**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**Form 10-K**

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**(Mark One)**

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

**Forthe fiscal year ended October 31, 2006**

**or**

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

**CommissionFile Number: 000-52038**

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**VERIGY LTD.**

(Exact Name of Registrantas Specified in Its Charter)

| **SINGAPORE**                                                    |   | **N/A**                               |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
| **NO. 1 YISHUN AVE 7  SINGAPORE 768923**                         |   | **N/A**                               |
| (Address of  Principal Executive Offices)                        |   | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code **(+65) 6377-1688**

**Securities registered pursuant to Section 12(b) ofthe Act:**

| Title of Each Class                | ** ** | **Name of Each Exchange on Which Registered** |
|------------------------------------|------------|-----------------------------------------------|
| **Ordinary  Shares, no par value** | ** ** | **The  NASDAQ Global Select Market**          |

 

**Securities registered pursuant to Section 12(g) ofthe Act:**

**None**

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Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o No x

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes o No x

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x No o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated or, a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check One):

|  | Large accelerated filer o | Accelerated  filer o | Non-accelerated  filer x |
|--|--------------------------------|----------------------|--------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o No x

The aggregate market valueof the registrant’s voting and non-voting common equity held by non-affiliatesas of April 30, 2006, the last business day of the registrant’s mostrecently completed second fiscal quarter: Not applicable because registrant’sordinary shares did not begin trading on The Nasdaq Global Select Market until June 13,2006.

As of December 15,2006, there were 58,811,045 outstanding ordinary shares, no par value.

**DOCUMENTS INCORPORATED BY REFERENCE**

| Document Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | ** ** | ** ** | **10-K Part** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|---------------|
| Portions  of the registrant’s Proxy Statement for its 2007 Annual General Meeting of  Shareholders, which will be filed pursuant to Regulation 14A within 120 days  after registrant’ s fiscal year ended October 31, 2006, are incorporated  by reference into Part III, Items 10 – 14 of this Annual Report on  Form 10-K. Except as expressly incorporated by reference, the  registrant’s Proxy statement shall not be deemed to be a part of this Annual  Report on Form 10-K. |       |       |

 

 

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**TABLEOF CONTENTS**

|                             | ** ** | ** **                                                                                                              | ** ** | **Page** |
|-----------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Forward-Looking  Statements |       | 3                                                                                                                       |       |
|                        |       | PART I                                                                                                             |       |     |   |
| Item 1                      |       | Business                                                                                                                |       | 3        |   |
| Item 1A                     |       | Risk Factors                                                                                                            |       | 19       |   |
| Item  1B                    |       | Unresolved  Staff Comments                                                                                              |       | 36       |   |
| Item 2                      |       | Properties                                                                                                              |       | 36       |   |
| Item 3                      |       | Legal  Proceedings                                                                                                      |       | 37       |   |
| Item  4                     |       | Submission  of Matters to a Vote of Security Holders                                                                    |       | 37       |   |
|                        |       | PART II                                                                                                            |       |     |   |
| Item 5                      |       | Market  for the Registrant’s Common Equity, Related Shareholder Matters and Issuer  Purchases of Equity Securities |       | 38       |   |
| Item 6                      |       | Selected  Financial Data                                                                                                |       | 39       |   |
| Item  7                     |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             |       | 41       |   |
| Item  7A                    |       | Quantitative  and Qualitative Disclosures About Market Risk                                                             |       | 61       |   |
| Item  8                     |       | Financial  Statements and Supplementary Data                                                                            |       | 62       |   |
| Item  9                     |       | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure                                   |       | 107      |   |
| Item  9A                    |       | Controls  and Procedures                                                                                                |       | 107      |   |
| Item 9B                     |       | Other  Information                                                                                                      |       | 108      |   |
|                        |       | PART III                                                                                                           |       |     |   |
| Item 10                     |       | Directors  and Executive Officers of the Registrant                                                                     |       | 109      |   |
| Item  11                    |       | Executive  Compensation                                                                                                 |       | 109      |   |
| Item  12                    |       | Security  Ownership of Certain Beneficial Owners and Management and Related Shareholder  Matters                        |       | 109      |   |
| Item  13                    |       | Certain  Relationships and Related Transactions                                                                         |       | 109      |   |
| Item  14                    |       | Principal  Accountant Fees and Services                                                                                 |       | 110      |   |
|                        |       | PART IV                                                                                                            |       |     |   |
| Item 15                     |       | Exhibits  and Financial Statement Schedules                                                                             |       | 110      |   |

 

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**Forward-LookingStatements**

The following discussionshould be read in conjunction with the combined and consolidated financialstatements and notes thereto included elsewhere in this Annual Report on Form 10-K.This report contains forward-looking statements including, withoutlimitation, statements regarding trends, cyclicality, seasonality and growth inthe markets we sell into, our strategic direction, expenditure in research anddevelopment, anticipated benefits from our operating model, our future effectivetax rate, new product introductions, product pricing, changes to ourmanufacturing processes, our liquidity position, our ability to generate cashfrom continuing operations, our expected growth, the potential impact ofadopting new accounting pronouncements, our potential future financial results,our purchase commitments, our obligation and assumptions about our retirementand post-retirement benefit plans, the impact of our variable cost structure,our lease payment obligations and expected savings from our restructuringprograms that involve risks and uncertainties. Additional forward-lookingstatements can be identified by words such as “anticipated,” “expect,” “believes,”“plan,” “predicts,” and similar terms. Our actual results could differ materiallyfrom the results contemplated by these forward-looking statements due tovarious factors, including those discussed in Item 1A and elsewhere in this Form 10-K.

**PART I**

**Item 1.**                        *Business*

**Overview**

Verigy became an independent company on June 1,2006, when we separated from Agilent Technologies Inc. We design, develop,manufacture and sell advanced test systems and solutions for the semiconductorindustry. We offer a single platform for each of the two general categories ofdevices being tested: our 93000 Series platform, designed to test System-on-a-Chip(SOC), System-in-a-Package (SIP) and high-speed memory devices, and ourVersatest V5000 Series platform, designed to test memory devices,including flash memory and multi-chip packages. Our test solutions areboth scalable and flexible. Our test platforms are scalable across differentfrequency ranges, different pin counts and different numbers of devices. Ourtest platforms’ flexibility allows for a single test system to test a widerange of applications for semiconductor devices. Our scalable platformarchitecture provides us with internal operating model efficiencies such asreduced research and development costs, engineering headcount, supportrequirements and inventory risk. The scalability and flexibility of our testsolutions also provides economic benefits to our customers by allowing them toget their complex, feature-rich semiconductor devices to market quickly and toreduce their overall costs. We also provide test and application expertise,service and support through our worldwide service organization.

We have a broad installedcustomer base, having sold over 1,400 of our 93000 Series systems and over2,300 Versatest Series systems. Our customers include integrated devicemanufacturers, or IDMs, test subcontractors, also referred to assubcontractors, which includes specialty assembly, package and test companiesas well as wafer foundries, and fabless design companies. As of October 31,2006, we had approximately 1,500 employees worldwide.

**The SemiconductorTest Equipment Industry**

***Industry Background***

Semiconductor devices, also referred to as integratedcircuits, or ICs, are the fundamental building blocks used in all electronicsystems. They have played an important role in enabling the proliferation ofcomputing, communications and consumer electronic products. As technologycontinues to penetrate most aspects of daily life, semiconductor devices areplaying an increasingly important role in a growing number and variety ofproducts. Consequently, the global semiconductor industry, while experiencingsignificant 

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cyclical fluctuations inits growth rate, has exhibited strong overall growth over the last30 years. With the continued development of new growth segments within thesemiconductor market, we believe the semiconductor market should continue toexperience periods of strong growth.

The design and manufacture of semiconductor devices isa complex and capital-intensive multi-step process. This process involvesdifferent types of equipment used to manufacture, assemble and testsemiconductor devices. Semiconductor test equipment and services are a criticalpart of this complex design and manufacturing process and are utilized in eachof the key design and manufacturing stages.

Demand for new semiconductor test equipment is drivenby two primary forces: growth in semiconductor unit volume that drives the needfor additional testing capacity, and the adoption of new technologies insemiconductor design, manufacturing and packaging that require new types ofsemiconductor testing equipment.

Due to the different architectures and functionalitiesof semiconductors, semiconductor test equipment and services are generallycategorized by the type of semiconductors tested. The two general categories areequipment used to test memory semiconductors, referred to as memory testing,and equipment used to test non-memory semiconductors, which includes testersfor testing less complex, discrete semiconductors, and testers designed to testvery complex, highly integrated semiconductors commonly referred to as System-on-a-Chip,or SOC, or System-in-a-Package, or SIP, testing.

SOCs and SIPs are semiconductors that integrate thefunctionality of multiple individual ICs onto a single IC or package of ICs,and often contain both digital and analog functionalities, including radiofrequency (RF) capabilities, communication interfaces and embedded memory. Bycombining multiple technologies onto a single, more complex chip or package,these devices provide the benefits of lower cost, smaller size, higherperformance and lower power consumption and facilitate faster time-to-marketthat is critical, particularly for products targeted to the consumerelectronics market.

Memory devices, particularly flash memory devices, representa significant and growing portion of the semiconductor industry. The flashmemory market for NAND and NOR flash, as measured by megabits shipped, hasdoubled every year since 2000. This growth has been fueled largely by theextensive use of flash memory in consumer products such as MP3 players, cellphones, digital cameras and other handheld devices. There are two key types offlash memory: NAND flash, which is suited to the storage of large amounts ofdata in devices such as MP3 players and digital cameras, and NOR flash, whichis typically used for the storage of basic operating instructions and programsthat enable devices such as cell phones to start-up and function. Given thecompact nature of consumer electronics products and the increasing need formore memory in these products, complex and more compact memory device packagingtechniques, such as stacked and multi-chip packages, or MCPs, are beingadopted.

Semiconductor test equipment plays an important roleby enabling semiconductor designers and manufacturers to lower their overallcosts and get products to market quickly in addition to improving the qualityand reliability of their end products. By detecting and sometimes repairingmanufacturing defects, test equipment enables semiconductor designers andmanufacturers to improve manufacturing yield, meaning the proportion ofsemiconductor devices that perform to specifications. Improving manufacturingyields. In addition, we believe that scalable and flexible test equipmentrepresents a key competitive advantage because it reduces test time, assists inachieving faster time to market and lowers capital investment requirements byallowing semiconductor designers and manufacturers to test different types ofsemiconductors with the same test equipment.

Bringing semiconductor products to market is amulti-step process, which includes stages referred to as production prototype,production ramp and high-volume production. Semiconductor test equipment playsan important role in each of these stages.

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***ProductionPrototype.******  ***Once an initial design of asemiconductor has been created, the first stage in bringing an actual IC tomarket is to produce a small quantity of prototype ICs to validate the designand ensure that it performs according to its specifications. What thesemiconductor designer needs most from the test equipment and services providerat this stage is advanced test equipment and test strategy expertise. Theengineering validation and device characterization that occurs at this stagerequires high precision test equipment to ensure accuracy and high flexibilityto modify test procedures and parameters, because the IC design may iteratemultiple times. Test strategies and methodologies are developed early to ensurethat the test solution implemented is capable of testing the ICs across theentire manufacturing process. Of all the stages of bringing a new semiconductorto market, it is at this stage that the most advanced test equipment isrequired.

***Production Ramp.  ***Oncea semiconductor passes the production prototype stage, the next stage inbringing it to market is the ramp to high volume production. In the productionramp stage the semiconductor designer and manufacturer is focused ontransitioning as quickly as possible to the high-volume production stage. Whatthe semiconductor designer and manufacturer needs from the test equipment andservices provider at this stage is application expertise and an understandingof manufacturing processes. Test solutions at this stage are no longer focused onvalidating the product design, but are focused on fine-tuning the manufacturingprocess to optimize yield. Test optimization is critical in this step, withsoftware analysis being used to determine which tests are unnecessary and canbe streamlined or eliminated in order to save time in the manufacturing processwhile maintaining the appropriate thoroughness of the test process.

***High Volume Production.******  ***The finalstage in bringing a semiconductor to market is high-volume production. The keyfocus for the semiconductor manufacturer at this stage is to reduce the overallcost of test by achieving high throughput of quality semiconductor devices. Toachieve this goal, semiconductor manufacturers require high-reliability testequipment with maximum up-time, and tailored service and support, from theirsemiconductor test equipment and services provider. Integration of the testequipment into the production process is optimized to improve efficiency andminimize the time that test equipment is not utilized. In order to achieve highthroughput, test equipment that is not only fast but can test multiple devicesat the same time is critical, especially in the testing of memory devices.

**Semiconductor TestMarket Challenges**

Because of thecompetitiveness of the broader consumer electronics market, semiconductordesigners and manufacturers are increasingly focused on bringing high qualitycomplex ICs to market faster and at lower costs. As a result, semiconductortest equipment and services suppliers are facing new challenges confronted bysemiconductor designers and manufacturers due to:

***Increased pressure to reduce overall cost of test***

Continued cost pressuresare driving semiconductor designers and manufacturers to demand higherutilization of test systems, as well as test systems that can be re-used acrossdifferent types and generations of ICs. Test systems are required todemonstrate the scalability and flexibility necessary to permit desired levelsof utilization and extend their useful life. Rapid technology change within thesemiconductor industry can quickly render non-scalable test equipment obsoletefor the testing of new generations of semiconductors.

***Increased pressure to improve time-to-market***

Today’s semiconductormarket is characterized by shortening product life cycles as a result ofincreased exposure to and reliance on the consumer electronics market.Semiconductor designers and manufacturers that are first to market and thatquickly adapt to changing technological advances gain a 

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significantcompetitive advantage. The complex nature of manufacturing semiconductordevices requires that test solutions providers offer their customers more thanjust delivery of test equipment. Semiconductor designers and manufacturersrequire tailored test solutions and a breadth of application expertise in orderto accelerate their time-to-market with new ICs and maximize their revenueopportunity. Equipment suppliers that are not able to complement their hardwaresystems with application expertise have limited ability to impact theircustomers’ time to market.

***Increased complexity and performance requirements oftest***

The trend towards SOCs,SIPs and MCPs has created new challenges for semiconductor designers andmanufacturers. These increasingly complex semiconductor designs, which enableimproved performance, form and function, require sophisticated test solutions.In addition, advances in interface technology, the adoption of new designprotocols and process technology innovations have only added to thiscomplexity. Low cost test equipment that lacks a high level of sophisticationand broad application can end up being more costly in the long run.

***Meeting the needs of test subcontractors***

Test subcontractors facespecific test challenges. Subcontractors provide test services to a diversegroup of semiconductor designers and manufacturers, which include both fablessdesign companies and integrated device manufacturers, referred to as IDMs. Asa result, subcontractors are continually challenged to provide the capabilitiesto test a wide range of ICs. Optimizing the utilization of a subcontractor’sinstalled capital equipment is therefore important to its success. In order tooptimize this utilization, subcontractors require flexible semiconductor testsystems that are capable of testing a broad spectrum of ICs. Additionally,subcontractors require systems that can test ICs with varying pin counts whilemaintaining cost efficiencies and high throughput levels. For this reason, testsolutions providers who fail to offer scalable and flexible architectures, aswell as a breadth of application expertise, may fall short in meeting the needsof subcontractors.

**Our Solution**

We design, develop, manufacture and sell advanced testsystems and solutions for the semiconductor industry. Unlike competitors whoprovide multiple platforms for SOC/SIP/high-speed memory and memory test,we provide a single platform for each of the two general categories of devicesbeing tested. As part of our single scalable platform strategy, we develop andoffer performance and capability enhancements to our platforms as part of ourproduct development roadmap. Our 93000 Series platform is designed to testSOC, SIP and high-speed memory devices, and our Versatest V5000 Series platformis designed to test memory devices, including flash memory and MCPs. We alsoprovide a range of services that assist our customers in quickly and costeffectively delivering the innovative, feature-rich products demanded by theirend users.

More than a decade ago, weintroduced the concept of a scalable platform architecture for semiconductortesting, and we are continuing to capitalize on the benefits of that strategytoday. Our scalable platform architecture provides us with internal operatingmodel efficiencies, such as reduced research and development costs, engineeringheadcount, support requirements and inventory risk. The scalability andflexibility of our solution also provides economic benefits to our customers byallowing them to get their complex, feature-rich semiconductor devices tomarket quickly and to reduce overall costs. We believe our advancedSOC/SIP/high-speed memory and memory test solutions provide optimalcombinations of flexibility, cost and performance to a wide range of designersand manufacturers in the semiconductor industry at all stages of bringing asemiconductor product to market, from design to 

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productionprototype to high-volume manufacturing. The key elements of our solutions are:

***Scalable platform across a broad range of performancelevels***

Reducing the overall cost of test is critical for ourcustomers. Our test platforms are scalable in a number of ways, includingfrequency range of the applied test signals, the number of pins to accommodateICs with different pin counts and the number of devices that can be tested inparallel. This scalability allows semiconductor manufacturers considerableflexibility in selecting the right test solution to meet their needs, at anoptimal level of capital investment. In addition, our test systems can bequickly reconfigured or upgraded as requirements change. The combination ofscalability, speed and ease of reconfiguration of our test systems enables ourcustomers to reduce their long-term capital equipment requirements and minimizemanufacturing downtime.

The scalability of ourtest platforms is enabled by a “tester-per-pin” architecture, in the case ofour SOC/SIP/high-speed memory test platform, and a “tester-per-site”architecture, in the case of our memory test platform. Our “tester-per-pin”architecture utilizes a separate and independent test processor for each pin ofeach device being tested, enabling each pin to be tested independently and inparallel to the testing of other pins. Our “tester-per-site” architecture istailored to make use of the parallel structure of memory devices to test alarge number of devices in parallel because it utilizes a separate andindependent test processor for each physical interface of the test system to adevice under test. We refer to those interfaces as test sites. With ouroptional Programmable Interface Matrix, our Versatest V5500 System for thefinal test of packaged devices can further capitalize on the parallel structureof memory devices to test multiple devices per test site, thereby increasingits parallel testing capabilities. For our SOC/SIP/high-speed memory testsystems, the process of frequency performance scaling is often done “instantly”through a software upload as the device test program is loaded into the system.For all of our test systems, the process of scaling up the number of devices atest system is capable of testing in parallel is often accomplished quickly,typically requiring only a few hours for basic scaling and only a few days formore extensive scaling. The per-pin architecture of our SOC/SIP/high-speedmemory test systems also enables us to offer customers innovative licensingmodels. For example, we currently offer our customers the unique ability topurchase and share performance licenses across different devices on a per-pinbasis. As a result, our customers are able to buy only the performance theyneed for each pin of the system.

***Flexible platforms across a breadth of applications***

Our test platforms are also highly flexible in thatthey allow a single test system to test a wide range of applications forsemiconductor devices. The high level of software reconfigurability of our testplatforms, and the support and enhancements we offer, enable our customers toimplement a broad range of application tests tailored to their needs, includingtests for high-speed digital, analog/mixed signal, flash memory, RF and high-speedmemory devices. In addition to enabling our customers to test a broad range of products,our test systems also support through software reconfiguration a number ofadvanced test methodologies, such as built-in self test, or BIST,design-for-test, or DFT, reduced pin count test, or RPC, and concurrent test.These methodologies can simplify testing complex devices, thereby increasingour customers’ throughput as well as improving their time to market. We arecontinually developing additional enhancements to our test platforms to supportadditional application tests and test methodologies.

Competing test platformsoften require an IC device manufacturer to have devices tested by multiple testsystems in order to complete the tests required for different applicationscontained in the devices. This process is not only expensive, cumbersome andtime-consuming, but it also takes up valuable floor space in the manufacturingfacility. In comparison, our test platforms are able to run the tests for asignificant number of different applications without having to move devices todifferent test systems. The flexible test capabilities of our 93000 Series andV5000 Series test platforms enable our customers to reduce their 

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overallcost of equipment acquisition, employee training and test equipment maintenancewhile simultaneously increasing equipment utilization.

***Advanced, innovative test technology***

As a result of the competitive pressures our customersface, they continually need to develop and bring to market increasingly complexproducts. We develop advanced technology solutions in order to assist ourcustomers in accomplishing this goal in a cost effective and timely manner.From our history as part of Agilent, which was part of Hewlett Packard untilits spin-off in 1999, we have a legacy of introducing new and innovativedesigns to market. Some of these key innovations include the development ofscalable platforms for both SOC/SIP/high-speed memory and memory testthrough our “tester-per-pin” and “tester-per-site” architectures, our testprocessors utilizing high performance application-specific integratedcircuits, or ASICs, and our liquid cooling technology for our test systemhardware.

Since 1991, we have used ASICs for our test processorsin place of larger, less integrated and less sophisticated designs, allowingour test processors to be very small and providing our test systems with thehigh performance and accuracy expected from an ASIC-based design. The smallsize of our ASIC-based test processors enables our “tester-per-pin” and “tester-per-site”architectures. Along with the additional performance, scalability andflexibility benefits of those architectures, our ASIC-based architecturesresult in test systems that are able to test large numbers of devices inparallel in a small test platform footprint.

Our products use liquidcooling technology, which provides lower operating temperatures, greater systemreliability, reduced operating costs, improved accuracy and speed and quieterand cooler operation than the traditional air cooled technology used in somecompetitive products. This allows our test platforms to achieve highperformance, accuracy, reliability and parallelism while simultaneouslyachieving a small test platform footprint. We released our first liquid cooledtester in 1991 and have extensive experience in the application of liquidcooling technology to semiconductor test systems.

***Global delivery of expert application knowledge***

Getting semiconductors tomarket quickly is vital for our customers. Our worldwide professional staff ofhighly trained applications engineers provides our customers with a high levelof technical expertise to assist our customers as they develop testapplications for their semiconductor devices. Our extensive expertise spans abroad range of semiconductor devices, including chipsets and graphics, wirelessand wired communication, flash memory, video and audio, high-speed memory andcomplex multi-chip memory packages. We also produce leading-edge innovativetest technologies and deliver, on a global basis, superior expertise across awide range of applications to assist our customers in quickly delivering newfeature-rich products to the market.

***Lowered overall cost of test for customers***

We have designed ourplatforms to be versatile and reconfigurable. As a result, our customers areable to select a configuration to meet their current test requirements and, asthose requirements change, to upgrade the capabilities of their test equipmentto meet their future needs without having to purchase completely new systems.Our high quality and reliable test solutions provide high uptime as measured bythe reliability of the test equipment. Additionally, our ability to provideinnovative solutions and technical expertise across a wide variety ofapplications helps our customers optimize test equipment performance for the specificsemiconductor device being tested, which reduces test times and increases bothyield and cost efficiencies. Consequently, we believe our solutions lower ourcustomers’ cost of test in high volume manufacturing.

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***Shortened time-to-market***

To achieve fast time tomarket, our customers require scalable and flexible test platforms andapplication expertise and support at each stage of the manufacturing process.We provide scalable and flexible test platforms based on our establishedarchitectures, which can be changed and reconfigured quickly to address newtest technologies. Our highly trained applications engineers provide supportfor the development of test strategies, test applications analysis andoptimization and test equipment utilization for our customers.

**Our Strategy**

Our objective is to be theleading semiconductor test equipment and services supplier, providing thehighest return on our customers’ investment in test equipment. We will continueto maintain our focus on our customers’ evolving needs by offering innovativeand versatile semiconductor test equipment and services solutions that addressthe challenges facing semiconductor designers and manufacturers, and we willremain committed to providing outstanding service and support to our customers.Additionally, we intend to continue to streamline our business and capitalizeon our research and development resources in an effort to achieve profitablegrowth in excess of the broader semiconductor test industry. We are also in theprocess of executing on our more flexible cost structure to enable us toincrease and decrease our capabilities and spending in response to cycles inthe semiconductor industry, and thereby deliver continued customerresponsiveness as well as improved overall profitability. Key elements of ourstrategy include:

***Maintaining the rapid pace of product innovation onscalable platforms***

We believe scalableplatforms offer our customers the best return on their investment in testequipment. The scalable architecture of our solutions coupled with the provenstability of our platforms facilitates our focus on innovative enhancements,application improvements and technical solutions in step with our customers’needs. The pace of innovation in the semiconductor industry is so rapid thatperformance doubles roughly every 18 months. Semiconductor companies thusrequire substantial technical expertise and constant innovation to successfullycompete. We believe that with our scalable product architecture, wide-rangingtechnical capabilities and expertise and established global delivery platform,we are well positioned to be an innovator in the semiconductor test market andto assist our customers in competing successfully in the semiconductor market.

***Continuing to focus on emerging opportunities forprofitable growth***

We will continue to lookto increase our market penetration by focusing on market opportunities where wecan capitalize on our technical expertise and add value to our customers whodemand the most sophisticated and complex test solutions. We believe that theseopportunities have attractive characteristics, such as the potential forincreased customer adoption of our solutions and the potential for high returnson our investment. Recent examples of such emerging opportunities include gameconsoles that utilize high-speed memory and full-featured mobile handsets thatutilize complex SOCs, SIPs and MCPs.

***Capitalizing on our success with test subcontractorsto increase our success with IDMs***

The scalability andflexibility of our platform architecture has led to our success in attractingsubcontractors to our test solutions. We believe that the same advantages ofour solutions that subcontractors find compelling will continue to drive theincreased adoption of our solutions by IDM customers. IDMs are facingincreasingly intense competition, time-to-market pressures and shorter productlifecycles associated with consumer driven demand, which has led them to beginto outsource an 

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increasingpercentage of their semiconductor test business. We believe that our successwith our subcontractor customers will drive IDMs to direct a greaterpercentage of their test business to us, as IDMs have an interest inmaintaining consistency across their internal and external test platforms. Thesefactors, combined with the cost and capital expenditures restrictions that manyIDMs experience, are increasing the need for better asset utilization byIDMs. We have existing relationships or recent customer wins at the tenlargest IDMs.

***Continuing to deliver an outstanding total customerexperience throughout the product life cycle***

Application supportthrough all phases of the product life cycle is critical to our customers’ability to achieve fast time-to-market for their products while achieving ahigh return on their test equipment investments. We will strive to continue toprovide our customers with thorough application expertise, to maintain theglobal delivery capabilities of our customer-facing teams, and toefficiently service our customers with an emphasis on responsiveness. We arealso increasing our presence in Asia in the areas of application engineering,research and development and order fulfillment in order to gain proximity toand further strengthen our relationships with customers in Asia. Additionally,we will continue to accentuate and reward the values of professionalism,technical expertise and uncompromising integrity in all our employees in aneffort to continually enhance our customers’ experience.

***Optimizing our operating model to generate sustainableprofitability***

The semiconductor industryhas historically been cyclical. This cyclicality requires semiconductor testsuppliers to have flexible cost structures in order to sustain profitabilitythrough the peaks and valleys of the industry’s cycles. We continue to focus onincreasing our profit margins and lowering our break-even point. To accomplishthis, we have negotiated flexible supply agreements, introduced flexible paystructures for all employees and optimized our information technologyinfrastructure for our business. Additionally, we have transitioned ourmanufacturing to a  new contractmanufacturer with a strong presence in Germany and in Asia. We believe ourenhanced presence in Asia will help us to achieve lower manufacturing costs. Weexpect to continue to streamline our cost structure and our global supply chainin an effort improve our profitability in the highly cyclical semiconductorindustry.

**Our Products andServices**

We offer a single platformfor each of the two general categories of devices being tested: our 93000 Series platform,designed to test SOCs, SIPs and high-speed memory devices, and ourVersatest V5000 Series platform, designed to test memory devices,including flash memory and multi-chip packages. Each of these platforms ishighly scalable and flexible and contains advanced, innovative test technology.We also provide high levels of test application expertise, services and supportfor our customers who use these platforms.

***93000 Series Platform—SOC, SIP and High-SpeedMemory Test***

Our 93000 Series platform, introduced in 1999,tests SOCs, SIPs and high-speed memory devices, which are used in a very widerange of electronic products including MP3 players, digital televisions, televisionset-top boxes, PCs, gaming consoles and cell phones and other wirelesscommunication devices. The scalability and flexibility of the 93000Series platform, enabled by its advanced, innovative test technology,allows it to cover the testing requirements for a wide range of devices andapplications in all stages of bringing a semiconductor product to market, fromproduction prototype to high-volume manufacturing, assisting devicemanufacturers in speeding time to market and lowering the overall cost of test.

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*Scalability.**  *Our 93000 Series platform,with its “tester-per-pin” architecture, is highly scalable in a number of ways,including with respect to the frequency range of the applied test signals, thenumber of pins to accommodate ICs with different pin counts and the number ofdevices that can be tested in parallel. The 93000 Series platform with ourlatest generation Pin Scale digital cards is scalable in frequency performancefrom 800 Mbits/second to 12 Gbits/second, addressing the test needs for a widerange of today’s high-speed interfaces, including PCI Express, HyperTransport,Serial ATA and ultra-high-speed I/O buses required for wired communications.With up to 32 channels per digital card and the ability to use from 4 to 64cards per system, the 93000 Series platform can scale in the number ofpins that it tests simultaneously, from 128 to 2,048 pins, enabling it to testlarge numbers of devices in parallel. Our 93000 Series platform’sscalability allows a customer to initially buy a 93000 Series platformwith just a few test pins and moderate frequency performance capabilities todayand then upgrade to more pins and greater frequency performance capabilities astest requirements change.

Our 93000 Series platform’s scalability isenabled by its “tester-per-pin” architecture. SOCs, SIPs and high-speedmemory devices are complex and sophisticated, and each device pin may need tobe tested independently for a thorough and complete test. Different SOCs, SIPsand high-speed memory devices have different numbers of pins. By beingable to select the number of digital cards and pins in the system, the exacttest system can be specified. A single 93000 Series system can test bothdifferent types and different numbers of devices by loading different testprograms onto the test processor. This ability to quickly change the type andnumber of devices being tested makes our test systems particularly well suitedfor subcontractors who test a wide range of products.

With its scalable “tester-per-pin” architecture, the 93000Series platform is the only SOC/SIP/high-speed memory test platformto offer a floating, per-pin licensing program. Our InstaPin performancelibrary gives customers instant access to the different speed and memorysettings in the test processors, pin-by-pin. Because these licenses are able tobe assigned from pin to pin within a tester, resources are utilized only whenneeded, where needed and without having to reconfigure system hardware. Webelieve that competing test platforms require manufacturers to manuallyreconfigure hardware or swap out entire test systems, lengthening test time andincreasing cost of test. With the 93000 Series platform’s InstaPinperformance library, our customers buy only the capability they need, pin-by-pin,and can easily use software to configure their test systems to meet the nextdevice’s test requirements.

*Flexibility.**  *Our 93000 Series platform cantest a wide range of applications with only one test system. Some competitorsrequire a device manufacturer to switch between different test systems in orderto run the tests required for different applications. This is a cumbersome andtime-consuming process. Not only can this process take hours to perform, whichraises the overall cost of test, but the extra test system required to run thedifferent application tests takes up valuable floor space within themanufacturing facility. In contrast, a single 93000 Series system is ableto test the high-speed digital, analog/mixed signal, RF, embedded memory, high-speedmemory and high speed interface I/O buses found in a wide range of applicationswithout having to move devices between different test systems. Our 93000 Series platformalso supports a number of advanced test methodologies such as BIST, DFT andconcurrent test. As a result, our customers can test their portfolio of deviceson a single platform, enabling them to cost-effectively address the changingtest needs common in the semiconductor industry. This flexibility isparticularly well suited to subcontractors, who test a wide variety ofproducts.

In addition to our 93000 Series platform’sability to adapt to a constantly changing test environment, the platform wasbuilt to be ready for future requirements. This means as devices get faster,interfaces and specifications of devices change or more capabilities areintegrated into devices, the 93000 Series platform can be quickly updatedor upgraded to accommodate the new technology as it becomes available. This iscritically important to large, cutting-edge device manufacturers who constantlyseek to remain at the head of the technology curve. When companies have toinvest in new test systems, rather than simply upgrade 

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their existing systems,their cost of test inevitably increases. The flexibility of the 93000 Series platformmeans that our customers’ investments in our test platforms are protected asthey can continue to use the 93000 Series platform over severalgenerations of products.

*Enabledby advanced, innovative test technology.**  *Our 93000 Series platform’s “tester-per-pin”architecture enabled by its ASIC-based and liquid cooled design is what makesthe platform scalable, flexible and able to achieve high performance andaccuracy in a small test platform footprint. Its “tester-per-pin”architecture provides for an ASIC-based test processor which tests each pin ofeach device, with all test processing done locally in the test processors andeach test processor operating independently and in parallel to the other testprocessors testing the other pins of the devices. The use of high performanceASICs in the test processors is what allows the test processors to achieve highperformance and test a large number of devices in parallel while being capableof fitting into a test system that occupies a relatively small footprint on thefloor of the manufacturing facility.

Our use of liquid coolingtechnology is another key element of the 93000 Series platform’s design.The combination of the 93000 Series’ “tester-per-pin” architecture and smalltest platform footprint means that there is a very large number of highperformance ASICs concentrated into a small amount of space. Maintaining thetest system’s high performance, accuracy and reliability for sustained periodsof time in real world operational conditions requires an efficient means ofdissipating the considerable amount of heat generated by the high performanceASICs. To address this issue, we introduced our first liquid cooled tester in1991 and have continued to utilize liquid cooling in the 93000 Series platformbecause it provides lower operating temperatures, greater system reliability,reduced operating costs, improved accuracy and speed and quieter and cooleroperation than the traditional air cooling used in many of our competitors’products. As a result, our 93000 Series systems provide our customers witha high-performance and reliable test solution which, when compared to some ofour competitors’ air cooled products, utilizes a relatively small amount ofspace on the semiconductor test floor and is quiet and cool in its operation.

***Versatest V5000 Series Platform—Flash, SRAM, DRAMand Mixed Memory Test***

Our Versatest V5000 Series platform, introducedin 2004, tests flash memory, SRAM, DRAM and mixed memory devices contained in avery wide range of electronic products. It can also test multi-chip packagescontaining single or multiple types of memory, addressing the emerging use ofMCPs to satisfy the increasing memory requirements of consumer electronicsdevices. Different systems are available that can be optimized for wafer test,final test or engineering development. The flexibility of this platform ensuresthat customers can test a number of different memory types at different stagesof manufacturing, allowing them to change their mix of products without havingto change test platforms.

*Scalability.**  *Our Versatest V5000 Series platform,with its “tester-per-site” architecture, is a highly scalable test solutiondesigned specifically for the testing of memory devices to enable highlyparallel and efficient testing to lower customers’ overall cost of test andshorten customers’ time to market. Low cost of test is achieved through testingefficiency and parallelism. Testing more devices in parallel can significantlyreduce cost of test, especially in high volume manufacturing, but only if thetester architecture does not result in increased test times. The Versatest Series platform’s“tester-per-site” architecture enables increased parallelism without any effecton test time, thus supporting highly parallel tests with high throughput. As aresult of the scalability of our Versatest Series platforms, customers canbuy test systems to meet their current exact requirements at the lowest capitalcost, and then upgrade as their test requirements change.

We have threeVersatest V5000 Series systems, each with a distinct purpose insemiconductor testing and with different levels of scalability depending onthat purpose:

·       OurVersatest V5500 Series system is a highly scalable high-volume productiontest system configured for final test of packaged devices, and optimized forfinal test of MCPs. When equipped 

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with our optionalProgrammable Interface Matrix, it can be scaled to test up to 512 devices andup to 24,576 pins in parallel. Like our other Versatest V5000 Series platforms,the Versatest V5500 Series system performance can test up to 200 Megahertzdata rates.

·       OurVersatest V5400 Series system is a highly scalable high-volume productiontest system configured and optimized for wafer test. It can be scaled to test upto 288 devices and up to 4608 pins in parallel while the devices beingtested are still in silicon wafer form. A V5400 system can be upgraded to aV5500 system at a customer’s site, thereby maintaining scalability across theproduct family.

·       OurVersatest V5000 Series system is a full function but less expensive andlower volume Versatest test system designed for use in the research anddevelopment environment. It provides engineers a relatively inexpensive testtool for testing small numbers of devices in prototype development thatprovides all of the functionality of an expensive production test system andcan be used to avoid the expense and inefficiency of taking a more expensive,high-volume test system out of production. Programs developed for the VersatestV5000 Series system can be quickly transferred to our Versatest V5400 andV5500 Series systems for high volume production, helping shorten customers’time to market.

The scalability of our Versatest V5000 Series systemsis enabled by a patented “tester-per-site” architecture. Designed specificallyfor memory testing, this architecture enables highly parallel and efficienttesting of memory devices as well as a high level of scalability by utilizing aseparate and independent test processor for each test site of the system. Thistest processor contains a dedicated set of resources, including power supplies,test pattern generators, test sequence controllers and error detectioncircuitry, that can be independently applied to each device under test. Thisindependent control of each device under test ensures the flexibility oftesting a wide variety of different memory types without a change in testerhardware. In addition, we believe our tester-per-site architecture is more efficientthan some competitive systems that share resources across several devices undertest. Competing systems that do not apply a tester-per-site architecture musttest these devices sequentially, causing test times to increase compared to ourparallel approach.

*Flexibility.**  *There are fewer pure NOR and NANDflash manufacturers, and the test mix for most manufacturers now includesseveral different types of memory such as Flash, DRAM and SRAM. In addition,device densities are increasing and use of new test methodologies, such as RPC,DFT and BIST, is increasing. The V5000 Series platform has the ability totest Flash, DRAM, SRAM and stacked memory devices on a single platform, and canprovide a wide variety of test methodologies, including RPC, DFT and BIST. Thisflexibility enables our customers to cost-effectively test a wide range ofparts without having to change test platforms.

*Enabledby advanced, innovative test technology.**  *Our Versatest V5000 Series system’s“tester-per-site” architecture enabled by its ASIC-based design iswhat makes the platform scalable, flexible and able to achieve high performanceand accuracy in a small test platform footprint. The “tester-per-site” architectureof the Versatest V5000 Series system provides for an ASIC-based testprocessor for the testing of devices at each test site of the system. All testprocessing is done locally in the test processors at each test site, with eachtest processor operating independently and in parallel to the other testprocessors testing devices at the other test sites. As in the 93000 Series platform,the test processors use high performance ASICs to achieve high performance andtest a large number of devices in parallel while being capable of fitting intoa test system that occupies a relatively small footprint on the floor of themanufacturing facility. Through the addition of additional test sites and testprocessors, the Versatest V5000 Series system can be easily scaled to testmore devices in parallel as customers’ requirements change, and the use of aseparate and independent test processor at each site of the system means thatthe speed of the test will stay the same as sites are added for additionalparallel testing.

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Our optional Programmable Interface Matrix, another ofour advanced innovative technologies, helps to further boost the parallelism ofour Versatest V5500 Series system for high volume production testing ofpackaged devices. Much like a telephone switching system routes callers totheir destinations, the Programmable Interface Matrix routes testing resourcesto the individual memory or MCP that requires testing. The switching is purelyelectronic, resulting in a faster and more reliable resource switching thanmechanical relays, with less downtime. It enables testing of up to 512 devicesin parallel for complex and high-pin-count MCPs and the flash memory prevalentin mobile devices. The Programmable Interface Matrix’s 24,576 pins ensure thateven highly complex memory devices can be tested with high parallelism and thusat lower cost.

Like our 93000 Series systems, our VersatestV5000 Series systems utilize liquid cooling technology that provides themwith lower operating temperatures, greater system reliability, reducedoperating costs, improved accuracy and speed and quieter and cooler operationthan the traditional air cooling used in many of our competitors’ products. Inaddition to enabling our Versatest V5000 Series systems to utilize arelatively small amount of space on the semiconductor test floor and be quietand cool in the operation compared to some of our competitors’ air cooledproducts, our liquid cooling technology enables the very high tester density,and hence the high parallelism of test, of our Versatest V5000 Series systemsand our optional Programmable Interface Matrix.

*Addressing uniquechallenges of multi-chip packages.**  *The rapid emergence of multi-chippackages, or MCPs, creates special testing challenges for memory device manufacturersin the final test of packaged devices. State-of-the-art consumer devices,especially mobile devices, continue to pack more functionality into smallerspaces. We are able to test concurrently the flash memory, SRAM and DRAMdevices that are often stacked into a single multi-chip package. All of thememory types in an MCP must be tested, but each memory type requires verydifferent test capabilities. We believe that competing test solutions providerscannot effectively or efficiently test all memory types in MCPs withoutmultiple insertions of the devices, usually on different test systems. In thesesituations, the increased test time and test floor complexity can significantlyincrease the cost of test. The scalable “tester-per-site” architecture of ourVersatest V5000 Series platform has allowed us to develop productenhancements and upgrades to enable our Versatest V5000 Series systems totest each MCPs with flash memory, SRAM and DRAM, the most common memory devicescontained in MCPs, without repeated insertions, providing our customers withhigh tester utilization and lower cost of test. The Versatest V5000 Series platform’sscalable architecture and software tools shared across different test systemshave further benefited MCP testing as programs previously created for testingsingle memories can be reused for testing the same type of memory on MCPs,reducing engineering time and thereby lowering overall cost of test.

**Test andApplication Expertise, Services and Support**

Our worldwide service organization performs a widevariety of services for our customers including professional test expertiseservices and total system support and professional services. Professionalservices include value-added, proactive services such as yieldoptimization and test program development assistance. We deliver, on a globalbasis, expertise across a wide range of applications to assist our customers inquickly delivering new feature-rich products to the market. Systems supportincludes ongoing and reactive services such as repair, calibration andrelocation as well as education and training.

We strive to provide highlevels of support and service through the life-cycle of our products. To thisend, generally we provide a standard one-year warranty which can be extended byour customers on an annual basis.

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**Introduction of NewPlatform Families**

We believe that our testplatforms are among the most highly scalable platforms in the semiconductortest industry. At the same time, in an effort to keep our test platforms as technologicallyadvanced as possible, we have in the past introduced and expect to introduce inthe future new test platforms, such as our introduction in 1999 of the 93000 Series platformwhich succeeded our 83000 Series platform. We also expect that from timeto time we may make upgrades to our test platforms that are so significant thatupgrading older platform versions through simply replacing the test processorswill not be cost effective. While these new introductions and significantupgrades give our platforms a finite lifespan as the technology in devicesbeing tested continues to advance, we generally provide continued support forour test platforms for a number of years after we have introduced a new orupgraded test platform and believe that we offer among the most scalable testplatforms in the semiconductor test industry, enabling manufacturers topurchase only the amount and performance level of hardware that they are ableto use while retaining the ability to upgrade that hardware as the need ariseslater.

**Research andDevelopment**

Our scalable platform architectures provide foroperating model efficiencies such as streamlined research and development andreduced total engineering headcount. Our research and development strategyfocuses on designing test solutions that lower the overall cost of test forsemiconductor designers and manufacturers. We strive to design highperformance, low overall cost per test semiconductor test equipment that hashigh throughput, scalability and flexibility and is efficient to manufacture,easy to use and simple to support.

From our history as part of Agilent, which was part ofHP until its spin-off in 1999, we have a legacy of introducing new andinnovative designs to market. We have a highly structured approach to maximizeresearch and development efficiency. A group of internal advisors formulates along-term technology plan with clear objectives. Through our direct engagementwith customers, high-priority projects are identified and appropriate resourcesare allocated. Engineering resources are organized by area of competence toeffectively develop expertise and to share technologies across product lines.

Our primary development center for SOC/SIP/high-speedmemory test solutions is in Boeblingen, Germany, and our primary developmentcenter for memory test solutions is in Cupertino, California. Our testprocessor and ASIC development is done in Colorado for both SOC/SIP/high-speedmemory and memory test solutions, where we have a center of core competency inVLSI SOC design. The R&D team has years of experience in the semiconductortest industry, with many key personnel having over 20 years of experiencein semiconductor test systems design.

Our expenditures forresearch and development for fiscal years 2006, 2005 and 2004 were$99 million, $101 million and $105 million, representing 12.7%,22.1% and 17.3% of net revenue in each year, respectively. As part of ourseparation from Agilent, we have consolidated our R&D teams in Boebligen,Germany, for our principal SOC development activities and in Cupertino,California, for our memory test development activities. We believe this willhelp us concentrate on our technology innovation and decrease our time tomarket for new products.

**Sales and Support**

We employ a direct worldwide sales and support modelthat enables us to meet strategic support commitments. Our experienced salespersonnel have the knowledge to address the technical benefits as well as theeconomic advantages of our systems. Our sales organization is tightly integratedwith our services and support organization, which allows us to betterunderstand our customers’ needs and to tailor solutions to meet those needs. Webelieve an ongoing service and support business is critical to providingsustained value to customers and maintaining customer loyalty.

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We sell our products and services directly to ourcustomers. We have established specialized sales and services teams to meet theneeds of our different types of customers, including IDMs, subcontractors andfabless design companies. Our sales organization is structured to fostercollaboration between us and our customers. This collaboration allows us tobetter address our customers’ semiconductor test needs and positions us to helpIDMs find solutions to their outsourced provider requirements and to helpintroduce subcontractors to IDMs who may need their services. As of October 31,2006, we had approximately 107 people in our sales organization withoffices located in all of the major semiconductor manufacturing markets.

Applications engineers work as part of the sales teambefore a sale is made and assist customers in the use of the product aftera sale is made. In the pre-sale role they provide in-depth technicalcommunication with customers, writing complex test programs and performingdemonstrations to show how our products solve specific test problems.Post-sale, our sales team assists in the creation of final test programs, andin the integration of the test cell into the customer’s environment. We believethat the quality of our applications sales force is a key differentiator in ourability to generate sales and provide customer satisfaction.

Our worldwide service organization representsapproximately 33% of our total employee base. Our services organization is supportedby a dedicated staff at our product development centers to address escalationswhen needed.

For our largest customers,we have dedicated global account managers with dedicated account teams. Accountmanagers are responsible for both sales performance and customer satisfaction.We recognize that we must have strong, long-term customer relationships to growour business over the semiconductor cycle. For that reason, each accountmanager is specifically responsible for the general relationship with thecustomer, including the coordination and preparation of technology roadmapexchanges. The account manager is also responsible for the support services forthat account and achieving a high level of customer satisfaction.

**Customers**

Our customers are broadly distributed acrossgeographic and product markets. In fiscal year 2006, one customer, ChipMosTechnologies (Bermuda) Ltd., accounted for more than 10% of our net revenue. Infiscal year 2005, no single customer accounted for more than 10% of our net revenue.In fiscal year 2004, one customer, Spansion Inc., accounted for more than10% of our net revenue.

Wederive a significant percent of our net revenue from outside the North America.The following table illustrates the breakdown of our revenue by geography.

| ** **                          | ** ** | **2006**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------|------------|-------------------------------|------------|----------|------------|----------|------------|
| ** **                          | ** ** | **($ in millions)** | ** ** |
| North America                       |       | $                             | 246        |     | $          | 124      |       | $ | 170 |   |
| *As a percent of total net revenue* |       | 31.6                          | %          | 27.2     | %          | 28.0     | %          |
| Europe                              |       | $                             | 48         |     | $          | 43       |       | $ | 65 |   |
| *As a percent of total net revenue* |       | 6.2                           | %          | 9.4      | %          | 10.7     | %          |
| Asia-Pacific,  excluding Japan      |       | $                             | 405        |     | $          | 195      |       | $ | 276 |   |
| *As a percent of total net revenue* |       | 52.0                          | %          | 42.8     | %          | 45.5     | %          |
| Japan                               |       | $                             | 79         |     | $          | 94       |       | $ | 96 |   |
| *As a percent of total net revenue* |       | 10.2                          | %          | 20.6     | %          | 15.8     | %          |
| Total net revenue                   |       | $                             | 778        |     | $          | 456      |       | $ | 607 |   |

 

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Although we experiencedstrong revenues in North America in fiscal year 2006, we expect the trend of anincreasing portion of our revenue coming from customers located in theAsia-Pacific region to continue as semiconductor manufacturing activitiescontinue to concentrate in the Asia-Pacific region.

**Manufacturing**

Through June 2006, we relied upon twomanufacturing models: a hybrid internal and contract manufacturing model forour 93000 Series products and a completely outsourced contractmanufacturing model for our Versatest series products. In connection with ourseparation from Agilent in June 2006, we transitioned the manufacturingprocesses for the 93000 Series platform products that we previouslyconducted internally to Flextronics Telecom Services Ltd. (“Flextronics”). As aresult of this transition, we now rely entirely on contract manufacturers. As of October 31, 2006, Flextronics ismanufacturing our Versatest V5000 Series platform in China and our 93000 Series platformin Germany. The complete transfer of volume manufacturing of the 93000 Series platformto China is expected to occur in the first half of calendar 2007. Flextronicswill continue to do limited early production runs of the 93000 Series platformin Germany. We expect this model to improve our ability to manage costs in acyclical market, drive down inventory costs and exposure, improve ourresponsiveness to customer demand and place us closer to emerging markets.

We will continue to maintain direct relationships withour key component suppliers and to control procurement of critical systemcomponents. This will allow us to respond quickly to changes in market demandand assure availability of parts. Effective component procurement is alsocritical to product quality, manufacturing cycle time and cost. We believe thatthe timely availability of low-cost, quality components provided by ourplanning and procurements teams, coupled with the large and variable capacityof our contract manufacturers, is an effective manufacturing strategy for ourcyclical market.

Our scalable platform architecture means we can reusemany component and subsystems in many different test system configurations.Component reuse helps us keep lower inventory levels, while helping us getbetter prices for the higher volumes of parts we buy. This is true both for the93000 Series and the Versatest V5000 Series platforms.

Our quality assuranceprogram focuses on continuous improvement in product quality. Engineering teamsassess quality at critical manufacturing stages to identify potential problems.Manufacturing engineers work with our contract manufacturers to fine-tune theproduction process, improve quality and efficiency and solve problems as theyarise. Customer service personnel extend the quality process into the field bymonitoring the quality and reliability of systems at customer sites.

**Competition**

The market for semiconductor test systems is highlycompetitive, rapidly evolving and subject to changing technology, customerneeds and new product introductions. We face substantial competition throughoutthe world in each of our product areas. Our primary competitors includeAdvantest Corporation, Credence Systems Corporation, LTX Corporation, NextestSystem Corporation, Teradyne, Inc. and Yokogawa Electric Corporation. Wealso compete with products developed internally by our customers.

The competitivefactors affecting the market for our products include:

·       productperformance, features and functionality;

·       price;

·       scalability;

·       flexibility;

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·       reliability,technical service and support;

·       qualityand availability of supporting software;

·       sizeof installed base; and

·       thelevel of training and customer support provided.

We believe that we competeeffectively with our competitors on the basis of these factors. Our ability toremain competitive will depend to a great extent upon our ongoing performancein the areas of product development and customer support. To be successful inthe future, we believe that we must respond promptly and effectively to thechallenges of technical change and our competitors’ innovations by continuallyenhancing our product offerings.

**Employees**

As of October 31,2006, we had approximately 1,500 employees, of which approximately 450 werelocated in Europe, approximately 510 were located in Asia and approximately 540were located in North America. Of our total employees, approximately 315were principally dedicated to research and development, 340 were dedicated tosales, general and administrative, 680 were dedicated to customer service,marketing, applications and services and support and 165 were dedicated tomanufacturing. Effective June 1, 2006, we transferred to Flextronicsapproximately 85 employees who were fully dedicated to manufacturing activitiesin Europe. As part of Agilent’s 2005 restructuring plan, we have terminatedapproximately 250 employees who were located primarily in the United States,which has impacted our headcount in each of the functional areas. We considerour relationship with our employees to be good. None of our domestic employeesis represented by a labor union or covered by a collective bargainingagreement, although works councils exist in various foreign jurisdictions wherewe have employees.

**Backlog**

At October 31,2006, and 2005, Verigy’s backlog of unfilled orders for products and serviceswere as follows:

| ** **       | ** ** | **Year Ended  October 31,** | ** ** |
|------------------|------------|---------------------------------------|------------|
| ** **       | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **       | ** ** | **(in millions)**                | ** ** |
| Products backlog |       | $                                     | 152        |   | $ | 100 |   |
| Services backlog |       | 97                                    |       | 75 |   |
| Total backlog    |       | $                                     | 249        |   | $ | 175 |   |

 

We define products backlog as systems for which wehave received purchase orders which we have not yet delivered but we expect todeliver within six months of our fiscal period end. Services backlog is definedas total outstanding orders for product support and services not yet rendered.We expect 80% of our services backlog as of October 31, 2006 to befulfilled within twelve months of our fiscal year end.

While backlog iscalculated on the basis of open orders, such orders may be subject tocancellation or delay by the customer with limited or no penalty. Our backlogat any particular date, therefore, is not necessarily indicative of actualsales which may be generated for any succeeding period. Historically, ourbacklog levels have fluctuated based upon the ordering pattern of our customersand limitations in our manufacturing capacity.

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**Intellectual Property**

We donot depend on any individual patent but, instead, rely on a combinationof patents, copyrights, trademarks, trade secrets, know how, confidentialityprovisions and licensing arrangements to establish and protect our proprietaryrights. We may be required to spendsignificant resources to monitor and protect our intellectual property rights.We may not be able to detect infringement and may lose our competitive decisionin the market before we do so. In addition, competitors may design around ourtechnology or develop competing technologies. Intellectual property rights mayalso be unavailable or limited in some foreign countries, which could make iteasier for competitors to capture market share. We often rely on licenses ofintellectual property useful for our business. We cannot be sure that theselicenses will be available in the future on favorable terms or at all.

**FinancialInformation About Geographic Areas**

For information on thegeographic concentration of our net revenues and long-lived assets, please seenote 23 “Segment and Geographic Information” of our combined andconsolidated financial statements.

**InvestorInformation**

We are subject to the informational requirements ofthe Securities Exchange Act of 1934 (the “Exchange Act”). Therefore, we fileperiodic reports, proxy statements and other information with the Securitiesand Exchange Commission (the “SEC”). Such reports, proxy statements and otherinformation may be obtained by visiting the Public Reference Room of theSEC at 100 F Street N.E., Washington, D.C. 20549 or by calling theSEC at 1-800-SEC-0330. In addition, the SEC maintains anInternet site (http: //www.sec.gov) that contains reports, proxy andinformation statements and other information regarding issuers that fileelectronically.

You can access our financial and certain otherinformation at our Investor Relations website. The address iswww.investor.verigy.com.

The charters of our AuditCommittee, our Compensation Committee, our Nominating and Governance Committee,as well as our Standards of Business Conduct (including code of ethicsprovisions that apply to our principal executive officer, principal financialofficer, controller and senior financial officers) are available on our websiteat www.investor.verigy.com under “Documents and Charters”. This information isalso available to shareholders by writing to the Company at the address on thecover of this Annual Report on Form 10-K.

**Item 1A.**                *Risk Factors*

A description of the riskfactors associated with our business is set forth below. You should carefullyconsider the risks described below and the other information in this reportbefore investing in our ordinary shares. Our business could be seriously harmedby any of these risks. The trading price of our ordinary shares could declinedue to any of these risks, and you may lose all or part of your investment.

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**Risks Relating toOur Business**

**We have undertakena significant restructuring of our operations and continue to incur significantexpenses to increase operational efficiencies.**

If we are unable tosuccessfully execute our wide-ranging cost saving initiative or if it fails togenerate significant cost savings, our business, financial condition andresults of operation could be materially adversely affected. We continue toincur significant expenses associate with our cost saving initiative, whichaffects our operations both domestically and internationally. This initiativeinvolves a number of significant ongoing changes, including:

·       changesto our employee compensation structure, as we recently introduced flexible paystructures which include a significant variable pay component based on overallcompany performance;

·       consolidationof our operations to a fewer number of facilities;

·       migrationof portions of certain activities to Asia;

·       migrationto a completely outsourced manufacturing model; and

·       establishingand stabilizing a new, free-standing IT environment in conjunction with ourrecent separation from Agilent.

This initiative ismulti-faceted and complex. Our management will continue to have to respond to avariety of risks related to the execution of this initiative, including theloss of key employees who desire more certain compensation structures or areunwilling or unable to relocate to different locations, the operational andadministrative complexity associated with transitioning to new supply chain andmanufacturing processes and the inherent intricacy of installing a new ITenvironment. If we fail to successfully implement these initiatives in full ina timely manner, or if they fail to generate significant cost savings, ourbusiness, financial condition, results of operations and cash flows would bematerially adversely affected.

**Our dependence oncontract manufacturers and sole source suppliers and contract manufacturers andour transition to a completely outsourced manufacturing model may prevent usfrom delivering our products on a timely basis.**

Through June 2006, we relied upon twomanufacturing models: a hybrid internal and contract manufacturing model forour 93000 Series products and a completely outsourced contractmanufacturing model for our Versatest series products. In connection with ourseparation from Agilent in June 2006, we transitioned the manufacturingprocesses for the 93000 Series products that we previously conductedinternally to Flextronics. As a result of this transition, we now rely entirelyon contract manufacturers.

Our current reliance on third-party manufacturersgives us less control over the manufacturing process and exposes us tosignificant risks, especially inadequate capacity, late delivery, substandardquality and high costs. Moreover, because our products are very complex tomanufacture, transitioning manufacturing activities from one location toanother, or from one manufacturing partner to another, is complicated. Flextronicscommenced production of our Versatest series products in China in July 2006and assumed our manufacturing activities for the 93000 Series products inGermany in June 2006. The activities currently conducted by Flextronics inGermany are expected to be completely transitioned to China during the firsthalf of calendar 2007. We cannot be certain that existing or future contractmanufacturers will be able to manufacture our products on a timely andcost-effective basis, or to our quality and performance specifications. Shouldour contract manufacturers be unable to meet our manufacturing requirements ina timely manner, whether as a result of transitional issues or otherwise, ourability to ship products and to realize the related revenues when anticipatedcould be materially impacted.

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We rely on sole sourcesuppliers, some of whom are relatively small in size, for many of thecomponents we use in our products, including custom integrated circuits, relaysand other electronic components. One sole source supplier recently relocatedits manufacturing activities to a new facility and, in connection with thistransition, has experienced significant difficulties in meeting ourrequirements for components. Another sole source supplier has recentlysubstantially extended the order lead times for the components we rely upon,and such components have become difficult to source in the market. Whileneither of these situations had a material impact on our results for fiscalyear 2006, the failure of these or other sole source suppliers to meet ourrequirements in a timely manner could impair our ability to ship products andto realize the related revenues when anticipated which could adversely affectour business and operating results.

**Our quarterlyoperating results may fluctuate significantly from period to period and thismay cause our share price to decline.**

In the past, we haveexperienced, and in the future we expect to continue to experience,fluctuations in revenue and operating results from quarter to quarter for avariety of reasons, including the risk factors described in this report. As aresult of these and other risks, as well as our having been previously a whollyowned subsidiary of Agilent, we believe that quarter-to-quarter comparisons ofour revenue and operating results may not be meaningful, and that thesecomparisons may not be an accurate indicator of our future performance. Inaddition, sales of a relatively limited number of our test systems account fora substantial portion of our net revenue in any particular quarter. Incontrast, our costs are relatively fixed in the short-term. Thus, changes inthe timing or terms of a small number of transactions could disproportionatelyaffect our operating results in any particular quarter. Moreover, our operatingresults in one or more future quarters may fail to meet the expectations ofsecurities analysts or investors. If this occurs, we would expect to experiencean immediate and significant decline in the trading price of our shares.

**Our business andoperating results could be harmed by the highly cyclical nature of thesemiconductor industry.**

Our business and operatingresults depend in significant part upon capital expenditures of semiconductordesigners and manufacturers, which in turn depend upon the current andanticipated market demand for products incorporating semiconductors from thesedesigners and manufacturers. Historically, the semiconductor industry has beenhighly cyclical with recurring periods of diminished product demand. Duringthese periods, semiconductor designers and manufacturers, facing reduced demandfor their products, have significantly reduced their capital and otherexpenditures, including expenditures for semiconductor test equipment andservices such as those we offer. These periods of reduced product and servicesdemand have been characterized by excessive inventory levels, cancellation ofcustomer orders and erosion of selling prices, as well as excessivesemiconductor test capacity. As a consequence, during these periods, we haveexperienced significant reductions in customer orders for new test equipment,fewer upgrades to existing test equipment and less demand for our test services.We have also experienced order cancellations, delays in commitments and delaysin collecting accounts receivable. Furthermore, because we have a highproportion of customers that are subcontractors, which during market downturnstend to reduce or cancel orders for new test systems and test services morequickly and dramatically than other customers, any downturn may cause a quickerand more significant adverse impact on our business than on the broadersemiconductor industry. In addition, although a decline in orders forsemiconductor capital equipment, including test equipment, may accompany orprecede the timing of a decline in the semiconductor market as a whole, anyrecovery in spending for semiconductor capital equipment, including testequipment, may lag any recovery by the semiconductor industry.

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**We have a limited ability to quickly or significantlyreduce our costs, which makes us particularly vulnerable to the highly cyclicalnature of the semiconductor industry.**

Historically, downturns inthe semiconductor industry have affected the test equipment and services marketmore significantly than the overall semiconductor industry. A significantportion of our overall costs are fixed. In addition, our products require longmanufacturing lead times, which require us to make material purchasingcommitments from our suppliers well in advance of product sales. Because a highproportion of our costs are fixed, we have a limited ability to reduce expensesand manufacturing inventory purchases quickly in response to decreases inorders and revenues. Moreover, to remain competitive, even during downturns inthe semiconductor industry or generally, we are required to maintainsignificant fixed costs for research and development. As a consequence, in adownturn, we may not be able to reduce our costs quickly, or by a sufficientamount, and our financial performance may suffer.

**The market forsemiconductor test equipment and services is highly concentrated, and we havelimited opportunities to sell our test equipment and services.**

The semiconductor industryis highly concentrated in that a small number of semiconductor designers andmanufacturers and subcontractors account for a substantial portion of thepurchases of semiconductor test equipment and services generally, including ourtest equipment and services. Consolidation in the semiconductor industry mayincrease this concentration. Accordingly, we expect that sales of our productswill be concentrated with a limited number of large customers for theforeseeable future. We believe that our financial results will depend insignificant part on our success in establishing and maintaining relationshipswith, and effecting substantial sales to, these potential customers. Even if weestablish these relationships, our financial results will depend in large parton these customers’ sales and business results.

**The loss of, or asignificant reduction in the number of sales to, our significant customerscould materially harm our business.**

For fiscal year 2006, revenue from our top tencustomers accounted for approximately 51.6% of our total net revenue, with onecustomer accounting for 10.1% of our total net revenue. In comparison, forfiscal year 2005, revenue from our top ten customers accounted forapproximately 54% of our total net revenue, with no customer accounting formore than 10% of our total net revenue.

Our relationshipswith our significant customers, who frequently evaluate competitive productsprior to placing new orders, could be adversely affected by a number offactors, including:

·       adecision by our customers to purchase test equipment and services from ourcompetitors;

·       adecision by our customers to pursue the development and implementation ofself-testing integrated circuits or other strategies that reduce their need forour new or enhanced test equipment;

·       theloss of market share by our customers in the markets in which they operate;

·       theshift by our IDM customers to fabless semiconductor models;

·       ourability to keep pace with changes in semiconductor technology;

·       ourability to maintain quality levels of our equipment and services that meetcustomer expectations;

·       ourability to produce and deliver sufficient quantities of our test equipment in atimely manner; and

·       ourability to provide quality customer service and support.

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Generally, our customersmay cancel orders with little or no penalty. Our business and operating resultscould be materially adversely affected by the loss of, or any reduction inorders by, any of our significant customers, particularly if we are unable toreplace that lost revenue with additional orders from new or existingcustomers.

**If we do notmaintain and expand existing customer relationships and establish new customerrelationships, our ability to generate revenue growth will be adverselyaffected.**

Our ability to increase our sales will depend in largepart upon our ability to obtain orders for new test systems, enhancements forexisting test systems and services from our existing and new customers. Maintainingand expanding our existing relationships and establishing new ones can requiresubstantial investment without any assurance from customers that they willplace significant orders. Moreover, if we are unable to provide new testsystems, enhancements for existing test systems and services to our customersin a timely fashion or in sufficient quantities, our business will be harmed. Inthe past we have experienced, and in our industry it is not unusual toexperience, difficulty in delivering new test equipment, as well as productenhancements and upgrades. When we encountered difficulties in the past, ourcustomer relationships and our ability to generate additional revenue fromcustomers were harmed. Our inability to meet the demands of customers wouldseverely damage our reputation, which would make it more difficult for us tosell test equipment, enhancements and services to existing, as well as new,customers and would adversely affect our ability to generate revenue.

In addition, we facesignificant obstacles in establishing new customer relationships. It isdifficult for us to establish relationships with new customers, because suchcompanies may have existing relationships with our competitors, may beunfamiliar with our product and service offerings, may have an installed baseof test equipment sufficient for their current needs or may not have theresources necessary to transition to, and train their employees on, our testequipment. Even if we do succeed in establishing new relationships, these newcustomers may nonetheless continue to favor our competitors, as our competitorsmay have had longer relationships with these customers or may maintain a largerinstalled base of their competing test equipment in the facilities of newcustomers and only purchase limited quantities from us. In addition, we couldface difficulties in our efforts to develop new customer relationships abroadas a result of buying practices that may favor local competitors or non-localcompetitors with a larger presence in local economies than we have. As aresult, we may be forced to partner with local companies in order to competefor business and such arrangements, if available, may not be achieved oneconomically favorable terms, which could negatively affect our financialperformance.

**Failure toaccurately estimate our customers’ demand and plan the production of our newand existing products could adversely affect our inventory levels and ourincome.**

Given the cyclical nature of the semiconductorindustry, we cannot reliably forecast the timing and size of our customers’orders. In order to meet anticipated demand, we must order components and buildsome inventory before we actually receive purchase orders. Our results could beharmed if we do not accurately estimate our customers’ product demands and areunable to adjust our purchases with market fluctuations, including those causedby the cyclical nature of the semiconductor industry. During a market upturn,our results could be materially and adversely affected if we cannot increaseour purchases of components, parts and services quickly enough to meetincreasing demand for our products, and during a market downturn, we could haveexcess inventory that we would not be able to sell, likely resulting ininventory write-offs. Either of these results could have a material adverseeffect on our business, financial condition and results of operations.

Further, if we do notsuccessfully manage the introduction of our new products and estimate customerdemand for such products, our ability to sell existing inventory may beadversely affected. If demand for our new products exceeds our projections, wemight have insufficient quantities of products for sale to our 

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customers,which could cause us to miss opportunities to increase revenues during marketupturns. If our projections exceed demand for our new products or if some ofour customers cancel their current orders for our old products in anticipationof our new products, we may have excess inventories of our new products andexcess obsolete inventories, which could result in inventory write-offs thatwould adversely affect our financial performance.

**Failure toaccurately predict our customers’ varying ordering patterns could adverselyaffect our inventory levels and our income.**

Our customers tend to makelarge purchases of our products on an inconsistent basis, rather than smallerpurchases on a consistent basis, which makes it difficult to predict the timingof customer orders. Failure to accurately predict our customers’ varyingordering patterns may cause us to experience insufficient or excess productinventories. If our competitors are more successful than us at timing new productintroductions and inventory levels to customers’ ordering patterns, we may loseimportant sales opportunities and our business and results of operations may beharmed.

**Existing customersmay be unwilling to bear expenses associated with transitioning to new andenhanced products.**

In order to grow ourbusiness, we need to sell enhancements and upgrades for our existing testequipment, in addition to selling new test equipment. Certain customers may beunwilling, or unable, to bear the costs of implementing enhancements andupgrades to our test equipment platforms, particularly during semiconductorindustry downturns. As a result, it may be difficult to market and sellenhancements and upgrades to customers. In addition, as we introduce newenhancements and upgrades, we cannot predict with certainty if and when ourcustomers will transition to those enhancements or upgrades. Any delay in orfailure of our customers to transition to new enhancements or upgrades couldresult in excess inventories or our new or enhanced products, which couldresult in inventory write-offs that would adversely affect our financialperformance.

**If we do notintroduce new test equipment platforms and upgrade existing test equipmentplatforms in a timely manner, and if we do not offer comprehensive andcompetitive services for our test equipment platforms, our test equipment andservices will become obsolete, we will lose existing customers and ouroperating results will suffer.**

The semiconductordesign and manufacturing industry into which we sell our test equipment ischaracterized by rapid technological changes, frequent new productintroductions, including upgrades to existing test equipment, and evolvingindustry standards. The success of our new or upgraded test equipment offeringswill depend on several factors, including our ability to:

·       properlyidentify customer needs and anticipate technological advances and industrytrends, such as the disaggregation of the traditional IDM semiconductor supplychain into fabless design companies, foundries and packaging, assembly and testproviders;

·       developand commercialize new and enhanced technologies and applications that meet ourcustomers’ evolving performance requirements in a timely manner;

·       developand deliver enhancements and related services for our current test equipmentthat are capable of satisfying our customers’ specific test requirements; and

·       introduceand promote market acceptance of new test equipment platforms, such as ourVersatest V5500 Series system for memory testing.

In many cases, our test equipment and services areused by our customers to develop, test and manufacture their new products. Wetherefore must anticipate industry trends and develop new test 

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equipment platforms orupgrade existing test equipment platforms in advance of the commercializationof our customers’ products. In addition, new methods of testing integratedcircuits, such as self-testing integrated circuits, may be developed whichwould render our test equipment uncompetitive or obsolete if we failed to adoptand incorporate these new methods into our new or existing test equipmentplatforms. Developing new test equipment platforms and upgrading existing testequipment platforms requires a substantial investment before we can determinethe commercial viability of the new or upgraded platform.

As our customers’ productrequirements are diverse and subject to frequent change, we will also need toensure that we have an adequate mix of products that meet our customers’varying requirements. If we fail to adequately predict our customers’ needs andtechnological advances, we may invest heavily in research and development oftest equipment that does not lead to significant revenue, or we may fail toinvest in technology necessary to meet changing customer demands. Without thetimely introduction of new or upgraded test equipment that reflectstechnological advances, our test equipment and services will likely becomeobsolete, we may have difficulty retaining customers and our revenue andoperating results would suffer.

**Our long andvariable sales cycle depends upon factors outside of our control, could causeus to expend significant time and resources prior to our ever earningassociated revenues and may therefore cause fluctuations in our operating results.**

Sales of oursemiconductor test equipment and services depend in significant part uponsemiconductor designers and manufacturers upgrading existing manufacturingequipment to accommodate the requirements of new semiconductor devices andexpanding existing, and adding new, manufacturing facilities. As a result, oursales are subject to a variety of factors we cannot control, including:

·       thecomplexity of our customers’ fabrication processes, which impacts the number ofour test systems and amount of our product enhancements and upgrades ourcustomers require;

·       thewillingness of our customers to adopt new or upgraded test equipment platforms;

·       theinternal technical capabilities and sophistication of our customers, whichimpacts their need for our test services; and

·       thecapital expenditures of our customers.

The decision to purchaseour equipment and services generally involves a significant commitment ofcapital. As a result, our test equipment has lengthy and variable sales cyclesduring which we may expend substantial funds and management effort to secure asale prior to receiving any commitment from a customer to purchase our testequipment or services. Prior to completing sales to our customers, we are oftensubject to a number of significant risks, including the risk that ourcompetitors may compete for the sale or that the customer may change itstechnological requirements. Our business, financial condition and results ofoperations may be materially adversely affected by our long and variable salescycle and the uncertainty associated with expending substantial funds andeffort with no guarantee that sales will be made.

**Test systems thatcontain defects that harm our customers could damage our reputation and causeus to lose customers and revenue.**

Our test equipment ishighly complex and employs advanced technologies. The use of complex technologyin our test equipment increases the likelihood that we could experience design,performance or manufacturing problems. If any of our products have defects orreliability or quality problems, we may, in some circumstances, be exposed toliability, our reputation could be damaged significantly and customers might bereluctant to buy our products, which could result in a decline in revenues, anincrease in product returns and the loss of existing customers and the failureto attract new customers.

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**We face substantialcompetition which, among other things, may lead to price pressure and adverselyaffect our sales and revenue.**

We face substantialcompetition throughout the world in each of our product areas. Our mostsignificant competitors historically have included Advantest Corporation,Credence Systems Corporation, LTX Corporation, Nextest Systems Corporation,Teradyne, Inc. and Yokogawa Electric Corporation. Many of our competitorshave substantially greater financial resources, broader product offerings, moreextensive engineering, manufacturing, marketing and customer supportcapabilities or a greater presence in certain countries than we do. We may haveless leverage with component vendors than some of our competitors have. Also,some of our competitors have greater resources and may be more willing or ablethan we are to put capital at risk to win business. Price reductions by ourcompetitors may force us to lower our prices. We also expect our currentcompetitors to continue to improve the performance of their current productsand to introduce new products, technologies or services that could adverselyaffect sales of our current and future test equipment and services. Additionally,current and future competitors may introduce testing technologies, equipmentand services, which may in turn reduce the value of our own test equipment andservices. Any of these circumstances may limit our opportunities for growth andnegatively impact our financial performance.

**We may facecompetition from Agilent in the future.**

Pursuant to theintellectual property matters agreement between us and Agilent, except asdescribed below, for a period of three years after the date in which Agilentdistributes to its stockholders all of our ordinary shares that it holds,Agilent agreed not to develop, manufacture, distribute, support or serviceautomated semiconductor test systems for providing high-volume functional testof ICs (including memory and high speed memory devices and SOCs) or SIPs, orcomponents for such products. However, during this three-year period, Agilentmay compete with us with respect to:

·       products(other than automated semiconductor test systems for high-volume functionaltest) for providing functional test of ICs or SIPs, whether or not includingparametric test (the testing of selected parameters of a device or group ofdevices to identify errors or flaws), design verification or engineeringcharacterization capabilities;

·       automatedsemiconductor test development systems (including hardware and software) thatare intended to enable development of test programs and protocols for use inhigh-volume functional test of ICs or SIPs, whether or not such developmenttest systems themselves are capable of providing such high-volume functionaltest; and

·       products(other than automated semiconductor test systems for high-volume functionaltest) for providing parametric test, design verification, engineeringcharacterization or functional test of: (i) wireless communicationsdevices, such as cellular telephones or wireless networking products, whetherin packaged device or module form, and whether or not implemented as an IC orSIP; (ii) modules (such as RF front-end modules) containing one or moreICs connected with other active or passive devices; and (iii) RF andhigher frequency (e.g., microwave and optical) devices and components such asoscillators, mixers, amplifiers and 3-port devices, to the extent thatsuch devices or components are in the form of an IC or SIP.

While none of these areas has provided materialrevenue to us in the past, nor are they expected to become areas of our focusfor the near future, we can provide no assurance that the limitations containedin the intellectual property matters agreement, which was entered into in thecontext of a parent-subsidiary relationship and may be less favorable to usthan if it had been negotiated between unaffiliated third parties, will beeffective at protecting us from competition from Agilent.

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In addition, the intellectual property mattersagreement permits Agilent to fulfill its obligations under contracts inexistence as of March 1, 2006, even though fulfilling such obligationswould otherwise have been precluded during the non-competition period and evenif fulfilling such obligations would result in Agilent competing with us. Thisexception will allow Agilent to fulfill its obligations to a semiconductormanufacturer pursuant to which Agilent will develop and sell components to themanufacturer for use in the manufacturer’s semiconductor test systems purchasedfrom a competitor of Verigy. While we do not believe that Agilent fulfillingthese obligations will have a material effect on our business or prospects, wemay in the future be less successful at selling test systems to thissemiconductor manufacturer than would have been the case were the manufacturernot able to combine products from Agilent with the test systems of ourcompetitor.

Although under the intellectual property mattersagreement Agilent transferred all of the intellectual property rights Agilentheld that relate exclusively to our products to us, Agilent retained and onlylicensed to us the intellectual property rights to underlying technologies usedin both our products and the products of Agilent. Under the agreement, Agilentremains free to use the retained underlying technologies without restriction(other than as described above with respect to the three-year non-competeperiod).

After the three-year non-compete period, Agilent willbe free to compete with any portion or all of our business without restriction,and in doing so will be free to use the retained underlying technologies. Agilentwill not be permitted to use the intellectual property rights transferred tous, and licensed from us back to Agilent, to compete with us with respect toour core business of developing, manufacturing, selling and supportingautomated semiconductor test systems for high-volume functional test of ICs or SIPs.Agilent will, however, be able to use such intellectual property rights todevelop and sell components for such systems, including systems developed andsold by us as well as those developed and sold by our competitors. Whileselling components has not represented a material portion of our business inthe past and is not expected to be an area of focus for the near future, ourbusiness could be adversely affected if systems offered by our competitorsbecome more competitive as a result of Agilent supplying components for ourcompetitors’ systems or if, by buying components from Agilent, our customersare able to delay or bypass altogether purchasing newer systems from us.

Competition from Agilentduring or after the three-year non-compete period described above or otheractions taken by Agilent that create real or perceived competition with us,could harm our business and operating results.

**Third parties maycompete with us by using intellectual property that Agilent licensed to usunder the intellectual property matters agreement.**

Under the intellectualproperty matters agreement, Agilent retained and only licensed to us theintellectual property rights to underlying technologies used in both ourproducts and the products of Agilent. Under the agreement, Agilent remains freeto license the intellectual property rights to the underlying technologies toany party, including our competitors. Any unaffiliated third party that islicensed to use such retained intellectual property would not be subject to thenon-competition provisions of the intellectual property matters agreement andcould compete with us at any time using the underlying technologies. Theintellectual property that Agilent retained and that can be licensed in thismanner does not relate solely or primarily to one or more of our products, orgroups of products; rather, the intellectual property that Agilent licensed tous is generally used broadly across our entire product portfolio. Competitionby third parties using the underlying technologies retained by Agilent couldharm our business and operating results.

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**Third parties may claim we are infringing theirintellectual property, and we could suffer significant litigation or licensingexpenses or be prevented from selling our products or services.**

Our industry has been and continues to becharacterized by uncertain and conflicting intellectual property claims andvigorous protection and pursuit of these rights. As a result, third parties mayclaim that we are infringing their intellectual property rights, and we may beunaware of intellectual property rights of others that may cover some of ourtechnology, products and services. Any litigation regarding patents or otherintellectual property could be costly and time-consuming, and divert our managementand key personnel from our business operations. The complexity of thetechnology involved and the uncertainty of intellectual property litigationincrease these risks. Claims of intellectual property infringement might alsorequire us to enter into costly royalty or license agreements. However, we maynot be able to obtain royalty or license agreements on terms acceptable to us,or at all. We also may be subject to significant damages or injunctions againstdevelopment and sale of certain of our products and services.

In addition, there may bethird parties who have refrained from asserting intellectual propertyinfringement claims against our products while we were a wholly ownedsubsidiary of Agilent that elect to pursue such claims against us now that ourseparation from Agilent is complete because we no longer have the benefit ofbeing able to counterclaim based on Agilent’s patent portfolio, and we are nolonger able to provide licenses of Agilent’s patent portfolio in order toresolve such claims.

**Third parties mayinfringe our intellectual property, and we may expend significant resourcesenforcing our rights or suffer competitive injury.**

Our success depends in large part on our proprietarytechnology. We rely on a combination of patents, copyrights, trademarks, tradesecrets, confidentiality provisions and licensing arrangements to establish andprotect our proprietary rights. If we fail to protect our intellectual propertyrights, our competitive position could suffer, which could harm our operatingresults. Our pending patent and trademark registration applications may not beallowed or competitors may challenge the validity or scope of these patentapplications or trademark registrations. In addition, our patents may notprovide us with a significant competitive advantage.

We may be required to spend significant resources tomonitor and protect our intellectual property rights. We may not be able todetect infringement and may lose competitive position in the market before wedo so. In addition, competitors may design around our technology or developcompeting technologies. Furthermore, the laws of some foreign countries do notoffer the same level of protection of our proprietary rights as the laws of theUnited States, and we may be subject to unauthorized use of our products ortechnologies in those countries, particularly in Asia, where we expect ourbusiness to expand significantly in the foreseeable future.

In addition, ouragreements with Agilent, and in particular the intellectual property mattersagreement, set forth the terms and provisions under which we received theintellectual property rights necessary to operate our business. Under ouragreements with Agilent, we do not have the right to enforce against thirdparties intellectual property rights we license from Agilent, and Agilent isunder no obligation to enforce such rights on our behalf.

**Intellectualproperty rights are difficult to enforce in the certain countries, which mayinhibit our ability to protect our intellectual property rights or those of oursuppliers and customers in those countries.**

Commercial law in certaincountries is relatively undeveloped compared to the commercial law in the U.S. Limitedprotection of intellectual property is available under local law. Consequently,operating in certain countries may subject us to an increased risk thatunauthorized parties may attempt to copy or otherwise obtain or use ourintellectual property or the intellectual property of our suppliers, customersor 

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businesspartners. We cannot assure you that we will be able to protect our intellectualproperty rights or those of our suppliers and customers or have adequate legalrecourse in the event that we encounter difficulties with infringements ofintellectual property under local law.

**Our brand identityis still relatively new in the marketplace, which could cause our product salesto suffer, and continuing to build our brand identity will require significantamounts of time and resources.**

Prior to our separationfrom Agilent in June 2006, we conducted our business under Agilent’s brandname. Since our separation, we have conducted our business under the “Verigy”brand name. We believe that, historically, sales of our products have benefitedfrom the use of the “Agilent” brand name. Our customers and suppliers, as wellas potential employees we are trying to recruit, may not recognize the “Verigy”brand name, which could negatively influence their business decisions concerningus. We need to continue to expend significant time, effort and resources toestablish the “Verigy” brand name in the marketplace. We cannot guarantee thatthis effort will ultimately be successful. If our effort to establish a newbrand identity is unsuccessful, our business, financial condition and resultsof operations may suffer.

**Our executiveofficers and certain key personnel are critical to our business.**

Our future operatingresults will depend substantially upon the performance of our executiveofficers and key personnel, some of whom are relatively new to our business. Ourfuture operating results also depend in significant part upon our ability toattract and retain qualified management, manufacturing, technical, applicationengineering, marketing, sales and support personnel. Competition for qualifiedpersonnel is intense, and we cannot ensure success in attracting or retainingqualified personnel. Our business is particularly dependent on expertise whichonly a very limited number of engineers possess and it may be increasinglydifficult for us to hire personnel over time. We operate in several geographiclocations, including parts of Asia and Silicon Valley, where the labor markets,especially for application engineers, are particularly competitive. Ourbusiness, financial condition and results of operations could be materiallyadversely affected by the loss of any of our key employees, by the failure ofany key employee to perform in his or her current position, or by our inabilityto attract and retain skilled employees, particularly engineers.

**We may needadditional financing, which could be difficult to obtain on favorable terms orat all.**

In the event we need toraise additional funds, we cannot be certain that we will be able to obtain suchadditional financing on favorable terms, if at all. Our future capitalrequirements will depend on many factors, including the timing and extent ofspending to support product development efforts, the expansion of sales andmarketing activities, the timing of introductions of new products andenhancements to existing products, the costs to ensure access to adequatemanufacturing capacity, market acceptance of our products and the cyclical andseasonal demand for our products. If we issue additional equity securities,shareholders may experience additional dilution and the new equity securitiesmay have rights, preferences or privileges senior to those of existing holdersof our ordinary shares. If we incur debt, we may become subject to restrictionson how we operate our business. If we cannot raise funds on acceptable terms,if and when needed, we may not be able to develop or enhance our products andservices, take advantage of future opportunities, grow our business or respondto competitive pressures, which could materially adversely affect our business,financial condition and results of operations. In addition, our agreements withAgilent, and in particular the tax sharing agreement, may limit our ability toincur debt or sell equity securities or to obtain additional financing.

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**We are in the process of implementing the governanceand accounting practices and policies required of a company publicly-traded inthe United States and incorporated in Singapore. Any delay in implementing suchgovernance and accounting practices and policies could harm our business.**

Prior to becoming a standalone company, we relied on the financial resources and the administrative andoperational support systems of Agilent to operate our business. In conjunctionwith our separation from Agilent, we have separated our assets from those ofAgilent and created our own financial, administrative, operational and othersupport systems or contract with third parties to replace Agilent’s systems. Manyof the new systems, including our enterprise resource planning (“ERP”) system,have been in effect only since the separation date. We have experienced, andexpect to continue to experience periodic interruptions in our ERP system, andit may take additional time to fully implement and stabilize the ERP system aswell as other support systems.

As a publicly-tradedcompany in the United States, we are subject to many rules andregulations, including the Securities Act of 1933, as amended, and theSecurities Exchange Act of 1934, as amended. We are also required to complywith the Sarbanes-Oxley Act of 2002, as amended, and the rules andregulations implemented thereunder. We are required to comply with Section 404of the Sarbanes-Oxley Act, beginning with our fiscal year ending October 31,2007. While we are diligently developing the systems, procedures and processesto enable us to fully meet the requirements associated with being publiclytraded in the United States, we may encounter problems or delays in completingthese activities. Any failure on our part to meet the requirements of operatingas a publicly-traded company could jeopardize our ability to produce reliablefinancial statements, subject us to disciplinary proceedings by the SEC or theNasdaq Global Select Market, cause investors to lose confidence in the accuracyand reliability of our financial reporting, or otherwise harm our business orresults of operations.

**Our results could be adversely affected if we do notcomply with certain operating conditions agreed to with the Singaporeauthorities. In addition, our new legal structure could cause our effective taxrate to vary significantly from period to period, and we could owe significanttaxes even during periods when we experience low operating profit or operatinglosses.**

We have negotiated taxincentives with the Singapore Economic Development Board, an agency of theGovernment of Singapore, which have been approved by Singapore’s Ministry ofFinance and Ministry of Trade and Industry. Under the incentives, a portion ofthe income we earn in Singapore during 10- to 15-year incentiveperiods is subject to reduced rates of Singapore income tax. The Singaporecorporate income tax rate that would apply, absent the incentives, is 20%. Inorder to receive the benefit of the incentives, we must develop and maintain inSingapore certain functions such as procurement, financial services, ordermanagement, credit and collections, spare parts depot and distribution center,a refurbishment center and regional activities like an application developmentcenter. In addition to these qualifying activities, we must hire specifiednumbers of employees and maintain minimum levels of investment in Singapore. Wehave from 2- to 9-years to phase-in the qualifying activities andto hire the specified numbers of employees. If we do not fulfill theseconditions for any reason, our incentive could lapse, our income in Singaporewould be subject to taxation at higher rates, and our overall effective taxrate could be between five and ten percentage points higher than would havebeen the case had we maintained the benefit of the incentives.

In addition, our effectivetax rate may vary significantly from period to period because, for example, wemay owe significant taxes in jurisdictions other than Singapore during periodswhen we are profitable in those jurisdictions even though we may beexperiencing low operating profit or operating losses on a consolidated basis. Oureffective tax rate will vary based on a variety of factors, including overallprofitability, the geographical mix of income before taxes and the related taxrates in the jurisdictions where we operate, as well as discrete events, suchas settlements of future audits. Certain combinations of these factors couldcause us to owe significant taxes even during periods when we experience lowincome before taxes or loss before taxes.

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**We sell ourproducts and services worldwide, and our business is subject to risks inherentin conducting business activities in geographies outside of the United States.**

Since we sell our products and services worldwide, ourbusiness is subject to risks associated with doing business internationally.Revenue from customers in Japan accounted for approximately 10.2%, 20.6% and15.8% of total net revenue for fiscal years 2006, 2005 and 2004, respectively.Revenue from customers in Singapore accounted for approximately 48.3%, 39.5%and 42.7% for fiscal years 2006, 2005 and 2004, respectively, and revenue fromcustomers in other countries in Asia accounted for approximately 3.7%, 3.3% and2.8% of total net revenue for fiscal years 2006, 2005 and 2004, respectively.The economies of Asia have been highly volatile and recessionary in the past,resulting in significant fluctuations in local currencies. Our exposure to thebusiness risks presented by the economies of Asia will increase to the extentthat we continue to expand our operations in that region, includingestablishing our headquarters in Singapore and transitioning our contractmanufacturing processes to Flextronics in China.

Our internationalactivities subjects us to a number of risks associated with conductingoperations internationally, including:

·       difficultiesin managing geographically disparate operations;

·       potentialgreater difficulty and longer time in collecting accounts receivable fromcustomers located abroad;

·       difficultiesin enforcing agreements through non-U.S. legal systems;

·       unexpectedchanges in regulatory requirements that may limit our ability to export oursoftware or sell into particular jurisdictions or impose multiple conflictingtax laws and regulations;

·       politicaland economic instability, civil unrest or war;

·       terroristactivities and health risks such as ‘bird flu’ and SARS that impactinternational commerce and travel;

·       difficultiesin protecting our intellectual property rights, particularly in countries wherethe laws and practices do not protect proprietary rights to as great an extentas do the laws and practices of the United States;

·       changinglaws and policies affecting economic liberalization, foreign investment,currency convertibility or exchange rates, taxation or employment; and

·       nationalizationof foreign owned assets, including intellectual property.

In addition, we areexposed to foreign currency exchange movements versus the U.S. dollar,particularly in the Japanese Yen. With respect to revenue, our primary exposureexists during the period between execution of a purchase order denominated in aforeign currency and collection of the related receivable. During this period,changes in the exchange rates of the foreign currency to the U.S. Dollar willaffect our revenue, cost of sales and operating margins and could result inexchange gains or losses. While a significant portion of our purchase orders todate have been denominated in U.S. Dollars, competitive conditions may requireus to enter into an increasing number of purchase orders denominated in foreigncurrencies. We incur a variety of costs in foreign currencies, including someof our manufacturing costs, component costs and sales costs. Therefore, as weexpand our operations in Asia, we may become more exposed to a strengthening ofcurrencies in the region against the U.S. dollar. We cannot assure you that anyhedging transactions we may enter into will be effective or will not result inforeign exchange hedging gains or losses. As a result, we are exposed togreater risks in currency fluctuations.

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**We may incur a variety of costs to engage in futureacquisitions of companies, products or technologies, and the anticipatedbenefits of any acquisitions we may make may never be realized.**

We mayacquire, or make significant or minority investments in, complementarybusinesses, products or technologies. Any future acquisitions or investmentscould be accompanied by risks such as:

·       difficultiesin assimilating the operations and personnel of acquired companies;

·       diversionof our management’s attention from ongoing business concerns;

·       ourpotential inability to maximize our financial and strategic position throughthe successful incorporation of acquired technology and rights into ourproducts and services;

·       additionalexpense associated with amortization of acquired assets;

·       difficultyin maintaining uniform standards, controls, procedures and policies;

·       impairmentof existing relationships with employees, suppliers and customers as a resultof the integration of new management personnel;

·       dilutionto our shareholders in the event we issue shares as consideration to finance anacquisition;

·       difficultyintegrating and implementing the accounting controls necessary to comply withregulatory requirements such as Section 404 of the Sarbanes-Oxley Act; and

·       increasedleverage, if we incur debt to finance an acquisition.

We cannot guarantee thatwe will realize any benefit from the integration of any business, products ortechnologies that we might acquire in the future, and our failure to do socould harm our business.

**If our facilities or the facilities of our contractmanufacturers were to experience catastrophic loss due to natural disasters,our operations would be seriously harmed.**

Our facilities and thefacilities of our contract manufacturers could be subject to a catastrophicloss caused by natural disasters, including fires and earthquakes. We and ourcontract manufacturers have significant facilities in areas with above averageseismic activity, such as California, Japan and Taiwan. If any of thesefacilities were to experience a catastrophic loss, it could disrupt ouroperations, delay production and shipments, reduce revenue and result in largeexpenses to repair or replace the facility. We do not carry catastrophicinsurance policies that cover potential losses caused by earthquakes.

**Risks Related to Our Separation from Agilent**

**Our historical financial information as a businesssegment of Agilent may not be representative of our results as an independentpublic company.**

The historical financialstatements prior to June 1, 2006, have been derived from the combined andconsolidated financial statements of Agilent and do not necessarily reflectwhat our financial position, results of operations or cash flows would havebeen had we been an independent entity during the historical periods presented.The historical costs and expenses reflected in our combined and consolidatedfinancial statements include an allocation for certain corporate functionshistorically provided by Agilent, including centralized legal, accounting, tax,treasury, information technology and other corporate services andinfrastructure costs, which we believe are reasonable reflections of thehistorical utilization levels of these services in support of our business. Thehistorical financial information is not necessarily indicative of our futureresults of operations, financial position, cash flows or costs and expenses. Wedid not make adjustments to periods prior to our separation from Agilent toreflect many significant changes that will occur in our cost structure, fundingand operations as a result of our separation from Agilent, including changes inour employee base, changes in our legal structure, potential increased costsassociated with reduced economies of scale, increased marketing expensesrelated to establishing a new brand identity and increased costs associatedwith being an independent publicly traded company.

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**Our tax sharingagreement with Agilent may require us to indemnify Agilent for certain taxliabilities, including liabilities that may arise in connection with adistribution of our ordinary shares by Agilent, and may limit our ability toobtain additional financing or participate in future acquisitions.**

Under our tax sharing agreement with Agilent, we andAgilent agreed to indemnify one another for certain taxes and similarobligations that the other party could incur under certain circumstances. Ingeneral, under the tax sharing agreement we are responsible for taxes relatingto our business that arise after our separation from Agilent.

Agilent’s distribution ofour ordinary shares to its stockholders was intended by Agilent to qualify as adistribution subject to Section 355 of the Internal Revenue Code of 1986,as amended. Under our tax sharing agreement with Agilent, we are obligated toindemnify Agilent for any taxes imposed on Agilent under Section 355(e) ofthe Code arising as a result of our actions. If we are required to indemnifyAgilent for additional taxes imposed on Agilent with respect to thedistribution of our ordinary shares to its stockholders, our results ofoperations may be materially impaired.

**We are subject tocertain covenants that restrict our ability to obtain additional financing orto engage in acquisition or disposition transactions for a period of two yearsafter the distribution.**

Our ability toobtain additional financing or to engage in transactions that would result in achange in control of Verigy is limited by the intellectual property matters agreementand the tax sharing agreement that we entered into with Agilent as part of ourseparation. Specifically, under the intellectual property matters agreement,Agilent’s consent is required for us to transfer intellectual property rightswe have licensed from Agilent, which may act as a deterrent to an acquisitionof us by a third party. Under our tax sharing agreement with Agilent, for twoyears following the distribution, we are subject to certain covenants that areintended to ensure that the distribution of our ordinary shares by Agilent isnot fully taxable to Agilent. Those covenants require us to obtain the consentof Agilent (which cannot be unreasonably withheld) before we can:

·       sellassets outside the ordinary course of business for consideration in excess of$50 million (including assumption of liabilities related to such assets);

·       mergeor liquidate our parent company or its subsidiaries that operate our businessinto another company; or

·       enterinto any other corporate transaction that would cause us to undergo a greaterthan 35% change in our share ownership.

The restrictive covenantsin our tax sharing agreement with Agilent restrict our ability to obtainadditional financing or to engage in acquisition or disposition transactionsfor a period of two years after the distribution, even if the financing ortransaction might be in the best interest of our shareholders. If we breachthose covenants, we may incur substantial additional liabilities and may beexposed to costly and time-consuming litigation.

**Any disputes thatarise between us and Agilent with respect to our past and ongoing relationshipscould harm our business operations.**

Disputes may arise between Agilent and us in a numberof areas relating to our past and ongoing relationships, including:

·       intellectualproperty and technology matters, including related non-compete provisionsapplicable to Agilent and us;

·       labor,tax, employee benefit, indemnification and other matters arising from ourseparation from Agilent;

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·       employeeretention and recruiting;

·       businesscombinations involving us;

·       salesor distributions by Agilent of all or any portion of its ownership interest inus;

·       thenature, quality and pricing of transitional services Agilent has agreed toprovide us; and

·       businessopportunities that may be attractive to both Agilent and us.

We may not be able toresolve any potential conflicts, and even if we do, the resolution may be lessfavorable than if we were dealing with an unaffiliated party.

**Some of ourdirectors and executive officers may have conflicts of interest because oftheir ownership of Agilent common stock, options to acquire Agilent commonstock and positions with Agilent.**

Some of our executiveofficers own Agilent common stock and options to purchase Agilent common stock.In addition, one of our directors is an executive officer of Agilent and ownsAgilent common stock and options to purchase Agilent common stock. Ownership ofAgilent common stock and some of our officers, ownership of Agilent commonstock and options to purchase Agilent common stock by one of our directors andthe presence of an executive officer of Agilent on our board of directors couldcreate, or appear to create, potential conflicts of interest and other issueswith respect to their fiduciary duties to us when our directors and officersare faced with decisions that could have different implications for Agilentthan for us.

**Risks Related tothe Securities Markets and Ownership of Our Ordinary Shares**

**Our securities havea limited trading history, and the price of our ordinary shares may fluctuatesignificantly.**

There has been apublic market for our ordinary shares for a short period of time. An activepublic market for our ordinary shares may not develop or be sustained, whichwould adversely impact the liquidity and market price of our ordinary shares. Themarket price of our ordinary shares may fluctuate significantly. Among thefactors that could affect the market price of our ordinary shares are the riskfactors described in this section and other factors including:

·       changesin expectations as to our future financial performance, including financialestimates or publication of research reports by securities analysts;

·       strategicmoves by us or our competitors, such as acquisitions or restructurings;

·       announcementsof new products or technical innovations by us or our competitors;

·       actionsby institutional shareholders; and

·       speculation in the press orinvestment community.

**We may becomeinvolved in securities litigation that could divert management’s attention andharm our business.**

The stock market ingeneral, and The Nasdaq Global Select Market and the securities ofsemiconductor capital equipment companies in particular, have experiencedextreme price and volume fluctuations that have often been unrelated ordisproportionate to the operating performance of the affected companies. Further,the market prices of securities of semiconductor test system companies havebeen particularly volatile. These market and industry factors may materiallyharm the market price of our ordinary shares, regardless of our operatingperformance. In the past, following periods of volatility in the market priceof a particular company’s securities, securities class action litigation hasoften been brought 

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againstthat company. We may become involved in this type of litigation in the future. Suchlitigation, whether or not meritorious, could result in the expenditure ofsubstantial funds, divert management’s attention and resources, and harm ourreputation in the industry and the securities markets, which would reduce ourprofitability and harm our business.

**It may be difficultfor investors to affect service of process within the United States on us or toenforce civil liabilities under the federal securities laws of the UnitedStates against us.**

We are incorporated inSingapore under the Companies Act, Chapter 50 of Singapore, or SingaporeCompanies Act. Some of our officers and directors reside outside the UnitedStates. A substantial portion of our assets is located outside the UnitedStates. As a result, it may not be possible for investors to effect service ofprocess within the United States upon us. Similarly, investors may be unable toenforce judgments obtained in U.S. courts predicated upon the civil liabilityprovisions of the federal securities laws of the United States against us inU.S. courts. Judgments of U.S. courts based upon the civil liabilityprovisions of the federal securities laws of the United States are not directlyenforceable in Singapore courts and are not given the same effect in Singaporeas judgments of a Singapore court. Accordingly, there can be no assurance as towhether Singapore courts will enter judgments in actions brought in Singaporecourts based upon the civil liability provisions of the federal securities lawsof the United States.

**In addition to ourtax sharing and intellectual property matters agreements with Agilent,Singapore corporate law may impede a takeover of our company by a third party,which could adversely affect the value of our ordinary shares.**

Under the Singapore Codeon Take-overs and Mergers, generally when a person (or a group of personsacting together) acquires shares having 30% or more of the voting rights of acompany or holds at least 30% but not more than 50% of the voting rights of acompany and thereafter acquires in any period of six months additional sharescarrying more than 1% of the voting rights, then such person is required by lawto make an offer to acquire the remaining voting shares of the company.

**For a limitedperiod of time, our board of directors has general authority to issue newshares on terms and conditions and with any preferences, rights or restrictionsas may be determined by our board of directors in its sole discretion.**

Under Singapore law, newshares may be issued only with the prior approval of our shareholders in ageneral meeting. As our sole shareholder prior to our initial public offering,Agilent provided general authority to issue new shares until the earlier tooccur of the conclusion of our 2007 annual general meeting or the expiration ofthe period within which the next annual general meeting is required to be held.Subject to the shareholder approval, the provisions of the Singapore CompaniesAct and our amended and restated memorandum and articles of association, ourboard of directors may allot and issue new shares on terms and conditions andwith the rights and restrictions as they may think fit to impose. Anyadditional issuances of new shares by our board of directors may adverselyimpact the market price of our ordinary shares.

**Our public shareholders may have more difficultyprotecting their interests than they would as shareholders of a U.S.corporation.**

Our corporate affairs aregoverned by our amended and restated memorandum and articles of association andby the laws governing corporations incorporated in Singapore. The rights of ourshareholders and the responsibilities of the members of our board of directorsunder Singapore law are different from those applicable to a corporationincorporated in the United States. Therefore, our public shareholders may havemore difficulty in protecting their interests in connection with actions takenby our management, members of our board of directors or our controlling shareholderthan they would as 

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shareholdersof a corporation incorporated in the United States. For example, controllingshareholders in U.S. corporations are subject to fiduciary duties whilecontrolling shareholders in Singapore corporations are not subject to suchduties.

**Item1B.**               *Unresolved Staff Comments*

None.

**Item2.**                        *Properties*

We have entered into longterm lease arrangements for our corporate headquarters in Singapore, our U.S.headquarters in Cupertino, California, and our Boeblingen, Germany facility. Wehave also entered into long term lease arrangements for our ASIC developmentoffice in Colorado as well as other sales and support facilities around theworld.

Our corporate headquartersare located at No. 1 Yishun Avenue 7, Singapore. Our U.S. headquartersoffices are located at 10100 N. Tantau Avenue, Cupertino, CA.

Thefollowing table provides certain information as to Verigy’s general offices andmanufacturing facilities:

| **Region** | ** ** | ** **           | ** ** | **Description**                              | ** ** | **Principal Location** | ** **   | **Major Activity+** | ** ** | **Total Leased  Square Footage** | ** ** |
|------------|------------|----------------------|------------|----------------------------------------------|------------|-----------------------------|--------------|--------------------------|------------|--------------------------------------------|------------|
|            |       |                 |       | ·    Austin, TX          |       |                        | (3)(4)       |                     |       |                                       | 18,487     |   |   |
|            |       |                 |       | ·    Burlington, MA      |       |                        | (3)          |                     |       |                                       | 3,182      |   |   |
|            |       |                 |       | ·    Cupertino, CA       |       |                        | (1)(2)(3)(4) |                     |       |                                       | 100,491    |   |   |
| Americas   |       | 6  Leased Facilities |       | ·    Englewood, CO       |       |                        | (4)          |                     |       |                                       | 3,253      |   |   |
|            |       |                 |       | ·    Ft. Collins, CO     |       |                        | (2)          |                     |       |                                       | 10,900     |   |   |
|            |       |                 |       | ·    San Diego, CA       |       |                        | (3)          |                     |       |                                       | 4,387      |   |   |
|       |       |                 |       | ·    Chungli, Taiwan     |       |                        | (2)(3)(4)    |                     |       |                                       | 19,711     |   |   |
|       |       |                 |       | ·    Hachioji, Japan     |       |                        | (2)(3)       |                     |       |                                       | 21,686     |   |   |
|       |       |                 |       | ·    Hsinchu, Taiwan     |       |                        | (2)          |                     |       |                                       | 3,309      |   |   |
|       |       |                 |       | ·    Kaohsiung, Taiwan   |       |                        | (3)          |                     |       |                                       | 4,985      |   |   |
| Asia       |       | 8  Leased Facilities |       | ·    Osaka, Japan        |       |                        | (3)          |                     |       |                                       | 2,368      |   |   |
|       |       |                 |       | ·    Seoul, Korea        |       |                        | (3)          |                     |       |                                       | 14,161     |   |   |
|       |       |                 |       | ·    Shanghai, China     |       |                        | (2)(3)       |                     |       |                                       | 48,212     |   |   |
|       |       |                 |       | ·    Yishun, Singapore   |       |                        | (1)(2)(3)(4) |                     |       |                                       | 32,744     |   |   |
|            |       |                 |       | ·    Boeblingen, Germany |       |                        | (2)(3)       |                     |       |                                       | 162,590    |   |   |
|            |       |                 |       | ·    Grenoble, France    |       |                        | (3)          |                     |       |                                       | 2,465      |   |   |
| Europe     |       | 4  Leased Facilities |       | ·    Milan, Italy        |       |                        | (3)          |                     |       |                                       | 2,048      |   |   |
|            |       |                 |       | ·    Paris, France       |       |                        | (3)          |                     |       |                                       | 1,755      |   |   |

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+                Majoractivities are categories as follows:

(1)          Corporate Administration

(2)          Research and Development

(3)          Sales, Support, andMarketing

(4)          Business / Call Center

We believe that all of ourfacilities are in good condition, are well maintained and are able to operateat present levels.

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**Item 3.**                        *Legal Proceedings*

We are subject to legalproceedings, claims, and litigation arising in the ordinary course of business.While the outcome of these matters is currently not determinable, we do notexpect that the ultimate costs to resolve these matters will have a materialadverse effect on our combined and consolidated financial position, results ofoperations, or cash flows.

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

During the fourth quarter of fiscal year 2006, therewere no matters submitted to a vote of securities holders, through thesolicitation of proxies or otherwise.

 

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**PART II**

**Item 5.**                        *Market for the Registrant’s Common Equity, Related Shareholders Mattersand Issuer Purchases of EquitySecurities*

Our ordinaryshares are listed on The Nasdaq Global Select Market with the ticker symbol “VRGY”.For the 2006 fiscal year, The Nasdaq Global Select Market reported the high andlow prices per quarter as follows:

| **Fiscal Year 2006**                | ** ** | ** **     | ** ** | **High**       | ** ** | **Low** | ** ** |
|-----------------------------------------------|------------|----------------|------------|----------------|------------|---------|------------|
| First Quarter  (ended January 31, 2006)  |       | Not Applicable |       | Not Applicable |       |
| Second Quarter  (ended April 30, 2006)   |       | Not Applicable |       | Not Applicable |       |
| Third Quarter  (ended July 31, 2006)     |       | $              | 16.50      |           | $          | 13.55   |       |
| Fourth Quarter (ended  October 31, 2006) |       | $              | 19.52      |           | $          | 14.37   |       |

 

As of October 31, 2006, there were 37,811shareholders of record of our ordinary shares. The closing share price for ourordinary shares on October 31, 2006, as reported by The Nasdaq GlobalSelect Market, was $16.80 per share.

We have not paid anydividends to date, and we currently intend to retain any future income to fundthe development and growth of our business. We do not anticipate paying anycash dividends in the foreseeable future.

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**Item 6.**                        *Selected Financial Data*

**SELECTED FINANCIALDATA**

Theselected financial data set forth below is derived in part from and should beread in conjunction with “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and our combined and consolidatedfinancial statements and related notes thereto included elsewhere in thisreport on Form 10-K. We have derived our combined and consolidatedstatement of operations data for the fiscal years ended October 31, 2006,2005, and 2004, and combined and consolidated balance sheet data as of October 31,2006 and 2005 from the audited combined and consolidated financial statementsincluded elsewhere in this Form 10K. The combined statement of operationsdata for the fiscal year ended October 31, 2003 and 2002 and combinedbalance sheet data as of October 31, 2004, 2003, and 2002 were derivedfrom our unaudited financial statements that are not included in this report onForm 10K. Historical results are not necessarily indicative of results tobe expected for future periods and may not reflect what our financial positionand results of operations would have been had we been a separate, stand-aloneentity during the historical periods presented.

| ** **                                                                                     | ** ** | **Fiscal Year Ended October 31, 2006**      | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2006**                                                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                     | ** ** | **(in millions, except per share amounts)** | ** ** |
| **Combined and Consolidated  Statement of Operations Data:**                              |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net revenue:                                                                                   |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Products                                                                                       |       | $                                                                    | 646        |   | $ | 355 |   | $ | 501 |   | $ | 452 |   | $ | 407 |   |
| Services                                                                                       |       | 132                                                                  |       | 101 |   | 106 |   | 88 |   | 91 |   |
| Total net revenue                                                                              |       | 778                                                                  |       | 456 |   | 607 |   | 540 |   | 498 |   |
| Cost of sales:                                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Cost of products                                                                               |       | 331                                                                  |       | 228 |   | 263 |   | 233 |   | 197 |   |
| Cost of services                                                                               |       | 97                                                                   |       | 88 |   | 91 |   | 76 |   | 70 |   |
| Total cost of sales                                                                            |       | 428                                                                  |       | 316 |   | 354 |   | 309 |   | 267 |   |
| Gross profit                                                                                   |       | 350                                                                  |       | 140 |   | 253 |   | 231 |   | 231 |   |
| Operating expenses:                                                                            |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Research and development                                                                       |       | 99                                                                   |       | 101 |   | 105 |   | 97 |   | 96 |   |
| Selling, general and administrative                                                            |       | 149                                                                  |       | 134 |   | 139 |   | 148 |   | 154 |   |
| Restructuring charges                                                                          |       | 17                                                                   |       | 7 |   | 4 |   | 11 |   | 11 |   |
| Separation costs                                                                               |       | 69                                                                   |       | 3 |   | — |   | — |   | — |   |
| Total operating expenses                                                                       |       | 334                                                                  |       | 245 |   | 248 |   | 256 |   | 261 |   |
| Income (loss)  from operations                                                                 |       | 16                                                                   |       | (105 | ) | 5 |   | (25 | ) | (30 | ) |
| Other income  (expense), net                                                                   |       | 5                                                                    |       | (1 | ) | 1 |   | 2 |   | — |   |
| Income (loss)  before taxes                                                                    |       | 21                                                                   |       | (106 | ) | 6 |   | (23 | ) | (30 | ) |
| Provision for  taxes                                                                           |       | 21                                                                   |       | 13 |   | 14 |   | 5 |   | 61 |   |
| Net loss                                                                                       |       | $                                                                    | —     |   | $ | (119 | ) | $ | (8 | ) | $ | (28 | ) | $ | (91 | ) |
| Basic and diluted  net loss per share                                                          |       | $                                                                    | —     |   | $ | (2.38 | ) | $ | (0.16 | ) | $ | (0.56 | ) | $ | (1.82 | ) |
| Weighted average shares  (in thousands) used in computing basic and diluted net loss per share |       | 53,356                                                               |       | 50,000 |   | 50,000 |   | 50,000 |   | 50,000 |   |

 

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| ** **                                            | ** ** | **October 31,**   | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **2006**               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                            | ** ** | **(in millions)** | ** ** |
| **Consolidated Balance Sheet Data  :**                |       |                   |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents and short-term investments |       | $                      | 300        |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Working capital                                       |       | $                      | 300        |   | $ | 41 |   | $ | 69 |   | $ | 123 |   | $ | 118 |   |
| Total assets                                          |       | $                      | 674        |   | $ | 260 |   | $ | 265 |   | $ | 309 |   | $ | 290 |   |
| Shareholders’ equity                             |       | $                      | 389        |   | $ | 87 |   | $ | 119 |   | $ | 169 |   | $ | 158 |   |

 

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**Item 7.**                        *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*

**Overview**

***Basis of Presentation and Separation from Agilent***

The accompanying financial data for fiscal years 2006,2005, and 2004 has been prepared by us pursuant to the rules andregulations of the Securities and Exchange Commission. For a full understandingof our financial position and results of operations, this discussion should beread in conjunction with the combined and consolidated financial statements andrelated notes presented in this report on Form 10-K.

Our fiscal year end is October 31, and our fiscalquarters end on January 31, April 30 and July 31. Unlessotherwise stated, all dates refer to our fiscal year and fiscal periods.

On June 16, 2006, we completed our initial publicoffering and became a separate stand-alone publicly-traded company andbecame incorporated in Singapore. Amounts included in the accompanying combinedand consolidated financial statements are expressed in U.S. dollars.

Prior to June 1, 2006, we operated as part ofAgilent, and not as a stand-alone company. Therefore, since Verigy had noseparate existence prior to June 1, 2006, there were no financialstatements prepared prior to June 1, 2006. The accompanying combined andconsolidated financial statements have been derived in accordance withaccounting principles generally accepted in the United State (“U.S.”).Financial statements prior to June 1, 2006, were derived from theaccounting records of Agilent, using the historical basis of assets andliabilities of Verigy and differ from Agilent’s “STS” segment disclosures underSFAS 131, “Disclosure About Segments of an Enterprise and RelatedInformation.”

Verigy and Agilent entered into a master separationand distribution agreement prior to the completion of our initial publicoffering that contains the key provisions relating to the separation and,Agilent’s distribution of its Verigy ordinary shares to its stockholders, whichoccurred on October 31, 2006. The master separation and distributionagreement describes generally the agreements and other documents that weredelivered on the separation date, including the ancillary agreements. Theseancillary agreements include the general assignment and assumption agreement,the tax sharing agreement, the employee matters agreement, the intellectualproperty matters agreement, the manufacturing trademark license agreement andthe transition services agreement.

Our business generated cash from operations of $164million during fiscal year 2006, while our business required a net investmentof $74 million from Agilent for the 2005 fiscal year because our cash fromoperations was not sufficient to cover our operating expenses. Prior to ourseparation, Agilent historically used a centralized approach to cash managementand financing of its operations. As such, none of the cash, cash equivalents ordebt at the Agilent corporate level is reflected in our combined andconsolidated financial statements prior to June 1, 2006.

Effective June 2, 2006, we entered into a$25 million short-term revolving credit facility with Agilent toallow us to fund our operations prior to the closing of our initial publicoffering. We have since repaid Agilent the amounts owed under this facility outof the net proceeds from our initial public offering, and the credit facilityhas been terminated.

Historically, we have received substantial managementand shared administrative services from Agilent and have engaged in certainintercompany transactions with Agilent. Prior to our separation from Agilent,we relied on Agilent for substantially all of our operational and administrativesupport. The combined and consolidated financial statements include allocationsof certain Agilent corporate expenses, including information technologyresources and support; finance, accounting, and auditing services; real estateand facility management services; human resources activities; certainprocurement activities; and treasury services, customer contractadministration, legal advisory services, and central research services. 

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We also historicallybenefited from license agreements that Agilent entered into with third partiesrelated to intellectual property.

Management believes the assumptions and allocationsunderlying the combined and consolidated financial statements are reasonableand appropriate under the circumstances. The expenses and cost allocations havebeen determined on a basis we consider to be a reasonable reflection of theutilization of services provided or the benefit received by us during theperiods presented.

The amounts recorded forthese transactions and allocations are not, however, necessarily representativeof the amounts that would have been incurred had we been a separate, stand-aloneentity that operated independently of Agilent. Our results of operations afterour separation from Agilent include costs and expenses for us to operate as astand-alone company. In addition, costs incurred subsequent to ourseparation include costs for transition services provided to us by Agilentunder service level agreements, and consequently, we expect future costs andexpenses to be different than our historical results of operations. We expectthat we will continue to incur significantly higher expenses such as auditfees, costs to maintain our corporate functions such as tax, treasury, andinvestor relations, and costs to comply with regulatory requirements. Theresults of operations do not include a full year’s impact of these costs orother costs such as those related to costs to maintaining a board of directors,internal audit department, or SEC reporting department and other costs tocomply with the Sarbanes-Oxley Act and other internal controlrequirements. Accordingly, the combined and consolidated financial statementsfor these periods may not be indicative of our future results of operations,financial position or cash flows.

***Business Summary***

We design, develop, manufacture and sell advanced testsystems and solutions for the semiconductor industry. As part of our singlescalable platform strategy, we develop and offer performance and capabilityenhancements to our platforms as part of our product development roadmap. Weoffer a single platform for each of the two general categories of devices beingtested: our 93000 Series platform, designed to test SOCs, SIPs and high-speedmemory devices, and our Versatest V5000 Series platform, designed to testmemory devices, including flash memory and multi-chip packages. We alsoprovide a range of services that assist our customers in quickly and costeffectively delivering the innovative, feature-rich products demanded bytheir end users.

More than a decade ago, we introduced the concept ofscalable platform architecture for semiconductor testing, and we are continuingto capitalize on the benefits of that strategy today. Our scalable platformarchitecture provides us with internal operating model efficiencies such asreduced research and development costs, engineering headcount, supportrequirements and inventory risk.

We sell our products andservices directly to a wide range of customers, including integrated devicemanufacturers, or IDMs, test subcontractors, which includes specialty assembly,package and test companies as well as wafer foundries, and fabless designcompanies. We have a broad installed customer base, having sold over 1,400 ofour 93000 Series systems and over 2,300 of our Versatest Series systems.

***Overview of Results***

In fiscal year 2006, one customer, ChipMosTechnologies (Bermuda) Ltd., accounted for more than 10% of our net revenue. Infiscal year 2005, no single customer accounted for more than 10% of our netrevenue. In fiscal year 2004, one customer, Spansion Inc., accounted formore than 10% of our net revenue.

We derive a significant percentage of our net revenuefrom outside North America. Net revenue from customers located outside of NorthAmerica represented 68.4%, 72.8%, and 72.0% of total net revenue in fiscalyears 2006, 2005, and 2004, respectively. Net revenue from customers located inthe Asia-Pacific 

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region (excluding Japan)represented 52.0%, 42.8%, and 45.5% of total net revenue in fiscal years 2006,2005, and 2004, respectively. Net revenue from customers located in Japanrepresented 10.2%, 20.6%, and 15.8% of total net revenue in fiscal years 2006,2005, and 2004, respectively. Net revenue from customers located in Singaporerepresented 48.3%, 39.5%, and 42.7% of total net revenue in fiscal years 2006,2005, and 2004, respectively. Although our revenues in North America werestrong in fiscal year 2006, we expect the trend of an increasing portion of ourrevenue coming from customers located in the Asia-Pacific region to continue assemiconductor manufacturing activities continue to concentrate in theAsia-Pacific region.

The sales of our products and services are dependent,to a large degree, on customers who are subject to cyclical trends in thedemand for their products. These cyclical periods have had and will havesignificant impacts on our business since our customers often delay oraccelerate purchases in reaction to changes in their businesses and to demandfluctuations in the semiconductor industry. Historically, these demandfluctuations have resulted in significant variations in our results ofoperations. Upturns and downturns in the semiconductor industry in recent yearshave generally affected the semiconductor test equipment and services industry moresignificantly than the overall capital equipment sector. Furthermore, we sellto a variety of customers, including subcontractors. Because we sell tosubcontractors, which during market downturns tend to reduce or cancel ordersfor new test systems and test services more quickly and dramatically than othercustomers, any downturn may cause a quicker and more significant adverse impacton our business than on the broader semiconductor industry. In addition,although a decline in orders for semiconductor capital equipment may accompanyor precede the timing of a decline in the semiconductor market as a whole,recovery in semiconductor capital equipment spending may lag the recovery bythe semiconductor industry.

In order to enhance our ability to maintain financialstrength in a cyclical business environment and as part of our separationfrom Agilent, we initiated a restructuring plan in 2005, as part of Agilent’s2005 restructuring plan, which involves reducing our workforce andconsolidating facilities. Under the 2005 restructuring plan, we recorded a$24 million charge in the fiscal year 2006, compared to a $8 millioncharge in fiscal year 2005. As part of our agreements with Agilent, Agilentwill pay for these restructuring costs and expenses related to the 2005restructuring plan. We expect to record restructuring-related charges in therange of $2 to $3 million during the first half of fiscal year 2007. Theanticipated reduction in our operating costs associated with headcountreductions, of approximately 300 people, and facility consolidations will beoffset in part by the addition of approximately 100 people in lower costlocations where we will be continuing operations. Consequently, we expect thecumulative effect of these actions to significantly lower our cost of ongoingoperations when compared to historical levels.

In addition, in connection with our separation fromAgilent, we incurred separation costs such as information technology set-upcosts, consulting, legal and other professional fees and other separationrelated costs. For fiscal year 2006, we incurred $83 million in separationcosts, of which approximately $8 million were recorded in costs of sales,compared to $3 million of total separation costs in fiscal year 2005, with noexpenses recorded in cost of sales. In fiscal year 2006, these separation costswere partially offset by a net curtailment and settlement gain (pertaining toAgilent’s U.S. Retirement and Post Retirement Benefit Plans) of approximately$10 million, of which $4 million was recorded in cost of sales. Also, duringfiscal year 2006, we invested in a new enterprise resource planning (“ERP”)system and capitalized approximately $20 million, as well as new site set upand leasehold improvements costs for our new U.S. headquarter facilities, wherewe capitalized approximately $8 million. All separation-related costs whichwere incurred as of the separation date remained as Agilent liabilities, whileseparation costs incurred after the separation date are Verigy’s liabilities.We anticipate separation-related costs in the range of $2 to $3 million duringthe first half of fiscal year 2007.

Through June 2006, we relied upon twomanufacturing models: a hybrid internal and contract manufacturing model forour 93000 Series products and a completely outsourced contractmanufacturing model for our Versatest series products. In connection with ourseparation from Agilent in June 2006, we 

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transitioned themanufacturing processes for the 93000 Series products that we previouslyconducted internally to Flextronics TelecomServices Ltd. (“Flextronics”). As a result of this transition, we nowrely entirely on contract manufacturers. Flextronicscommenced production of our Versatest series products in China in July 2006and assumed our manufacturing activities for the 93000 Series products inGermany in June 2006. The activities currently conducted by Flextronics inGermany are expected to be transitioned to China during the first half ofcalendar 2007. Flextronics will continue to do limited early production runs ofthe 93000 Series platform in Germany. We expect this manufacturing modelto improve our ability to manage costs in a cyclical market, drive downinventory costs and exposure, improve our responsiveness to customer demand andplace us closer to emerging markets.

We believe that relying upon independent contractmanufacturers will decrease our fixed costs and better position us to respondto changes in the demand for our products. With our selection of Flextronics asour primary independent manufacturing supplier, we are leveraging theirworldwide processes, tools and infrastructure and are expanding ourmanufacturing in Asia, where Flextronics already has a significant capabilityfor manufacturing complex technologies. As a result of this outsourcingarrangement, we expect to lower our fixed costs by reducing our capitalinvestments and manufacturing equipment and by reducing the size of ourmanufacturing work force located in high-cost geographies. In addition, weexpect to reduce our material costs by leveraging Flextronics’ supply chainexpertise and securing local suppliers. As a result of these actions, we expectto have improved gross margins and a reduced level of inventory and equipmentwhen compared to historical levels.

In connection with engaging with Flextronics as ourprimary contract manufacturer, Agilent, acting on our behalf, signed severalasset purchase agreements with Flextronics in connection with the transfer ofour manufacturing activities as well as a global manufacturing servicesagreement. Upon the separation, Verigy assumed all of Agilent’s rights andobligations under the agreements with Flextronics. Effective June 1, 2006, we sold to Flextronics approximately$19 million of raw material inventory and approximately $2 million ofmachinery and equipment for approximately net book value. In addition, we paidFlextronics $1.5 million for transition-related services, which weare recognizing as an expense ratably over the manufacturing contract period ofapproximately 4 years. Also, in connection with these agreements, Flextronicspaid us $1.5 million on October 19, 2006, and will pay us anadditional $1.5 million in the first quarter of fiscal year 2007, that we willdefer and recognize ratably over the manufacturing contract period.

In connection with the transfer of our manufacturingactivities to Flextronics, we transferred approximately 85 employees toFlextronics and Flextronics assumed certain pension and other employeeliabilities associated with these employees. On July 14, 2006, we reimbursedAgilent approximately $7 million for payments that Agilent had made toFlextronics, on our behalf, related to future severance, pension and flexibletime off liabilities associated with employees transferred to Flextronics underthe various Flextronics asset purchase agreements described elsewhere in thisreport on Form 10-K. On September 19, 2006, we also paid Flextronicsapproximately $1 million for pension and flexible time off liabilities inaccordance with the Flextronics agreements. Also, we have potential futureobligations of approximately $2 million associated with these transferredemployees. We have deferred approximately $5 million of severance costsand are recognizing them ratably over the employees’ period of service untilthe respective dates of the employees’ termination from Flextronics. Duringfiscal year 2006, we recorded $1.8 million of these charges in our cost ofproducts.

Our third and fourthfiscal quarters tend to be our strongest quarters for new orders, while ourfirst fiscal quarter tends to be our weakest quarter for orders. We believethat the most significant factor driving these seasonal patterns is the holidaybuying season for consumer electronics products. The seasonality of ourbusiness is often masked to a significant extent, however, by the high degreeof cyclicality of the semiconductor industry.

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**Critical Accounting Policies and Estimates**

The preparation offinancial statements in accordance with accounting principles generallyaccepted in the U.S. (“U.S. GAAP”) requires management to make estimates andassumptions that affect the amounts reported in our combined financialstatements and accompanying notes. Management bases its estimates on historicalexperience and various other assumptions believed to be reasonable. Althoughthese estimates are based on management’s best knowledge of current events andof actions that may impact the company in the future, actual results may bedifferent from the estimates. Our critical accounting policies are those thataffect our financial statements materially and involve difficult,subjective or complex judgments by management. Those policies includerevenue recognition, restructuring and asset impairment charges, inventoryvaluation, warranty, share-based compensation, retirement and post-retirementplan assumptions, valuation of goodwill and intangible assets and accountingfor income taxes.

*Revenue recognition.**  *Consistent with the SEC’s StaffAccounting Bulletin No. 104, or “SAB 104,” we recognize revenue on thesale of semiconductor test equipment when there is persuasive evidence of anarrangement, delivery has occurred or services have been rendered, the salesprice is fixed or determinable and collectibility is reasonably assured.Delivery is considered to have occurred when title and risk of loss havetransferred to the customer, for products, or when service has been performed.We consider the price to be fixed or determinable when the price is not subjectto refund or adjustments. We consider arrangements with extended payment termsbeyond 90 days not to be fixed or determinable, unless they are securedunder a letter of credit arrangement guaranteed by a reputable financialinstitution, and accordingly we defer such revenue until amounts become due. Atthe time we take an order, we evaluate the creditworthiness of our customers todetermine the appropriate timing of revenue recognition. For sales orarrangements that include customer-specified acceptance criteria,including those where acceptance is required upon achievement of performancemilestones or fulfillment of other future obligations, revenue is recognizedafter the acceptance criteria have been met. If the criteria are not met, thenrevenue is deferred until such criteria are met or until the period(s) overwhich the last undelivered element is delivered. To the extent that acontingent payment exceeds the fair value of the undelivered element, we deferthe contingent payment.

Our product revenue isgenerated predominantly from the sales of various types of test equipment.Software is embedded in many of our test equipment products, but the softwarecomponent is considered to be incidental. For revenue arrangements that includemultiple elements, we recognize revenue in accordance with EITF 00-21. Forproducts that include installation, if we have previously successfullyinstalled similar equipment at the same customer location, product revenue isrecognized upon delivery, and recognition of installation revenue is delayeduntil the installation is complete. Otherwise, neither the product nor theinstallation revenue is recognized until the installation is complete. Revenuefrom services includes extended warranty, customer support, consulting,training, and education services. Service revenue is deferred and recognizedover the contractual period or as services are rendered to the customer. Forexample, customer support contracts are recognized ratably over the contractualperiod, while training revenue is recognized as the training is provided to thecustomer. In addition, all of the revenue recognition criteria described abovemust be met before service revenue is recognized. We use objective evidence offair value to allocate revenue to elements in multiple element arrangements andrecognize revenue when the criteria for revenue recognition have been met foreach element. In the absence of objective evidence of fair value of a deliveredelement, we allocate revenue to the fair value of the undelivered elements andthe residual revenue to the delivered elements. The price charged when anelement is sold separately generally determines fair value.

*Restructuring and assetimpairment charges.**  *Werecognize a liability for restructuring costs at fair value only when theliability is incurred. The three main components of our restructuring chargesare workforce reductions, consolidating facilities and asset impairments.Workforce-related charges are 

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accrued when it isdetermined that a liability has been incurred, which is generally afterindividuals have been notified of their termination dates and expectedseverance payments. Plans to eliminate excess facilities result in charges forlease termination fees and future commitments to pay lease charges, net ofestimated future sublease income. We recognize charges for elimination ofexcess facilities when we have vacated the premises. Asset impairmentsprimarily consist of property, plant and equipment associated with excessfacilities being eliminated, and are based on an estimate of the amounts and timingof future cash flows related to the expected future remaining use and ultimatesale or disposal of the property, plant and equipment. The charges associatedwith consolidating facilities and asset impairment charges incurred by Agilentwere allocated to Verigy to the extent the underlying benefits related to ourbusiness. These estimates were derived using the guidance of Statement ofFinancial Accounting Standards (“SFAS”) No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), StaffAccounting Bulletin 100, “Restructuring and Impairment Charges” (“SAB 100”),Emerging Issues Task Force 94-3, “Liability Recognition for Costs to Exit anActivity (Including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”)and lastly, SFAS No. 146 “Accounting for Exit or Disposal Activities” (“SFASNo. 146”) which was effective for exit and disposal activities initiatedafter December 31, 2002. If the amounts and timing of cash flows fromrestructuring activities are significantly different from what we haveestimated, the actual amount of restructuring and asset impairment chargescould be materially different, either higher or lower, than those we haverecorded.

*Inventory valuation.**  *We assess the valuation of ourinventory, including demonstration inventory, on a quarterly basis based uponestimates about future demand and actual usage. To the extent that we determinethat we are holding excess or obsolete inventory, we write down the value ofour inventory to its net realizable value. Such write-downs are reflectedin cost of products and can be material in amount. For example, we recorded anet charge of $18 million in fiscal year 2005 for excess and obsoleteinventory. Our inventory assessment involves difficult estimates of futureevents and, as a result, additional write-downs may be required. Ifactual market conditions are more favorable than anticipated, inventorypreviously written down may be sold to customers, resulting in lower cost ofproducts and higher income from operations than expected in that period. Excessand obsolete inventory resulting from shifts in demand or changes in marketconditions for raw materials and components can result in significantvolatility in our costs of products.

In our inventory valuationanalysis, we also include inventory that we could be obligated to purchase fromour suppliers based on our production forecasts. To the extent that ourcommitted inventory purchases exceed our forecasted productions needs, we writedown the value of those inventories by taking a charge to our cost of productsand increasing our supplier liability.

*Warranty.**  *We generally provide a one-yearwarranty on products commencing upon installation or delivery. We accrue forwarranty costs in accordance with Statement of Financial Standards No. 5, “Accountingfor Contingencies” (“SFAS No. 5”), based on historical trends in warrantycharges as a percent of gross product shipments. Estimated warranty charges arerecorded within cost of products at the time revenue is recognized and theliability is reported in other current liabilities on the combined balancesheet. The accrual is reviewed regularly and periodically adjusted to reflectchanges in warranty cost estimates. For some products we also offer extendedwarranties beyond one year. Costs associated with our extended warrantycontracts beyond one year are expensed as incurred.

*Separation costs.*   Separationcosts are one-time internal and external spin-off related costs, such asinformation technology set-up costs and consulting and legal and otherprofessional fees.

*Share-basedcompensation.**  *InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 123 (Revised 2004) “Share-BasedPayment” (“SFAS No. 123(R)”). SFAS No. 123(R) addresses allforms of share-based payment (“SBP”) awards, including shares issuedunder employee stock purchase plans, stock options, restricted shares and stockappreciation rights. SFAS No. 123(R), which became effective for usbeginning in the first quarter of fiscal 

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year 2006,superseded our prior accounting for SBP awards under APB No. 25 andrequires us to recognize compensation expense for all SBP awards based onfair value. In March 2005, the SEC released Staff Accounting Bulletin No. 107,“Share-Based Payment” (“SAB No. 107”) relating to the adoption ofSFAS No. 123(R). With respect to valuing SBP awards outstanding atthe time of adoption of SFAS No. 123(R), we used the modifiedprospective transition method using the Black-Scholes option pricingmodel. Our estimate of compensation expense requires a number of complex andsubjective assumptions including our stock price volatility, employee exercisepatterns (expected life of the options), future forfeitures and related taxeffects. We will recognize SBP compensation expense for awards issued after November 1,2005 on a straight-line basis over the vesting period of the award. For awardsissued prior to November 1, 2005 by Agilent, we will recognize SBP compensationexpense based on FASB Interpretation 28 “Accounting for Stock AppreciationRights and Other Variable Stock Option or Award Plans an interpretation of APBOpinions No. 15 and 25,” which provides for accelerated expensing.Effective the distribution date, unvested Agilent stock options held by Verigyemployees from the distribution date were terminated. All vested Agilentoptions held by Verigy employees at the distribution date remained as Agilentoptions and were not replaced with Verigy equity awards. Exercise of Agilentstock options by Verigy employees has no impact on our financial statements noron our outstanding ordinary shares. To the extent that the Agilent options werenot vested as of the distribution date, Verigy has replaced the Agilent optionswith new Verigy options based on the following ratio: average price of Agilentcommon stock on October 30, 2006 (the date prior to the distributiondate), divided by the average price of Verigy ordinary shares on October 31,2006 (the day of the distribution). Approximately 2.2 million replacementVerigy options were issued on October 31, 2006. The replacement of theAgilent options with Verigy options was accounted for as a stock optionmodification in accordance with FAS 123(R).

*Retirement andpost-retirement plan assumptions.**  *Retirement and post-retirementbenefit plan costs are a significant cost of doing business. They representobligations that will ultimately be settled sometime in the future andtherefore are subject to estimation. Pension accounting is intended to reflectthe recognition of future benefit costs over the employees’ average expectedfuture service based on the terms of the plans and the investment and fundingdecisions made by us. To estimate the impact of these future payments and ourdecisions concerning funding of these obligations, we are required to makeassumptions using actuarial concepts within the framework of U.S. GAAP. Twocritical assumptions are the discount rate and the expected long-term return onplan assets. Other important assumptions include the health care cost trendrate, expected future salary increases, expected future increases to benefitpayments, expected retirement dates, employee turnover and retiree mortalityrates. We evaluate these assumptions at least annually.

The discount rate is usedto determine the present value of future benefit payments at each measurementdate (October 31 for U.S. plans and September 30 for non-U.S. plans).The discount rate for U.S. plans was determined based on published rates forhigh quality corporate bonds. The discount rate for non-U.S. plans wasgenerally determined in a similar manner. Differences between the expectedfuture cash flows of our plans and the maturities of the high quality corporatebonds are not expected to have a material impact on the selection of discountrates. In recent years, decreasing interest rates, particularly outside theU.S., have increased our net plan costs. The increase in net plan costs hasbeen in large part offset by a declining number of plan participants as aresult of our various restructuring programs. The entire impact of decliningdiscount rates is not recognized immediately under current accountingstandards. As of October 31, 2006, delayed recognition of the impact ofdeclining discount rates was the primary factor in approximately$16 million in unrecognized net actuarial losses for non-U.S. plans thatwere transferred from Agilent. These losses are being recognized over theexpected average future service lives of plan participants.

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The expected long-termreturn on plan assets is estimated using current and expected assetallocations, as well as historical and expected returns. Declining rate ofreturn assumptions generally result in increased pension expense whileincreasing rate of return assumptions generally result in lower pensionexpense. A one percent change in the estimated long-term return on plan assetswould result in a $0.3 million impact on pension expense for our fiscalyear 2006.

In connection with ourseparation from Agilent, Agilent transferred to us the liabilities associatedwith the defined benefit plans for our employees located in Germany, France,Korea, Italy and Taiwan. With the exception of Italy and France, Agilent fundedthese plans on June 1, 2006, based on 80% of the estimated accumulatedbenefit obligations as of the separation date. Verigy made no additionalcontributions to the retirement plans during fiscal year 2006. Effective ourseparation date, we put in place a new defined benefit plan for our employeesin Japan as well as a new retiree medical account program for our employees inthe U.S. who meet certain age and service criteria.

Effective November 28,2006, Agilent substantially completed its obligation to fund our Germanydefined benefit plans at the accumulated obligation level as of the separationdate. With the exception of Italy, which is insignificant, Agilent will fundthe remaining plans based on 100% of the accumulated benefit obligation levelas of June 1, 2006, as soon as the actuarial valuations are completed bythe end of our first quarter of fiscal 2007.

In fiscal years 2006, 2005and 2004 we incurred expenses of $2 million, $5 million and$6 million, respectively, for our defined benefit retirement andpost-retirement plans in the U.S. and $5 million, $6 million, and$6 million for the same respective periods for our non-U.S plans. Weexpect to incur expenses of approximately $5.6 million in fiscal year 2007for our defined benefit retirement plans that we have in place as ofOctober 31, 2006.

Workforce-relatedevents such as restructurings or divestitures can result in curtailment andsettlement gains or losses to the extent they have an impact on the averagefuture working lifetime or total number of participants in our retirement andpostretirement plans.

*Valuation of goodwill andintangible assets.**  *Weperformed our annual goodwill impairment analysis in the fourth quarter of2006. Based on our estimates of forecasted discounted cash flows, we concludedthat we did not have any impairment at that time.

Our accounting forgoodwill and purchased intangible assets complies with SFAS No. 142“Goodwill and Other Intangible Assets” (“SFAS No. 142”). We test goodwillfor possible impairment on an annual basis and at any other time thatimpairment indicators arise. Circumstances that could trigger an impairmenttest include but are not limited to: significant decrease in market price of anasset, significant adverse changes in the extent or use or physical conditionof an asset, significant adverse change in legal or regulatory factorsaffecting an asset, unanticipated competition, loss of key personnel,accumulation of costs significantly in excess of expected costs to acquire orconstruct an asset, operating or cash flow losses (or projections of losses)that demonstrates continuing losses associated with the use of an asset, or acurrent expectation that more likely than not, an asset will be sold ordisposed of significantly before the end of its previously estimated usefullife. Purchased intangible assets are carried at cost less accumulatedamortization. Amortization is computed using the straight-line method over theeconomic lives of the respective assets, generally three to five years.

The process of evaluatingthe potential impairment of goodwill and other intangibles is highly subjectiveand requires significant judgment. We estimate expected future cash flows thencompare the carrying value including goodwill and other intangibles to thediscounted future cash flows. If the total of future cash flows is less thanthe carrying amount of the assets, we recognize an impairment loss based on theexcess of the carrying amount over the fair value of the assets. Estimates ofthe future cash flows associated with the assets are critical to theseassessments. Changes in these estimates based on changed economic conditions orbusiness strategies could result in material impairment charges in futureperiods.

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*Accountingfor income taxes.**  *Althoughour operating results prior to our separation have been included in Agilent’sconsolidated tax returns our provision for income taxes in our combined andconsolidated financial statements have been determined on a separate returnbasis. We are required to assess the realization of our net deferred tax assetsand the need for a valuation allowance on a separate return basis, and excludefrom that assessment any utilization of those losses by Agilent. Thisassessment requires that our management make judgments about benefits thatcould be realized from future taxable income, as well as other positive andnegative factors influencing the realization of deferred tax assets. Due to thelosses we incurred in the U.S. and Japan, prior to fiscal year 2003, werecorded a valuation allowance against any net deferred tax assets in thesejurisdictions. Until our separation, we maintained a full valuation allowancein these jurisdictions until sufficient positive evidence exists to supportreversal of the valuation allowance.

We did not retain any deferred tax assets andliabilities related to temporary differences, net operating losses and creditcarryforwards from Agilent. We did, however, retain approximately $4 million ofprepaid tax assets upon our separation. As a result, for periods after June 1,2006, our deferred tax assets and liabilities are based on temporarydifferences between the book and tax basis of the net assets that weretransferred in connection with our separation from Agilent and our operatingactivities beginning as of June 1, 2006.

Our effective tax ratevaries based on a variety of factors, including overall profitability, thegeographical mix of income before taxes and the related tax rates in thejurisdictions where we operate, as well as discrete events, such as auditsettlements. Certain combinations of these factors could cause us to owesignificant taxes (and to have high effective tax rates) during periods when weexperience low operating profit or operating losses. Conversely, we expect torealize more favorable effective tax rates as our profitability increases. Wewill also be subject to audits and examinations of our tax returns by taxauthorities in various jurisdictions, including the Internal Revenue Service.We will regularly assess the likelihood of adverse outcomes resulting fromthese examinations to determine the adequacy of our provision for income taxes.

**Foreign Currency**

Our revenue, costs and expenses, and monetary assetsand liabilities are exposed to changes in foreign currency exchange rates as aresult of our global operating and financing activities. In the past, weexperienced some fluctuation within individual lines of the combined and consolidated statement of operationsand balance sheet as Agilent’s hedging strategy was not designed to offset thecurrency movements in each category of revenue, expenses, monetary assets andliabilities.

Prior to our separationfrom Agilent, gains or losses associated with Agilent’s derivative instrumentcontracts had been allocated to us. As such, the historical results of ourbusiness prior to June 1, 2006, reflected the hedging program in place atAgilent. Since our separation, we have implemented a hedging strategy thatmitigates currency exposures on certain balance sheet positions. We have not yet implemented a hedging program thatmitigates our currency exposures on our income statement and are currentlyevaluating the magnitude and value-at-risk of our net currency exposures. We donot use derivative financial instruments for speculative or trading purposes.

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**Results ofOperations**

Thefollowing table sets forth certain operating data as a percent of net revenuefor the periods presented.

| ** **                          | ** ** | **Year Ended October 31,** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net revenue:                        |       |                                      |       |   |   |   |   |
| Products                            |       | 83.0                                      | %          | 77.9 | % | 82.5 | % |
| Services                            |       | 17.0                                      |       | 22.1 |   | 17.5 |   |
| Total net revenue                   |       | 100.0                                     |       | 100.0 |   | 100.0 |   |
| Cost of sales:                      |       |                                      |       |   |   |   |   |
| Cost of products                    |       | 42.5                                      |       | 50.0 |   | 43.3 |   |
| Cost of services                    |       | 12.5                                      |       | 19.3 |   | 15.0 |   |
| Total cost of sales                 |       | 55.0                                      |       | 69.3 |   | 58.3 |   |
| Gross margin                        |       | 45.0                                      |       | 30.7 |   | 41.7 |   |
| Operating  expenses:                |       |                                      |       |   |   |   |   |
| Research and development            |       | 12.7                                      |       | 22.1 |   | 17.3 |   |
| Selling, general and administrative |       | 19.2                                      |       | 29.4 |   | 22.9 |   |
| Restructuring charges               |       | 2.1                                       |       | 1.5 |   | 0.7 |   |
| Separation costs                    |       | 8.9                                       |       | 0.7 |   | 0.0 |   |
| Total operating expenses            |       | 42.9                                      |       | 53.7 |   | 40.9 |   |
| Income (loss)  from operations      |       | 2.1                                       |       | (23.0 | ) | 0.8 |   |
| Other income  (expense), net        |       | 0.6                                       |       | (0.2 | ) | 0.2 |   |
| Income (loss)  before income taxes  |       | 2.7                                       |       | (23.2 | ) | 1.0 |   |
| Provision for  income taxes         |       | 2.7                                       |       | 2.9 |   | 2.3 |   |
| Net loss                            |       | 0.0                                       | %          | (26.1 | )% | (1.3 | )% |

 

**Net Revenue**

| ** **                 | ** ** | **Year Ended October 31,** | ** ** | **2006 over 2005** | ** ** | **2005 over 2004** | ** ** |
|----------------------------|------------|-------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **2006**                                  | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                 | ** ** | **(in millions)**                    | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Net revenue from  products |       | $                                         | 646        |                         | $          | 355                          |       | $ | 501 |   |   | 82.0 | % |   |   | (29.1 | )% |   |
| Net revenue from  services |       | 132                                       |       | 101                          |       | 106                          |       |   | 30.7 | % |   |   | (4.7 | )% |   |
| Total net revenue          |       | $                                         | 778        |                         | $          | 456                          |       | $ | 607 |   |   | 70.6 | % |   |   | (24.9 | )% |   |

 

Ourrevenues by geographic region for fiscal years 2006, 2005 and 2004 are asfollows:

| ** **                          | ** ** | **Year Ended October 31,** | ** ** | **2006 over 2005** | ** ** | **2005 over 2004** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **2006**                                  | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                          | ** ** | **($ in millions)**             | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| North America                       |       | $                                         | 246        |                         | $          | 124                          |       | $ | 170 |   |   | 98.4 | % |   |   | (27.1 | )% |   |
| *As a percent of total net revenue* |       | 31.6                                      | %          | 27.2                         | %          | 28.0                         | %          |   |   |   |   |   |   |   |   |
| Europe                              |       | $                                         | 48         |                         | $          | 43                           |       | $ | 65 |   |   | 11.6 | % |   |   | (33.8 | )% |   |
| *As a percent of total net revenue* |       | 6.2                                       | %          | 9.4                          | %          | 10.7                         | %          |   |   |   |   |   |   |   |   |
| Asia-Pacific,  excluding Japan      |       | $                                         | 405        |                         | $          | 195                          |       | $ | 276 |   |   | 107.7 | % |   |   | (29.3 | )% |   |
| *As a percent of total net revenue* |       | 52.0                                      | %          | 42.8                         | %          | 45.5                         | %          |   |   |   |   |   |   |   |   |
| Japan                               |       | $                                         | 79         |                         | $          | 94                           |       | $ | 96 |   |   | (16.0 | )% |   |   | (2.1 | )% |   |
| *As a percent of total net revenue* |       | 10.2                                      | %          | 20.6                         | %          | 15.8                         | %          |   |   |   |   |   |   |   |   |
| Total net revenue                   |       | $                                         | 778        |                         | $          | 456                          |       | $ | 607 |   |   | 70.6 | % |   |   | (24.9 | )% |   |

 

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*NetRevenue.**  *Netrevenue is derived from the sale of products and services and is adjusted forreturns and allowances, which historically have been insignificant. Our productrevenue is generated predominantly from the sales of our test equipmentproducts. Revenue from services includes extended warranty, customer support,consulting, training and education activities. Service revenue is recognizedover the contractual period or as services are rendered to the customer.

Net revenue for fiscal year 2006, was $778 million, anincrease of $322 million, or 70.6%, from the $456 million achieved infiscal year 2005. Net product revenue for fiscal year 2006, was $646 million,an increase of $291million, or 82%, from fiscal year 2005. The increase in netproduct revenue was primarily a result of a higher volume of sales enabled byincreased overall demand for our products. Net product revenue from ourSOC/SIP/high-speed memory test systems increased by $175 million, or 65.5%,with most of the sales being of the enhanced version of our 93000 Series platform.Continued customer demand for our 93000 Series platform increased ourpenetration in a breadth of applications, from next generation graphics andwireless gaming, to high-end SOC applications and digital consumer applicationsas well as SOC solutions with RF capabilities. During the fourth quarter offiscal 2006, we experienced some weakness in demand for our SOC/SIP/high-speedmemory test systems, particularly from sub-contractors. As a result, a higherportion of our net revenue during the latter part of fiscal 2006 has come fromour IDM customers. Sales of our memory test systems also contributed to the netproduct revenue increase, with net product revenue from our memory test systemsincreasing by $116 million, or 131.8%. Substantially all of these saleswere of the enhanced version of our Versatest V5000 Series platform, whichwas introduced in late fiscal year 2004. This demand was primarily a result ofstrong sales of flash memory devices as a result of greater demand forhand-held consumer products, as well as expansion of our addressable marketsinto NAND flash and flash final test. Service revenue for fiscal year 2006,accounted for $132 million, or 17.0% of net revenue, compared to$101 million, or 22.1% of net revenue for fiscal year 2005. The increasein service revenue is attributed to our growing installed base and increasedservices associated with a strong demand for products at the end offiscal year 2006.

Net revenue in fiscal year 2005 was $456 million,a decrease of $151 million, or 24.9%, from the $607 million achievedin fiscal year 2004. Net product revenue in fiscal year 2005 was$355 million, a decrease of $146 million, or 29.1%, from the$501 million achieved in fiscal year 2004. The decrease in overall andproduct revenue in fiscal year 2005 was due in large part to weakness in thesemiconductor industry which resulted in under-utilization of the installedtest equipment and a decline in spending on new test equipment, particularly asthe weakness in the semiconductor industry that began towards the end of fiscalyear 2004 continued into the first half of fiscal year 2005. Product revenuewas also adversely affected by delayed customer purchases in anticipation ofour enhanced product platforms. This decrease was partially offset by theexpansion of our addressable market into new markets, including NAND flash.Services revenue for fiscal year 2005 accounted for $101 million, or 22.1%of net revenue, compared to $106 million, or 17.5% of net revenue, for fiscalyear 2004. Services revenue tends to rise and fall in direct relation toproduct revenue although services revenue tends to show lower volatility thanproduct revenue due to services being provided over time.

We derive a significant percent of our net revenuefrom outside of North America. Net revenue from customers located outside ofNorth America represented 68.4%, 72.8%, and 72.0% of total net revenue infiscal years 2006, 2005, and 2004, respectively. Net revenue in North Americawas higher in fiscal year 2006, compared to fiscal year 2005, primarily due toincreased sales to key IDM customers for both our SOC/SIP/high-speedmemory and memory test systems in the U.S. The prior trend away from the NorthAmerican market was largely due to general weakness in the North Americanmarket which began in 2004. Despite the recent rebound in sales to the NorthAmerican market, we expect the general trend of increasing sales in the AsiaPacific region to continue as semiconductor manufacturing activities continueto concentrate in that region.

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Net revenue from customerslocated in the Asia-Pacific region (excluding Japan) represented 52.0%, 42.8%,and 45.5% of total net revenue in fiscal years 2006, 2005, and 2004respectively. Net revenue from customers located in Japan represented 10.2%,20.6%, and 15.8% of total net revenue in fiscal years 2006, 2005, and 2004,respectively. The year-over-year percentage decreases in net revenue from Japanand increases in net revenue from the Asia-Pacific region (excluding Japan) isdue to continued outsourcing to contract manufacturers who are located in theAsia-Pacific region (excluding Japan).

**Cost of Sales**

*Cost of Products*

| ** **                         | ** ** | **Year Ended October 31,** | ** ** | **2006 over 2005** | ** ** | **2005 over 2004** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **2006**                                  | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                         | ** ** | **($ in millions)**             | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Cost of products                   |       | $                                         | 331        |                         | $          | 228                          |       | $ | 263 |   |   | 45.2 | % |   |   | (13.3 | )% |   |
| *As a  percent of product revenue* |       | 51.2                                      | %          | 64.2                         | %          | 52.5                         | %          |   |   |   |   |   |   |   |   |
|                                    |            |                                           |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |

 

*Costof Products.**  *Costof products consists primarily of manufacturing materials, outsourcedmanufacturing costs, direct labor, manufacturing and administrative overhead,warranty costs and provisions for excess and obsolete inventory, partiallyoffset, when applicable, by benefits from sales of previously written-downinventory.

The increase in cost of products in fiscal year 2006,compared to fiscal year 2005, was directly related to the increase in productsshipped in 2006. The decrease in cost of products as a percent of net productrevenue, compared to fiscal year 2005, was a result of higher revenue, higher marginsfrom both our product lines, less inventory write-offs for discontinuedproducts as well as our continued progress in moving to our new manufacturingmodel. This decrease was partially offset by higher performance-based variablepay costs in fiscal year 2006. Excess and obsolete inventory-relatedcharges in fiscal year 2006 were $18 million compared to inventory-relatedcharges of $25 million in fiscal year 2005. In addition, we soldpreviously written down inventory of $11 million and $7 million in fiscalyears 2006 and 2005, respectively. The sales of previously written downinventory reduced cost of products as a percentage of product revenue byapproximately 0.9 and 1.3 percentage points for fiscal years 2006 and 2005,respectively.

Our cost of products also included approximately$7 million of restructuring charges in fiscal year 2006, compared toapproximately $1 million in fiscal year 2005. Separation costs, net ofcurtailment and settlement gains, were $4 million in fiscal year 2006 andinsignificant for fiscal year 2005. Our cost of products also includedapproximately $1.7 million of SFAS 123R share-basedcompensation expense in fiscal year 2006, compared to no such charges forfiscal year 2005. As of October 31, 2006, we held inventory that waspreviously written down by $29 million and is primarily composed of componentraw material. We continue to dispose of the remaining inventory on a recurringbasis.

The decrease in cost of products in fiscal year 2005,compared to fiscal year 2004, was directly related to the decrease in productsshipped in 2005. The increase in cost of products as a percent of net productrevenue in fiscal year 2005, compared to fiscal year 2004, was a result ofaggressive price discounting for our legacy products as well as higherinventory write-offs for discontinued products. Excess and obsolete inventory-relatednet charges in 2005 were $18 million, comprised of a $25 millioncharge partially offset by $7 million in sales of previously reservedinventory, compared to inventory-related net charges of $2 millionin fiscal year 2004, comprised of a $3 million charge partially offset by$1 million in sales of previously reserved inventory. Our cost of productsalso included $1 million of restructuring charges in 2005 compared to$1 million in 2004.

Our cost of products inabsolute amount are expected to increase or decrease with revenue. As a percentof net product revenue, these costs will vary depending on a variety offactors, including the mix of 

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systemconfigurations in a particular period, competitive and other pressures onpricing and our ability to manage inventory levels to avoid excess and obsoleteinventory charges. In order to mitigate the risk and to manage our coststhrough the peaks and valleys of the semiconductor industry, we are furtherstreamlining our cost structure by reducing our fixed costs and adding moreflexibility to our manufacturing model through the outsourcing of the majorityof our manufacturing. We believe our efforts will provide us with the flexibilityto respond more rapidly to changes in industry conditions and to bettercapitalize on market opportunities during market upturns, and will provide uswith more consistent cost of products.

*Cost of Services*

| ** **                          | ** ** | **Year Ended October 31,** | ** ** | **2006 over 2005** | ** ** | **2005 over 2004** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **2006**                                  | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                          | ** ** | **($ in millions)**             | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Cost of services                    |       | $                                         | 97         |                         | $          | 88                           |       | $ | 91 |   |   | 10.2 | % |   |   | (3.3 | )% |   |
| *As a  percent of services revenue* |       | 73.5                                      | %          | 87.1                         | %          | 85.8                         | %          |   |   |   |   |   |   |   |   |
|                                     |            |                                           |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |

 

*Costof Services.**  *Costof services includes cost of field service and support personnel, spare partsconsumed in service activities and administrative overhead allocations.

The increase in cost of services in dollars in fiscalyear 2006, compared to fiscal year 2005, was primarily due to higher servicerevenue being generated from product shipments. Cost of services as a percentof service revenue was 73.5% in fiscal year 2006, compared to 87.1% in fiscalyear 2005. The improvement in the cost of services margin reflects betterutilization of service personnel as our installed base increased as well as thebenefit of the improved reliability and quality of our current productoffering. Our cost of services also included approximately $0.4 million ofrestructuring charges in fiscal year 2006, compared to no such charges infiscal year 2005 and approximately $0.2 million of SFAS 123R share-basedcompensation expense in fiscal year 2006, compared to no such charges forfiscal year 2005.

The decrease in cost of services in dollars in fiscalyear 2005 compared to fiscal year 2004 was primarily due to less servicerevenue being generated from product shipments. Also, lower costs of servicedriven by improvements in product quality were more than offset by expenditureswe made in application development resources through the downturn in order tocapitalize on future upturns.

As a percent of servicerevenue, cost of services will vary depending on a variety of factors,including the effect of price erosion, the reliability and quality of ourproducts and our need to maintain customer service and support centersworldwide.

**Operating Expenses**

*Research and Development Expenses*

| ** **                     | ** ** | **Year Ended October 31,** | ** ** | **2006 over 2005** | ** ** | **2005 over 2004** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                     | ** ** | **2006**                                  | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                     | ** ** | **($ in millions)**             | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Research and  development      |       | $                                         | 99         |                         | $          | 101                          |       | $ | 105 |   |   | (2.0 | )% |   |   | (3.8 | )% |   |
| *As a  percent of net revenue* |       | 12.7                                      | %          | 22.1                         | %          | 17.3                         | %          |   |   |   |   |   |   |   |   |
|                                |            |                                           |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |

 

*Research and Development.**  *Research and development (“R&D”)expense includes costs related to:

·       salariesand related compensation expenses for research and development and engineeringpersonnel;

·       materialsused in R&D activities;

·       outsidecontractor expenses;

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·       depreciationof equipment used in R&D activities;

·       facilitiesand other overhead and support costs for the above; and

·       effectivefiscal year 2006, share-based compensation.

R&D costs have generally been expensed asincurred.

Research and development expense declined slightly inabsolute dollars in fiscal year 2006, compared to fiscal year 2005, primarilydue to lower allocated cost from Agilent prior to our separation as well as ourcontinued progress in lowering our post-separation cost structure partiallyoffset by higher performance-based variable pay expenses. R&D expensesdecreased significantly as a percent of net revenue in fiscal year 2006,compared to fiscal year 2005, primarily due to the increase in revenue despitehigher performance-based variable pay expenses and $1.3 million of share-basedcompensation expense. We believe that we need to maintain a significant levelof research and development spending in order to remain competitive and, as aresult, our research and development expenses have varied only modestly indollars but vary more significantly as a percent of revenue. As part of ourseparation from Agilent, we have consolidated our R&D teams in Boebligen,Germany, for our principal SOC developments and in Cupertino, California, forour memory test products. We believe this will help us concentrate on ourtechnology innovation and decrease our time to market with new products.

R&D expense declinedslightly in dollars in fiscal year 2005 compared to fiscal year 2004 reflectinga slight decrease in R&D activity in fiscal year 2005 following thesuccessful release of updated versions of our products in late fiscal year 2004and the beginning of fiscal year 2005. R&D expense increased as a percentof net revenue in fiscal year 2005 due to our declining revenue level.

*Selling, General and Administrative Expenses*

| ** **                           | ** ** | **Year Ended October 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **2006**                             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2006 over 2005  Change** | ** ** | **2005 over 2004  Change** | ** ** |
| ** **                           | ** ** | **($ in millions)**        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general  and administrative |       | $                                    | 149        |       | $          | 134        |       | $ | 139 |   |   | 11.2 | % |   |   | (3.6 | )% |   |
| *As a  percent of net revenue*       |       | 19.2                                 | %          | 29.4       | %          | 22.9       | %          |   |   |   |   |   |   |   |   |
|                                      |            |                                      |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |

 

*Selling, General andAdministrative.**  *Selling,general and administrative (“SG&A”) expense includes costs related to:

·       salariesand related expenses for sales, marketing and applications engineeringpersonnel;

·       salescommissions paid to sales representatives and distributors;

·       outsidecontractor expenses;

·       othersales and marketing program expenses;

·       traveland professional service expenses;

·       salariesand related expenses for administrative, finance, human resources, legal andexecutive personnel; and

·       facilityand other overhead and support costs for the above.

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Selling, general and administrative expenses increased11.2% to $149 million in fiscal year 2006, compared to fiscal year 2005. Thisincrease was a result of share-based compensation expenses that are now beingrecorded in accordance with SFAS 123R, higher performance-basedvariable pay expenses, higher commission costs on increased sales and salaryincreases. These increases were partially offset by cost savings from lower ITand infrastructure costs. SG&A expenses included approximately$7.2 million of share-based compensation expenses in fiscal year 2006,compared to no such expenses for fiscal year 2005.

The decrease in SG&A expense in dollars in fiscalyear 2005 compared to fiscal year 2004 was primarily due to reduced facilitiesand IT costs, as well as cost control efforts implemented in light of ourdeclining revenue. During the market downturn, we maintained our spending inour sales and support team to be positioned to accelerate the roll-out ofenhanced versions of our products.

In general, we believe ourSG&A expenses will decrease in absolute amount compared to prior periodsdue to our efforts to streamline our infrastructure and consolidate excessfacilities. The expected savings realized from our cost reduction efforts willbe partially offset by incremental costs associated with operating as astand-alone public company, including professional fees such as legal,regulatory and accounting compliance costs that we will incur and share-basedcompensation expenses that are now being recorded in accordance withSFAS 123R. SG&A expenses can fluctuate due to changes in commissionexpenses which are tied to changes in sales volume and customer mix.

*RestructuringCharges*

In fiscal year 2005, Agilent launched a newrestructuring program and as part of Agilent’s 2005 restructuring plan, weinitiated a plan, to further reduce operational costs, primarily throughclosing, consolidating and relocating some sites and reducing and realigningour workforce. Under this plan, we took a $24 million charge in fiscal year2006 and an $8 million charge in fiscal year 2005. Overall, we reduced ourworkforce by approximately 250 people since October 31, 2005, and addedapproximately 100 people in certain geographies, ending with approximately1,500 employees as of October 31, 2006.

In fiscal year 2004, we recorded $5 million inrestructuring charges associated with restructuring programs that wereinitiated by Agilent prior to the 2005 restructuring plan. Those programs weredesigned to reduce costs and expenses for support services, such as financeinformation technology, and workplace services. 

Asummary of the statement of operations impact of the charges resulting from allrestructuring plans for fiscal years ended October 31, 2006, 2005 and 2004is shown below:

| ** **                                              | ** ** | **Year Ended October 31,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                              | ** ** | ** 2006 **                      | ** ** | ** 2005 ** | ** ** | ** 2004 ** | ** ** |
| ** **                                              | ** ** | **(in millions)**                    | ** ** |
| Restructuring  charges (included in cost of sales)      |       |                                      | $          | 7 |   |   |   | $ | 1 |   |   |   | $ | 1 |   |   |
| Restructuring  charges (included in operating expenses) |       |                                      | 17         |   |   |   | 7 |   |   |   | 4 |   |   |
| Total restructuring  charges                            |       |                                      | $          | 24 |   |   |   | $ | 8 |   |   |   | $ | 5 |   |   |

 

*Summary ofFlextronics-related restructuring charges*

In connection with the transfer of our manufacturingactivities to Flextronics, we transferred approximately 85 employees toFlextronics, and Flextronics assumed certain pension and other employeeliabilities associated with these employees. On July 14, 2006, wereimbursed Agilent approximately $7 million for payments that Agilent hadmade to Flextronics, on our behalf, related to future severance, pension andflexible time off liabilities associated with employees transferred toFlextronics under the various Flextronics asset purchase agreements describedelsewhere in this report on Form 10-K. On September 19, 2006, we alsopaid Flextronics approximately $1 million for pension and flexible timeoff 

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liabilities in accordancewith the Flextronics agreements. Also, we have potential future obligations ofapproximately $2 million associated with these transferred employees. Wehave deferred approximately $5 million of severance costs and are recognizingthem ratably over the employees’ period of service until the respective datesof the employees’ termination from Flextronics. During fiscal year 2006, werecorded $1.8 million of these charges in our cost of products. 

See Note 15 “Restructuringand Asset Impairment” of the combined and consolidated financial statements fora description of the restructuring and asset impairment activity. 

*Separation Costs*

Thefollowing table presents the components of separation costs for fiscal years2006, 2005 and 2004, respectively.

| ** **                                                             | ** ** | **Year Ended October 31,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | **(in millions)**                    | ** ** |
| Separation costs  (included in cost of sales)                          |       |                                      | $          | 8 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Separation costs  (included in operating expense)                      |       |                                      | 75         |   |   |   | 3 |   |   |   | — |   |   |
| Total of  separation costs                                             |       |                                      | 83         |   |   |   | 3 |   |   |   | — |   |   |
| Net curtailment and settlement gains (included in  costs of sales)     |       |                                      | (4         | ) |   |   | — |   |   |   | — |   |   |
| Net curtailment  and settlement gains (included in operating expenses) |       |                                      | (6         | ) |   |   | — |   |   |   | — |   |   |
| Net separation costs                                                   |       |                                      | $          | 73 |   |   |   | $ | 3 |   |   |   | $ | — |   |   |

 

In connection with our separation from Agilent, weincurred one-time internal and external separation costs, such as informationtechnology set-up costs and consulting and legal and other professional fees. 

For fiscal year 2006, we incurred $83 million inseparation costs, of which approximately $8 million was recorded in costs ofsales. These expenses were partially offset by a net curtailment and settlementgain of approximately $10 million which pertained to Agilent’s U.S. RetirementPlans and Agilent’s Post Retirement Benefit Plan. These net curtailment andsettlement gains which resulted from the separation of our business fromAgilent and the significant workforce reductions we incurred during fiscal year2006 were recorded by Agilent in accordance with SFAS No. 88 and werepushed down to our business. For fiscal year 2005, we incurred $3 millionin separation costs and no expenses were recorded in costs of sales.

All separation-relatedcosts which were incurred up to the separation date, approximately $22 million,was Agilent’s responsibility, and all separation-related costs incurredafter the separation date is our responsibility. We anticipateseparation-related costs in the range of $2 to $3 million during the first halfof fiscal year 2007.

**Provision for Income Taxes**

| ** **                  | ** ** | **Year Ended October 31,** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                  | ** ** | **(in millions)**                    | ** ** |
| Provision for  income taxes |       |                                      | $          | 21 |   |   |   | $ | 13 |   |   |   | $ | 14 |   |   |
|                             |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We recorded income tax provisions of $21 million,$13 million and $14 million for fiscal years ended 2006, 2005 and2004, respectively. Through June 1, 2006, Verigy’s income tax expensereflected amounts based on Agilent’s consolidated tax profile, thus our incometax expense for the first seven months consisted of allocated expense fromAgilent. Since our separation from Agilent on June 1, 2006, our taxexpense is based on our new business model and tax status in the countrieswhere we do business.

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As of October 31, 2006, we had $56 million ofdeferred tax assets due to temporary differences between the book and tax basisof the net assets which were acquired upon our separation from Agilent. As of October 31,2005, we had net deferred tax assets of $10 million since we had recorded fullvaluation allowances in the United States and Japan against all deferred taxassets due to accumulated losses in successive years in those jurisdictions. Uponour separation from Agilent, we did not retain any pre-separation deferred taxassets or liabilities which had resulted from historical temporary differences,net operating losses and credit carryforwards. We did, however, retainapproximately $4 million of prepaid tax assets upon our separation.

Going forward, our effective tax rate will vary basedon a variety of factors, including overall profitability, the geographical mixof income before taxes and the related tax rates in the jurisdictions where weoperate, completion of separation, restructuring and other one-time charges, aswell as discrete events, such as settlements of future audits. We will besubject to audits and examinations of our tax returns by tax authorities invarious jurisdictions, including the Internal Revenue Service. We willregularly assess the likelihood of adverse outcomes resulting from theseexaminations to determine the adequacy of our provision for income taxes.

We will be subject toaudits and examinations of our tax returns by tax authorities in variousjurisdictions, including the Internal Revenue Service. We will regularly assessthe likelihood of adverse outcomes resulting from these examinations todetermine the adequacy of our provision for income taxes.

**Financial Condition**

***Liquidity and Capital Resources***

As of October 31, 2006, we had $300 million incash and cash equivalents. This cash balance was a result of our net proceedsfrom our initial public offering in June 2006 of approximately $121million, a one-time payment Agilent made to us of $19 million, the amount bywhich the aggregate net proceeds of our initial public offering were less than$140 million and net cash generated from our operating activities. We alsoreceived additional cash of approximately $21 million in fiscal year 2006from the sale of raw material inventory and property, plant and equipmentassociated with the transition of our manufacturing activities to Flextronics. 

Prior to June 1,2006, Agilent used a centralized approach to cash management and financing ofits operations. As such, transactions relating to our business prior to June 1,2006, were accounted for through the Agilent net invested equity account forour business. Accordingly, none of the cash, cash equivalents or debt at theAgilent corporate level had been assigned to our business in the historicalcombined and consolidated financial statements prior to June 1, 2006. 

*Net Cash ProvidedBy (Used in) Operating Activities*

Net cash provided by operating activities was $164million in fiscal year 2006 compared to $74 million cash used for operatingactivities in fiscal year 2005. The significant net cash generation in fiscalyear 2006, compared to fiscal year 2005, was primarily due to our breakevenposition in fiscal year 2006 versus a net loss of $119 million in fiscal year2005. In addition, an increase in our accounts payable and payables to Agilentof $85 million and net liabilities retained by Agilent of $82 million, and a$16 million increase in deferred revenue contributed to the higher cashgeneration on fiscal year 2006. Also, in fiscal year 2006, we had non-cashcharges of $18 million from inventory write-offs, $10 million of non-cashcompensation costs (FAS 123R), and $9 million in depreciation expense. Theseimpacts were partially offset by a $41 million increase in our accountsreceivable, $9 million decrease in income taxes payable, and $42 milliondecrease in the net change of current assets and accrued liabilities. Also, infiscal year 2006, we had a non-cash net $10 million curtailment and settlementgain.

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Cash used for operatingactivities was $74 million in fiscal year 2005, compared to cash generatedfrom operating activities of $48 million in fiscal year 2004. Operatingactivities during fiscal year 2005 resulted in cash usage of $74 milliondue to our net loss of $119 million, working capital used for increasedaccounts receivable of $18 million and inventory of $10 million,offset by depreciation expense of $6 million that did not require cash,and an increase in other assets and liabilities of $23 million and anincrease in deferred revenue of $10 million. Restructuring paymentsincluded net cash payments of $4 million and $1 million, during fiscalyears 2005, and 2004, respectively.

*Net Cash Used inInvesting Activities*

Net cash used in investing activities for the fiscalyear 2006 was $36 million, $22 million higher than the $14 millioninvestment for the fiscal year 2005. The $36 million investment in thefiscal year 2006 is comprised of approximately $20 million for the new ERP andIT infrastructure set-up costs, $10 million relating primarily to capitalexpenditures for test and computer equipment, office furniture as well as newresearch and development equipment for use in product and applicationdevelopment and approximately $5 million for new site set-ups as well asleasehold improvements. 

Net cash used in investingactivities for fiscal year 2005 was $14 million, compared to$5 million in fiscal year 2004. The $9 million increase in 2005 isprimarily due to increased expenditures for test and computer equipment, officefurniture as well as new research and development equipment for use in productand applications development.

*Net Cash Providedby (Used in) Financing Activities*

In June 2006, wecompleted our initial public offering of 8.5 million ordinary shares at aprice of $15 per share which, less underwriting discount and commission,resulted in aggregate net proceeds of approximately $119 million. On July 6,2006, the underwriters of the initial public offering exercised a portion oftheir over-allotment option, which resulted in the issuance of additional151,559 shares and generated approximately $2 million in net proceeds. Inaddition, Agilent made a payment to us of $19 million pursuant to themaster separation agreement, the amount by which the aggregate net proceedsfrom our initial public offering were less than $140 million. 

Net cash provided by financing activities for thefiscal year 2006 was $173 million compared to cash provided by Agilent to us of$88 million for fiscal year 2005. In fiscal year 2006, the $173 million isprimarily comprised of $121 million of initial public offering proceeds, $19million of capital contributions from Agilent plus additional cash infusionfrom Agilent of $41 million that our business required prior to our separation.

On June 16, 2006, we used a part of our initialpublic offering proceeds to repay Agilent $25 million plus accrued interestthat we had borrowed from Agilent under a short-term revolving credit facilitythat we entered into with Agilent on June 2, 2006. This credit facilityhas been terminated as of October 31, 2006.

On October 1, 2006, we completed theorganizational structure of our China legal entity as well as the purchase ofthe net assets of our China operations from Agilent, which were valued atapproximately $14 million. 

Net cash provided byAgilent for fiscal year 2005 was $88 million compared to $43 millioncash returned to Agilent in fiscal year 2004. In fiscal year 2005 our businessrequired cash infusion from Agilent because our cash from operations was notsufficient to cover our operating expenses. In fiscal year 2004, a positivecash flow from our operating activities, coupled with an improved workingcapital position, enabled us to return $43 million cash to Agilent. 

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***Other***

For up to two years following our separation fromAgilent, Agilent will continue to provide services and access to resourcesnecessary for our operations. In general, these services and resources includefacilities management, site information technology infrastructure, use ofvarious applications and support systems, as well as employee related servicesfor transitional employees remaining with Agilent. Under the transitionservices agreement, Verigy has the ability to negotiate with Agilent for theprovision of additional transition services not set forth in the agreement,which additional services will generally be subject to the provisions of theagreement. The agreement will terminate, and Agilent will have no obligation toprovide any further transition services to Verigy, two years after theseparation date. Since our separation, our total transition services costs fromAgilent were approximately $38 million, of which approximately $8 million wascapitalized. We expect that the majority of transition services provided byAgilent will end in fiscal year 2007, for an additional cost to us ofapproximately $4 million to $6 million. In all cases, the charges forthese interim services are generally intended to allow Agilent to recover thecost of providing such services plus an appropriate return on such services,which, consistent with Agilent’s intercompany pricing practices, will generallybe 10%. Agilent is obligated to provide transition services to us only for aperiod of two years after the separation date.

As of October 31, 2006, we have released Agilentfrom all guarantees or other security obligations that they had entered into onour behalf. These guarantees and security arrangements related to real propertylease deposits and guarantees, security for company credit card programs andother credit arrangements and required deposits with governmental trade and taxagencies. As of October 31, 2006, Verigy has replaced all the cashdeposits that Agilent had made for us on our behalf and also released Agilentfrom all guarantees and security obligations that they had made for us on ourbehalf. 

We have contractual commitments for non-cancelableoperating leases and vendor financing arrangements. We have in the pastprovided lease residual value guarantees on these financing arrangements and wehave no other material guarantees or commitments.

Our liquidity is affected by many factors, some ofwhich are based on normal ongoing operations of our business and some of whicharise from fluctuations related to global economics and markets. Our cashbalances are generated and held in many locations throughout the world. Localgovernment regulations may restrict our ability to move cash balances to meetcash needs under certain circumstances. We do not currently expect suchregulations and restrictions to impact our ability to pay vendors and conductoperations throughout our global organization. 

We believe that the netproceeds from our initial public offering in June 2000, together with cashgenerated from operations, will be sufficient to satisfy our working capital,capital expenditure and other liquidity needs at least through the next twelvemonths. We may require or choose to obtain debt or equity financing in thefuture. We cannot assure you that additional financing, if needed, will beavailable on favorable terms or at all.

***Contractual Obligations and Commitments***

*ContractualObligations*

Our cash flows from operations are dependent on anumber of factors, including fluctuations in our operating results, accountsreceivable collections, inventory management and the timing of tax and otherpayments. As a result, the impact of contractual obligations on our liquidity andcapital resources in future periods should be analyzed in conjunction with suchfactors.

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Thefollowing table summarizes our contractual obligations at October 31, 2006(in millions):

| ** **                                                     | ** ** | **Total** | ** ** | **Less than  one year** | ** ** | **One to  three years** | ** ** | **Three to  five years** | ** ** | **More than  five years** | ** ** |
|----------------------------------------------------------------|------------|-----------|------------|-----------------------------------|------------|-----------------------------------|------------|------------------------------------|------------|-------------------------------------|------------|
| Operating leases                                               |       | $         | 80         |                              |       | $                                 | 13         |                               |       |                                | $          | 19 |   |   |   | $ | 18 |   |   |   | $ | 30 |   |   |
| Commitments to  contract manufacturers and suppliers |       | 121       |       |                              | 121        |                              |       |                               | —     |                                |       |   | — |   |   |   | — |   |   |
| Other purchase  commitments                                    |       | 59        |       |                              | 57         |                              |       |                               | 2          |                                |       |   | — |   |   |   | — |   |   |
| Long term  liabilities                                         |       | 34        |       |                              | —     |                              |       |                               | 34         |                                |       |   | — |   |   |   | — |   |   |
| Total                                                          |       | $         | 294        |                              |       | $                                 | 191        |                               |       |                                | $          | 55 |   |   |   | $ | 18 |   |   |   | $ | 30 |   |   |

 

*Operatingleases.**  *Commitmentsunder operating leases relate primarily to leasehold property. Following ourseparation, we have entered into long term lease arrangements for our corporateheadquarters in Singapore, our U.S. headquarters in Cupertino, California, andour Boeblingen, Germany facility, the site of our 93000 Series platformdevelopment. We have also entered into long term lease arrangements for ourASIC development office in Colorado as well as other sales and supportfacilities around the world.

*Commitmentsto contract manufacturers and suppliers.**  *We purchase components from avariety of suppliers and historically we have used several contractmanufacturers to provide manufacturing services for our products. During thenormal course of business, we issue purchase orders with estimates of our requirementsseveral months ahead of the delivery dates. However, our agreements with thesesuppliers usually allow us the option to cancel, reschedule, or adjust ourrequirements based on our business needs prior to firm orders being placed.Typically purchase orders outstanding with delivery dates within 30 daysare non-cancelable. Therefore, only approximately 41% of our purchasecommitments arising from these agreements are firm, non-cancelable, andunconditional commitments. We expect to fulfill the purchase commitments forinventory within one year.

In addition, we record a liability for firm,non-cancelable, and unconditional purchase commitments for quantities in excessof our future demand forecasts. Such liabilities were $6 million as of October 31, 2006,and $13 million as of October 31, 2005. These amounts are included inother accrued liabilities in our combined balance sheets at October 31,2006 and October 31, 2005.

*Otherpurchase commitments.**  *Thesecommitments relate primarily to contracts with professional services suppliers,which include third-party consultants for legal, finance, engineering andother administrative services. With the exception of our IT service providers,our purchase commitments from professional service providers are typicallycancelable with a notice of 90-days or less without significant penalties. Ouragreement with our primary IT service provider requires a notification periodof 120 days and includes a termination charge of up to approximately $3.2million in order to cancel our long term contract.

*Retirement plans.**  *In connection with our separationfrom Agilent, Agilent transferred to us the liabilities associated with thedefined benefit plans for our employees located in Germany, France, Korea,Italy and Taiwan. With the exception of Italy and France, Agilent funded theseplans on June 1, 2006, based on 80% of the estimated accumulated benefitobligations as of the separation date. Effective November 28, 2006,Agilent substantially completed its obligation to fund our Germany definedbenefit plans at the accumulated benefit obligation level as of the separationdate. With the exception of Italy, which is insignificant, Agilent will fundthe remaining plans based on 100% of the accumulated benefit obligation levelas of June 1, 2006, as soon as the actuarial valuations are completed bythe end of our first quarter of fiscal 2007. Verigy made no significantcontributions to the retirement plans during fiscal year 2006. We expectexpenses of approximately $5.6 million in 2007 for the retirement plansthat have been transferred to us.

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***Off-Balance Sheet Arrangements***

We had no materialoff-balance sheet arrangements as of October 31, 2006 or October 31,2005.

**Item 7A.**                *Quantitative and Qualitative Disclosures About Market Risk*

With the exception of Japan, where products are soldprimarily in Yen, our products are generally sold in U.S. Dollars. Services andsupport sales are sold primarily in local currency when sold after the initialproduct sale. As such, our revenue, costs and expenses, and monetary assets andliabilities are somewhat exposed to changes in foreign currency exchange ratesas a result of our global operating and financing activities. We experiencesome fluctuations within individual lines of the combined and consolidatedstatement of operations and balance sheet as our hedging strategy is notdesigned to offset the currency movements in each category of revenue,expenses, monetary assets and liabilities. 

We have not yet implemented a hedging program thatmitigates our currency exposures on our income statement and are currentlyevaluating the magnitude and value-at-risk of our net currency exposures. Priorto our separation from Agilent, Agilent hedged net cash flow and balance sheetexposures that were not denominated in the functional currencies of itssubsidiaries on a short term and anticipated basis and gains or lossesassociated with Agilent’s derivative instrument contracts had been allocated tous. As such, the historical results of our business prior to June 1, 2006reflected the hedging program in place at Agilent. Since our separation, wehave implemented a hedging strategy that mitigates currency exposures oncertain balance sheet positions. Verigy and Agilent do not use derivativefinancial instruments for speculative or trading purposes. 

We performed a sensitivityanalysis assuming a hypothetical 10 percent adverse movement in foreignexchange rates to the hedging contracts and the underlying exposures describedabove. As of October 31, 2006 and October 31, 2005, the analysisindicated that these hypothetical market movements would not have a materialeffect on our consolidated financial position, results of operations or cashflows. 

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**Item8.**                        *Financial Statements and Supplementary Data*
|                                                                                                                                          | ** ** | **Page** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **Index to Combined and  Consolidated Financial Statements**                                                                             |       |     |
| Combined and  Consolidated Financial Statements:                                                                                         |       |     |
| Report of Independent  Registered Public Accounting Firm                                                                                 |       | 63       |
| Combined and Consolidated  Statement of Operations for each of the three years in the period ended  October 31, 2006                |       | 64       |
| Combined and Consolidated  Balance Sheet at October 31, 2006 and 2005                                                               |       | 65       |
| Combined and Consolidated  Statement of Cash Flows for each of the three years in the period ended  October 31, 2006                |       | 66       |
| Combined and Consolidated  Statement of Stockholders’ Equity for each of the three years in the period  ended October 31, 2006 |       | 67       |
| Notes to Combined and  Consolidated Financial Statements                                                                                 |       | 68       |
| Quarterly  Summary (unaudited)                                                                                                           |       | 105      |

 

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Shareholders and Board of Directors of VerigyLtd.:

In our opinion, the combinedand consolidated financial statements listed in the accompanying indexpresent fairly, in all material respects, the financial position of Verigy Ltd.(“Company”) and its subsidiaries at October 31, 2006 and 2005, and theresults of their operations and their cash flows for each of the three years inthe period ended October 31, 2006 in conformity with accounting principlesgenerally accepted in the United States of America. In addition, in our opinion, thefinancial statement schedule listed in the accompanying index****presents fairly, in all materialrespects, the information set forth therein when read in conjunction with therelated combined and consolidated****financialstatements.Thesefinancial statements and financial schedule are the responsibility of theCompany's management. Our responsibility is to express an opinion on thesefinancial statements and financial schedule based on our audits. We conductedour audits of these statements in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used and significantestimates made by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

As disclosed in Note 5 to the combined andconsolidated financial statements, the Company and its parent prior todistribution, Agilent Technologies, Inc., engaged in extensiveintercompany transactions, and the combined and consolidated statements ofoperations include allocated costs on a basis that the management believes isappropriate in the circumstances. The amounts recorded for these transactionsand allocations are not necessarily representative of the amounts that wouldhave been reflected in the financial statements had the company been an entityoperated independently of the parent.

As disclosed in Note 2 tothe combined and consolidatedfinancial statements, the Company changed the manner in which it accounts forshare-based compensation in fiscal 2006.

/s/ PricewaterhouseCoopersLLP

San Jose, CaliforniaDecember 20, 2006

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**VERIGY LTD.COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                                                                     | ** ** | **Year Ended October 31,**                            | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** | **     2004     ** | ** ** |
| ** **                                                                                     | ** ** | **(in millions, except per share amounts)** | ** ** |
| Net revenue:                                                                                   |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Products                                                                                       |       |                                                                 | $          | 646 |   |   |   | $ | 355 |   |   |   | $ | 501 |   |   |
| Services                                                                                       |       |                                                                 | 132        |   |   |   | 101 |   |   |   | 106 |   |   |
| Total net revenue                                                                              |       |                                                                 | 778        |   |   |   | 456 |   |   |   | 607 |   |   |
| Cost of sales (Note 5):                                                                        |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Cost of products                                                                               |       |                                                                 | 331        |   |   |   | 228 |   |   |   | 263 |   |   |
| Costs of services                                                                              |       |                                                                 | 97         |   |   |   | 88 |   |   |   | 91 |   |   |
| Total cost of sales                                                                            |       |                                                                 | 428        |   |   |   | 316 |   |   |   | 354 |   |   |
| Operating expenses (Note 5):                                                              |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Research and development                                                                       |       |                                                                 | 99         |   |   |   | 101 |   |   |   | 105 |   |   |
| Selling, general and administrative                                                            |       |                                                                 | 149        |   |   |   | 134 |   |   |   | 139 |   |   |
| Restructuring charges                                                                          |       |                                                                 | 17         |   |   |   | 7 |   |   |   | 4 |   |   |
| Separation costs                                                                               |       |                                                                 | 69         |   |   |   | 3 |   |   |   | — |   |   |
| Total operating expenses                                                                       |       |                                                                 | 334        |   |   |   | 245 |   |   |   | 248 |   |   |
| Income (loss)  from operations                                                                 |       |                                                                 | 16         |   |   |   | (105 | ) |   |   | 5 |   |   |
| Other income  (expense), net                                                                   |       |                                                                 | 5          |   |   |   | (1 | ) |   |   | 1 |   |   |
| Income (loss)  before taxes                                                                    |       |                                                                 | 21         |   |   |   | (106 | ) |   |   | 6 |   |   |
| Provision for  taxes                                                                           |       |                                                                 | 21         |   |   |   | 13 |   |   |   | 14 |   |   |
| Net loss                                                                                       |       |                                                                 | $          | — |   |   |   | $ | (119 | ) |   |   | $ | (8 | ) |   |
| Basic and diluted net loss per shares                                                          |       |                                                                 | $          | — |   |   |   | $ | (2.38 | ) |   |   | $ | (0.16 | ) |   |
| Weighted average shares  (in thousands) used in computing basic and diluted net loss per share |       |                                                                 | 53,356     |   |   |   | 50,000 |   |   |   | 50,000 |   |   |

 

The accompanying notes are an integral part of these combined financial statements.

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**VERIGYLTD.COMBINED AND CONSOLIDATED BALANCE SHEETS**

| ** **                                                                                 | ** ** | **October 31,  2006**                              | ** ** | **October 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                 | ** ** | **(in millions,  except share amounts)** | ** ** |
| ASSETS                                                                                     |       |                                                    |       |                       |       |   |   |   |   |
| Current assets:                                                                            |       |                                                    |       |                       |       |   |   |   |   |
| Cash and cash equivalents                                                                  |       |                                                    | $          | 300                        |       |   |   | $ | — |   |   |
| Trade accounts receivable, net                                                             |       |                                                    | 108        |                       |       |   | 75 |   |   |
| Receivables from Agilent                                                                   |       |                                                    | 8          |                       |       |   | — |   |   |
| Inventory                                                                                  |       |                                                    | 87         |                       |       |   | 110 |   |   |
| Other current assets                                                                       |       |                                                    | 48         |                       |       |   | 14 |   |   |
| Total current assets                                                                       |       |                                                    | 551        |                       |       |   | 199 |   |   |
| Property, plant  and equipment, net                                                        |       |                                                    | 44         |                       |       |   | 18 |   |   |
| Goodwill                                                                                   |       |                                                    | 18         |                       |       |   | 17 |   |   |
| Other long term  assets                                                                    |       |                                                    | 61         |                       |       |   | 26 |   |   |
| Total assets                                                                               |       |                                                    | $          | 674                        |       |   |   | $ | 260 |   |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                 |       |                                                    |       |                       |       |   |   |   |   |
| Current liabilities:                                                                       |       |                                                    |       |                       |       |   |   |   |   |
| Accounts payable                                                                           |       |                                                    | $          | 75                         |       |   |   | $ | 21 |   |   |
| Payables to Agilent                                                                        |       |                                                    | 37         |                       |       |   | — |   |   |
| Employee compensation and benefits                                                         |       |                                                    | 43         |                       |       |   | 40 |   |   |
| Deferred revenue, current                                                                  |       |                                                    | 58         |                       |       |   | 42 |   |   |
| Income taxes and other taxes payable                                                       |       |                                                    | 23         |                       |       |   | 32 |   |   |
| Other accrued liabilities                                                                  |       |                                                    | 15         |                       |       |   | 23 |   |   |
| Total current liabilities                                                                  |       |                                                    | 251        |                       |       |   | 158 |   |   |
| Long-term liabilities                                                                      |       |                                                    | 34         |                       |       |   | 15 |   |   |
| Total liabilities                                                                          |       |                                                    | 285        |                       |       |   | 173 |   |   |
| Commitments and  contingencies (Note 20 and 21)                                            |       |                                                    |       |                       |       |   |   |   |   |
| Shareholders’  equity                                                                 |       |                                                    |       |                       |       |   |   |   |   |
| Owner’s net investment                                                                |       |                                                    | —     |                       |       |   | 86 |   |   |
| Ordinary shares,  no par value; 58,651,559 issued and outstanding at October 31, 2006 |       |                                                    |       |                       |       |   |   |   |   |
| Additional paid in capital                                                                 |       |                                                    | 358        |                       |       |   | — |   |   |
| Retained earnings                                                                          |       |                                                    | 34         |                       |       |   | — |   |   |
| Accumulated other comprehensive income (loss)                                              |       |                                                    | (3         | )                          |       |   | 1 |   |   |
| Total shareholders’ equity                                                            |       |                                                    | 389        |                       |       |   | 87 |   |   |
| Total liabilities  and shareholders’ equity                                           |       |                                                    | $          | 674                        |       |   |   | $ | 260 |   |   |

 

The accompanying notes are an integral part of these combined and consolidated financial statements.

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**VERIGYLTD.COMBINED**ANDCONSOLIDATED STATEMENTS OF CASHFLOWS

| ** **                                                                                  | ** ** | **Year Ended October 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                  | ** ** | **(in millions)**                    | ** ** |
| Cash flows from operating  activities:                                                      |       |                                      |       |   |   |   |   |
| Net loss                                                                                    |       | $                                         | —     |   | $ | (119 | ) | $ | (8 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating  activities: |       |                                      |       |   |   |   |   |
| Depreciation and amortization                                                               |       | 9                                         |       | 6 |   | 6 |   |
| Excess and obsolete inventory-related charges                                               |       | 18                                        |       | 25 |   | 3 |   |
| Loss on disposal of property, plant and equipment                                           |       | 3                                         |       | — |   | — |   |
| Share-based compensation                                                                    |       | 10                                        |       | — |   | — |   |
| Asset impairment and other exit costs                                                       |       | 3                                         |       | — |   | — |   |
| Pension curtailment and settlement net gains                                                |       | (10                                       | )          | — |   | — |   |
| Restructuring charges pushed down by Agilent                                                |       | 4                                         |       | — |   | — |   |
| Assets and liabilities retained by Agilent due to  separation                               |       | 82                                        |       | — |   | — |   |
| Changes in assets  and liabilities:                                                         |       |                                      |       |   |   |   |   |
| Trade accounts receivable, net                                                              |       | (33                                       | )          | (18 | ) | 82 |   |
| Receivables from Agilent                                                                    |       | (8                                        | )          | — |   | — |   |
| Inventory (Note 19)                                                                         |       | 5                                         |       | (10 | ) | (23 | ) |
| Accounts payable                                                                            |       | 54                                        |       | 2 |   | (2 | ) |
| Employee compensation and benefits                                                          |       | 3                                         |       | 2 |   | 6 |   |
| Payables to Agilent                                                                         |       | 31                                        |       | — |   | — |   |
| Deferred revenue                                                                            |       | 16                                        |       | 10 |   | 3 |   |
| Income taxes and other taxes payable                                                        |       | (9                                        | )          | 7 |   | (1 | ) |
| Other current assets and accrued liabilities                                                |       | (42                                       | )          | 9 |   | (14 | ) |
| Other long term assets and long term liabilities                                            |       | 28                                        |       | 12 |   | (4 | ) |
| Net cash provided by (used in) operating activities                                         |       | 164                                       |       | (74 | ) | 48 |   |
| Cash flows from investing  activities:                                                      |       |                                      |       |   |   |   |   |
| Purchases of investments                                                                    |       | (1                                        | )          | (3 | ) | — |   |
| Investments in property, plant and equipment, net  (Note 19)                                |       | (36                                       | )          | (11 | ) | (5 | ) |
| Net cash used in investing activities                                                       |       | (37                                       | )          | (14 | ) | (5 | ) |
| Cash flows from financing  activities:                                                      |       |                                      |       |   |   |   |   |
| Net proceeds from sale of ordinary shares (IPO  Proceeds)                                   |       | 121                                       |       | — |   | — |   |
| Capital contributions by Agilent                                                            |       | 19                                        |       | — |   | — |   |
| Borrowings from Agilent                                                                     |       | 25                                        |       | — |   | — |   |
| Repayment of debt to Agilent                                                                |       | (25                                       | )          | — |   | — |   |
| Distribution of share-based compensation (Note 8)                                           |       | (8                                        | )          | — |   | — |   |
| Cash receipts from Agilent related to sale of net  assets                                   |       | 535                                       |       | — |   | — |   |
| Cash payments to Agilent related to sale of net  assets                                     |       | (531                                      | )          | — |   | — |   |
| Net Agilent invested equity                                                                 |       | 37                                        |       | 88 |   | (43 | ) |
| Net cash provided by (used in) financing activities                                         |       | 173                                       |       | 88 |   | (43 | ) |
| Net increase in cash and cash equivalents                                                   |       | 300                                       |       | — |   | — |   |
| Cash and cash equivalents at beginning of period                                            |       | —                                    |       | — |   | — |   |
| Cash and cash equivalents at end of period                                                  |       | $                                         | 300        |   | $ | — |   | $ | — |   |
| Supplemental disclosures  of cash flow information:                                         |       |                                      |       |   |   |   |   |
| Cash paid for income taxes                                                                  |       | $                                         | 6          |   | $ | — |   | $ | — |   |
| Other non-cash  activities:                                                                 |       |                                      |       |   |   |   |   |
| Deferred tax assets acquired upon separation                                                |       | $                                         | 43         |   | $ | — |   | $ | — |   |
| Fixed assets  (included in payables to Agilent) purchased from Agilent                      |       | $                                         | 6          |   | $ | — |   | $ | — |   |

 

The accompanying notes are an integral part of these combined and consolidated financial statements.

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**VERIGYLTD.COMBINED AND CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

| ** **                                                    | ** ** | **Ordinary Shares**                                                                               | ** ** | ** **     | ** ** | ** **       | ** ** | **Accumulated** | ** ** | ** **             | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|----------------|------------|------------------|------------|-----------------|------------|------------------------|------------|
| ** **                                                    | ** ** | ** **                                                                                             | ** ** | **Additional** | ** ** | **Owner’s** | ** ** | ** **      | ** ** | **Other**              | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Number**                                                                                             | ** ** | **Paid-In**    | ** ** | **Net**          | ** ** | **Retained**    | ** ** | **Comprehensive**      | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **of Shares**                                                                                     | ** ** | **Capital**    | ** ** | **Investment**   | ** ** | **Earnings**    | ** ** | **Income (loss)** | ** ** | **Total** | ** ** |
| ** **                                                    | ** ** | **(in millions, except number of  shares  in thousands)** | ** ** |
| Balance at  October 31, 2003                             |       |                                                                                                   | —     |           |       |             | $          | —          |       |                   |       | $ | 168 |   |   |   | $ | — |   |   |   | $ | 1 |   |   | $ | 169 |   |
| Components of  comprehensive loss:                            |       |                                                                                                   |       |           |       |             |       |            |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                      |       |                                                                                                   | —     |           |       |             | —     |            |       |                   | (8         | ) |   |   | — |   |   |   | — |   |   | (8 | ) |
| Foreign currency translation                                  |       |                                                                                                   | —     |           |       |             | —     |            |       |                   |       |   |   |   | — |   |   |   | 1 |   |   | 1 |   |
| Net return of investment to Agilent                           |       |                                                                                                   | —     |           |       |             | —     |            |       |                   | (43        | ) |   |   | — |   |   |   | — |   |   | (43 | ) |
| Balance at  October 31, 2004                             |       |                                                                                                   | —     |           |       |             | —     |            |       |                   | 117        |   |   |   | — |   |   |   | 2 |   |   | 119 |   |
| Components of  comprehensive loss:                            |       |                                                                                                   |       |           |       |             |       |            |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                      |       |                                                                                                   | —     |           |       |             | —     |            |       |                   | (119       | ) |   |   | — |   |   |   | — |   |   | (119 | ) |
| Foreign currency translation                                  |       |                                                                                                   | —     |           |       |             | —     |            |       |                   |       |   |   |   | — |   |   |   | (1 | ) |   | (1 | ) |
| Net investment by Agilent                                     |       |                                                                                                   | —     |           |       |             | —     |            |       |                   | 88         |   |   |   | — |   |   |   | — |   |   | 88 |   |
| Balance as of  October 31, 2005                          |       |                                                                                                   | —     |           |       |             | —     |            |       |                   | 86         |   |   |   | — |   |   |   | 1 |   |   | 87 |   |
| Components of  comprehensive income:                          |       |                                                                                                   |       |           |       |             |       |            |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss (pre-separation)                                     |       |                                                                                                   | —     |           |       |             | —     |            |       |                   | (36        | ) |   |   |   |   |   |   | — |   |   | (36 | ) |
| Net income (post separation)                                  |       |                                                                                                   |       |           |       |             |       |            |       |                   |       |   |   |   | 36 |   |   |   |   |   |   | 36 |   |
| Capital contribution from Agilent (Pre-separation)            |       |                                                                                                   | 50,000     |           |       |             | 186        |            |       |                   | (50        | ) |   |   | — |   |   |   | (1 | ) |   | 135 |   |
| Capital contribution from Agilent  (post separation)          |       |                                                                                                   | —     |           |       |             | 19         |            |       |                   | —     |   |   |   | — |   |   |   | — |   |   | 19 |   |
| Net repayments to Agilent  (post separation)                  |       |                                                                                                   | —     |           |       |             | (13        | )               |       |                   | —     |   |   |   | — |   |   |   | — |   |   | (13 | ) |
| Issuance of ordinary shares, net  (IPO)                       |       |                                                                                                   | 8,652      |           |       |             | 121        |            |       |                   | —     |   |   |   | — |   |   |   | — |   |   | 121 |   |
| Loss on initialization of pension liability position          |       |                                                                                                   | —     |           |       |             | —     |            |       |                   | —     |   |   |   | (2 | ) |   |   | — |   |   | (2 | ) |
| Deferred tax assets acquired upon separation                  |       |                                                                                                   | —     |           |       |             | 43         |            |       |                   | —     |   |   |   | — |   |   |   | — |   |   | 43 |   |
| Share-based compensation (Verigy options)                     |       |                                                                                                   | —     |           |       |             | 2          |            |       |                   | —     |   |   |   | — |   |   |   | — |   |   | 2 |   |
| Change in minimum pension liability                           |       |                                                                                                   | —     |           |       |             | —     |            |       |                   | —     |   |   |   | — |   |   |   | (3 | ) |   | (3 | ) |
| Deferred taxes, related to other comprehensive  income (loss) |       |                                                                                                   | —     |           |       |             | —     |            |       |                   | —     |   |   |   | — |   |   |   | 1 |   |   | 1 |   |
| Change in foreign currency translation                        |       |                                                                                                   | —     |           |       |             | —     |            |       |                   | —     |   |   |   | — |   |   |   | (1 | ) |   | (1 | ) |
| Balance as of  October 31, 2006                          |       |                                                                                                   | 58,652     |           |       |             | $          | 358             |       |                   |       | $ | — |   |   |   | $ | 34 |   |   |   | $ | (3 | ) |   | $ | 389 |   |

 

The accompanying notes are an integral part of these combined and consolidated financial statements.

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**1.**                 OVERVIEW ANDBASIS OF PRESENTATION

***Overview***

Verigy (“we,” “us” or the “Company”) designs, developsand manufactures semiconductor test equipment and provides test systemsolutions that are used in the manufacture of System-on-a-Chip (SOC),System-in-a-Package (SIP), high-speed memory and memory devices. In addition totest equipment, our solutions include consulting, service and support offeringssuch as start-up assistance, application services and system calibration andrepair.

Prior to our initial public offering, we were a whollyowned subsidiary of Agilent. On June 16, 2006, we completed our initialpublic offering and became a separate stand-alone publicly-traded companyincorporated in Singapore focused on technology and innovation in semiconductortesting. Effective October 31, 2006 (“the distribution date”), Agilentdistributed the 50 million Verigy ordinary shares it owned to its shareholders.See Note 4, “IPO, Separation from Agilent and Distribution” for furtherinformation regarding our initial public offering, our separation from Agilentand Agilent’s distribution of our ordinary shares to its shareholders.

Our fiscal year end is October 31, and our fiscalquarters end on January 31, April 30, and July 31.

Amounts included in theaccompanying combined and consolidated financial statements are expressed inU.S. dollars.

***Basis of Presentation***

Prior to June 1, 2006, we had operated as part ofAgilent, and not as a stand-alone company. Therefore, since Verigy had noseparate existence prior to June 1, 2006, there were no financialstatements prepared prior to June 1, 2006. The accompanying combined andconsolidated financial statements have been derived in accordance withaccounting principles generally accepted in the United States (“U.S.”). Financialstatements prior to June 1, 2006 were derived from the accounting recordsof Agilent using the historical basis of assets and liabilities of Verigy.

We historically have received substantial managementand shared administrative services from Agilent, and we and Agilent engage incertain transactions. Prior to our separation from Agilent, we had relied onAgilent for substantially all of our operational and administrative support. Thecombined financial statements prior to June 1, 2006 include allocations ofcertain Agilent corporate expenses, including information technology resourcesand support; finance, accounting, and auditing services; real estate andfacility management services; human resources activities; certain procurementactivities; treasury services, customer contract administration, legal advisoryservices, and Agilent Labs services. We had benefited from Agilentagreements with third parties related to cost sharing arrangements coveringbranding and marketing expenses, intellectual property licenses and agreementsrelated to the use of real property.

Management believes the assumptions and allocationsunderlying the combined and consolidated financial statements are reasonableand appropriate under the circumstances. The expenses and cost allocations havebeen determined on a basis we consider to be a reasonable reflection of theutilization of services provided or the benefit received by us during theperiods presented. However, the amounts recorded for these transactions andallocations are not necessarily representative of the amounts that would havebeen reflected in the financial statements had we been an entity that operatedindependently of Agilent. Our future results of operations which will reflectour separation from Agilent will include costs and expenses for us to operateas an independent company, and consequently, these costs and expenses may bematerially different than our historical results of operations, financialposition, and cash flows. Accordingly, the financial statements for theseperiods are not necessarily indicative of our future results of operations,financial position, and cash flows. 

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Agilent historically used a centralized approach tocash management and financing of its operations. Transactions relating toVerigy prior to June 1, 2006 were accounted for through the Agilentinvested equity account for Verigy. Accordingly, none of the cash, cashequivalents or debt at the Agilent corporate level has been assigned to Verigyin the combined and consolidated financial statements prior to June 1, 2006.

Historically, Agilent provided funds to finance ourworking capital and other cash requirements, but we do not expect Agilent toprovide any further funding to us. In the event we need to raise additionalfunds, we cannot be certain that we will be able to obtain additional financingon favorable terms, or at all. Our future capital requirements will depend onmany factors, including the timing and extent of spending to support productdevelopment efforts, the expansion of sales and marketing activities, thetiming of introductions of new products and enhancements to existing products,the costs to ensure access to adequate manufacturing capacity, marketacceptance of our products and the cyclical and seasonal demand for ourproducts. If we cannot raise funds on acceptable terms, if and when needed, wemay not be able to develop or enhance our products and services, take advantageof future opportunities, grow our business or respond to competitive pressures,which could materially adversely affect our business, financial condition, cashflows and results of operations.

See Note 5, “Transactionswith Agilent” for further information regarding the relationships we have withAgilent.

**2.**                 SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

*Basisof presentation.**  *Theaccompanying financial data has been prepared by us pursuant to the rules andregulations of the U.S. Securities and Exchange Commission (“SEC”).

*Reclassifications.*   Certain amounts in the combined and consolidatedfinancial statements as of and for the years ended October 31, 2004 and October 31,2005 were reclassified to conform to the presentation used in 2006.

*Principlesof combination.**  *Ourcombined and consolidated financial statements include the global historicalassets, liabilities and operations of Verigy. All significant intra-companytransactions within Verigy have been eliminated. All significant transactionsbetween us and other Agilent businesses are included in these combined andconsolidated financial statements. All transactions with Agilent, prior to ourseparation from Agilent, were considered to be effectively settled for cash inthe combined and consolidated statements of cash flows at the time thetransaction is recorded. 

*Principlesof consolidation.**  *Thecombined and consolidated financial statements include the accounts of thecompany and our wholly owned subsidiaries. All significant intercompanyaccounts and transactions have been eliminated. 

*Useof estimates.**  *Thepreparation of financial statements in accordance with accounting principlesgenerally accepted in the U.S. requires management to make estimates andassumptions that affect the amounts reported in our combined financialstatements and accompanying notes. Management bases its estimates on historicalexperience and various other assumptions believed to be reasonable. Althoughthese estimates are based on management’s best knowledge of current events andactions that may impact us in the future, actual results may be different fromthe estimates. Our critical accounting policies are those that affect ourfinancial statements materially and involve difficult, subjective or complexjudgments by management. Those policies are revenue recognition, restructuringand asset impairment charges, inventory valuation, warranty, share-basedcompensation, retirement and post-retirement plan assumptions, valuation ofgoodwill and intangible assets and accounting for income taxes.

*Revenuerecognition.**  *Consistentwith the SEC’s Staff Accounting Bulletin No. 104, or “SAB 104,” werecognize revenue on the sale of semiconductor test equipment when there ispersuasive evidence of an 

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arrangement, delivery hasoccurred or services have been rendered, the sales price is fixed ordeterminable and collectibility is reasonably assured. Delivery is consideredto have occurred when title and risk of loss have transferred to the customer,for products, or when service has been performed. We consider the price to be fixedor determinable when the price is not subject to refund or adjustments. Weconsider arrangements with extended payment terms beyond 90 days not to befixed or determinable unless they are secured under a letter of creditarrangement guaranteed by a reputable financial institution, and accordingly wedefer such revenue until amounts become due. At the time we take an order, weevaluate the creditworthiness of our customers to determine the appropriatetiming of revenue recognition. For sales or arrangements that include customer-specifiedacceptance criteria, including those where acceptance is required uponachievement of performance milestones or fulfillment of other futureobligations, revenue is recognized after the acceptance criteria have been met.If the criteria are not met, then revenue is deferred until such criteria aremet or until the period(s) over which the last undelivered element isdelivered. To the extent that a contingent payment exceeds the fair value ofthe undelivered element, we defer the contingent payment.

*Productrevenue.**  *Ourproduct revenue is generated predominantly from the sales of various types oftest equipment. Software is embedded in many of our test equipment products,but the software component is considered to be incidental. For sales orarrangements that include customer-specified acceptance criteria,including those where acceptance is required upon achievement of performancemilestones or fulfillment of other future obligations, revenue is recognizedafter the acceptance criteria have been met. For products that includeinstallation, if we have previously successfully installed similar equipment atthe same customer location, product revenue is recognized upon delivery, andrecognition of installation revenue is delayed until the installation iscomplete. Otherwise, neither the product nor the installation revenue isrecognized until the installation is complete.

*Servicerevenue.**  *Revenuefrom services includes extended warranty, customer support, consulting,training and education. Service revenue is deferred and recognized over thecontractual period or as services are rendered to the customer. For example,customer support contracts are recognized ratably over the contractual period,while training revenue is recognized as the training is provided to the customer.In addition the four revenue recognition criteria described above must be metbefore service revenue is recognized.

*Multipleelement arrangements.**  *Weuse objective evidence of fair value to allocate revenue to elements inmultiple element arrangements and recognize revenue when the criteria forrevenue recognition have been met for each element. If the criteria are notmet, then revenue is deferred until such criteria are met or until the period(s) overwhich the last undelivered element is delivered. In the absence of objectiveevidence of fair value of a delivered element, we allocate revenue to the fairvalue of the undelivered elements and the residual revenue to the deliveredelements. The price charged when an element is sold separately determines fairvalue. To the extent that a contingent payment exceeds the fair value of theundelivered element, we defer the contingent payment.

*Warrantyrevenue and cost.**  *Wegenerally provide a one-year warranty on products commencing upon installationor delivery. We accrue for warranty costs in accordance with Statement ofFinancial Standards No. 5, “Accounting for Contingencies” (“SFAS No. 5”),based on historical trends in warranty charges as a percentage of gross productshipments. Estimated warranty charges are recorded within cost of products atthe time revenue is recognized and the liability is reported in other currentliabilities on the combined and consolidated balance sheet. The accrual isreviewed regularly and periodically adjusted to reflect changes in warrantycost estimates. For some products we also sell extended warranties beyond oneyear. Revenue related to our extended warranty contracts beyond one year isrecorded as deferred revenue in the combined and consolidated balance sheet andrecognized on a straight-line basis over the contract period. Related costs areexpensed as incurred.

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*Deferredrevenue.**  *Deferredrevenue is primarily comprised of extended warranty, revenue deferred forinstallations yet to be completed, and advanced billing and customer depositsfor service, support and maintenance agreements.

*Tradeaccounts receivable, net.**  *Trade accounts receivable are recorded at theinvoiced amount and do not bear interest. Our accounts receivable have beenreduced by an allowance for doubtful accounts, which is our best estimate ofthe amount of probable credit losses in our existing accounts receivable. Wedetermine the allowance based on customer specific experience and the aging ofour receivables, among other factors. We do not have any off-balance-sheetcredit exposure related to our customers. Our allowance for doubtful accountswas $0.1 million, $0.2 million and $0.3 million as of October 31,2006, 2005, and 2004, respectively.

*Restructuringand asset impairment charges.**  *We recognize a liability forrestructuring costs at fair value only when the liability is incurred. Thethree main components of our restructuring charges are workforce reductions,consolidating facilities and asset impairments. Workforce-related chargesare accrued when it is determined that a liability has been incurred, which isgenerally after individuals have been notified of their termination dates andexpected severance payments. Plans to eliminate excess facilities result incharges for lease termination fees and future commitments to pay lease charges,net of estimated future sublease income. We recognize charges for eliminationof excess facilities when we have vacated the premises. Asset impairmentsprimarily consist of property, plant and equipment associated with excessfacilities being eliminated, and are based on an estimate of the amounts andtiming of future cash flows related to the expected future remaining use andultimate sale or disposal of the property, plant and equipment. The chargesassociated with consolidating facilities and asset impairment charges incurredby Agilent were allocated to Verigy to the extent the underlying benefitsrelated to our business. These estimates were derived using the guidance ofStatement of Financial Accounting Standards (“SFAS”) No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”),Staff Accounting Bulletin 100, “Restructuring and Impairment Charges” (“SAB 100”),Emerging Issues Task Force 94-3, “Liability Recognition for Costs to Exit anActivity (Including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”)and lastly, SFAS No. 146 “Accounting for Exit or Disposal Activities” (“SFASNo. 146”). If the amounts and timing of cash flows from restructuringactivities are significantly different from what we have estimated, the actualamount of restructuring and asset impairment charges could be materiallydifferent, either higher or lower, than those we have recorded.

*Share-basedcompensation.**  *UntilNovember 1, 2005, we accounted for share-based awards, based onAgilent’s stock, using the intrinsic value method of accounting in accordancewith Accounting Principles Board Opinion No. 25 “Accounting for StockIssued to Employees” (“APB 25”) and related interpretations. Under theintrinsic value method, we recorded compensation expense related to stockoptions in our combined statements of operations when the exercise price of ouremployee stock-based award was less than the market price of the underlyingAgilent stock on the date of the grant. We had no stock option expenses wherethe exercise price was less than the market price on the date of the grant inall years presented.

*Impactof the Adoption of SFAS 123R.**  *In December 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 123 (Revised 2004) “Share-Based Payment” (“SFASNo. 123(R)”). SFAS No. 123(R) addresses all forms of share-basedpayment (“SBP”) awards, including shares issued under employee stock purchaseplans, stock options, and restricted share and stock appreciation rights. SFAS No. 123(R),which became effective for us beginning in the first quarter of fiscal year2006, superseded our prior accounting for SBP awards under APB No. 25 andrequires us to recognize compensation expense for all SBP awards based on fairvalue. In March 2005, the SEC released Staff Accounting Bulletin No. 107,“Share-Based Payment” (“SAB No. 107”) relating to the adoption ofSFAS No. 123(R). With respect to valuing SBP awards outstanding at thetime of adoption of SFAS No. 123(R), we used the modified prospectivetransition method using the Black-Scholes option 

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pricing model. Ourestimate of compensation expense requires a number of complex and subjectiveassumptions including our stock price volatility, employee exercise patterns(expected life of the options), future forfeitures and related tax effects. Werecognize SBP compensation expense for awards issued after November 1,2005 on a straight-line basis over the vesting period of the award. For awardsissued prior to November 1, 2005, we recognize SBP compensation expensebased on FASB Interpretation 28 “Accounting for Stock Appreciation Rights andOther Variable Stock Option or Award Plans an interpretation of APB Opinions No. 15and 25,” which provides for accelerated expensing. Effective the distributiondate, unvested Agilent stock options held by Verigy employees were terminated. Allvested Agilent options held by Veirgy employees at the distribution dateremained as Agilent options and were not replaced with Verigy equity awards. Exerciseof Agilent options by Verigy employees will have no impact on our financialstatements nor on our outstanding ordinary shares. To the extent that theAgilent options were not vested as of the distribution date, Verigy hasreplaced the Agilent options with new Verigy options based on the followingratio: average price of Agilent common stock on October 30, 2006 (the dateprior to the distribution date), divided by the average price of Verigyordinary share on October 31, 2006 (the day of the distribution).Approximately 2.2 million replacement Verigy options were issued on October 31,2006. The replacement of the Agilent options with Verigy options was accountedfor as a stock option modification in accordance with FAS 123(R).

*Retirementand post-retirement plan assumptions.**  *Retirement and post-retirementbenefit plan costs are a significant cost of doing business. They representobligations that will ultimately be settled sometime in the future and thereforeare subject to estimation. Retirement and post-retirement accounting isintended to reflect the recognition of future benefit costs over the employees’average expected future service based on the terms of the plans and theinvestment and funding decisions made by us. To estimate the impact of thesefuture payments and our decisions concerning funding of these obligations, weare required to make assumptions using actuarial concepts within the frameworkof U.S. GAAP. Two critical assumptions are the discount rate and the expectedlong-term return on plan assets. Other important assumptions include the healthcare cost trend rate, expected future salary increases, expected futureincreases to benefit payments, expected retirement dates, employee turnover andretiree mortality rates. We evaluate these assumptions at least annually. 

The discount rate is used to determine the presentvalue of future benefit payments at each measurement date (October 31 forU.S. plans and September 30 for non-U.S. plans). The discount rate forU.S. plans was determined based on published rates for high quality corporatebonds. The discount rate for non-U.S. plans was generally determined in asimilar manner. Differences between the expected future cash flows of our plansand the maturities of the high quality corporate bonds are not expected to havea material impact on the selection of discount rates. In recent years,decreasing interest rates, particularly outside the U.S., have increased ournet plan costs. The increase in net plan costs has been in large part offset bya declining number of plan participants as a result of our variousrestructuring programs. The entire impact of declining discount rates is notrecognized immediately under current accounting standards. As of October 31,2006, delayed recognition of the impact of declining discount rates was theprimary factor resulting in approximately $16 million in unrecognized netactuarial losses for non-U.S. plans that were transferred to us by Agilent.These losses are being recognized over the expected average future servicelives of plan participants.

The expected long-term return on plan assets isestimated using current and expected asset allocations, as well as historicaland expected returns. Declining rate of return assumptions generallyresult in increased pension expense while increasing rate of returnassumptions generally result in lower pension expense. A one percent change inthe estimated long-term return on plan assets would result in a $0.3 millionimpact on pension expense for our fiscal year 2006.

In connection with our separation from Agilent,Agilent transferred to us the liabilities associated with the defined benefitplans for our employees located in Germany, France, Korea, Italy and Taiwan.With 

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the exception of Italy andFrance, Agilent funded these plans on June 1 2006 based on 80% of theestimated accumulated benefit obligations as of the separation date. Verigymade no additional contributions to the retirement plans during fiscal year2006. Effective our separation date, we put in place a new defined benefit planfor our employees in Japan as well as a new retiree medical account program forour employees in the U.S. who meet certain age and service criteria.

Effective November 28, 2006, Agilentsubstantially completed their obligation to fund our Germany defined benefitplans at the accumulated benefit obligation level as of the separation date.With the exception of Italy, which is insignificant, Agilent will fund theremaining plans based on 100% of the accumulated benefit obligation level as ofJune 1, 2006, as soon as the actuarial valuations are completed in thefirst quarter of fiscal 2007. 

In fiscal years 2006, 2005 and 2004 we incurredexpenses of $2 million, $5 million and $6 million, respectively,for our defined benefit retirement and post-retirement plans in the U.S. and$5 million, $6 million, and $6 million for the same respectiveperiods for our non-U.S plans. 

Workforce-related events such as restructuringsor divestitures can result in curtailment and settlement gains or losses to theextent they have an impact on the average future working lifetime or totalnumber of participants in our retirement and postretirement plans.

*Goodwilland purchased intangible assets.**  *We adopted SFAS No. 142 “Goodwilland Other Intangible Assets” (“SFAS No. 142”) on November 1, 2002 andrecorded an allocation of goodwill from Agilent. Goodwill is not amortized butis reviewed annually (or more frequently if impairment indicators arise) forimpairment. Impairment indicators include the significant decrease in marketprice of an asset, significant adverse changes in the extent or use or physicalcondition of an asset, significant adverse change in legal or regulatoryfactors affecting an asset, accumulation of costs significantly in excess ofexpected costs to acquire or construct an asset, operating or cash flow losses(or projections of losses) that demonstrates continuing losses associated withthe use of an asset, or a current expectation that is more likely than not,that an asset will be sold or disposed of significantly before the end of itspreviously estimated useful life. Purchased intangible assets are carried atcost less accumulated amortization. Amortization is computed using thestraight-line method over the economic lives of the respective assets,generally three to five years.

The process of evaluating the potential impairment ofgoodwill and other intangibles is highly subjective and requires significantjudgment. We estimate expected future cash flows then compare the carryingvalue including goodwill and other intangibles to the discounted future cashflows. If the total of future cash flows is less than the carrying amount ofthe assets, we recognize an impairment loss based on the excess of the carryingamount over the fair value of the assets. Estimates of the future cash flowsassociated with the assets are critical to these assessments. Changes in theseestimates based on changed economic conditions or business strategies couldresult in material impairment charges in future periods.

*Separationcosts.*   Separation costs are one-time internaland external spin-off related costs, such as information technology set-upcosts and consulting and legal and other professional fees.

*Shippingand handling costs.**  *Ourshipping and handling costs charged to customers are included in net revenueand the associated expense is recorded in cost of products in the combinedstatements of operations for all years presented.

*Advertising.**  *Business specific advertising costsare expensed as incurred. Advertising costs were insignificant for all threeyears presented. Some corporate advertising expenses were allocated to us byAgilent as part of corporate allocations described in Note 5 but are notseparately identifiable.

*Researchand development.**  *Costsrelated to research, design and development of our products are charged toresearch and development expense as they are incurred.

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*Netloss per share.**  *Basic net loss per share is computed bydividing net loss—the numerator—by the weighted average number of common sharesoutstanding—the denominator—during the period excluding the dilutive effect ofstock options and other employee stock plans. Diluted net loss per share giveseffect to all potentially dilutive common stock equivalents outstanding duringthe period. In computing diluted net loss per share, the average stock pricefor the period is used in determining the number of shares assumed to bepurchased from the proceeds of stock option exercises and unamortized sharebased compensation. The calculation of dilutive net loss per share excludesshares of potential ordinary shares if the effect is anti-dilutive.

*Cash,cash equivalent, and short-term investments.**  *We classifyhighly liquid investments as cash equivalents if their original or remainingmaturity is three months or less at the date of purchase. Cash and cashequivalents consist of cash deposited in checking and money market accounts.

*Accountingfor income taxes.**  *Althoughour operating results prior to our separation have been included in Agilent’sconsolidated tax returns our provision for income taxes in our combined andconsolidated financial statements have been determined on a separate returnbasis. We are required to assess the realization of our net deferred tax assetsand the need for a valuation allowance on a separate return basis, and excludefrom that assessment any utilization of those losses by Agilent. Thisassessment requires that our management make judgments about benefits thatcould be realized from future taxable income, as well as other positive and negativefactors influencing the realization of deferred tax assets. Due to the losseswe incurred in the U.S. and Japan, prior to fiscal year 2003, we recorded avaluation allowance against any net deferred tax assets in these jurisdictions.Until our separation, we maintained a full valuation allowance in thesejurisdictions. 

We did not retain any deferred tax assets andliabilities related to temporary differences, net operating losses and creditcarryforwards from Agilent. We did, however, retain approximately $4 million ofprepaid tax assets upon our separation. As a result, for periods after June 1,2006, our deferred tax assets and liabilities are based on temporarydifferences between the book and tax basis of the net assets that weretransferred in connection with our separation from Agilent and our operatingactivities beginning as of June 1, 2006.

Our effective tax rate varies based on a variety offactors, including overall profitability, the geographical mix of income beforetaxes and the related tax rates in the jurisdictions where we operate, as wellas discrete events, such as audit settlements. Certain combinations of thesefactors could cause us to owe significant taxes (and to have high effective taxrates) during periods when we experience low income before taxes or loss beforetaxes. Conversely, we expect to realize more favorable effective tax rates asour profitability increases. We will also be subject to audits and examinationsof our tax returns by tax authorities in various jurisdictions, including theInternal Revenue Service. We will regularly assess the likelihood of adverseoutcomes resulting from these examinations to determine the adequacy of ourprovision for income taxes.

*Fairvalue of financial instruments.**  *The carrying values of accountsreceivable, accounts payable, accrued employee compensation and benefits andother accrued liabilities approximate fair value because of their shortmaturities.

*Concentrationof credit risk.**  *Wesell our products through our direct sales force. In fiscal year 2006, onecustomer accounted for 10.1% of our net revenue. In fiscal year 2005, no singlecustomer accounted for 10% or more of our net revenue. In fiscal year 2004, onecustomer accounted for 15.1% of our net revenue. One customer accounted for20.2% of our accounts receivable balance at October 31, 2006. No singlecustomer accounted for 10% or more of the combined accounts receivable balanceat October 31, 2005. We perform ongoing credit evaluations of ourcustomers’ financial conditions, and require collateral, such as letters ofcredit and bank guarantees, in certain circumstances.

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*Concentrationof suppliers.**  *Certaincomponents and parts used in our products are procured from a single or alimited group of suppliers, some of whom are relatively small in size. Thefailure of these suppliers to meet our requirements in a timely manner couldimpair our ability to ship products and to realize the related revenues whenanticipated which could adversely affect our business and operating results.

*Derivativeinstruments.**  *Wedo not enter directly into any derivative instrument contracts, however Agilenthas historically used such instruments and part of its gain or loss has beenallocated to us. Prior to our separation, Agilent had entered into foreignexchange contracts, primarily forward contracts and purchased options, to hedgeexposures to changes in foreign currency exchange rates. These contracts weredesignated at inception as hedges of the related foreign currency exposures,which include committed and anticipated revenue and expense transactions andassets and liabilities that are denominated in currencies other than thefunctional currency of the entity that has the exposure. To achieve hedgeaccounting, contracts must reduce the foreign currency exchange rate riskotherwise inherent in the amount and duration of the hedged exposures andcomply with established risk management policies. Neither Verigy nor Agilentuses derivative financial instruments for speculative or trading purposes.

For derivative instruments that were designated and qualifiedas a cash flow hedge, changes in the value of the effective portion of thederivative instrument were recognized in accumulated comprehensive income (loss).These amounts were reclassified and recognized in cost of sales when either theforecasted transaction occurs or it becomes probable the forecasted transactionwill not occur, and allocated to us based on our forecasted revenue and costexposures. Amounts recorded in all fiscal years presented were insignificant.For derivative instruments that were designated and qualified as a fair valuehedge, changes in the value of the derivative were recognized in other incomeand expense in the current period, and allocated to us along with othergeneral corporate expenses. In all fiscal years reported, amounts recorded wereinsignificant. Changes in the fair value of the ineffective portion of derivativeinstruments, if any, were recognized in income in the current period. Amountsrecorded in any of all fiscal years presented were insignificant.

*Inventory.*   Weassess the valuation of our inventory, including demonstration inventory, on aquarterly basis based upon estimates about future demand and actual usage. Tothe extent that we determine that we are holding excess or obsolete inventory,we write down the value of our inventory to its net realizable value. Suchwrite-downs are reflected in cost of products and can be material inamount. Our inventory assessment involves difficult estimates of future eventsand, as a result, additional write-downs may be required. If actualmarket conditions are more favorable than anticipated, inventory previouslywritten down may be sold to customers, resulting in lower cost of products andhigher income from operations than expected in that period. Excess and obsoleteinventory resulting from shifts in demand or changes in market conditions forraw materials and components can result in significant volatility in our costsof products.

In our inventory valuation analysis, we also includeinventory that we could be obligated to purchase from our suppliers based onour production forecasts. To the extent that our committed inventory purchasesexceed our forecasted productions needs, we write down the value of thoseinventories by taking a charge to our cost of products and increasing oursupplier liability.

*Property, plant andequipment.**  *Property,plant and equipment are stated at cost less accumulated depreciation andamortization. Additions, improvements and major renewals are capitalized;maintenance, repairs and minor renewals are expensed as incurred. When assetsare retired or disposed of, the assets and related accumulated depreciation andamortization are removed from our general ledger and the resulting gain or lossis reflected in the combined statement of operations. Buildings andimprovements are depreciated over ten to forty years, or the lease term iflower, and machinery and equipment over three to ten years. We are currentlyusing the straight-line method to depreciate assets. However, prior to 

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November 1,2001, assets were being depreciated principally using accelerated methods andwill continue to be depreciated under those methods until they are fullydepreciated or retired.

*Capitalized software.**  *We capitalize certain internal andexternal costs incurred to acquire or create internal use software inaccordance with AICPA Statement of Position 98-1, “Accounting for the Costs ofComputer Software Developed or Obtained for Internal Use.” Capitalized softwareis included in property, plant and equipment and is depreciated over three tosix years when development is complete.

*Impairment of long-livedassets.**  *Wecontinually monitor events and changes in circumstances that could indicatecarrying amounts of long-lived assets, including intangible assets, may not berecoverable. When such events or changes in circumstances occur, we assess therecoverability of long-lived assets by determining whether the carrying valueof such assets will be recovered through undiscounted expected future cashflows. If the total of the undiscounted future cash flows is less than thecarrying amount of those assets, we recognize an impairment loss based on theexcess of the carrying amount over the fair value of the assets.

*Foreign currencytranslation.**  *Wefollow SFAS No. 52 “Foreign Currency Translation” for both the translationand remeasurement of balance sheet and income statement items into U.S.Dollars. For those business units that operate in a local currency functionalenvironment, all assets and liabilities are translated into U.S. Dollars usingthe exchange rates in effect at the end of the period; revenue and expenses aretranslated using average exchange rates in effect during each period. Resultingtranslation adjustments are reported as a separate component of accumulatedcomprehensive income (loss) in shareholders’ equity.

For those business unitsthat operate in a U.S. Dollar functional environment, foreign currency assetsand liabilities are remeasured into U.S. Dollars using the exchange rates ineffect at the end of the period except for nonmonetary assets and capitalaccounts, which are remeasured at historical exchange rates. Revenue andexpenses are generally remeasured at monthly exchange rates which approximateaverage exchange rates in effect during each year, except for those expensesrelated to balance sheet amounts that are remeasured at historical exchangerates. An allocation from Agilent of the applicable gains or losses fromforeign currency remeasurement for periods prior to June 1, 2006, isincluded in other income (expense) in the combined and consolidated statementsof operations.

**3.**                 RECENT ACCOUNTINGPRONOUNCEMENTS

In November 2005, theFASB issued FSP FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments” (“FSP 115-1 and 124-1”),which clarifies when an investment is considered impaired, whether theimpairment is other than temporary, and the measurement of an impairment loss.It also includes accounting considerations subsequent to the recognition of another-than-temporary impairment and requires certain related disclosures. FSP115-1 and 124-1 will be effective for all reporting periods beginning after December 15,2005. We do not believe that adopting or applying either standard will have amaterial impact on our financial statements.

In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—An Interpretation of FASB Statement No. 109” (“FIN 48”). Thisinterpretation clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, “Accounting for Income Taxes.” It prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position as well as provides guidance onde-recognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. The provisions of FIN 48 will be effective forfiscal years beginning after December 15, 2006 and are to be applied toall tax positions upon initial adoption of this standard. Only tax positionsthat meet the more-likely-than-not recognition threshold at the effective datemay be recognized or continue to be recognized upon adoption of FIN 48.The cumulative effect of applying the 

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provisionsof FIN 48 should be reported as an adjustment to the opening balance ofretained earnings (or other appropriate components of equity) for that fiscalyear. We expect to adopt this pronouncement beginning in our fiscal year 2008and we have not yet determined the potential financial impact of adopting FIN 48.

In June 2006, the FASB issued Emerging Issues TaxForce (EITF) Issue No. 06-3, “How Sales Taxes Collected from Customers andRemitted to Governmental Authorities Should Be Presented in the IncomeStatement (i.e. Gross Versus Net Presentation)” (“EITF 06-3”). EITF 06-3requires disclosure of accounting policy regarding the gross or netpresentation of point-of-sales taxes such as sales tax and value-addedtax. If taxes included in gross revenues are significant, the amount of suchtaxes for each period for which an income statement is presented should also bedisclosed. EITF 06-3 will be effective for the first annual or interimreporting period beginning after December 15, 2006. We will be adoptingthis pronouncement beginning in our fiscal year 2007 and do not currentlybelieve that it will have a material impact on our financial statements.

In September 2006, the Staff of the SEC issuedStaff Accounting Bulletin No. 108, “*Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements*” (SAB 108). SAB 108 providesguidance on the consideration of the effects of prior year misstatements inquantifying current year misstatements for the purpose of determining whetherthe current year’s financial statements are materially misstated. SAB 108 iseffective for fiscal year ending after November 15, 2006. We are currentlyevaluating the impact of SAB 108 on our combined and consolidated financialpositions, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 158,“Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans,an amendment of FASB statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”),which requires companies to recognize a net liability or asset to report thefunded status of their defined benefit pension and other postretirement benefitplans on their balance sheets. Except for the measurement date requirement,SFAS No. 158 is effective for fiscal years ending after December 15,2006. The measurement date requirement will not be effective until fiscal yearsending after December 15, 2008. SFAS No. 158 will be appliedprospectively. We are currently evaluating the impact of adopting SFAS No. 158on our consolidated financial position.

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157).The purpose of SFAS No. 157 is to define fair value, establish a frameworkfor measuring fair value and enhance disclosures about fair value measurements.The measurement and disclosure requirements are effective for the companybeginning in the first quarter of fiscal 2008. We are currently evaluatingwhether SFAS No. 157 will result in a change to its fair valuemeasurements. 

**4.**                 IPO,SEPARATION FROM AGILENT, AND DISTRIBUTION

On June 16, 2006, we completed our initial publicoffering (“IPO”) of 8.5 million ordinary shares at a price of $15 pershare, which less underwriting discount and commission, resulted in aggregatenet proceeds of approximately $118.6 million. On July 6, 2006, theunderwriters of the IPO exercised a portion of their over-allotment optionwhich resulted in the issuance of additional 151,559 shares and generatedapproximately $2.1 million in net proceeds. The remaining portion of theunderwriters’ over-allotment option has lapsed. As part of the offering,Agilent made a one-time payment to us of $19.3 million, the amount by which ournet proceeds from the IPO were less than $140 million. 

Following the offering, Agilent owned 50 millionordinary shares or approximately 85 percent of Verigy’s ordinary shares. Effective October 31, 2006, Agilentdistributed the 50 million Verigy ordinary shares it owned to its shareholders.Agilent shareholders of record as of October 16, 2006 received 0.122435ordinary shares of Verigy for each Agilent share owned. 

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Verigy and Agilent, and, in some cases,their respective subsidiaries, entered into agreements in connection with the June 1,2006 separation of our business from Agilent, including a master separation anddistribution agreement. These agreements cover a variety of matters, includingthe transfer, ownership and licensing of intellectual property and other assetsand liabilities relating to our business, the use of shared facilities,employee and tax-related matters and the transitional services. In addition, aloan agreement between Agilent and Veirgy, provided for a $25 million revolvingcredit facility from Agilent to Verigy on the separation date withinterest at one-month LIBOR plus 50 basis points. Asof October 31, 2006, all amounts were paid back and the agreement wasterminated. The agreements relating to the separation from Agilent were negotiatedand entered into in the context of a parent-subsidiary relationship.

As of October 31,2006, Verigy has replaced all the cash deposits that Agilent had made for us onour behalf and also released Agilent from all guarantees and securityobligations that they had made for us on our behalf. These guarantees andsecurity arrangements related to real property lease deposits and guarantees,security for company credit card programs and other credit arrangements andrequired deposits with governmental trade and tax agencies. 

For up to two yearsfollowing our separation from Agilent, Agilent will continue to provideservices and access to resources necessary for Verigy under the transitionservices agreement. In general, these services and resources include facilitiesmanagement, site information technology infrastructure, use of variousapplications and support systems, as well as employee related services fortransitional employees remaining with Agilent. Under the transition servicesagreement, Verigy has the ability to negotiate with Agilent for the provisionof additional transition services not set forth in the agreement, whichadditional services will generally be subject to the provisions of theagreement. The agreement will terminate, and Agilent will have no obligation toprovide any further transition services to Verigy, two years after theseparation date. Since our separation, our total transition services costs fromAgilent were approximately $38 million, of which approximately $8 millionwas capitalized related primarily due to new site set up costs.

See Note 5, “Transactionswith Agilent” for further information regarding the relationships we have withAgilent.

*Indemnifications to Verigy*

In connection with our spin-off, Agilenthas agreed to indemnify us for certain liabilities that were excluded from theseparation and were not transferred to us, for specified IPO-relatedliabilities and other specified items. 

**5.**                 TRANSACTIONS WITHAGILENT

Prior to our separation,we were a wholly owned subsidiary of Agilent and thus our transactions withAgilent were considered intercompany. After our separation date, ourtransactions with Agilent are considered related party transactions sinceAgilent still owned approximately 85% of our outstanding ordinary shares until October 31,2006. 

*Intercompany and Related Party Transactions*

We derived revenue fromthe sales of products to other Agilent businesses for fiscal years ended October 31,2006, 2005 and 2004 of $1.1 million, $2.0 million and$3.0 million, respectively. These revenues prior to June 1, 2006 wererecorded using a cost plus methodology and may not necessarily represent aprice an unrelated third party would pay.

We purchased materialsfrom other Agilent businesses during fiscal years 2006, 2005 and 2004 of$5 million, $9 million and $7 million, respectively. Allpurchases were at cost and were recorded in cost of products for the respectiveyears.

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*Allocated Costs*

The combined andconsolidated statements of operations include our direct expenses as well asallocations of expenses arising from shared services and infrastructureprovided to us by Agilent. These allocated expenses include costs ofcentralized research and development, legal and accounting services, employee benefits,real estate and facilities, corporate advertising, insurance services,information technology, treasury and other corporate and infrastructureservices. These expenses are allocated to us using estimates that we considerto be a reasonable reflection of the utilization of services provided to orbenefits received by us. The allocation methods include headcount, squarefootage, actual consumption and usage of services, adjusted invested capitaland others.

Allocatedcosts included in the accompanying combined statements of operations are asfollows:

| ** **                           | ** ** | **Year Ended October 31,** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(in millions)**                    | ** ** |
| Cost of products                     |       |                                      | $          | 16 |   |   | $ | 26 |   | $ | 30 |   |
| Research and development             |       |                                      | 10         |   |   | 21 |   | 21 |   |
| Selling, general and  administrative |       |                                      | 39         |   |   | 55 |   | 62 |   |
| Other (income) expense,  net         |       |                                      | 1          |   |   | — |   | (1 | ) |
| Total allocated costs                |       |                                      | $          | 66 |   |   | $ | 102 |   | $ | 112 |   |

 

Since our separation fromAgilent became effective on June 1, 2006, fiscal year 2006 includes onlyseven months of allocated costs.

***Receivables fromand Payables to Agilent***

| ** **               | ** ** | **Year Ended October 31,** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **               | ** ** | **(in millions)**                    | ** ** |
| Receivables from Agilent |       |                                      | $          | 8 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Payables to Agilent      |       |                                      | $          | 37 |   |   |   | $ | — |   |   |   | $ | — |   |   |

 

Receivables from Agilentconsists of approximately $3 million of cash collected by Agilent from ourcustomers that had not yet been remitted to Verigy and approximately $5 millionof payments due to us from Agilent related to the remaining funding for ourpension and employee benefit plans in accordance with the master separationagreement. The cash collected by Agilent from our customers is transferred tous on a weekly basis. Effective November 28, 2006, Agilent substantially completedits obligation to fund our Germany defined benefit plans at the accumulatedbenefit obligations level as of the separation date. With the exception ofItaly, which is insignificant, Agilent will fund the remaining plans based on 100%of the accumulated benefit obligation level as of June 1, 2006, as soon as theactuarial valuations are completed by the end of our first quarter of fiscal2007.

Payables to Agilentconsists of approximately $26 million accrued liabilities fortransition-related services provided to us by Agilent, approximately $8 millionfor capitalized costs relating to new site set ups as well as leaseholdimprovement for our new U.S. headquarters facilities and approximately $3million accrued liabilities for the purchase of assets related to our Chinaoperations. Our total costs from Agilent under the transition services agreementfor the five months since our separation totaled approximately $38 million.See Note 16, Separation Costs, for separation cost details and net gainsassociated with curtailment and settlement.

***Agreements with Agilent***

We share and operate undernumerous agreements executed by Agilent with third parties, including but notlimited to purchasing, manufacturing, supply, and distribution agreements; useof facilities owned, leased, and managed by Agilent; and software, technologyand other intellectual property agreements.

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**6.**                 NETLOSS PER SHARE

Basic net loss per share is calculated by dividing netloss by the weighted-average number of ordinary shares outstanding. Theweighted-average number of ordinary shares outstanding does not include thedilutive effect of ordinary equivalent shares, such as share options andrestricted share units. Diluted net loss per share is calculated by dividingnet loss by the weighted-average ordinary shares outstanding plus the dilutiveeffect of ordinary equivalent shares, such as share options. The calculation ofdiluted net loss per share excludes shares of potential ordinary shares if theeffect is anti-dilutive.

Thefollowing is a reconciliation of the basic and diluted net loss per sharecomputations for the periods presented below:

| ** **                                                                                       | ** ** | **Year Ended October 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Basic Net loss Per Share                                                                         |       |                                      |       |   |   |   |   |
| Net loss (in millions)                                                                           |       | $                                         | —     |   | $ | (119 | ) | $ | (8 | ) |
| Weighted average number of ordinary shares                                                       |       | 53,356                                    |       | 50,000 |   | 50,000 |   |
| Basic net (loss) per share                                                                       |       | $                                         | —     |   | $ | (2.38 | ) | $ | (0.16 | ) |
| Diluted Net loss  Per Share                                                                      |       |                                      |       |   |   |   |   |
| Net loss (in millions)                                                                           |       | $                                         | —     |   | $ | (119 | ) | $ | (8 | ) |
| Weighted average number of ordinary shares                                                       |       | 53,356                                    |       | 50,000 |   | 50,000 |   |
| Potentially dilutive common stock equivalents—stock  options and other employee stock plans |       | —                                    |       | — |   | — |   |
| Total shares for purpose of calculating diluted net  loss per share                              |       | 53,356                                    |       | 50,000 |   | 50,000 |   |
| Diluted net loss per share                                                                       |       | $                                         | —     |   | $ | (2.38 | ) | $ | (0.16 | ) |

 

Weighted average shares are presented in thousands.

The dilutive effect of outstanding options andrestricted share units is reflected in diluted net income per share byapplication of the treasury stock method, which includes consideration ofshare-based compensation required by SFAS No. 123(R).

Thefollowing table presents options to purchase ordinary shares, which were notincluded in the computation of diluted net income per share because they wereanti-dilutive.

| ** **                                                         | ** ** | **Year Ended October 31,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Non-qualified share  options                                       |       |                                      |       |   |   |   |   |
| Number of options to purchase ordinary shares  (in thousands) |       | 3,504                                     |       | — |   | — |   |
| Weighted-average exercise price                                    |       | $                                         | 14.06      |   | $ | — |   | $ | — |   |
| Average common  stock price                                        |       | $                                         | 16.14      |   | Not Applicable |   | Not Applicable |   |
| Restricted share  units                                            |       |                                      |       |   |   |   |   |
| Number of restricted share units (in thousands)                    |       | 197                                       |       | — |   | — |   |
| Weighted-average exercise price                                    |       | $                                         | 15.47      |   | $ | — |   | $ | — |   |
| Average common  stock price                                        |       | $                                         | 16.14      |   | Not Applicable |   | Not Applicable |   |

 

Pursuant to the Master Separation and DistributionAgreement and the Employee Matters Agreement entered into between Verigy Ltd.and Agilent Technologies, Inc. in connection with Verigy’s separation fromAgilent (collectively the “***SeparationAgreements***”), on October 31, 2006, Agilent cancelled theunvested Agilent equity awards held by Verigy employees as of October 31,2006 (the “***OriginalAgilent Awards***”). In accordance with the Separation Agreements,and in connection with the cancellation of the 

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Original Agilent Awards,the compensation committee of the board of directors of Verigy Ltd. approvedand issued under the Verigy Ltd. 2006 Equity Incentive Plan replacement Verigyequity awards to Verigy employees whose Original Agilent Awards were cancelled(the “***Replacement Awards***”).

Those awards that were provided to employees outsideof the United States, where options are impractical and/or infeasible due tolocal requirement or where other awards may obtain more favorable treatmentunder Applicable Local Law, were cancelled and immediately replaced with Verigyrestricted share units. The number of replaced restricted share units was basedon the intrinsic value of the closing price of Agilent stock option ondistribution date divided by the closing price of a Verigy ordinary share onthe distribution date.

On October 31, 2006,the board of directors of Verigy approved and issued approximately 2.2 millionand 0.05 million replacement options and restricted shares units, respectively.The replacement of the Agilent options withVerigy options was accounted for as a stock option modification in accordancewith FAS 123(R).

**7.**                 PROVISIONFOR TAXES

We recorded income tax provisions of approximately $21million, $13 million and $14 million for fiscal years ended October 31,2006, 2005 and 2004, respectively.

Through June 1, 2006, Verigy’s income tax expensereflected amounts based on Agilent’s consolidated tax profile so our income taxexpense for the first seven months consisted of allocated expense from Agilent.Since our separation from Agilent on June 1, 2006, our tax expense isbased on our new operating structure and tax status in the countries where wedo business.

Priorto June 1, 2006, we considered the U.S. entities as our domestic entitiesas did Agilent. Following our separation from Agilent, we consider ourSingapore entities as our domestic entities since that is where we areincorporated. Our provision for income taxes for fiscal years 2006, 2005, and2004 are as follows:

| ** **

** ** | ** ** | **Five Months  Ended  October 31,** | ** ** | **Seven Months  Ended  May 31,** | ** ** | **Twelve Months  Ended  October 31,** | ** ** | **Twelve Months  Ended  October 31,** | ** ** | **Twelve Months  Ended  October 31,** | ** ** |
|------------------------|------------|-----------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                      | ** ** | **2006**                                   | ** ** | **2005**                                        | ** ** | **2004**                                        | ** ** |
| ** **             | ** ** | **(in millions)**                        | ** ** |
| Current:               |       |                                          |       |                                       |       |                                            |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Domestic (U.S.)        |       |                                          | $          | —                                     |       |                                            |       | $                                               | —     |                                            |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Domestic (Singapore)   |       |                                          | 1          |                                       |       |                                            | —     |                                            |       |                                            | 1          |   |   |   | — |   |   |   | — |   |   |
| Foreign                |       |                                          | 22         |                                       |       |                                            | 10         |                                            |       |                                            | 32         |   |   |   | 15 |   |   |   | 13 |   |   |
| Deferred:              |       |                                          |       |                                       |       |                                            |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Domestic (U.S.)        |       |                                          | —     |                                       |       |                                            | —     |                                            |       |                                            | —     |   |   |   | — |   |   |   | (1 | ) |   |
| Domestic (Singapore)   |       |                                          | —     |                                       |       |                                            | —     |                                            |       |                                            | —     |   |   |   | — |   |   |   | — |   |   |
| Foreign                |       |                                          | (13        | )                                          |       |                                            | 1          |                                            |       |                                            | (12        | ) |   |   | (2 | ) |   |   | 2 |   |   |
| Total tax provision    |       |                                          | $          | 10                                         |       |                                            |       | $                                               | 11         |                                            |       |   | $ | 21 |   |   |   | $ | 13 |   |   |   | $ | 14 |   |   |

 

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Thetable below shows the geographical mix of our pre-tax profit and loss positionsfor fiscal years 2005 and 2004, as well as our pre and post separation incomeand losses for fiscal year 2006.

| ** **                                 | ** ** | **Five Months  Ended  October 31,** | ** ** | **Seven Months  Ended  May 31,** | ** ** | **Twelve Months  Ended  October 31,** | ** ** | **Twelve Months  Ended  October 31,** | ** ** | **Twelve Months  Ended  October 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                      | ** ** | **2006**                                   | ** ** | **2005**                                        | ** ** | **2004**                                        | ** ** |
| ** **                                 | ** ** | **(in millions)**                        | ** ** |
| Domestic (U.S.)                            |       |                                          | $          | —                                     |       |                                            |       | $                                               | (6         | )                                               |       |   | $ | (6 | ) |   |   | $ | (81 | ) |   |   | $ | (7 | ) |   |
| Domestic (Singapore)                       |       |                                          | 24         |                                       |       |                                            | —     |                                            |       |                                            | 24         |   |   |   | — |   |   |   | — |   |   |
| Foreign                                    |       |                                          | 22         |                                       |       |                                            | (19        | )                                               |       |                                            | 3          |   |   |   | (25 | ) |   |   | 13 |   |   |
| Total net income (loss)  before taxes |       |                                          | $          | 46                                         |       |                                            |       | $                                               | (25        | )                                               |       |   | $ | 21 |   |   |   | $ | (106 | ) |   |   | $ | 6 |   |   |

 

Thetable below reconciles the differences between our domestic statutory incometax rates and our effective tax rate:

| ** **                                                              | ** ** | **Five Months  Ended  October 31,** | ** ** | **Seven Months  Ended  May 31,** | ** ** | **Twelve Months  Ended  October 31,** | ** ** | **Twelve Months  Ended  October 31,** | ** ** | **Twelve Months  Ended  October 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                                      | ** ** | **2006**                                   | ** ** | **2005**                                        | ** ** | **2004**                                        | ** ** |
| Notional U.S.  federal tax rate                                         |       |                                          | 35.0       | %                                          |       |                                            | 35.0       | %                                               |       |                                            | 35         | % |   |   | 35.0 | % |   |   | 35.0 | % |   |
| State income  taxes, net of federal benefit                             |       |                                          | 1.0        |                                       |       |                                            | —     |                                            |       |                                            | 2.1        |   |   |   | — |   |   |   | 1.6 |   |   |
| Foreign income  taxed at different rates                                |       |                                          | (6.7       | )                                          |       |                                            | (70.8      | )                                               |       |                                            | 68.9       |   |   |   | (21.6 | ) |   |   | 177.4 |   |   |
| Nontaxable gain  from reversal of prior years’ retirement expenses |       |                                          | (7.6       | )                                          |       |                                            | —     |                                            |       |                                            | (16.6      | ) |   |   | — |   |   |   | — |   |   |
| R&D credits                                                         |       |                                          | —     |                                       |       |                                            | —     |                                            |       |                                            | —     |   |   |   | 1.3 |   |   |   | (22.5 | ) |   |
| Other, net                                                              |       |                                          | —     |                                       |       |                                            | —     |                                            |       |                                            | 0.5        |   |   |   | 0.7 |   |   |   | (30.8 | ) |   |
| Valuation  allowance—Others                                        |       |                                          | —     |                                       |       |                                            | (8.6       | )                                               |       |                                            | 10.1       |   |   |   | (27.5 | ) |   |   | 65.4 |   |   |
|                                                                    |       |                                          | 21.7       | %                                          |       |                                            | (44.4      | )%                                              |       |                                            | 100        | % |   |   | (12.1 | )% |   |   | 226.1 | % |   |

 

Our income taxes payable were approximately $15million, $31 million and $23 million, at October 31, 2006, 2005and 2004 respectively. These amounts are included within income taxes and othertaxes payable. The payables as of fiscal year end October 31, 2005 and2004 represent amounts that had not been settled through the Agilent invested equityaccount at the respective fiscal years.

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Deferredincomes taxes reflect the net effect of temporary differences between thecarrying amounts of assets and liabilities used for financial reporting and taxpurposes. We had no deferred tax liabilities as of fiscal years ended October 31,2006 and 2005. The significant components of deferred tax assets included inthe combined and consolidated balance sheets as of October 31, 2006 and2005 are:

| ** **                                     | ** ** | **Year Ended October 31,**                            | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| ** **                                     | ** ** | **Deferred  Tax  Assets**                                            | ** ** | **Deferred  Tax  Assets** | ** ** |
| ** **                                     | ** ** | **(in millions)**                                               | ** ** |
| Inventory                                      |       |                                                                 | $          | 7 |   |   |   | $ | 4 |   |   |
| Property, plant  and equipment                 |       |                                                                 | 6          |   |   |   | — |   |   |
| Intangible                                     |       |                                                                 | 25         |   |   |   | — |   |   |
| Warranty                                       |       |                                                                 | —     |   |   |   | 3 |   |   |
| Employee  benefits, other than retirement      |       |                                                                 | 5          |   |   |   | 17 |   |   |
| Other retirement  benefits                     |       |                                                                 | 9          |   |   |   | — |   |   |
| Net operating  losses and credit carryforwards |       |                                                                 | —     |   |   |   | 120 |   |   |
| Other                                          |       |                                                                 | 4          |   |   |   | 1 |   |   |
| Subtotal                                       |       |                                                                 | 56         |   |   |   | 145 |   |   |
| Tax valuation  allowance                       |       |                                                                 | —     |   |   |   | (135 | ) |   |
| Total deferred tax asset                       |       |                                                                 | $          | 56 |   |   |   | $ | 10 |   |   |

 

The provisions for income taxes in the combined andconsolidated financial statements have been determined on a separate returnbasis. We are required to assess the realization of our net deferred tax assetsand the need for a valuation allowance on a separate return basis, prior to ourseparation, and exclude from that assessment any utilization of those losses byAgilent. This assessment requires that our management make judgments aboutbenefits that could be realized from future taxable income, as well as otherpositive and negative factors influencing the realization of deferred taxassets.

As of October 31, 2006, we had $56 million ofdeferred tax assets due to temporary differences between the book and tax basisof the net assets which were acquired upon our separation from Agilent. As of October 31,2005, we had net deferred tax assets of $10 million since we had recorded fullvaluation allowances in the United States and Japan against all deferred taxassets due to accumulated losses in successive years in those jurisdictions.Upon our separation from Agilent, we did not retain any pre-separation deferredtax assets or liabilities which had resulted from historical temporarydifferences, net operating losses and credit carryforwards. We did, however,retain approximately $4 million of prepaid tax assets upon our separation.

Going forward, oureffective tax rate will vary based on a variety of factors, including overallprofitability, the geographical mix of income before taxes and the related taxrates in the jurisdictions where we operate, completion ofseparation, restructuring and other one-time charges, as well asdiscrete events, such as settlements of future audits. We will be subject toaudits and examinations of our tax returns by tax authorities in variousjurisdictions, including the Internal Revenue Service. We will regularly assessthe likelihood of adverse outcomes resulting from these examinations todetermine the adequacy of our provision for income taxes.

**8.**                 SHARE-BASEDCOMPENSATION

***2006 Equity Incentive Plan***

On June 7, 2006, our board of directors adoptedthe Verigy Ltd. 2006 Equity Incentive Plan (the “2006 EIP”). There are10,300,000 ordinary shares authorized for issuance under the plan. The 2006 EIP

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provides for grants ofincentive stock options, nonqualified stock options, stock appreciation rights,restricted shares and share units. At October 31, 2006, there wereapproximately 6.6 million ordinary shares available for issuance under the 2006EIP.

Except for replacement options granted in connectionwith Verigy’s separation from Agilent, employee nonqualified stock options havean exercise price no less than 100% of the fair market value of a share on thedate of grant, and generally vest at a rate of 25% per year over 4 years. Themaximum allowable term is 10 years. Restricted share units awarded to employeespay out in an equal number of shares of stock, and generally vest at a rate of25% per year over 4 years. Options and restricted share units cease to vestupon termination of employment. If an employee terminates employment due todeath, disability or retirement due to age, then the vested portion of theemployee’s option and restricted share unit award is determined by adding 12months to the length of his or her actual service, and the option isexercisable as to the vested shares for one year after the date of termination,or, if earlier, the expiration of the term of the option.

Outside director optionsvest on the first anniversary of the date of grant and have a maximum term of10 years. Outside director restricted share units vest on the first anniversaryof the date of grant and are payable on the third anniversary of the date ofgrant. All awards granted to an outside director become fully vested upon thedirector’s termination of services because of death, disability, retirement ator after age 65, or if the Company is subject to a change in control before thedirector’s service terminates.

***2006 Employee Shares Purchase Plan***

On June 7, 2006, our board of directors adoptedthe 2006 Employee Shares Purchase Plan (the “Purchase Plan”). The Purchase Planis intended to qualify for favorable tax treatment under section 423 of theU.S. Internal Revenue Code. The number of shares available for purchase underthe plan is 1,700,000.

Under the Purchase Plan,eligible employees may elect to purchase shares from payroll deductions up to10% of eligible compensation during 6-month offering periods. Thepurchase price is (i) 85% of the fair market value per ordinary share onthe trading day before the beginning of an offering period or, in the case ofthe first offering period under the Purchase Plan, 85% of the IPO price; or(ii) 85% of the fair market value per ordinary share on the last tradingday of an offering period, whichever is lower. The Purchase Plan restricts the maximum number of shares that anemployee can purchase to 2,500 shares each offering period and to $25,000 worthof ordinary shares each calendar year.

***Share-Based Compensation for Verigy Options***

As of November 1, 2005, we adopted the provisionsof SFAS No. 123 (R) which requires the measurement and recognition ofcompensation expense for all share-based payment awards made to our employeesand directors including employee stock option awards and employee stockpurchases made under our Employee Stock Purchase Plan (“ESPP”).

Subsequent to June 12, 2006, the effective dateof our registration statement on from S-1, certain of our employees anddirectors were granted non-qualified share options and restricted share units(“RSU”). For the newly issued Verigy options, we have recognized compensationexpense based on the estimated grant date fair value method required under SFASNo. 123 (R) using a straight-line amortization method. As SFASNo. 123 (R) requires that share-based compensation expense be basedon awards that are ultimately expected to vest, estimated share-basedcompensation for the period from June 1, 2006 to October 31, 2006 hasbeen reduced for estimated forfeitures. Verigy expenses restricted share unitsbased on fair market value of the shares at the date of grant over the periodduring which the restrictions lapse.

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In addition, pursuant to the Master Separation andDistribution Agreement and the Employee Matters Agreement entered into betweenVerigy Ltd. and Agilent Technologies, Inc. in connection with Verigy’sseparation from Agilent (collectively the “***Separation Agreements***”), on October 31,2006, Agilent cancelled the unvested Agilent equity awards held by Verigyemployees as of October 31, 2006 (the “***Original Agilent Awards***”). In accordancewith the Separation Agreements, and in connection with the cancellation of theOriginal Agilent Awards, the compensation committee of the board of directorsof Verigy Ltd. approved and issued under the Verigy Ltd. 2006 Equity IncentivePlan replacement Verigy equity awards to Verigy employees whose OriginalAgilent Awards were cancelled (the “***Replacement Awards***”). The ratio that was usedfor the replacement options is the average price of Agilent common stock on October 30,2006 (the date prior to the distribution date), divided by the average price ofVerigy ordinary shares on October 31, 2006 (the day of the distribution).

Those awards that were provided to employees outsideof the United States, where options are impractical and/or infeasible due tolocal requirement or where other awards may obtain more favorable treatment underApplicable Local Law, were cancelled and immediately replaced with Verigyrestricted share units. The number of replaced restricted share units was basedon the intrinsic value of the closing price of Agilent stock option ondistribution date divided by the closing price of Verigy ordinary share ondistribution date.

As required by SFAS No. 123(R) for modification of equity award, we are recognizing, over theremaining requisite service period, the sum of the incremental compensationcost and the remaining unrecognized compensation cost for the original Agilentaward on the modification date. The incremental compensation cost ofapproximately $3.8 million is the difference between the fair value of themodified replacement award and the fair value of the original Agilent awardimmediately before it was modified.

***Share-Based Payment Award Activity Related to VerigyOptions***

Thefollowing table summarizes stock option and restricted share unit activity theyear ended October 31, 2006:

| ** **                               | ** ** | **Option**              | ** ** | **Restricted Share Unit  (RSU)** | ** ** |
|------------------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **Shares**              | ** ** | **Weighted  Average  Exercise  Price**     | ** ** | **Shares** | ** ** | **Weighted  Average  Grant  Date  Share  Price** | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** | ** **                                 | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Outstanding as of  October 31, 2005 |       |                    | —     |                                       |       |   | $ | — |   |   |   | — |   |   |   | $ | — |   |   |
| Granted                                  |       |                    | 1,240      |                                       |       |   | $ | 15 |   |   |   | 143 |   |   |   | $ | 15 |   |   |
| Exercised                                |       |                    | —     |                                       |       |   | $ | — |   |   |   | — |   |   |   | $ | — |   |   |
| Replacement award                        |       |                    | 2,267      |                                       |       |   | $ | 14 |   |   |   | 54 |   |   |   | $ | 17 |   |   |
| Cancellations                            |       |                    | (3         | )                                          |       |   | $ | 15 |   |   |   | — |   |   |   | $ | — |   |   |
| Outstanding as of  October 31, 2006 |       |                    | 3,504      |                                       |       |   | $ | 14 |   |   |   | 197 |   |   |   | $ | 15 |   |   |

 

On October 31, 2006, the board of directors ofVerigy approved and issued approximately 2.2 million and 0.05 million ofreplacement options and restricted share units, respectively.

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Thefollowing table summarizes information about all outstanding options topurchase shares of Verigy ordinary shares at October 31, 2006:

| ** **                              | ** ** | **Options Outstanding** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | ** **                   | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
| ** **                              | ** ** | **(in thousands)**      | ** ** | ** ** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
| $  7.48 –  15       |       |                         | 2,081      |   |   |   | 7.1 years |   |   |   | $ | 13 |   |   |   | $ | 8,259 |   |   |
| $15.01 – 20                   |       |                         | 1,423      |   |   |   | 9.4 years |   |   |   | $ | 16 |   |   |   | 1,349 |   |   |
|                                    |       |                         | 3,504      |   |   |   | 8.0 years |   |   |   | $ | 14 |   |   |   | $ | 9,608 |   |   |
|                                         |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The aggregate intrinsic value in the table aboverepresents the total pretax intrinsic value, based on Verigy’s closing stockprice of $16.80 at October 31, 2006, which would have been received byaward holders had all award holders exercised their awards that werein-the-money as of that date.  As of October 31,2006, none of the Verigy options were exercisable. Pursuant to the vestingschedule for the director and employee options granted by Verigy as of October31, 2006, the first vesting date for any grant is November 15, 2006.

Thefollowing table summarizes information about all outstanding restricted shareunit awards of Verigy ordinary shares at October 31, 2006:

| ** **                                     | ** ** | **Restricted Share Units Outstanding** | ** ** |                    |
|------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------|
| **Range of Grant  Date Share Price** | ** ** | ** **                                            | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Grant  Date  Share  Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
| ** **                                     | ** ** | **(in thousands)**                               | ** ** | ** **              | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |   |
| $14.75 – 15                          |       |                                                  | 141        |                    |   |   | 2.9 years |   |   |   | $ | 15 |   |   |   | $ | 261 |   |   |   |
| $15.01 – 20                          |       |                                                  | 56         |                    |   |   | 2.1 years |   |   |   | $ | 17 |   |   |   | 1 |   |   |   |
|                                           |       |                                                  | 197        |                    |   |   | 2.6 years |   |   |   | $ | 15 |   |   |   | $ | 262 |   |   |   |
|                                                |            |                                                       |            |                         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Impact of theAdoption of SFAS No. 123 (R) Related Verigy Options and RSU***

Theimpact on our results for share-based compensation for Verigy options forfiscal years 2006 was as follows:

| ** **                                                                                             | ** ** | **Twelve Months**                                        | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **Ended**                                                     | ** ** |
| ** **                                                                                             | ** ** | **October 31,**                                          | ** ** |
| ** **                                                                                             | ** ** | **2006**                                                      | ** ** |
| ** **                                                                                             | ** ** | **(in millions, except  per share data)** | ** ** |
| Cost of products  and services                                                                         |       |                                                          | $          | 0.1 |   |   |
| Research and  development                                                                              |       |                                                          | 0.1        |   |   |
| Selling, general  and administrative                                                                   |       |                                                          | 1.4        |   |   |
| Total share-based compensation expense                                                                 |       |                                                          | $          | 1.6 |   |   |
| Impact of share-based  compensation expense related to Verigy options on our net loss per  share: |       |                                                          |       |   |   |
| Basic                                                                                                  |       |                                                          | $          | (0.03 | ) |   |
| Diluted                                                                                                |       |                                                          | $          | (0.03 | ) |   |

 

For fiscal year 2006, share-based compensationcapitalized within inventory was insignificant.

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The weighted average grantdate fair value of awards related to Verigy options, as determined under SFAS No. 123(R), granted during fiscal year 2006 was $7.28 per share. For fiscal year 2006,there was no tax benefit realized from exercised stock options and similarawards. As of October 31, 2006, the total unrecorded share-basedcompensation balance for unvested options and similar awards, net of expectedforfeitures was approximately $19.0 million.

***Valuation Assumptions for Verigy Options***

Thefair value of options granted was estimated at grant date using a Black-Scholesoptions-pricing model with the following weighted-average assumptions:

| ** **                            | ** ** | **Five Months Ended** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **October 31, 2006**  | ** ** |
| Risk-free  interest rate for options  |       |                            | 4.99       | % |   |
| Risk-free  interest rate for the ESPP |       |                            | 5.0        | % |   |
| Dividend yield                        |       |                            | 0          | % |   |
| Volatility for  options               |       |                            | 55.9       | % |   |
| Volatility for  the ESPP              |       |                            | 38.7       | % |   |
| Expected option life                  |       |                            | 4.09 years |   |   |
| Expected life for the  ESPP           |       |                            | 6 months   |   |   |

 

The Black-Scholes modelrequires the use of highly subjective and complex assumptions, including theoption’s expected life and the price volatility of the Company’s underlyingstock. Because we did not have historical data, we used data from peercompanies to determine our assumptions for the expected option life and thevolatility of our stock price. For the risk-free interest rate, we used therate of return on US Treasury Strips as of October 31, 2006 withmaturities commensurate with expected option life assumptions.

***Valuation Assumptions for Verigy “Replacement Award”Options***

Thetable below summarizes sets of weighted average assumptions used to estimatethe fair values, using a Black-Scholes option-pricing model, of thosereplacement options which were issued to employees at distribution date.

| ** **                           | ** ** | **Original  Agilent Award**                    | ** ** | **Original  Agilent Award  Immediately  Before  Modification** | ** ** | **Verigy  Modified  Replacement  Award** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **Year Ended October 31, 2006** | ** ** |
| Risk-free  interest rate for options |       |                                                | 4.40       | %                                                                   |       |                                     | 4.69       | % |   |   | 4.70 | % |   |
| Dividend yield                       |       |                                                | 0          | %                                                                   |       |                                     | 0          | % |   |   | 0 | % |   |
| Volatility for  options              |       |                                                | 29.0       | %                                                                   |       |                                     | 30.4       | % |   |   | 55.9 | % |   |
| Expected option life                 |       |                                                | 4.25 years |                                                                |       |                                     | 3.00 years |   |   |   | 2.86 years |   |   |

 

The Black-Scholes modelrequires the use of highly subjective and complex assumptions, including theoption’s expected life and the price volatility of the Company’s underlyingstock. For the risk-free interest rate, we used the rate of return on USTreasury Strips as of October 31, 2006 with maturities commensurate withexpected option life assumptions. The calculation of fair value of thoseoriginal Agilent options was based the assumptions chosen by Agilent at grantdate. The calculation of fair value immediately before modification was basedon Agilent’s assumptions at grant date and updated to reflect Agilent’sspecific experience. The estimated fair value calculations for the replacementoptions were based 

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on the assumptionschosen by Agilent at the granted date for each option grant and were updated toreflect anticipated Verigy-specific experience.

***Share-Based Compensation for Agilent Options Held byVerigy Employees***

*Share-basedcompensation.*   Prior to our separation fromAgilent, our employees participated in Agilent’s stock-based compensationplans. Until November 1, 2005, we accounted for stock-based awards,based on Agilent’s stock, using the intrinsic value method of accounting inaccordance with Accounting Principles Board Opinion No. 25 “Accounting forStock Issued to Employees” (“APB 25”) and related interpretations. Under theintrinsic value method, we recorded compensation expense related to stockoptions in our condensed combined and consolidated statements of operationswhen the exercise price of our employee stock-based award was less thanthe market price of the underlying Agilent stock on the date of the grant. Wehad no stock option expenses where the exercise price was less than the marketprice on the date of the grant in any of the periods presented.

***Share-Based Payment Award Activity Related to AgilentOptions Held by Verigy Employees***

Thefollowing table summarizes equity share-based payment award for the fiscalyears 2006, 2005 and 2004:

| ** **                                                                | ** ** | **Shares**              | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|
| ** **                                                                | ** ** | **(in thousands)** | ** ** | ** **                                 | ** ** |
| Outstanding as of  October 31, 2003                                  |       |                    | 2,557      |                                       |       |   | $ | 27 |   |   |
| Granted under  Option Exchange Program                                    |       |                    | 692        |                                       |       |   | $ | 28 |   |   |
| Granted                                                                   |       |                    | 957        |                                       |       |   | $ | 25 |   |   |
| Exercised                                                                 |       |                    | (92        | )                                          |       |   | $ | 15 |   |   |
| Cancellations                                                             |       |                    | (5         | )                                          |       |   | $ | 16 |   |   |
| Outstanding as of  October 31, 2004                                  |       |                    | 4,109      |                                       |       |   | $ | 29 |   |   |
| Granted                                                                   |       |                    | 682        |                                       |       |   | $ | 18 |   |   |
| Exercised                                                                 |       |                    | (282       | )                                          |       |   | $ | 22 |   |   |
| Cancellations                                                             |       |                    | (11        | )                                          |       |   | $ | 19 |   |   |
| Outstanding as of  October 31, 2005                                  |       |                    | 4,498      |                                       |       |   | $ | 28 |   |   |
| Granted                                                                   |       |                    | 584        |                                       |       |   | $ | 34 |   |   |
| Exercised                                                                 |       |                    | (1,358     | )                                          |       |   | $ | 25 |   |   |
| Cancellations                                                             |       |                    | (241       | )                                          |       |   | $ | 29 |   |   |
| Net  Transfer-Outs—Agilent employees                                 |       |                    | (1,034     | )                                          |       |   | $ | 29 |   |   |
| Vested options  remaining with Agilent                                    |       |                    | (1,135     | )                                          |       |   | $ | 30 |   |   |
| Unvested options  replaced with Verigy options and restricted share units |       |                    | (1,314     | )                                          |       |   | $ | 31 |   |   |
| Outstanding as of  October 31, 2006                                  |       |                    | —     |                                       |       |   | $ | — |   |   |

 

***Impact of the Adoption of SFAS No. 123 (R) Relatedto Agilent Options Held by Verigy Employees***

Agilent adopted SFAS No. 123 (R) using themodified prospective transition method beginning November 1, 2005.Accordingly, for the periods prior to our separation, we recorded share-basedcompensation expense for awards granted prior to, but not yet vested, as of November 1,2005 as if the fair value method required for pro forma disclosure under SFAS No. 123was in effect for expense recognition purposes, adjusted for estimatedforfeitures. For these awards, we have continued to recognize compensationexpense using the accelerated amortization method under FIN 28. For share-basedawards granted after November 1, 2005, we have recognized compensationexpense based on the estimated grant 

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date fair value methodrequired under SFAS No. 123 (R). For these awards we have recognizedcompensation expense using a straight-line amortization method. As SFAS No. 123(R) requires that share-based compensation expense be based on awards thatare ultimately expected to vest, estimated share-based compensation for allperiods presented has been reduced for estimated forfeitures.

We recorded the distribution of share-basedcompensation expenses for Agilent options as an increase in Agilent’s investedequity in Verigy.

The calculations are based on Agilent stock optionsheld by our employees and Agilent’s assumptions. To the extent that ouremployees’ Agilent options were unvested as of the distribution date, Verigyreplaced the Agilent options with new Verigy options using a conversion ratiodetermined at the distribution date. The ratio was based upon the average ofthe high and low of the stock price of Agilent common stock on the trading daybefore the distribution date compared to the average of the high and low shareprice of our ordinary shares on the distribution date.

Theimpact on our results for share-based compensation for Agilent options forfiscal years 2006 was as follows:

| ** **                                                                                            | ** ** | **Twelve Months**                                        | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                            | ** ** | **Ended**                                                     | ** ** |
| ** **                                                                                            | ** ** | **October 31,**                                          | ** ** |
| ** **                                                                                            | ** ** | **2006**                                                      | ** ** |
| ** **                                                                                            | ** ** | **(in millions,  except per share data)** | ** ** |
| Cost of products  and services                                                                        |       |                                                          | $          | 1.7 |   |   |
| Research and development                                                                              |       |                                                          | 1.2        |   |   |
| Selling, general  and administrative                                                                  |       |                                                          | 5.9        |   |   |
| Total share-based compensation expense                                                                |       |                                                          | $          | 8.8 |   |   |
| Impact of share-based compensation expense related  to Verigy options on our net loss per share: |       |                                                          |       |   |   |
| Basic                                                                                                 |       |                                                          | $          | (0.16 | ) |   |
| Diluted                                                                                               |       |                                                          | $          | (0.16 | ) |   |

 

For fiscal year 2006, our share-based compensationcapitalized within inventory was insignificant.

Since our separation fromAgilent, there were no Agilent option grants for Verigy employees. The weightedaverage grant date fair value of awards related to Agilent options, asdetermined under SFAS No. 123 (R), granted during fiscal years 2006, 2005and 2004 was $10.38, $18.56 and $24.78 per share, respectively. For fiscal years 2006, 2005, and 2004 the taxbenefit realized from exercised stock options and similar awards wasinsignificant. As of October 31, 2006, there was no unrecorded deferredshare-based compensation balance for unvested shares.

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***Valuation Assumptions for Agilent Options Held byVerigy Employees***

Thefair value of options granted was estimated at grant date using a Black-Scholesoptions-pricing model with the following weighted-average assumptions:

| ** **                            | ** ** | **Years Ended October 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free  interest rate for options  |       | 4.4                                        | %          | 3.55 | % | 3.25 | % |
| Risk-free  interest rate for the ESPP |       | 4.5                                        | %          | 2.42 | % | 1.17 | % |
| Dividend yield                        |       | 0                                          | %          | 0 | % | 0 | % |
| Volatility for  options               |       | 29                                         | %          | 39 | % | 57 | % |
| Volatility for  the ESPP              |       | 29                                         | %          | 37 | % | 36 | % |
| Expected option life                  |       | 4.25 years                                 |       | 4 years |   | 5.5 years |   |
| Expected life for the  ESPP           |       | 6 months –   1.5 years           |       | 6 months –  2 years |   | 6 months –  2 years |   |

 

The Black-Scholes model requires the use of highlysubjective and complex assumptions, including the option’s expected life andthe price volatility of the underlying stock. Beginning November 1, 2005,the expected stock price volatility assumption was determined using the impliedvolatility for Agilent’s stock. Prior to the adoption of SFAS No. 123 (R),a combination of historical and implied volatility was used in deriving ourexpected volatility assumption. We have determined that implied volatility ismore reflective of market conditions and a better indicator of expectedvolatility than a combined method of determining volatility.

*Proforma information.**  *Proforma net income (loss) information, as required by Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-BasedCompensation,” (“SFAS No. 123”) has been determined as if we had accountedfor the employee stock options we granted, including shares issuable to ouremployees under the Agilent Employee Stock Purchase Plan , and the OptionExchange Program, under SFAS No. 123’s fair value method.

Thepro forma information for fiscal years 2005 and 2004 was as follows:

| ** **                              | ** ** | **Years Ended October 31,**                                                                                                        | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **           2005           ** | ** ** | **           2004           ** | ** ** |
| ** **                              | ** ** | **(in millions, except per share data)**                                                                            | ** ** |
| Net loss as  reported                   |       |                                                                                                                                         | $          | (119 | ) |   |   | $ | (8 | ) |   |
| SFAS No. 123  based compensation   |       |                                                                                                                                         | (17        | ) |   |   | (19 | ) |   |
| Tax benefit                             |       |                                                                                                                                         | 1          |   |   |   | 2 |   |   |
| Net loss—pro  forma                |       |                                                                                                                                         | $          | (135 | ) |   |   | $ | (25 | ) |   |
| Net loss per  share, basic and diluted: |       |                                                                                                                                         |       |   |   |   |   |   |   |
| As reported                             |       |                                                                                                                                         | $          | (2.38 | ) |   |   | $ | (0.16 | ) |   |
| Pro forma                               |       |                                                                                                                                         | $          | (2.70 | ) |   |   | $ | (0.50 | ) |   |

 

**9.**                 INVENTORY

| ** **       | ** ** | **Year Ended  October 31,** | ** ** |
|------------------|------------|---------------------------------------|------------|
| ** **       | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **       | ** ** | **(in millions)**                | ** ** |
| Finished goods   |       |                                  | $          | 42 |   |   | $ | 33 |   |
| Work in progress |       |                                  | 8          |   |   | 9 |   |
| Raw materials    |       |                                  | 37         |   |   | 68 |   |
| Total inventory  |       |                                  | $          | 87 |   |   | $ | 110 |   |

 

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Finished goods inventory includes demonstrationproducts of $18 million for 2006 and $20 million for 2005. Effective June 1,2006, we sold approximately $19 million of raw material inventory toFlextronics for approximately net book value. See Note 19 “Flextronics” forfurther details.

The total cost of productsin the combined and consolidated statements of operations for 2006, 2005 and2004 included inventory-related gross charges of $18 million,$25 million and $3 million, respectively, for excess and obsoleteinventory on our site as well inventory at our contract manufacturers andsuppliers where we have non-cancelable purchase commitments. In addition, wesold previously written down inventory of $11 million, $7 million,and $1 million, respectively, for the same periods.

**10.**          OTHERCURRENT ASSETS

| ** **                   | ** ** | **Year Ended  October 31,** | ** ** |
|------------------------------|------------|---------------------------------------|------------|
| ** **                   | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                   | ** ** | **(in millions)**                | ** ** |
| Current deferred  tax assets |       |                                  | $          | 16 |   |   |   | $ | 2 |   |   |
| Transaction tax  receivable  |       |                                  | 17         |   |   |   | 2 |   |   |
| Prepaid taxes                |       |                                  | 2          |   |   |   | 8 |   |   |
| Other prepayments            |       |                                  | 9          |   |   |   | 2 |   |   |
| Sundry  receivables          |       |                                  | 3          |   |   |   | — |   |   |
| Other                        |       |                                  | 1          |   |   |   | — |   |   |
| Total other current  assets  |       |                                  | $          | 48 |   |   |   | $ | 14 |   |   |

 

The $16 million current deferred tax assets as of October 31,2006, pertain solely to temporary differences between the book and tax basis ofthe net assets which were acquired upon our separation.

The $17 milliontransaction tax receivable as of October 31, 2006, relates to transactiontaxes that we paid for inventory purchases from our suppliers. We also hadapproximately $8 million of transaction tax payable as of October 31,2006, which is included in income taxes and other taxes payable.

**11.**          PROPERTY,PLANT AND EQUIPMENT, NET

| ** **                                | ** ** | **Year Ended  October 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|
| ** **                                | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(in millions)**                | ** ** |
| Leasehold  improvements                   |       | $                                     | 12         |   | $ | 1 |   |
| Software                                  |       | 22                                    |       | 4 |   |
| Machinery and  equipment                  |       | 46                                    |       | 55 |   |
| Total property,  plant and equipment      |       | 80                                    |       | 60 |   |
| Accumulated depreciation and amortization |       | (36                                   | )          | (42 | ) |
| Total property, plant  and equipment, net |       | $                                     | 44         |   | $ | 18 |   |

 

We recorded approximately$9 million, $6 million and $6 million of depreciation and amortization expensesfor fiscal years 2006, 2005, and 2004, respectively.

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**12.**          OTHERLONG TERM ASSETS

| ** **                        | ** ** | **Year Ended October 31,**                            | ** ** |
|-----------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                        | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| ** **                        | ** ** | **(in millions)**                                               | ** ** |
| Deferred tax  assets, non-current |       |                                                                 | $          | 40 |   |   |   | $ | 8 |   |   |
| Investments                       |       |                                                                 | 4          |   |   |   | 3 |   |   |
| Retirement plan  assets           |       |                                                                 | 1          |   |   |   | 3 |   |   |
| Prepaid taxes                     |       |                                                                 | —     |   |   |   | 2 |   |   |
| Flexible time off  assets         |       |                                                                 | 11         |   |   |   | 8 |   |   |
| Other                             |       |                                                                 | 5          |   |   |   | 2 |   |   |
| Total other long term  assets     |       |                                                                 | $          | 61 |   |   |   | $ | 26 |   |   |

 

Upon our separation from Agilent, we did not retainany pre-separation deferred tax assets or liabilities. The $40 million deferredtax assets as of October 31, 2006, pertains primarily to temporarydifferences between the book and tax basis of the net assets which wereacquired upon our separation.

Our investments consist of investments in privatecompanies accounted for using the cost method as we have no significantinfluence over the investee. All of our investments are subject to periodicimpairment review, which requires significant judgment to identify events orcircumstances that would likely have a significant adverse effect on the futureuse of the investment. Charges related to other than temporary impairments were$0.3 million in fiscal year 2005. This impairment charge was included inother income (expense), net in the combined and consolidated statements ofoperations. No impairment charges were recorded in the other periods presented.

Information about ourpension plans and associated assets are presented in Note 17, “Retirementand Post-Retirement Pension Plans”.

**13.**          GOODWILL

Asummary of our goodwill activity for fiscal years 2006 and 2005 is shown in thetable below:

| ** **                            | ** ** | **Year Ended October 31,**                            | ** ** |
|---------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                            | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| ** **                            | ** ** | **(in millions)**                                               | ** ** |
| Beginning balance  at November 1 |       |                                                                 | $          | 17 |   |   |   | $ | 18 |   |   |
| Currency  translation adjustment      |       |                                                                 | 1          |   |   |   | (1 | ) |   |
| Ending balance at  October 31    |       |                                                                 | $          | 18 |   |   |   | $ | 17 |   |   |

 

**14.**          GUARANTEES

***Standard Warranty***

Asummary of our standard warranty accrual activity for fiscal years ended October 31,2006 and 2005 is shown in the table below; also see Note 18, “OtherAccrued Liabilities”:

| ** **                                      | ** ** | **Year Ended  October 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                      | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(in millions)**                | ** ** |
| Balance at  beginning of year                   |       | $                                     | 6          |   |   | $ | 7 |   |   |
| Accruals for  warranties issued during the year |       | 10                                    |       |   | 8 |   |   |
| Settlements made  during the year               |       | (10                                   | )          |   | (9 | ) |   |
| Balance at end of year                          |       | $                                     | 6          |   |   | $ | 6 |   |   |

 

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***Extended Warranty***

Asummary of our extended warranty deferred revenue activity for October 31,2006 and 2005 is shown in the table below:

| ** **                             | ** ** | **Year Ended  October 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **(in millions)**                | ** ** |
| Balance at  beginning of year          |       |                                  | $          | 13 |   |   |   | $ | 13 |   |   |
| Recognition of  revenue                |       |                                  | (6         | ) |   |   | (5 | ) |   |
| Deferral of  revenue for new contracts |       |                                  | 13         |   |   |   | 5 |   |   |
| Balance at end of year                 |       |                                  | $          | 20 |   |   |   | $ | 13 |   |   |

 

In our combined andconsolidated balance sheets, current deferred revenue is reported separatelyand long-term deferred revenue is included in long-term liabilities. SeeNote 18, Other Accrued Liabilities and Long-Term Liabilities.

***Indemnifications***

As is customary in our industry and as provided for inlocal law in the U.S. and other jurisdictions, many of our standard contractsprovide remedies to our customers and others with whom we enter into contracts,such as defense, settlement, or payment of judgment for intellectual propertyclaims related to the use of our products. From time to time, we indemnifycustomers, as well as our suppliers, contractors, lessors, lessees, companiesthat purchase our businesses or assets and others with whom we enter intocontracts, against combinations of loss, expense, or liability arising fromvarious triggering events related to the sale and the use of our products, theuse of their goods and services, the use of facilities and state of our ownedfacilities, the state of the assets and businesses that we sell and othermatters covered by such contracts, usually up to a specified maximum amount. Inaddition, from time to time we also provide protection to these parties againstclaims related to undiscovered liabilities, additional product liability orenvironmental obligations. In our experience, claims made under suchindemnifications are rare and the associated estimated fair value of theliability is not material.

Under the agreements withAgilent, Verigy will indemnify Agilent in connection with Verigy activitiesconducted prior to and following its separation from Agilent in connection withthe businesses that constitute Verigy and the liabilities that Verigy will bespecifically assuming under the agreements. These indemnifications will cover avariety of aspects of Verigy’s business, including, but not limited to,employee, tax, intellectual property and environmental matters.

**15.**          RESTRUCTURINGAND ASSET IMPAIRMENT

Agilent initiated several restructuring plans in prioryears; the 2001 Plan, the 2002 Plan and the 2003 Plan (collectively, the “PriorPlans”). Agilent’s Prior Plans were designed to reduce costs and expenses inorder to return Agilent to profitability. The two main components of theseplans are workforce reduction and consolidation of excess facilities. Under allplans, we directly incurred and recorded only charges for workforce management.In addition, we recorded charges allocated to us by Agilent for our share ofthe expenses they incurred to reduce costs for support services such asfinance, information technology, and workplace services. Agilent achieved thesecost reductions by moving global shared services operations sites to lower costregions, reducing the number of properties, particularly sales andadministrative sites, and by reducing their workforce through involuntaryterminations and selected outsourcing of manufacturing and administrativefunctions. Our allocated portion of these costs is included in our combined andconsolidated financial statements and the schedules below. All accruedliabilities associated with the allocated costs were recorded by Agilent andnot us.

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In fiscal year 2004, we recorded $1 million indirect restructuring charges for workforce reductions and Agilent allocatedapproximately $4 million ($2 million for workforce management and$2 million for consolidation of excess facilities) to us. We had noaccrued balances at the end of the respective reporting years for activitiesrelated to workforce management or consolidation of facilities.

Asummary of Prior Plans restructuring activity (including restructuring costsallocated to us by Agilent) by year is shown below:

| ** **                   | ** ** | **Year Ended  October 31,** | ** ** |
|------------------------------|------------|---------------------------------------|------------|
| ** **                   | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                   | ** ** | **(in millions)**                | ** ** |
| Workforce  management        |       |                                  | $          | — |   |   |   | $ | — |   |   |   | $ | 3 |   |   |
| Consolidation of  facilities |       |                                  | —     |   |   |   | — |   |   |   | 2 |   |   |
| Total restructuring  charges |       |                                  | $          | — |   |   |   | $ | — |   |   |   | $ | 5 |   |   |

 

***Summary information for Agilent’s 2005 Plan***

In fiscal year 2005, Agilent launched a newrestructuring program to align its workforce with its smaller organization sizeafter the announced sale of its semiconductor products business, whichcompleted on December 1, 2005, and its announced intention to spin us off.

Also, in fiscal year 2005, we initiated a plan, aspart of Agilent’s 2005 restructuring plan, to further reduce operational costs,primarily through closing, consolidating, and relocating some sites andreducing and realigning our workforce (“2005 Plan”). Under this plan, we tookan $8 million charge in fiscal year 2005, $5 million of which relatedto a reduction in headcount, $2 million of which related to headcountreduction by Agilent for corporate and administrative personnel that hadsupported our business and $1 million of which related to consolidation offacilities. Overall, we reduced our workforce by approximately 250 people sinceOctober 31, 2005 and added approximately 100 people, ending with approximately1,500 employees as of October 31, 2006.

Asummary of Agilent’s 2005 Plan restructuring activity during fiscal years endedOctober 31, 2005 and 2006 is shown in the table below:

| ** **                                           | ** ** | **Workforce  Reduction** | ** ** | **Asset  Impairment  and  Consolidation  of Excess  Facilities** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|--------------------------|------------|-----------------------------------------------------------------------|------------|-----------|------------|
| ** **                                           | ** ** | **(in millions)**   | ** ** |
| Balance at  October 31, 2004                    |       |                     | $          | —                                                                |       |      |       | $ | — |   |   | $ | — |   |
| Total charges  including amount allocated by Agilent |       |                     | 7          |                                                                  |       |      | 1          |   |   | 8 |   |
| Less allocated  and paid by Agilent                  |       |                     | (2         | )                                                                     |       |      | (1         | ) |   | (3 | ) |
| Less cash  payments                                  |       |                     | (4         | )                                                                     |       |      | —     |   |   | (4 | ) |
| Balance at  October 31, 2005                    |       |                     | $          | 1                                                                     |       |      |       | $ | — |   |   | $ | 1 |   |
| Total charges allocated  by Agilent                  |       |                     | 19         |                                                                  |       |      | 3          |   |   | 22 |   |
| Less amounts paid  by Agilent                        |       |                     | (4         | )                                                                     |       |      | (3         | ) |   | (7 | ) |
| Less cash  payments                                  |       |                     | (10        | )                                                                     |       |      | —     |   |   | (10 | ) |
| Less  restructuring liabilities retained by Agilent  |       |                     | (6         | )                                                                     |       |      | —     |   |   | (6 | ) |
| Balance at  October 31, 2006                    |       |                     | $          | —                                                                |       |      |       | $ | — |   |   | $ | — |   |

 

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We had no accrued restructuring liability as of October 31,2006, compared to $1 million liability as of October 31, 2005 related tothe Agilent 2005 Restructuring Plan. In accordance with the separationagreements with Agilent, Agilent retained and paid for all restructuringliabilities associated with the 2005 restructuring plan.

Asummary of the statement of operations impact of the charges resulting from allrestructuring plans for fiscal years ended October 31, 2006, 2005 and 2004is shown below:

| ** **                                              | ** ** | **Year Ended  October 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | **(in millions)**                | ** ** |
| Restructuring  charges (included in cost of sales)      |       |                                  | $          | 7 |   |   |   | $ | 1 |   |   |   | $ | 1 |   |   |
| Restructuring  charges (included in operating expenses) |       |                                  | 17         |   |   |   | 7 |   |   |   | 4 |   |   |
| Total restructuring  charges                            |       |                                  | $          | 24 |   |   |   | $ | 8 |   |   |   | $ | 5 |   |   |

 

Therestructuring costs allocated to us by Agilent and included in the table aboveare shown separately below:

| ** **                                              | ** ** | **Year Ended  October 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | **(in millions)**                | ** ** |
| Restructuring  charges (included in cost of sales)      |       |                                  | $          | 2 |   |   |   | $ | — |   |   |   | $ | 1 |   |   |
| Restructuring  charges (included in operating expenses) |       |                                  | 9          |   |   |   | 3 |   |   |   | 3 |   |   |
| Total restructuring  charges                            |       |                                  | $          | 11 |   |   |   | $ | 3 |   |   |   | $ | 4 |   |   |

 

***Summary of Flextronics-related restructuring charges***

In connection with thetransfer of our manufacturing activities to Flextronics, we have transferredapproximately 85 employees to Flextronics, and Flextronics has assumed certainpension and other employee liabilities associated with these employees. We areresponsible for any liabilities associated with known future severance paymentsfor the transferred employees and will benefit from the future services ofthese employees as they will be working exclusively on our products. On June 1,2006, Agilent paid into a trust account approximately $3 million, on ourbehalf, for the severance payments associated with the transferred employees.On July 14, 2006, we reimbursed Agilent for all these payments, inaccordance with the master separation and distribution agreement. Also, we havepotential obligation in the future of approximately $2 million associatedwith these transferred employees. We have deferred these costs and arerecognizing them ratably over the employees’ period of service until therespective dates of the employees’ termination from Flextronics. During fiscalyear 2006, we recorded $1.8 million of these charges in our cost of products.

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**16.**          SEPARATIONCOSTS

Thefollowing table presents the components of separation costs for fiscal years2006, 2005, and 2004, respectively.

| ** **                                                             | ** ** | **Year Ended  October 31,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | **(in millions)**                | ** ** |
| Separation costs  (included in cost of sales)                          |       |                                  | $          | 8 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Separation costs  (included in operating expense)                      |       |                                  | 75         |   |   |   | 3 |   |   |   | — |   |   |
| Total of  separation costs                                             |       |                                  | 83         |   |   |   | 3 |   |   |   | — |   |   |
| Net curtailment and settlement gains (included in  costs of sales)     |       |                                  | (4         | ) |   |   | — |   |   |   | — |   |   |
| Net curtailment  and settlement gains (included in operating expenses) |       |                                  | (6         | ) |   |   | — |   |   |   | — |   |   |
| Net separation costs                                                   |       |                                  | $          | 73 |   |   |   | $ | 3 |   |   |   | $ | — |   |   |

 

In connection with our separation from Agilent, weincurred one-time internal and external separation costs, such as informationtechnology set-up costs and consulting and legal and other professional fees.

For fiscal year 2006, we incurred $83 million inseparation costs, of which approximately $8 million was recorded in costs ofsales. These expenses were partially offset by a net curtailment and settlementgain of approximately $10 million which pertained to Agilent’s U.S. RetirementPlans and Agilent’s Post Retirement Benefit Plan. These net curtailment andsettlement gains which resulted from the separation of our business fromAgilent and the significant workforce reductions we incurred during fiscal year2006 were recorded by Agilent in accordance with SFAS No. 88 and werepushed down to our business. For fiscal year 2005, we incurred $3 millionin separation costs and no expenses were recorded in costs of sales.

All separation-relatedcosts which were incurred up to the separation date, approximately $22 million,was Agilent’s responsibility, and all separation-related costs incurredafter the separation date is our responsibility.

**17.**          RETIREMENTPLANS AND POST-RETIREMENT BENEFITS

*General.**  *Substantially all of our employeesare covered under various Verigy defined benefit and/or defined contributionplans. Additionally, we sponsor retiree medical accounts for certian eligibleU.S. employees. Prior to the seperation, Agilent had sponsored post-retirementhealth care benefits and a death benefit under the Retiree Survivor’s BenefitPlan for our eligible U.S. employees.

*U.S.Retirement and Post-retirement Health Care Benefits for U.S. Employees*

Effective June 1, 2006, Verigy established a newdefined contribution benefit plan (“Verigy 401(k) plan”) for its U.Semployees. Verigy’s 401(k) plan provides matching contribution of up to 4%of eligible compensation. Eligible compensation consists of base and variablepay. In addition, we also adopted the profit sharing plan for our U.S.employees, whereby the Company will make a maximum 2% contribution to theemployee’s 401(k) plan if certain annual financial targets are achieved. Asmall number of our U.S. employees meeting certain age and service requirementswill also receive an additional 2% profit sharing contribution to their 401(k) accountsif certain annual financial targets are achieved.

Effective June 1, 2006, Verigy made availablecertain retiree benefits to U.S. employees meeting certain age and servicerequirements upon termination of employment through Verigy’s Retiree MedicalAccount (RMA) Plan. At the date of separation, the present value of Verigy’sresponsibility for the retiree medical benefit obligation was approximately$2.3 million. We are ratably recognizing this obligation over a period of 6.4years, the shorter of the estimated average working lifetime or retirementeligibility of these 

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employees. There are noplan assets related to these obligations and we do not expect to make anycontributions in the next fiscal year. For fiscal year 2006, the expensesamount recognized under the RMA plan was approximately $0.2 million. 

Prior to the separationdate, June 1, 2006, the former U.S. Agilent employees newly employed byVerigy benefited from Agilent 401(k) matching contributions. These amountswere reflected in the respective costs of sales, research and development, andselling, general and administrative in the accompanying combined andconsolidated statement of operations. Agilent allocated the 401(k) matchingamounts to Verigy on a headcount basis.

For fiscal year 2006, theCompany’s matching expenses for our US employees under the Verigy 401(k) andthe Verigy profit sharing plans were $0.7 million and $0.5 million,respectively.

*Non-U.S. RetirementBenefit Plans.**  *Eligibleemployees outside the U.S. generally receive retirement benefits under variousretirement plans based upon factors such as years of service and employeecompensation levels. Eligibility is generally determined in accordance withlocal statutory requirements.

*Change in Plans.**  *Upon the separation of the businessfrom Agilent, the defined benefit plans in the U.S., United Kingdom,Switzerland, and Japan were not transferred to us while the liabilitiesassociated with plans in Germany, Korea Taiwan, France and Italy weretransferred to us. With the exception of Italy and France, Agilent funded thetransferred plans on June 1 2006 based on 80% of the estimated accumulatedbenefit obligations as of the separation date. On November 28, 2006,Agilent substantially completed its obligation to fund our Germany definedbenefit plans at the accumulated benefit obligation level as of the separationdate. With the exception of Italy, which is insignificant, Agilent will fundthe remaining plans based on 100% of the accumulated benefit obligation levelas of June 1, 2006, as soon as the actuarial valuations are completed bythe end of our first quarter of fiscal 2007. Verigy made no significantcontributions to the retirement plans during fiscal year 2006.

*Costs for All U.S. andNon-U.S. Plans.**  *Thefollowing tables provide the principal components of total retirement relatedbenefit plans impact on income (loss) of Verigy:

| ** ** | ** ** | **U.S.  Year Ended October 31,** | ** ** | **Non-U.S.  Year Ended October 31,** | ** ** | **Total  Year Ended October 31,** | ** ** |
|------------|------------|--------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------------|------------|
| ** ** | ** ** | **2006**                                   | ** ** | **2005**                                       | ** ** | **2004**                                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** ** | ** ** | **(in millions)**                     | ** ** |
|            |            |                                            |            |                                                |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |

| Defined benefit  and contribution pension plan costs |   |   | $      | 2      |   |   |   | $      | 5      |   |   |   | $      | 5      |   |   |   | $      | 5      |   |   |   | $      | 6      |   |   |   | $      | 6      |   |   |   | $      | 7      |   |   |   | $ | 11 |   |   |   | $ | 11 |   |   |
|------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---|----|--------|--------|--------|---|----|--------|--------|
| Non-pension  post-retirement benefit costs      |   |   | — |   |   |   | — |   |   |   | 1      |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1      |   |   |
| Total retirement-related  plans costs                |   |   | $      | 2      |   |   |   | $      | 5      |   |   |   | $      | 6      |   |   |   | $      | 5      |   |   |   | $      | 6      |   |   |   | $      | 6      |   |   |   | $      | 7      |   |   |   | $ | 11 |   |   |   | $ | 12 |   |   |

 

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*Non-U.S. Defined Benefit.**  *For fiscal years ended October 31,2006, 2005 and 2004, the net pension costs related to our employeesparticipating in our non-U.S. defined benefit plans were comprised of:

| ** **                                              | ** ** | **Non-U.S. Plans  Year Ended October 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                              | ** ** | **Five Months  Ended  October 31,**                  | ** ** | **Seven Months  Ended  May 31,** | ** ** | **Twelve Months  Ended  October 31** | ** ** | **Twelve Months  Ended  October 31,** | ** ** |
| ** **                                              | ** ** | **2006**                                                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | **(in millions)**                                         | ** ** |
| Service cost—benefits  earned during the year |       |                                                           | $          | 1.9 |   |   |   | 1.9 |   |   |   | $ | 2.9 |   |   |   | $ | 2.7 |   |   |
| Interest cost on benefit  obligation                    |       |                                                           | 0.7        |   |   |   | 1.3 |   |   |   | 2.2 |   |   |   | 1.9 |   |   |
| Expected return on plan  assets                         |       |                                                           | (0.3       | ) |   |   | (1.4 | ) |   |   | (2.3 | ) |   |   | (2.1 | ) |   |
| Amortization and  deferrals:                            |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Actuarial loss                                          |       |                                                           | 0.2        |   |   |   | 0.7 |   |   |   | 0.8 |   |   |   | 0.8 |   |   |
| Net transition  obligation                              |       |                                                           | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total net plan costs                                    |       |                                                           | $          | 2.5 |   |   |   | $ | 2.5 |   |   |   | $ | 3.6 |   |   |   | $ | 3.3 |   |   |
|                                                         |            |                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Measurement date.**  *We use September 30measurement date for all of our non-U.S. plans and October 31 for our U.S.retiree medical account.

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*Funded status—**As*of our 2006 and2005 fiscal year ends, the funded status of our non-U.S. defined benefit planswere:

| ** **                                                                     | ** ** | **Non-U.S. Defined Benefit Plans** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                     | ** ** | **Year Ended  October 31,**   | ** ** |
| ** **                                                                     | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                                                                     | ** ** | **(in millions)**                  | ** ** |
| Change in fair  value of plan assets:                                          |       |                                    |       |   |   |
| Fair value—beginning of period                                            |       | $                                       | 37.1       |   | $ | 33.2 |   |
| Actual return on plan assets                                                   |       | 1.6                                     |       | 5.2 |   |
| Employer contributions                                                         |       | —                                  |       | 0.3 |   |
| Participants’ contributions                                               |       | —                                  |       | — |   |
| Benefits paid                                                                  |       | —                                  |       | (0.3 | ) |
| Change in plan assets due to separation from Agilent                           |       | (7.3                                    | )          | — |   |
| Currency impact                                                                |       | (0.5                                    | )          | (1.3 | ) |
| Fair value—end of  period                                                 |       | $                                       | 30.9       |   | $ | 37.1 |   |
| Change in benefit  obligation:                                                 |       |                                    |       |   |   |
| Benefit obligation—beginning of period                                    |       | $                                       | 53.5       |   | $ | 39.7 |   |
| Service cost                                                                   |       | 3.8                                     |       | 2.9 |   |
| Interest cost                                                                  |       | 2.0                                     |       | 2.2 |   |
| Participants’ contributions                                               |       | —                                  |       | — |   |
| Plan amendment                                                                 |       | —                                  |       | 0.5 |   |
| Actuarial (gain)/loss                                                          |       | (4.7                                    | )          | 10.4 |   |
| Benefits paid                                                                  |       | (0.2                                    | )          | (0.2 | ) |
| Change in pension liabilities due to separation from  by Agilent               |       | —                                  |       | — |   |
| Currency impact                                                                |       | 1.5                                     |       | (2.0 | ) |
| Benefit obligation—end of period                                          |       | $                                       | 55.9       |   | $ | 53.5 |   |
| Plan assets less  than benefit obligation                                      |       | $                                       | (25.0      | ) | $ | (16.4 | ) |
| Unrecognized net  actuarial loss                                               |       | 16.0                                    |       | 15.7 |   |
| Unrecognized  prior service cost                                               |       | —                                  |       | 0.5 |   |
| Net prepaid  (accrued) costs                                                   |       | $                                       | (9.0       | ) | $ | (0.2 | ) |
| Amounts  recognized in the combined and consolidated balance sheet consist of: |       |                                    |       |   |   |
| Prepaid defined  benefit plan costs                                            |       | $                                       | —     |   | $ | 2.9 |   |
| Accrued defined  benefit plan costs                                            |       | (12.7                                   | )          | (3.9 | ) |
| Deferred tax  assets                                                           |       | 1.4                                     |       | 0.3 |   |
| Accumulated other  comprehensive income                                        |       | 2.3                                     |       | 0.5 |   |
| Net prepaid (accrued)  costs                                                   |       | $                                       | (9.0       | ) | $ | (0.2 | ) |

 

As of October 31,2006 and 2005, the amounts of the obligations and assets for our non-U.S.defined benefit plans were as follows:

| ** **                                                  | ** ** | **Year Ended  October 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                                  | ** ** | **(in millions)**                | ** ** |
| Aggregate projected  benefit obligation (“PBO”)   |       |                                  | $          | 56 |   |   |   | $ | 54 |   |   |
| Aggregate accumulated  benefit obligation (“ABO”) |       |                                  | $          | 40 |   |   |   | $ | 38 |   |   |
| Aggregate fair value of  plan assets                        |       |                                  | $          | 31 |   |   |   | $ | 37 |   |   |

 

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As of October 31,2006 and 2005, we had some non-U.S. defined benefit plans with accumulatedbenefit obligations (“ABO”) that were in excess of the fair value of the planassets. The amounts of the obligations and assets for these plans were:

| ** **                                                  | ** ** | **Year Ended  October 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                                  | ** ** | **(in millions)**                | ** ** |
| Aggregate  accumulated benefit obligation (“ABO”) |       |                                  | $          | 40 |   |   |   | $ | 5 |   |   |
| Aggregate fair value of  plan assets                        |       |                                  | $          | 31 |   |   |   | $ | 3 |   |   |

 

*AdditionalMinimum Liability.**  *Asthe accumulated benefit obligation for three of our Germany pension plansexceeded their respective pension plan assets, an additional minimum pensionliability adjustment was required in fiscal year 2006. The impact of theadditional minimum liability on accumulated comprehensive income (loss) was$2.3 million with $1.4 million applied to deferred tax assets. Infiscal year 2005, an additional minimum pension liability adjustment was alsorequired as the accumulated benefit obligation for one of our Germany pensionplans exceeded its pension plan assets. The impact of the additional minimumliability on accumulated comprehensive income (loss) was $0.5 million with$0.3 million applied to deferred tax assets.

*Assumptions.**  *The assumptions used to determinethe benefit obligations and expense for all of Verigy’s defined benefit andpost-retirement benefit plans are presented in the tables below. The impacts ofthe assumptions listed for the years 2006, 2005 and 2004 have already beenrecognized in our combined and consolidated statement of operations. Theexpected long-term return on assets below is based on the historical rate ofreturn for our chosen asset mix of equities and fixed income investmentsadjusted for anticipated future movements. 

Assumptions used to calculate the net periodic cost ineach year were as follows:

| ** **                                                  | ** ** | **Five Months Ended  October 31,** | ** **  | **Seven Months Ended  May 31,** | ** ** | **Year Ended  October 31,** | ** ** | **Year Ended  October 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------|-------------|------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                                          | ** **  | **2006**                                       | ** ** | **2005**                              | ** ** | **2004**                              | ** ** |
| U.S. defined  benefit plans:                                |       |                                              |        |                                           |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Discount rate                                               |       |                                              | —      |                                           |       |                                  | 5.75       | %                                     |       |   | 5.75 | % |   |   | 6.25 | % |   |
| Average increase in compensation levels                     |       |                                              | —      |                                           |       |                                  | 4.0        | %                                     |       |   | 4.0 | % |   |   | 4.25 | % |   |
| Expected long-term return on assets                         |       |                                              | —      |                                           |       |                                  | 8.5        | %                                     |       |   | 8.50 | % |   |   | 8.75 | % |   |
| Non-U.S.  defined benefit plans:                            |       |                                              |        |                                           |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Discount rate                                               |       |                                              | 2.25 - 4.75 | %                                              |       |                                  | 2.25 - 6.0 | %                                     |       |   | 2.25 - 6.0 | % |   |   | 2.0 - 6.0 | % |   |
| Average increase in compensation levels                     |       |                                              | 2.5 - 3.0   | %                                              |       |                                  | 2.5 - 5.0  | %                                     |       |   | 2.5 - 5.0 | % |   |   | 2.5 - 5.0 | % |   |
| Expected long-term return on assets                         |       |                                              | 2.75 - 3.0  | %                                              |       |                                  | 4.5 - 7.5  | %                                     |       |   | 4.5 - 7.5 | % |   |   | 5.0 - 7.5 | % |   |
| U.S. post-retirement  benefits plans:                       |       |                                              |        |                                           |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Discount rate                                               |       |                                              | 5.75        | %                                              |       |                                  | 5.75       | %                                     |       |   | 5.75 | % |   |   | 6.25 | % |   |
| Expected long-term return on assets                         |       |                                              | —      |                                           |       |                                  | 8.5        | %                                     |       |   | 8.5 | % |   |   | 8.75 | % |   |
| Current medical cost trend rate                             |       |                                              | 8.0         | %                                              |       |                                  | 10.0       | %                                     |       |   | 10.0 | % |   |   | 10.0 | % |   |
| Ultimate medical cost trend rate                            |       |                                              | 5.0         | %                                              |       |                                  | 5.0        | %                                     |       |   | 5.0 | % |   |   | 5.0 | % |   |
| Medical cost  trend rate decreases to ultimate rate in year |       |                                              | 2010        |                                           |       |                                  | 2010       |                                  |       |   | 2010 |   |   |   | 2009 |   |   |

 

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Assumptionsused to calculate the benefit obligations and the resulting additional minimumpension liability were as follows:

| ** **                               | ** ** | **Five Months Ended  October 31,** | ** ** | **Seven Months Ended  May 31,** | ** ** | **Year Ended  October 31,** | ** **    |
|------------------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------|---------------|
| ** **                               | ** ** | **2006**                                          | ** ** | **2006**                                       | ** ** | **2005**                              | ** **    |
| Non-U.S. defined  benefit plans:         |       |                                              |       |                                           |       |                                  |          |   |   |   |   |   |   |
| Discount rate                            |       |                                              | 2.25 - 4.5 | %                                              |       |                                  | 2.25—6.0 | % |   |   | 3.5 - 6.0 | % |   |
| Average increase  in compensation levels |       |                                              | 3.0 - 4.0  | %                                              |       |                                  | 2.5—5.0  | % |   |   | 3.0 - 5.0 | % |   |
| Expected long-term  return on assets     |       |                                              | 2.75 - 6.0 | %                                              |       |                                  | 4.5 -7.5      | % |   |   | 6.75 | % |   |

 

**18.**          OTHERACCRUED LIABILITIES AND LONG TERM LIABILITIES

Otheraccrued liabilities at October 31, 2006 and 2005, were as follows:

| ** **                       | ** ** | **Year Ended  October 31,** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|
| ** **                       | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                       | ** ** | **(in millions)**                | ** ** |
| Supplier  liabilities            |       |                                  | $          | 6 |   |   |   | $ | 13 |   |   |
| Accrued warranty  costs          |       |                                  | 6          |   |   |   | 6 |   |   |
| Other                            |       |                                  | 3          |   |   |   | 4 |   |   |
| Total other accrued  liabilities |       |                                  | $          | 15 |   |   |   | $ | 23 |   |   |

 

Supplier liabilities reflect the amount by which ourfirmly committed inventory purchases from our suppliers exceed our forecastedproduction needs. The decrease in supplier liabilities from October 31,2005 to October 31, 2006 is primarily due to our product portfolio beingcomprised of new generation products, and thus, less exposure for materialsalready purchased by suppliers for certain specific products and productcomponents. See Note 14, “Guarantees” for additional information regardingwarranty accruals. Per the master separation agreement, Agilent retained allseparation-related costs which were accrued as of June 1, 2006.

Long-termliabilities at October 31, 2006 and 2005 were as follows:

| ** **                                        | ** ** | **Year Ended  October 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | **(in millions)**                | ** ** |
| Long-term  extended warranty and deferred revenue |       |                                  | $          | 15 |   |   |   | $ | 10 |   |   |
| Retirement plan  accruals                         |       |                                  | 15         |   |   |   | 4 |   |   |
| Other                                             |       |                                  | 4          |   |   |   | 1 |   |   |
| Total long-term  liabilities                      |       |                                  | $          | 34 |   |   |   | $ | 15 |   |   |

 

See Note 17, “Retirement and Post RetirementPension Plans” for additional information regarding retirement plan accruals.

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**19.**          FLEXTRONICS

In March 2006, we selected Flextronics TelecomServices Ltd. (“Flextronics”) as our primary contract manufacturer and signedseveral asset purchase agreements with them in connection with the transfer ofour manufacturing activities to Flextronics as well as a global manufacturingservices agreement. All of these agreements were entered into by Agilent, butupon the separation date, Verigy assumed all of Agilent’s rights andobligations under these agreements. Ouragreements with Flextronics will expire in March 2010 although it may beautomatically extended for subsequent terms of one year, absent nine-monthnotice of an intention to terminate the agreement from us or Flextronics. Theagreements may also be terminated by us or Flextronics for other customaryreasons, including if the other party becomes subject to bankruptcy proceedingsor materially breaches the agreement. In addition, generally, we may terminatethe agreements if Flextronics fails to make a timely delivery on more than 15% ofour placed orders in any three-month period. We are not obligated to useFlextronics exclusively to manufacture our products, nor is Flextronicsobligated to manufacture test equipment exclusively for us. However, theagreement does require our consent for Flextronics to sell any of our productsto unaffiliated third parties.

Effective June 1, 2006, we sold to Flextronicsapproximately $19 million of inventory and approximately $2 millionof machinery and equipment for approximately net book value. In addition, on October 16,2006, we paid Flextronics $1.5 million for transition-relatedservices, which we are recognizing as an expense ratably over the manufacturingcontract period of approximately 4 years. Also, in connection with theseagreements, Flextronics paid us $1.5 million on October 19, 2006, and willpay us an additional $1.5 million consideration in fiscal year 2007 thatwe will defer and recognize ratably over the manufacturing contract period.

See Note 15 “Restructuringand Asset Impairment” for information pertaining to the transfer ofapproximately 85 employees to Flextronics.

**20.**          COMMITMENTS

*Operating LeaseCommitments:*   Followingour separation from Agilent, we entered into various operating leasearrangements with unrelated third parties. The following table reflects ournon-cancellable operating lease commitments as of October 31, 2006:

| **Fiscal Year** | ** ** | ** **             | ** ** | **Amount** | ** ** |
|----------------------|------------|------------------------|------------|------------|------------|
| ** **           | ** ** | **(in millions)** | ** ** |
| 2007                 |       |                   | $          | 13.0       |       |   |
| 2008                 |       |                   | 9.8        |       |       |
| 2009                 |       |                   | 9.6        |       |       |
| 2010                 |       |                   | 9.1        |       |       |
| 2011                 |       |                   | 8.4        |       |       |
| Thereafter           |       |                   | 30.4       |       |       |
| Total                |       |                   | $          | 80.3       |       |   |

 

Rent expense was approximately $4.6 million, $2.0and $2.0 million for fiscal years 2006, 2005, and 2004,  respectively. Prior to our separation fromAgilent, Agilent had allocated to us our pro rata portion of expenses for rent,property tax, insurance, and routine maintenance.

As of October 31,2006, Verigy has replaced all the cash deposits that Agilent had made for us onour behalf and also released Agilent from all guarantees and securityobligations that they had made for us on our behalf. These guarantees andsecurity arrangements related to real property lease deposits and guarantees,security for company credit card programs and other credit arrangements andrequired deposits with governmental trade and tax agencies.

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**21.**          CONTINGENCIES

From time to time, we areinvolved in lawsuits, claims, investigations and proceedings, including patent,commercial and environmental matters that arise in the ordinary course ofbusiness. There are no such matters pending that we expect to be material inrelation to our business, combined and consolidated financial condition, andresults of operations or cash flows.

**22.**          OTHERINCOME AND EXPENSE

Thefollowing table presents the components of other income (expense), net forfiscal years ended October 31, 2006, 2005, and 2004:

| ** **                   | ** ** | **Year Ended October 31,** | ** ** |
|------------------------------|------------|--------------------------------------|------------|
| ** **                   | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                   | ** ** | **(in millions)**               | ** ** |
| Interest income              |       |                                 | $          | 4 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Other, net                   |       |                                 | 1          |   |   |   | (1 | ) |   |   | 1 |   |   |
| Other income (expense),  net |       |                                 | $          | 5 |   |   |   | $ | (1 | ) |   |   | $ | 1 |   |   |

 

Interest income is derivedprincipally from the investment of our surplus cash balances in bank timedeposits and other money market instruments.

**23.**          SEGMENT &GEOGRAPHIC INFORMATION

SFAS No. 131,“Disclosures About Segments of an Enterprise and Related Information,” requiresus to identify the segment or segments we operate in. Based on the standardsset forth in SFAS 131, we operate in one reportable segment: we providetest system solutions that are used in the manufacture of semiconductordevices. Below is the revenue detail for the two product platforms within thissegment:

| ** **                 | ** ** | **Year Ended October 31,** | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                 | ** ** | **(in millions)**               | ** ** |
| Net revenue from  products |       |                                 |       |   |   |   |   |
| SOC/SIP/High-Speed Memory  |       | $                                    | 442        |   | $ | 267 |   | $ | 370 |   |
| Memory                     |       | 204                                  |       | 88 |   | 131 |   |
| Net revenue from products  |       | 646                                  |       | 355 |   | 501 |   |
| Net revenue from  services |       | 132                                  |       | 101 |   | 106 |   |
| Total net revenue          |       | $                                    | 778        |   | $ | 456 |   | $ | 607 |   |

 

*Major customers*

In fiscal year 2006, onecustomer accounted for 10.1% of our net revenue. In fiscal year 2005, no singlecustomer accounted for 10% or more of our net revenue. In fiscal year 2004, onecustomer accounted for 15.1% of our net revenue.

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*Geographic Net Revenue Information:*

| ** **        | ** ** | **Year Ended October 31,** | ** ** |
|-------------------|------------|--------------------------------------|------------|
| ** **        | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **        | ** ** | **(in millions)**               | ** ** |
| United States     |       | $                                    | 245        |   | $ | 118 |   | $ | 168 |   |
| Singapore         |       | 376                                  |       | 180 |   | 259 |   |
| Japan             |       | 79                                   |       | 94 |   | 96 |   |
| Rest of the World |       | 78                                   |       | 64 |   | 84 |   |
| Total net revenue |       | $                                    | 778        |   | $ | 456 |   | $ | 607 |   |

 

Net revenue is attributedto geographic areas based on the country in which the customer takes title toour products.

*Geographic Property, Plant and Equipment Information:*

| ** **              | ** ** | **Year Ended  October 31,** | ** ** |
|-------------------------|------------|---------------------------------------|------------|
| ** **              | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **              | ** ** | **(in millions)**                | ** ** |
| United States           |       |                                  | $          | 13 |   |   |   | $ | 8 |   |   |
| Germany                 |       |                                  | 4          |   |   |   | 4 |   |   |
| Singapore               |       |                                  | 20         |   |   |   | — |   |   |
| Japan                   |       |                                  | 1          |   |   |   | 1 |   |   |
| Rest of the World       |       |                                  | 6          |   |   |   | 5 |   |   |
| Total long-lived assets |       |                                  | $          | 44 |   |   |   | $ | 18 |   |   |

 

**24.**          SUBSEQUENTEVENTS

Effective November 30, 2006, we issued 144,357shares as part of the semi-annual Employee Shares Purchase Plan (“ESPP”).

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**QUARTERLY SUMMARY(Unaudited)**

Thefollowing table presents our unaudited quarterly results of operations, inmillions, for each of our last eight quarters through the quarter ended October 31,2006. This table should be read in conjunction with the combined andconsolidated audited annual financial statements and related notes containedelsewhere in this Form 10-K. We have prepared the unauditedinformation on the same basis as our audited combined and consolidatedfinancial statements. Results of operations for any quarter are not necessarilyindicative of results for any future quarters or years.

| ** **                                                                                  | ** ** | **Quarter Ended**  | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                  | ** ** | **Oct. 31,  2006** | ** ** | **Jul. 31,  2006** | ** ** | **Apr. 30,  2006** | ** ** | **Jan. 31,  2006** | ** ** | **Oct. 31,  2005** | ** ** | **Jul. 31,  2005** | ** ** | **Apr. 30,  2005** | ** ** | **Jan. 31,  2005** | ** ** |
| ** **                                                                                  | ** ** | **(in millions)**  | ** ** |
| Net revenue:                                                                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Products                                                                                    |       | $                       | 164        |   | $ | 181 |   | $ | 158 |   | $ | 143 |   | $ | 131 |   | $ | 93 |   | $ | 76 |   | $ | 55 |   |
| Services                                                                                    |       | 38                      |       | 33 |   | 34 |   | 27 |   | 28 |   | 25 |   | 24 |   | 24 |   |
| Total net revenue                                                                           |       | 202                     |       | 214 |   | 192 |   | 170 |   | 159 |   | 118 |   | 100 |   | 79 |   |
| Cost of sales:                                                                              |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of products                                                                            |       | 88                      |       | 88 |   | 81 |   | 74 |   | 81 |   | 58 |   | 49 |   | 40 |   |
| Cost of services                                                                            |       | 25                      |       | 23 |   | 25 |   | 24 |   | 23 |   | 22 |   | 22 |   | 21 |   |
| Total cost of sales                                                                         |       | 113                     |       | 111 |   | 106 |   | 98 |   | 104 |   | 80 |   | 71 |   | 61 |   |
| Gross profit                                                                                |       | 89                      |       | 103 |   | 86 |   | 72 |   | 55 |   | 38 |   | 29 |   | 18 |   |
| Operating expenses:                                                                         |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and  development                                                                   |       | 24                      |       | 25 |   | 25 |   | 25 |   | 25 |   | 24 |   | 26 |   | 26 |   |
| Selling, general and administrative                                                         |       | 35                      |       | 37 |   | 40 |   | 37 |   | 33 |   | 33 |   | 36 |   | 32 |   |
| Restructuring charges                                                                       |       | 1                       |       | 2 |   | 8 |   | 6 |   | 6 |   | 1 |   | — |   | — |   |
| Separation costs                                                                            |       | 13                      |       | 21 |   | 20 |   | 15 |   | 3 |   | — |   | — |   | — |   |
| Total operating  expenses                                                                   |       | 73                      |       | 85 |   | 93 |   | 83 |   | 67 |   | 58 |   | 62 |   | 58 |   |
| Income (loss)  from  operations                                                             |       | 16                      |       | 18 |   | (7 | ) | (11 | ) | (12 | ) | (20 | ) | (33 | ) | (40 | ) |
| Other income  (expense), net                                                                |       | 3                       |       | 2 |   | — |   | — |   | (1 | ) | — |   | — |   | — |   |
| Income (loss)  before taxes                                                                 |       | 19                      |       | 20 |   | (7 | ) | (11 | ) | (13 | ) | (20 | ) | (33 | ) | (40 | ) |
| Provision for  taxes                                                                        |       | 5                       |       | 7 |   | 4 |   | 5 |   | 2 |   | 2 |   | 4 |   | 5 |   |
| Net loss                                                                                    |       | $                       | 14         |   | $ | 13 |   | $ | (11 | ) | $ | (16 | ) | $ | (15 | ) | $ | (22 | ) | $ | (37 | ) | $ | (45 | ) |
| Weighted average  net income (loss) per share:                                              |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic:                                                                                      |       | $                       | 0.25       |   | $ | 0.23 |   | $ | (0.22 | ) | $ | (0.32 | ) | $ | (0.30 | ) | $ | (0.44 | ) | $ | (0.74 | ) | $ | (0.90 | ) |
| Diluted:                                                                                    |       | $                       | 0.25       |   | $ | 0.23 |   | $ | (0.22 | ) | $ | (0.32 | ) | $ | (0.30 | ) | $ | (0.44 | ) | $ | (0.74 | ) | $ | (0.90 | ) |
| Weighted average  shares (in thousands) used in computing net income (loss) per share: |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic:                                                                                      |       | 58,652                  |       | 54,662 |   | 50,000 |   | 50,000 |   | 50,000 |   | 50,000 |   | 50,000 |   | 50,000 |   |
| Diluted:                                                                                    |       | 58,666                  |       | 54,681 |   | 50,000 |   | 50,000 |   | 50,000 |   | 50,000 |   | 50,000 |   | 50,000 |   |

 

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Thefollowing table presents our historical results for the periods indicated as apercent of net revenue:

| ** **                          | ** ** | **Quarter Ended**  | ** ** |
|-------------------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **Oct. 31,  2006** | ** ** | **Jul. 31,  2006** | ** ** | **Apr. 30,  2006** | ** ** | **Jan. 31,  2006** | ** ** | **Oct. 31,  2005** | ** ** | **Jul. 31,  2005** | ** ** | **Apr. 30,  2005** | ** ** | **Jan. 31,  2005** | ** ** |
| Net revenue:                        |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Products                            |       |                    | 81.2       | % |   |   | 84.6 | % |   |   | 82.3 | % |   |   | 84.1 | % |   |   | 82.4 | % |   |   | 78.8 | % |   |   | 76.0 | % |   |   | 69.6 | % |   |
| Services                            |       |                    | 18.8       |   |   |   | 15.4 |   |   |   | 17.7 |   |   |   | 15.9 |   |   |   | 17.6 |   |   |   | 21.2 |   |   |   | 24.0 |   |   |   | 30.4 |   |   |
| Total net revenue                   |       |                    | 100.0      |   |   |   | 100.0 |   |   |   | 100.0 |   |   |   | 100.0 |   |   |   | 100.0 |   |   |   | 100.0 |   |   |   | 100.0 |   |   |   | 100.0 |   |   |
| Cost of sales:                      |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of products                    |       |                    | 43.6       |   |   |   | 41.1 |   |   |   | 42.2 |   |   |   | 43.5 |   |   |   | 50.9 |   |   |   | 49.2 |   |   |   | 49.0 |   |   |   | 50.6 |   |   |
| Cost of services                    |       |                    | 12.3       |   |   |   | 10.8 |   |   |   | 13.0 |   |   |   | 14.2 |   |   |   | 14.5 |   |   |   | 18.6 |   |   |   | 22.0 |   |   |   | 26.6 |   |   |
| Total cost of sales                 |       |                    | 55.9       |   |   |   | 51.9 |   |   |   | 55.2 |   |   |   | 57.7 |   |   |   | 65.4 |   |   |   | 67.8 |   |   |   | 71.0 |   |   |   | 77.2 |   |   |
| Gross margin                        |       |                    | 44.1       |   |   |   | 48.1 |   |   |   | 44.8 |   |   |   | 42.3 |   |   |   | 34.6 |   |   |   | 32.2 |   |   |   | 29.0 |   |   |   | 22.8 |   |   |
| Operating expenses:                 |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and development            |       |                    | 11.9       |   |   |   | 11.7 |   |   |   | 13.0 |   |   |   | 14.7 |   |   |   | 15.7 |   |   |   | 20.3 |   |   |   | 26.0 |   |   |   | 32.9 |   |   |
| Selling, general and administrative |       |                    | 17.3       |   |   |   | 17.2 |   |   |   | 20.8 |   |   |   | 21.8 |   |   |   | 20.8 |   |   |   | 28.0 |   |   |   | 36.0 |   |   |   | 40.5 |   |   |
| Restructuring charges               |       |                    | 0.5        |   |   |   | 0.9 |   |   |   | 4.2 |   |   |   | 3.5 |   |   |   | 3.8 |   |   |   | 0.8 |   |   |   | 0.0 |   |   |   | 0.0 |   |   |
| Separation costs                    |       |                    | 6.4        |   |   |   | 9.8 |   |   |   | 10.4 |   |   |   | 8.8 |   |   |   | 1.8 |   |   |   | 0.0 |   |   |   | 0.0 |   |   |   | 0.0 |   |   |
| Total operating expenses            |       |                    | 36.1       |   |   |   | 39.6 |   |   |   | 48.4 |   |   |   | 48.8 |   |   |   | 42.1 |   |   |   | 49.1 |   |   |   | 62.0 |   |   |   | 73.4 |   |   |
| Income (loss)  from operations      |       |                    | 8.0        |   |   |   | 8.5 |   |   |   | (3.6 | ) |   |   | (6.5 | ) |   |   | (7.5 | ) |   |   | (16.9 | ) |   |   | (33.0 | ) |   |   | (50.6 | ) |   |
| Other income  (expense), net        |       |                    | 1.5        |   |   |   | 0.9 |   |   |   | — |   |   |   | — |   |   |   | (0.6 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Income (loss)  before taxes         |       |                    | 9.5        |   |   |   | 9.4 |   |   |   | (3.6 | ) |   |   | (6.5 | ) |   |   | (8.1 | ) |   |   | (16.9 | ) |   |   | (33.0 | ) |   |   | (50.6 | ) |   |
| Provision for  taxes                |       |                    | 2.5        |   |   |   | 3.3 |   |   |   | 2.1 |   |   |   | 2.9 |   |   |   | 1.3 |   |   |   | 1.7 |   |   |   | 4.0 |   |   |   | 6.3 |   |   |
| Net loss                            |       |                    | 6.9        | % |   |   | 6.1 | % |   |   | (5.7 | )% |   |   | (9.4 | )% |   |   | (9.4 | )% |   |   | (18.6 | )% |   |   | (37.0 | )% |   |   | (56.9 | )% |   |

 

*NetRevenue.**  *Thesemiconductor test equipment market is cyclical and highly volatile. Weexperienced strong revenue growth in the fiscal year 2006 as demand for ourtest systems increased. The product revenue increased was primarily due to ourSOC/SIP/high-speed memory test systems, with most of the sales being of theenhanced version of our 93000 Series platform. Continued customer demandfor our 93000 series platform increased our penetration in a breadth ofapplications from next generation graphics and wireless gaming to high-end SOCapplications and digital consumer applications. Revenue of our memory testsystems also contributed to our product revenue due to the enhanced version ofour Versatest V5000 Series platform. This demand was primarily a result ofstrong sales of flash memory devices as a result of greater demand of hand-heldconsumer products, as well as expansion of our addressable markets into NANDflash and flash final test.

*Costof Products.**  *Asa percent of net revenue, cost of products will vary depending on a variety offactors, including the mix of system configurations in a particular period,competitive and other pressures on pricing, and our ability to manage inventorylevels to avoid excess and obsolete inventory charges. As a result, our grossproduct margin has been highly volatile.

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Lower revenue adversely impacted our cost of productsas a percent of revenue through the first half of fiscal year 2005. Whenrevenues started increasing in the third quarter of fiscal year 2005, so didour gross margins, reflecting substantial improvements in utilization ofoverhead costs and manufacturing personnel. In the third and fourth quarter offiscal year 2005, charges for excess and obsolete inventory related todiscontinue products adversely impacted our cost of products as a percent ofrevenue.

Our cost of products in absolute amount are expectedto increase or decrease with revenue. In order to mitigate the risk and tomanage our costs through the peaks and valleys of the semiconductor industry,we are currently streamlining our cost structure by reducing our fixed costsand adding more flexibility to our manufacturing model through the outsourcingof the majority of our manufacturing. We believe our efforts will provide uswith the flexibility to respond more rapidly to changes in industry conditionsand to better capitalize on market opportunities during market upturns, andwill provide us with more consistent cost of products.

*Costof Services.**  *Ourcost of services in absolute amount is expected to increase or decrease withservices revenue. As a percent of net services revenue, these costs will varydepending on a variety of factors, including our ability to weather priceerosion, the reliability and quality of our products and our need to maintaincustomer service and support centers worldwide

*Researchand Development.**  *Ourresearch and development expenses have fluctuated from quarter to quarter as apercent of net revenue, but have generally remained level in absolute dollars,reflecting management’s commitment to product innovation without regard todemand cycles. R&D spending levels tend to fluctuate modestly from quarterto quarter based on the timing of project activities.

*Selling,General and Administrative.**  *SG&A expenses have generally stayed flat overtime but have fluctuated and will continue to fluctuate from quarter to quarteras a percent of net revenue. In general, we believe our SG&A expenses willdecrease due to our efforts to streamline our infrastructure, consolidateexcess facilities and right-size our business. These cost reductions will bepartially offset by incremental costs associated with professional fees such aslegal, regulatory and accounting compliance costs that we are incurring as a stand-alonecompany. Our SG&A expenses will also be impacted as we progress with theimplementation our new manufacturing model, expand in China and expenseshare-based compensation costs as required by FAS 123(R). In addition,commission expenses included in SG&A expenses will fluctuate with changesin sales volume and customer mix.

Our quarterly results ofoperations have varied in the past and are likely to do so again in thefuture primarily due to the cyclical nature of the semiconductor industry.As such, we believe that period-to-period comparisons of our results ofoperations should not be relied upon as an indication of future performance. Infuture periods, the market price of our ordinary shares could decline if ourrevenues and results of operations are below the expectations of analysts andinvestors. Factors that may cause our revenue and results of operations tofluctuate include those discussed in the “Risk Factors” section of this Form 10-K.

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

None.

**Item 9A.**                *Controls and Procedures*

*Disclosure Controlsand Procedures*

Disclosure controls and procedures are designed withthe objective of ensuring that (i) information required to be disclosed inthe company’s reports filed under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms and (ii) information is accumulated andcommunicated to management, including the 

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Chief ExecutiveOfficer and Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosures. Based on their evaluation, Verigy’s ChiefExecutive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures are effective.

Because of its inherentlimitations, disclosure controls and procedures and internal control overfinancial reporting may not prevent or detect misstatements. In addition,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditionsor that the degree of compliance with the policies or procedures maydeteriorate. Management necessarily applied its judgment in assessing thebenefits of controls relative to their costs. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the company have been detected. The design of any system of controls isbased in part upon certain assumptions about the likelihood of future events,and there can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions, regardless of how remote.

*Changes in InternalControl over Financial Reporting*

There were no changes in our internal control overfinancial reporting during the quarter ended October 31, 2006, that havematerially affected, or are reasonably likely to materially affect, our internalcontrol over financial reporting.

Prior to becoming a standalone company, we relied on the financial resources and the administrative andoperational support systems of Agilent to operate our business. In conjunctionwith our separation from Agilent, we have separated our assets from those ofAgilent and have created our own financial, administrative, operational andother support systems or contract with third parties to replace Agilent’ssystems. Many of the new systems, including our ERP system, have been in effectonly since the separation date. We have experienced, and expect to continue toexperience periodic interruptions in our ERP system, and it may take additionaltime to fully implement and stabilize the ERP system as well as other support systems.In order to successfully implement our own systems and operate as a stand-alonebusiness, we must be able to attract and retain a number of highly skilledemployees.

**Item 9B.**               *Other Information*

*Director &Officer Indemnity Agreements*

On December 20, 2006, our Board of Directors and theBoard of Directors of our primary U.S. subsidiary approved a form of IndemnityAgreement to be entered into between the U.S. subsidiary and each officer anddirector of the company and each of it’s direct and indirect subsidiaries. ThisIndemnity Agreement is substantially similar to the indemnity agreementspreviously approved and entered into between the company and each officer anddirector of the company and its direct and indirect subsidiaries. The U.S.indemnity agreement is intended to supplement the existing indemnityagreements. The laws of the State of Delaware, where the company’s primary U.S.subsidiary is incorporated, permit indemnification of directors and officersunder a broader range of circumstances than is permitted under the laws ofSingapore, where the company is incorporated. As a result of these differencesin law, directors and officers of the company and its subsidiaries may beentitled to indemnification under the U.S. Indemnity Agreements incircumstances where the company itself would not be permitted to provideindemnification. The form of U.S. Indemnity Agreement is attached hereto asExhibit 10.11, and is incorporated by reference in this description.

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**PART III**

**Item 10:**                *Directors and Executive Officers of the Registrant*

Certain informationrelating to our directors and executive officers, committee information,reports and charters, executive compensation, security ownership of certainbeneficial owners and management and related stockholder matters, and certainrelationships and related transactions is incorporated by reference herein fromour definitive proxy statement in connection with our 2007 Annual GeneralMeeting of Shareholders, which proxy statement will be filed with theCommission not later than 120 days after the close of our fiscal year. For thispurpose, the Compensation Committee Report and Performance Graph included insuch proxy statement are specifically not incorporated herein.

***Standards of Business Conduct***

We have adopted Standardsof Business Conduct that apply to all of our employees and our Directors. TheStandards of Business Conduct are available on our website athttp://www.investor.verigy.com/documents.cfm. Any amendment (other than technical,administrative or other non-substantive amendments) to or material waiver (asdefined by the SEC) of a provision of the Standards of Business Conduct thatapplies to our principal executive officer, principal financial officer,principal accounting officer, controller or persons performing similarfunctions and relates to elements of the Standards of Business Conductspecified in the rules of the SEC will be posted on our website.

**Item 11:**                *Executive Compensation.*

Certain informationrelating to our directors and executive officers, executive compensation,security ownership of certain beneficial owners and management and relatedstockholder matters, and certain relationships and related transactions isincorporated by reference herein from our definitive proxy statement inconnection with our 2007 Annual General Meeting of Shareholders, which proxystatement will be filed with the Commission not later than 120 days after theclose of the fiscal year. For this purpose, the Compensation Committee Reportand Performance Graph included in such proxy statement are specifically notincorporated herein.

**Item 12:**                *Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters.*

Certain informationrelating to our directors and executive officers, executive compensation,security ownership of certain beneficial owners and management and relatedstockholder matters, and certain relationships and related transactions isincorporated by reference herein from our definitive proxy statement inconnection with our 2007 Annual General Meeting of Shareholders, which proxystatement will be filed with the Commission not later than 120 days after theclose of the fiscal year. Also see “Item 7: Management’s Discussionand Analysis of Financial Condition and Results of Operations—EquityCompensation Plans.”

**Item 13:**                *Certain Relationships and Related Transactions.*

Certain informationrelating to our directors and executive officers, executive compensation,security ownership of certain beneficial owners and management and related stockholdermatters, and certain relationships and related transactions is incorporated byreference herein from our definitive proxy statement in connection with our2007 Annual General Meeting of Shareholders, which proxy statement will befiled with the Commission not later than 120 days after the close of the fiscalyear.

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**Item 14:**                *Principal Accountant Fees and Services.*

Certain informationrelating to audit fees of Verigy’s independent registered public accountingfirm is incorporated by reference herein from our definitive proxy statement inconnection with our 2007 Annual General Meeting of Shareholders, which proxystatement will be filed with the Securities and Exchange Commission not laterthan 120 days after the close of the fiscal year.

**PART IV**

**Item 15.**                 *Exhibits and Financial Statement Schedules*

(a)           Thefollowing documents are filed as part of this report:

**1.**     **Financial Statements.**

SeeIndex to Consolidated Financial Statements under Item 8 on Page 49 ofthis report.

**2.**     **Financial Statement Schedule.**

The following additional financial statement scheduleshould be considered in conjunction with our consolidated financial statements.All other schedules have been omitted because the required information iseither not applicable or not sufficiently material to require submission of theschedule:

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

|        | VERIGY LTD. |
|--------|-------------|
|   | By:         | /s/  KEITH L. BARNES |
|   |        | Keith L. Barnes |
|   |        | *President,  Chief Executive Officer, and Director* |

 

Date: December 21, 2006

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**POWER OF ATTORNEY**

KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Keith L. Barnes andRobert J. Nikl, jointly and severally, his or her attorney-in-fact, each withthe full power of substitution, for such person, in any and all capacities, tosign any and all amendments to this Annual Report on Form 10-K, andto file the same, with all exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, granting unto saidattorney-in-fact and agent full power and authority to do and perform each andevery act and thing requisite and necessary to be done in connection therewith,as fully to all intents and purposes as he might do or could do in personhereby ratifying and confirming all that each of said attorneys-in-fact andagents, or his substitute, may do or cause to be done by virtue hereof.

Pursuant to therequirements of the Securities Exchange Act of 1934, this Report on Form 10-Khas been signed below by the following persons on behalf of the registrant inthe capacities and on the dates indicated.

|                              | **Signature** | ** **                                        | ** ** | ** **             | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|------------------------------|---------------|---------------------------------------------------|------------|------------------------|-----------|------------|------------|------------|----------|------------|
| /s/ KEITH L. BARNES     |          | President, Chief Executive Officer and Director   |       | December 21, 2006 |
| **Keith  L. Barnes**         |          | (Principal  Executive Officer)                    |       |                   |
| /s/ ROBERT J. NIKL      |          | Chief Financial Officer  (Principal Financial and |       | December 21, 2006 |
| **Robert  J. Nikl**          |          | Accounting  Officer)                              |       |                   |
| /s/ ADRIAN T. DILLON    |          | Chairman of the Board  and Director               |       | December 21, 2006 |
| **Adrian  T. Dillon**        |          |                                              |       |                   |
| /s/ PAUL CHAN  KWAI WAH |          | Director                                          |       | December 21, 2006 |
| **Paul  Chan Kwai Wah**      |          |                                              |       |                   |
| /s/ C.  SCOTT GIBSON    |          | Director                                          |       | December 21, 2006 |
| **C.  Scott Gibson**         |          |                                              |       |                   |
| /s/ ERNEST GODSHALK     |          | Director                                          |       | December 21, 2006 |
| **Ernest  Godshalk**         |          |                                              |       |                   |
| /s/ ERIC MEURICE        |          | Director                                          |       | December 21, 2006 |
| **Eric  Meurice**            |          |                                              |       |                   |
| /s/ CLAUDINE SIMSON     |          | Director                                          |       | December 21, 2006 |
| **Claudine  Simson**         |          |                                              |       |                   |

 

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**SCHEDULE II**

**VERIGY LTD.Valuation and Qualifying Accounts**

| **Description**                  | ** ** | ** **             | ** ** | **Balance at  Beginning  of Period** | ** ** | **Additions Charged to  Costs, Expenses or  Other Accounts**** | ** ** | **Deductions*** | ** ** | **Balance at  End of  Period** | ** ** |
|----------------------------------|------------|------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-----------------|------------|------------------------------------------|------------|
| ** **                       | ** ** | **(In Millions)** | ** ** |
| **2006**                         |       |                   |       |                                           |       |                                                                                    |       |            |       |                                     |       |   |   |   |   |   |   |
| Allowance for doubtful  accounts |       |                   | $          | 0.2                                            |       |                                                                                    |       | $               | —     |                                     |       |   | $ | (0.1 | ) |   |   | $ | 0.1 |   |   |
| Tax valuation  allowance(***)    |       |                   | $          | 135.0                                          |       |                                                                                    |       | $               | —     |                                     |       |   | $ | (135.0 | ) |   |   | $ | — |   |   |
| **2005**                         |       |                   |       |                                           |       |                                                                                    |       |            |       |                                     |       |   |   |   |   |   |   |
| Allowance for doubtful  accounts |       |                   | $          | 0.3                                            |       |                                                                                    |       | $               | —     |                                     |       |   | $ | (0.1 | ) |   |   | $ | 0.2 |   |   |
| Tax valuation  allowance         |       |                   | $          | 105.6                                          |       |                                                                                    |       | $               | 29.4       |                                     |       |   | $ | — |   |   |   | $ | 135.0 |   |   |
| **2004**                         |       |                   |       |                                           |       |                                                                                    |       |            |       |                                     |       |   |   |   |   |   |   |
| Allowance for doubtful  accounts |       |                   | $          | 1.0                                            |       |                                                                                    |       | $               | —     |                                     |       |   | $ | (0.7 | ) |   |   | $ | 0.3 |   |   |
| Tax valuation  allowance         |       |                   | $          | 100.2                                          |       |                                                                                    |       | $               | 5.46       |                                     |       |   | $ | — |   |   |   | $ | 105.6 |   |   |

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*                    Deductionsinclude current year reduction in deferred tax assets due to current yeardecrease in net deferred tax assets for return to provision true-ups, otheradjustments, and other comprehensive incomew impact to deferred taxes.

**             Additionsinclude valuation allowance build due to current year increase in net deferredtax assets, return to provision true-ups, other adjustments, and othercomprehensive income impact to deferred taxes.

***      Pursuantto our separation, all deferred tax asset and associated valuation allowancesas of the separation date remained with Agilent.

**3.**                 Exhibits.

Exhibitsare incorporated herein by reference or are filed with this report as indicatedbelow (numbered in accordance with Item 601 of Regulation S-K):

**EXHIBIT INDEX**
|                  | ** ** | ** **                                                                                                                         | ** ** | **Incorporated   By Reference** |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|
| Exhibit   Number | ** ** | ** **                                                                                                                         | ** ** | **Exhibit Description**    | ** ** | **Form** | ** ** | **File Number** | ** ** | **Exhibit** | ** ** | **Date** | ** ** | **Filed   Herewith** |
| 2.1              |       | Master Separation and  Distribution Agreement between Agilent and Verigy Ltd., effective  May 31, 2006                        |       | S-1/A                           |   | 333-132291 |   | 2.1 |   | 6/5/2006 |   |   |
| 2.2              |       | General Assignment and  Assumption Agreement between Agilent and Verigy Ltd., effective June 1,  2006                         |       | S-1/A                           |   | 333-132291 |   | 2.2 |   | 6/5/2006 |   |   |
| 2.3              |       | Intellectual Property  Matters Agreement among Agilent, Verigy (Singapore) Pte. Ltd. and Verigy  Ltd., effective June 1, 2006 |       | S-1/A                           |   | 333-132291 |   | 2.3 |   | 6/5/2006 |   |   |
| 2.4              |       | Employee Matters  Agreement between Agilent and Verigy Ltd., effective June 1, 2006                                           |       | S-1/A                           |   | 333-132291 |   | 2.4 |   | 6/5/2006 |   |   |
|                  |            |                                                                                                                                    |            |                                 |  |  |  |  |  |  |  |  |  |  |

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| 2.5      |   | Tax Sharing Agreement  between Agilent and Verigy Ltd., effective June 1, 2006                                                                                |   | S-1/A  |   | 333-132291 |   | 2.5    |   | 6/5/2006  |   |   |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|------------|--------|--------|--------|-----------|--------|--------|
| 2.6      |   | Transition Services  Agreement between Agilent and Verigy Ltd., effective June 1, 2006                                                                        |   | S-1/A  |   | 333-132291 |   | 2.6    |   | 6/5/2006  |   |   |
| 2.7      |   | Manufacturing Trademark  License Agreement between Agilent and Verigy Ltd., effective  June 1, 2006                                                      |   | S-1/A  |   | 333-132291 |   | 2.7    |   | 6/5/2006  |   |   |
| 3.1      |   | Amended and Restated  Memorandum and Articles of Association of Verigy Ltd.                                                                              |   | S-1/A  |   | 333-132291 |   | 3.2    |   | 6/5/2006  |   |   |
| 4.1      |   | Form of Specimen  Share Certificate for Verigy Ltd.’s Ordinary Shares                                                                                    |   | S-1/A  |   | 333-132291 |   | 4.1    |   | 6/1/2006  |   |   |
| 10.1**   |   | Form of Indemnity  Agreement entered into by Verigy Ltd.with each of its directors and executive  officers                                                    |   | S-1/A  |   | 333-132291 |   | 10.1   |   | 5/23/2006 |   |   |
| 10.2**   |   | 2006 Equity Incentive  Plan, as amended December 13, 2006                                                                                                     |   |   |   |       |   |   |   |      |   | X      |
| 10.2.1** |   | Form of Employee  Share Option Grant Agreement, as amended December 20, 2006                                                                             |   |   |   |       |   |   |   |      |   | X      |
| 10.2.2** |   | Form of  Non-Employee Director Share Option Grant Agreement, as amended December 20,  2006                                                               |   |   |   |       |   |   |   |      |   | X      |
| 10.2.3** |   | Form of Employee  Share Unit Agreement, as amended December 20, 2006                                                                                     |   |   |   |       |   |   |   |      |   | X      |
| 10.2.4** |   | Form of  Non-Employee Director Share Unit Agreement, as amended December 20, 2006                                                                        |   |   |   |       |   |   |   |      |   | X      |
| 10.2.5** |   | Form of Verigy Ltd.  2006 Equity Incentive Plan Share Option Agreement for Employees Located  Outside of the United States, as amended December 20, 2006 |   |   |   |       |   |   |   |      |   | X      |
| 10.2.6** |   | Form of Verigy Ltd.  2006 Equity Incentive Plan Share Unit Agreement for Employees Located Outside  of the United States, as amended December 20, 2006   |   |   |   |       |   |   |   |      |   | X      |
| 10.2.7** |   | Form of Verigy Ltd.  2006 Equity Incentive Plan Share Option Agreement for Employees Located in France,  as amended December 20, 2006               |   |   |   |       |   |   |   |      |   | X      |

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| 10.2.8**  |   | Form of Verigy Ltd.  2006 Equity Incentive Plan Share Unit Agreement for Employees Located in  France, as amended December 20, 2006                      |   |   |   |       |   |    |   |      |   | X      |
|-----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|------------|--------|---------|--------|-----------|--------|--------|
| 10.2.9**  |   | Form of Replacement  Option Award Agreement for U.S. Employees                                                                                                |   | 8-K    |   | 000-52038  |   | 10.2.9  |   | 11/1/2006 |   |   |
| 10.2.10** |   | Form of Replacement  Option Award Agreement for Employees Outside the U.S.                                                                               |   | 8-K    |   | 000-52038  |   | 10.2.10 |   | 11/1/2006 |   |   |
| 10.2.11** |   | Form of Replacement  Share Unit Agreement for Employees Located in France                                                                                |   | 8-K    |   | 000-52038  |   | 10.2.11 |   | 11/1/2006 |   |   |
| 10.2.12** |   | Form of  Four-Tranche Officer Share Option Agreement                                                                                                          |   |   |   |       |   |    |   |      |   | X      |
| 10.2.13** |   | Form of  Four-Tranche Officer Share Option Agreement for France-Based Officers                                                                                |   |   |   |       |   |    |   |      |   | X      |
| 10.3**    |   | 2006 Employee Shares  Purchase Plan, as amended December 20, 2006                                                                                             |   |   |   |       |   |    |   |      |   | X      |
| 10.4      |   | Global Manufacturing  Services Agreement between Agilent Technologies International SÀRL and  Flextronics Telecom Services Ltd., effective March 2, 2006 |   | S-1/A  |   | 333-132291 |   | 10.4    |   | 5/24/2006 |   |   |
| 10.5**    |   | Employment Offer Letter  to Keith L. Barnes, dated April 4, 2006                                                                                    |   | S-1/A  |   | 333-132291 |   | 10.11   |   | 5/1/2006  |   |   |
| 10.6**    |   | Retention Bonus  Agreement between Pascal Ronde and Verigy Ltd., dated May 19, 2006                                                                           |   | S-1/A  |   | 333-132291 |   | 10.13   |   | 5/23/2006 |   |   |
| 10.7**    |   | Employment Offer Letter  to Robert Nikl, dated May 26, 2006                                                                                              |   | S-1/A  |   | 333-132291 |   | 10.14   |   | 6/1/2006  |   |   |
| 10.8      |   | Lease Agreement by and  between Verigy US, Inc. and Pau Moulds CPP-A LLC, dated May31, 2006                                                                   |   |   |   |       |   |    |   |      |   | X      |
| 10.9**    |   | Form of Severance  Agreement for U.S.-based Officers                                                                                                          |   |   |   |       |   |    |   |      |   | X      |
| 10.10**   |   | Description of Verigy’s  Pay-For-Results Program                                                                                                              |   |   |   |       |   |    |   |      |   | X      |
| 10.11**   |   | Form of Indemnification  Agreement between Verigy US, Inc. and Verigy Ltd.’s Officers and  Directors                                                |   |   |   |       |   |    |   |      |   | X      |
| 21.1      |   | Verigy Ltd.’s  Subsidiaries                                                                                                                                   |   |   |   |       |   |    |   |      |   | X      |
| 23.1      |   | Consent of  PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm                                                                              |   |   |   |       |   |    |   |      |   | X      |
| 24.1      |   | Power of Attorney (see  signature page to this Form 10-K)                                                                                                |   |   |   |       |   |    |   |      |   | X      |

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| 31.1 |   | Certification of  Principal Executive Officer Pursuant to Rule 13a-14 of the  Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |   |   |   |   |   |   |   |   |   | X |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---|
| 31.2 |   | Certification of  Principal Financial Officer Pursuant to Rule 13a-14 of the  Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |   |   |   |   |   |   |   |   |   | X |
| 32.1 |   | Certification of  Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                         |   |   |   |   |   |   |   |   |   | X |
| 32.2 |   | Certification of Principal Financial Officer  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                         |   |   |   |   |   |   |   |   |   | X |

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**             Management contractsor compensation plans or arrangements in which directors or executive officersare eligible to participate.

 

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