior to vesting in the
shares at the original purchase price. As of October 31, 1999, 2,324,770 options
were granted and outstanding at fair value to employees and are exercisable by
employees at exercise prices between $0.06 and $0.60 per share. These shares
vest over a four-year period. Activity under this plan (in thousands, except per
share amounts) is as follows:

<TABLE>
<CAPTION>

                                                                                       OPTIONS OUTSTANDING
                                                                           ------------------------------------------
                                                   OPTIONS AVAILABLE           NUMBER            WEIGHTED AVERAGE
                                                       FOR GRANT             OF SHARES            EXERCISE PRICE
                                                 ----------------------    -----------------  -----------------------
<S>                                              <C>                       <C>                <C>
         Balance at October 31, 1996.........               --                        --               $  --
         Initial shares authorized...........            2,000                        --                  --
         Options granted.....................             (851)                      851                0.10
                                                 ----------------------    -----------------  -----------------------
         Balance at October 31, 1997.........            1,149                       851                0.10
         Grants..............................             (195)                      195                0.10
         Cancellations.......................              410                      (410)               0.10
         Exercises...........................               --                        (2)               0.10
                                                 ----------------------    -----------------  -----------------------
         Balance at October 31, 1998.........            1,364                       634               $0.10
                                                 ----------------------    -----------------  -----------------------
         Increase in shares authorized.......            1,000                        --
         Grants..............................           (1,757)                    1,757                0.24
         Cancellations.......................               45                       (45)               0.10
         Exercises...........................               --                       (22)               0.10
                                                 ----------------------    -----------------  -----------------------
         Balance at October 31, 1999.........              652                     2,324               $0.19
                                                 ======================    =================  =======================
</TABLE>

         Fluence has reserved for issuance approximately 3,000,000 shares of
common stock in connection with the Fluence Plan.

         The following table summarizes information about options outstanding
under the Fluence Plan at October 31, 1999 (option amounts are recorded in
thousands except per share amounts):

<TABLE>
<CAPTION>

                               OPTIONS OUTSTANDING                                               OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------------  ----------------------------------
                                                   WEIGHTED-AVG.                                  OPTIONS          WEIGHTED
                               OPTIONS               REMAINING                                   CURRENTLY          AVERAGE
        RANGE OF             OUTSTANDING         CONTRACTUAL LIFE         WEIGHTED-AVG.        EXERCISABLE AT       EXERCISE
     EXERCISE PRICE        AT OCT. 31, 1999           (YEARS)            EXERCISE PRICE      OCTOBER 31, 1999        PRICE
----------------------  ---------------------  --------------------  --------------------  --------------------   ------------
<S>                     <C>                    <C>                   <C>                   <C>                    <C>
    $0.06 - $0.60                2,324                 8.74                  $0.19                1,379               $0.29
</TABLE>

         These options will expire, if not exercised, at specific dates from
July 2007 to September 2009.

         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
125,083, 101,023, and 114,940 shares were issued pursuant to the plan in 1999,
1998 and 1997, respectively. At October 31, 1999, approximately 288,251 shares
were reserved for issuance under the plan.

       The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its employee stock options
because, as discussed below, the alternative fair value accounting provided for
under SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, 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.


                                       50
<PAGE>

         Pro forma information regarding net income (loss) and net income (loss)
per share is required by SFAS No. 123. This information is required to be
determined as if the Company had accounted for its employee stock options
(including shares issued under the Employee Stock Purchase Plan, collectively
called "options") granted subsequent to October 31, 1995 under the fair value
method of SFAS No. 123.

         In calculating pro forma compensation, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which 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:


                                                    1999     1998      1997
                                                   ------   ------    ------
         Expected life (years)...................  3.06     3.03      3.35
         Expected stock price volatility.........  0.72     0.70      0.65
         Risk-free interest rate.................  5.97%    4.28%     5.67%

         The grant date weighted-average fair value of options granted during
the year were $14.62, $12.58 and $25.23 for 1999, 1998 and 1997, respectively.

         The pro forma net income (loss) and net income (loss) per share include
expense related to the Company's Employee Stock Purchase Plan. 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 1999, 1998 and
1997:

                                                    1999     1998     1997
                                                   ------   ------    ------
         Expected life (years)...................   0.50     0.50     0.50
         Expected stock price volatility.........   0.76     0.82     0.65
         Risk-free interest rate.................   5.65%    4.55%    5.67%

         The weighted-average fair value of purchase rights granted during the
year were $6.84, $9.42 and $7.49 for 1999, 1998 and 1997, respectively.

         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>

                                                                   1999            1998          1997
                                                             -------------  -------------- ------------
<S>                                                              <C>           <C>           <C>
    Net income (loss) as reported.........................        $   (809)       $(26,282)     $10,693
    Pro forma net income (loss)...........................        $ (5,010)       $(30,725)     $ 8,316
    Basic net income (loss) per share.....................        $  (0.04)       $  (1.22)     $  0.49
    Pro forma basic net income (loss) per share...........        $  (0.24)       $  (1.43)     $  0.38
    Diluted net income (loss) per share as reported.......        $  (0.04)       $  (1.22)     $  0.47
    Pro forma diluted net income (loss) per share.........        $  (0.24)       $  (1.43)     $  0.37
</TABLE>

         Because SFAS 123 is applicable only to options granted subsequent to
October 31, 1995, its pro forma effect will not be fully reflected until fiscal
2000.

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


                                       51
<PAGE>

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 9 -- 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 only contribution to this
plan was $441,000 in fiscal 1997. At October 31, 1999 the Company had accrued
approximately $350,000 to be paid as a Company contribution to this plan for
employees in the plan at December 31, 1999.

         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 $892,000, $1,285,000 and $476,000
in fiscal 1999, 1998 and 1997, respectively.

NOTE 10 -- INCOME TAXES

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

<TABLE>
<CAPTION>

                                                          YEAR ENDED OCTOBER 31,
                                          -----------------------------------------------
                                            1999            1998               1997
                                          ------------   --------------   ---------------
<S>                                       <C>            <C>              <C>
         Federal:
                  Current................    $ (704)        $ (3,786)         $ 9,062
                  Deferred...............      (788)          (8,868)          (3,059)
                                          ------------   --------------   ---------------
                                             (1,492)         (12,654)           6,003
         State:
                  Current................      (160)            (539)           1,818
                  Deferred...............       119           (1,636)            (373)
                                          ------------   --------------   ---------------
                                                (41)          (2,175)           1,445
         Foreign:
                  Current................       161               44               83
                                          ------------   --------------   ---------------
                                           $ (1,372)       $ (14,785)          $7,531
                                          ============   ==============   ===============
</TABLE>

         Pre-tax income (loss) from foreign operations was approximately
$364,000 in 1999, $6,000 in 1998 and $(206,000) in 1997.

         A reconciliation between the Company's effective tax rate (36% in 1999
and 1998, 41% in 1997) and the U.S. statutory rate is as follows (in thousands):

<TABLE>
<CAPTION>

                                                                                          YEAR ENDED OCTOBER 31,
                                                                          ---------------------------------------------
                                                                                1999           1998           1997
                                                                          --------------  --------------  -------------
<S>                                                                            <C>          <C>             <C>
        Tax computed at statutory rate..................................       $(1,339)     $(14,373)       $6,380
        State income tax (net of federal benefit).......................           (27)       (1,414)          935
        Foreign sales corporation benefit...............................             --           --          (862)
        In-process research and development not currently benefited.....            301          466         1,264
        Net operating loss carryforward benefit.........................             --           --          (141)
        Research and development credits................................          (300)         (300)         (370)
        Other items.....................................................            (7)          836           325
                                                                          --------------  --------------  -------------
                                                                               $(1,372)     $(14,785)       $7,531
                                                                          ==============  ==============  =============
</TABLE>

       At October 31, 1999, the Company has unused net operating loss and
research tax credit carryforwards for federal income tax purposes of
approximately $3,300,000 and $194,000, respectively, which expire in 2003
through 2018. Utilization of the net operating loss carryforwards at October 31,
1999 is limited to approximately $401,000 annually under the provisions of
Section 382 of the Internal Revenue Code of 1986, as amended. Utilization of the
credit carryforwards is similarly limited.


                                       52
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                OCTOBER 31,
                                                                   --------------------------------------
                                                                        1999                  1998
                                                                   ----------------      ----------------
<S>                                                                <C>                   <C>
           Deferred tax assets:
           Accounting for inventories...........................        $ 6,758               $ 8,277
           Allowance for doubtful accounts......................          1,289                 2,168
           Accruals not currently deductible....................          5,994                 6,506
           Net operating loss carryforwards.....................          1,170                   703
           Acquired technology..................................          1,478                 2,766
           Book over tax depreciation...........................          2,877                    --
           Research credit carryforwards........................            194                   194
                                                                   ----------------      ----------------
                   Total deferred tax assets....................         19,760                20,614
           Valuation allowance for deferred tax assets..........         (2,572)               (2,572)
                                                                   ----------------      ----------------
                                                                         17,188                18,042
           Deferred tax liability:
           Tax over book depreciation...........................            --                   (166)
                                                                   ----------------      ----------------
                   Total deferred tax liability.................            --                   (166)
                                                                   ----------------      ----------------
                   Net deferred tax assets......................        $17,188               $17,876
                                                                   ================      ================
</TABLE>

         There was no change in the valuation allowance in 1999 and a net
increase of $466,000 and $1,209,000 in 1998 and 1997, respectively.

         Realization of the Company's net deferred tax assets is dependent upon
the Company generating sufficient taxable income in future years in appropriate
tax jurisdictions to obtain benefit from the reversal of temporary differences
and from tax credit carryforwards. The amount of deferred tax assets considered
realizable is subject to adjustment in future periods if estimates of future
taxable income are reduced.

NOTE 11 -- CONTINGENCIES

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

NOTE 12 -- ACCUMULATED OTHER COMPREHENSIVE INCOME

         Accumulated other comprehensive income and changes thereto consist of:

<TABLE>
<CAPTION>

                                                                                  YEAR ENDED OCTOBER 31,
                                                                ------------------------------------------------------
                                                                      1999              1998           1997
                                                                -----------------  -------------  -------------
<S>                                                                    <C>               <C>               <C>
Beginning balance gain (loss), net of tax.....................         $(241)            $  --             $--
Unrealized gain (loss) on available-for-sale securities.......          (517)               --              --
Currency translation adjustment...............................            97              (241)             --
                                                                -----------------  -------------  -------------
Ending balance (loss).........................................         $(661)            $(241)            $--
                                                                =================  =============  =============
</TABLE>

NOTE 13 -- RELATED PARTY TRANSACTIONS


         Bernard V. Vonderschmitt, a director of the Company, is the founder and
chairman of Xilinx, Inc. and Dr. William G. Howard, the Company's Chairman, is a
director of Xilinx. For the years ended October 31, 1999, 1998 and 1997, the
Company sold approximately $4,551,000, $2,868,000, and $1,356,000 respectively,
of products and 99 and 1998, respectively.

         Dr. William G. Howard, a director of the Company, was a director of
VLSI Technology, Inc. ("VLSI") from May 31, 1996 until June 1999. The Company's
sales to VLSI were approximately $5,625,000, $2,011,000, and


                                       53
<PAGE>

$171,000 in fiscal 1999, 1998 and 1997, respectively. The amounts receivable
from VLSI were approximately $1,525,000 and $568,000 at October 31, 1999 and
1998, respectively. Dr. Howard also serves as a director of Ramtron
International, Inc. ("Ramtron"). The Company's sales to Ramtron were
approximately $1,000, $151,000, and $6,000 in fiscal 1999, 1998 and 1997,
respectively. Amounts receivable from Ramtron were approximately zero and $1,000
at October 31, 1999 and 1998, respectively.

         The Company sells products and services to Israeli Test House, Inc.
("ITH"), a company in which the Company has an investment. For the years ended
October 31, 1999, 1998 and 1997, sales to ITH totaled approximately $14,700,
$21,000, and $6,000, respectively. The amounts receivable from ITH were
approximately $11,900 and $345,000 at October 31, 1999 and 1998, respectively.

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                             AND FINANCIAL DISCLOSURE.

         Not Applicable.


                                       54

<PAGE>


                                    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 2000 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 2000 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 2000 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 2000 Annual Meeting of Stockholders and is incorporated herein
by reference.


                                       55

<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>
<S>                                                                              <C>
                                                                                 PAGE
                                                                                 ----
                       Report of Ernst & Young LLP, Independent Auditors.......   35
                       Consolidated Balance Sheets--
                           October 31, 1999 and 1998...........................   36
                       Consolidated Statements of Operations--
                           Years Ended October 31, 1999, 1998 and 1997.........   37
                       Consolidated Statements of Stockholders' Equity--
                           Years Ended October 31, 1999, 1998 and 1997.........   38
                       Consolidated Statements of Cash Flows--
                           Years Ended October 31, 1999, 1998 and 1997.........   39
                       Notes to Consolidated Financial Statements..............   40
</TABLE>

            2.   FINANCIAL STATEMENT SCHEDULE. The following financial
                 statement schedule of Credence Systems Corporation, for
                 the years ended October 31, 1999, 1998 and 1997, 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:

                                                                          PAGE
                                                                          ----
                       Schedule II--Valuation and Qualifying Accounts      59

                 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 60.

(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 December 15, 1999, reporting its
            financial results for the fourth fiscal quarter ended October 31,
            1999.


(c)         See Exhibit Index on page 60.


(d)         The following financial statement schedule of Credence Systems
            Corporation, for the years ended October 31, 1999, 1998 and 1997, 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:
                                                                         PAGE
                                                                         ----
                   Schedule II--Valuation and Qualifying Accounts         59

            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.


                                       56
<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 27, 2000.


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



                                    By:     /S/ GRAHAM J. SIDDALL
                                        ----------------------------------------
                                        Graham J. Siddall
                                        PRESIDENT AND CHIEF EXECUTIVE OFFICER

                                            /S/ DENNIS P. WOLF
                                        ----------------------------------------
                                        Dennis P. Wolf
                                        EXECUTIVE VICE PRESIDENT, CHIEF
                                        FINANCIAL OFFICER AND SECRETARY
                                        (PRINCIPAL FINANCIAL AND ACCOUNTING
                                        OFFICER)


                                       57
<PAGE>



                                POWER OF ATTORNEY

         KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Graham Siddall and Dennis P. Wolf, 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.

<TABLE>
<CAPTION>

           SIGNATURE                                 TITLE                              DATE
           ---------                                 -----                              ----
<S>                                      <C>                                       <C>

 /s/ GRAHAM J. SIDDALL                   President and Chief Executive Officer     January 27, 2000
----------------------------------
 Graham J. Siddall

 /s/ DENNIS P. WOLF                      Executive Vice President, Chief           January 27, 2000
----------------------------------       Financial Officer and Secretary
 Dennis P. Wolf

 /s/ WILLIAM G. HOWARD, JR.              Chairman of the Board of Directors        January 27, 2000
----------------------------------
 William G. Howard, Jr.

 /s/ HENK J. EVENHUIS                    Director                                  January 27, 2000
----------------------------------
 Henk J. Evenhuis

 /s/ JOS C. HENKENS                      Director                                  January 27, 2000
----------------------------------
 Jos C. Henkens

 /s/ BERNARD V. VONDERSCHMITT            Director                                  January 27, 2000
----------------------------------
 Bernard V. Vonderschmitt

 /s/ JON D. TOMPKINS                     Director                                  January 27, 2000
----------------------------------
 Jon D. Tompkins
</TABLE>



                                       58
<PAGE>

                                                                     SCHEDULE II

                          CREDENCE SYSTEMS CORPORATION
                        VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                       ADDITIONS
                                                  BALANCE AT           CHARGED TO                               BALANCE AT
                                                   BEGINNING            COSTS AND                                  END
                                                    OF YEAR             EXPENSES            WRITE-OFFS           OF YEAR

                                               ------------------   -------------------   ----------------    ---------------
<S>                                            <C>                  <C>                   <C>                 <C>
Year ended October 31, 1999
      Allowance for doubtful accounts.......           $5,409           $  (645)(a)             $1,548               $3,216
Year ended October 31, 1998
      Allowance for doubtful accounts.......           $1,763            $4,325                $   679               $5,409
Year ended October 31, 1997
      Allowance for doubtful accounts.......           $1,781           $   762                $   780               $1,763
</TABLE>

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

(a)  During fiscal 1999 the Company reclassified $1,000,000 from the allowance
     for doubtful accounts to the other costs incurred related to the fiscal
     1998 special charges. This $1,000,000 was offset by $355,000 in additional
     expenses recorded during the year.



                                       59

<PAGE>


                                  EXHIBIT INDEX
<TABLE>
<CAPTION>

EXHIBIT
NUMBER                                                                               PAGE
------                                                                               ----
<C>         <S>                                                                      <C>
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(11)     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(13)     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(26)    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(24)    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 Laboratotires, Inc., a
            California Corporation.

2.12        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
            a Delaware Corporation.

2.13        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.

3.1(11)     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>

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EXHIBIT
NUMBER                                                                               PAGE
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<C>         <S>                                                                      <C>
4.2(4)      Fourth Amendment Agreement to the Investor Rights Agreement dated
            March 10, 1994.

4.3(19)     Purchase Agreement between the Company and Smith Barney, Inc. for
            purchase of $115,000,000 5 1/4% Convertible Subordinated Notes due
            2002, dated September 4, 1997.

4.4(19)     Indenture between the Company and State Street Bank and Trust
            Company of California, N.A., as Trustee dated September 10, 1997.

4.5(19)     Form of 5 1/4% Convertible Subordinated Note due 2002.

4.6(19)     Registration Rights Agreement between the Company and Smith Barney,
            Inc. dated as of September 4, 1997.

4.7(21)     Form of Rights Agreement, dated as of June 2, 1998, by and between
            the Company and BankBoston, N.A., as Rights Agent.

4.8(21)     Form of Certificate of Designation for the Series A Junior
            Participating Preferred Stock of the Company.

4.9(21)     Form of Rights Certificate.

4.10(10)    Fifth Amendment Agreement to the Investor Rights Agreement dated May
            26, 1995.

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

10.4(10)    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(7)     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(4)    Stock Transfer Agreement by and among the Company, Richard Cann,
            Rene Verhaegen and Credence Europa Limited dated as of February 28,
            1994.

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EXHIBIT
NUMBER                                                                               PAGE
------                                                                               ----
<C>         <S>                                                                      <C>
10.11(4)    Secured Line of Credit Agreement between Credence Europa Limited and
            the Company dated as of February 28, 1994.

10.12(9)    Lease by and between the Company and The Mutual Life Insurance
            Company of New York dated June 16, 1995.

10.13(13)   First Amendment to Lease by and between the Company and The Mutual
            Life Insurance Company of New York dated December 29, 1995.

10.14(14)   Loan and Security Agreement between the Company and Silicon Valley
            Bank and Comerica Bank-California dated April 28, 1995, as amended.

10.15(12)   Domestic and International Master Agreement for Purchase of
            Equipment and Product Support between the Company and Comdisco,
            Inc., dated January 31, 1995.

10.16(13)   Employment Agreement by and between the Company and Elwood H.
            Spedden dated October 31, 1995.

10.17(14)   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.

10.18(15)   Loan Agreement among Silicon Valley Bank, Bank of Hawaii and the
            Company, dated July 26, 1996.

10.19(16)   License Agreement between the Company and Kinetix Test Systems, LLC,
            dated July 31, 1996.

10.20(16)   Lease Agreement between Petula Associates, Ltd and Koll Portland
            Associates, dba KBC Tigard II and the Company dated September 12,
            1995.

10.21(16)   Sixth Amendment to Lease by and between the Company and Pen Nom I
            Corporation dated March 10, 1995.

10.22(27)   Software OEM License Agreement between the Company, Test Systems
            Strategies, Inc. and Summit Design, Inc. dated May 19, 1997.

10.23(18)   Joint Venture Agreement dated June 10, 1997, between the Company and
            Innotech Corporation.

10.24(23)   Lease Agreement between the Company and Bedford Property Investors,
            Inc. dated December 10, 1997.

10.25(24)   Lease Agreement between the Company and Pacific Realty Associates,
            L.P., dated April 10, 1998.

10.26(25)   Amendment to Loan Agreement dated July 24, 1998 between the Company,
            Silicon Valley Bank and Bank of Hawaii.

10.27(25)   Non-Recourse Receivables Purchase Agreement dated May 1, 1998
            between the Company and Silicon Valley Financial Services.

10.28(31)   Employment offer letter, dated March 24, 1998, by and between the
            Company and Dennis P. Wolf.

10.29(31)   Letter Agreement, dated January 19, 1999, by and between the Company
            and Dr. Wilmer R. Bottoms.

</TABLE>

                                        62
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<CAPTION>

EXHIBIT
NUMBER                                                                               PAGE
------                                                                               ----
<C>         <S>                                                                      <C>
10.30(29)   Amendment to Loan Agreement dated February 5, 1999 between Silicon
            Valley Bank, Bank of Hawaii and the Company.

10.31(30)   Amendment to Loan Agreement dated July 23, 1999 between Silicon
            Valley Bank and the Company.

10.32(30)   Employment Agreement by and between the Company and Graham J.
            Siddall, dated July 29, 1999.

21.1        Subsidiaries of the Company.

23.1        Consent of Ernst & Young LLP, Independent Auditors.

24.1        Power of Attorney (reference is made to page 58 of this report).

27.1        EDGAR Financial Data Schedule.

99.1(28)    1993 Stock Option Plan, as Amended and Restated through March 24,
            1999.

99.2(20)    Form of Notice of Grant to be generally used in connection with the
            1993 Stock Option Plan.

99.3(20)    Form of Stock Option Agreement to be generally used in connection
            with the 1993 Stock Option Plan.

99.4(20)    Addendum to the Stock Option Agreement (Special Tax Elections).

99.5(20)    Addendum to the Stock Option Agreement (Limited Stock Appreciation
            Rights).

99.6(20)    Addendum to the Stock Option Agreement (Change in Control).

99.7(20)    Addendum to the Stock Option Agreement (Financial Assistance).

99.8(20)    Form of Notice of Grant of Stock Option (Non-Employee Director) to
            be generally used in connection with the automatic option grant of
            the 1993 Stock Option Plan.

99.9(20)    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       Employee Stock Purchase Plan, as Amended and Restated through June
            14, 1998.

99.11(8)(13) Compensation Agreement between the Company and Jos C. Henkens,
             dated November 5, 1993.

99.12(8)(13) Compensation Agreement between the Company and Wilmer R. Bottoms,
             dated November 5, 1993.

99.13(8)(13) Compensation Agreement between the Company and Robert F. Kibble,
             dated November 5, 1993.

99.14(8)(13) Compensation Agreement between the Company and Bernard V.
             Vonderschmitt, dated November 5, 1993.

99.15(8)(13) Compensation Agreement between the Company and Henk J. Evenhuis,
             dated November 4, 1993.

99.16(20)   Form of Stock Purchase Agreement

99.17(20)   Form of Enrollment/Change Form

</TABLE>

                                        63
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<CAPTION>

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

99.18(29)   Employment Agreement by and between the Company and David A.
            Ranhoff, dated March 31, 1999.

99.19(29)   Employment Agreement by and between the Company and Dennis P. Wolf,
            dated March 31, 1999.

99.20(29)   Employment Agreement by and between the Company and William G.
            Howard, dated March 31, 1999.
</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-8 (Registration No. 33-71856).

(4)   Incorporated by reference to an exhibit to the Company's Registration
      Statement on Form S-1 (Registration No. 33-76264) as amended.

(5)   Incorporated by reference to an exhibit to the Company's Registration
      Statement on Form S-8 (Registration No. 33-76542).

(6)   Incorporated by reference to an exhibit to the Company's Quarterly Report
      on Form 10-Q for the quarterly period ended April 30, 1994.

(7)   Incorporated by reference to an exhibit to the Company's Quarterly Report
      on Form 10-Q for the quarterly period ended July 31, 1994.

(8)   Management contract or compensatory plan filed pursuant to Item 14(c).

(9)   Incorporated by reference to an exhibit to the Company's Quarterly Report
      on Form 10-Q for the quarterly period ended July 31, 1995.

(10)  Incorporated by reference to an exhibit to the Company's Registration
      Statement on Form S-3 (Registration No. 33-92802), as amended.

(11)  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.

(12)  Incorporated by reference to an exhibit to the Company's Quarterly Report
      on Form 10-Q for the quarterly period ended April 30, 1995.

(13)  Incorporated by reference to an exhibit to the Company's 1995 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 April 30, 1996.

(15)  Incorporated by reference to an exhibit to the Company's Quarterly Report
      on Form 10-Q for the quarterly period ended July 31, 1996.

(16)  Incorporated by reference to an exhibit to the Company's 1996 Annual
      Report on Form 10-K.

(17)  Incorporated by reference to an exhibit to the Company's Quarterly Report
      on Form 10-Q for the quarterly period ended April 30, 1997.

                                       64
<PAGE>

(18)  Incorporated by reference to an exhibit to the Company's Quarterly Report
      on Form 10-Q for the quarterly period ended July 31, 1997.

(19)  Incorporated by reference to an exhibit to the Company's Registration
      Statement on Form S-3 (Registration No. 333-39387) as amended.

(20)  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.

(21)  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.

(22)  Incorporated by reference to an exhibit to the Company's Registration
      Statement on Form S-8 (File No. 333-59051) as filed with the Commission on
      July 4, 1998.

(23)  Incorporated by reference to an exhibit to the Company's Quarterly Report
      on Form 10-Q for the quarterly period ended January 31, 1998.

(24)  Incorporated by reference to an exhibit to the Company's Quarterly Report
      on Form 10-Q for the quarterly period ended April 30, 1998.

(25)  Incorporated by reference to an exhibit to the Company's Quarterly Report
      on Form 10-Q for the quarterly period ended July 31, 1998.

(26)  Incorporated by reference to an exhibit to the Company's Annual Report on
      Form 10-K for the year ended October 31, 1997.

(27)  Filed herewith. This agreement was previously filed as an exhibit to the
      Company's Quarterly Report on Form 10-Q for the quarterly period ended
      July 31, 1997. Confidential treatment had been granted to certain portions
      of this exhibit but no longer applies.

(28)  Incorporated by reference to an exhibit to the Company's Registration
      Statement on Form S-8 (File No. 333-77007) as filed with the Commission On
      April 26, 1999.

(29)  Incorporated by reference to an exhibit to the Company's Quarterly Report
      on Form 10-Q for the quarterly period ended April 30, 1999.

(30)  Incorporated by reference to an exhibit to the Company's Quarterly Report
      on Form 10-Q for the quarterly period ended July 31, 1999.

(31)  Incorporated by reference to an exhibit to the Company's Annual Report on
      Form 10-K for the year ended October 31, 1998.




                                       65