UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

|(Mark One)                                 |                                                                                         
|------------------------------------------ | ----------------------------------------------------------------------------------------
|ý                                          | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended October 31, 2007
|or                                        
|o                                          | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-52038

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VERIGY LTD.(Exact name of registrant as specified in its charter)

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

Registrant's
telephone number, including area code(+65) 6755-2033

Securities
registered pursuant to Section 12(b) of the 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) of the Act: None

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check One):

Large
accelerated filer ý                Accelerated filer o                Non-accelerated
filer o

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

The aggregate market value of the registrant's voting and non-voting common equity held by non-affiliates as of April 30, 2007, the
last business day of the registrant's most recently completed second fiscal quarter was $1.5 billion based upon the closing sale price of our ordinary shares on The NASDAQ Global Select Market.

As
of December 13, 2007, there were 59,910,476 outstanding ordinary shares of Verigy Ltd.

DOCUMENTS INCORPORATED BY REFERENCE

|Document Description                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | 10-K Part
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------
|Portions of the registrant's Proxy Statement for its 2008 Annual General Meeting of Shareholders, which will be filed pursuant to Regulation 14A within 120 days after registrant's fiscal year ended
October 31, 2007, 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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TABLE OF CONTENTS

|                           |  |                                                                                                                  |  | Page
|-------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ----
|Forward-Looking Statements |  | 3                                                                                                               
|PART I                    
|Item 1                     |  | Business                                                                                                         |  | 3   
|Item 1A                    |  | Risk Factors                                                                                                     |  | 19  
|Item 1B                    |  | Unresolved Staff Comments                                                                                        |  | 32  
|Item 2                     |  | Properties                                                                                                       |  | 32  
|Item 3                     |  | Legal Proceedings                                                                                                |  | 33  
|Item 4                     |  | Submission of Matters to a Vote of Security Holders                                                              |  | 33  
|PART II                   
|Item 5                     |  | Market for the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |  | 34  
|Item 6                     |  | Selected Financial Data                                                                                          |  | 36  
|Item 7                     |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                            |  | 37  
|Item 7A                    |  | Quantitative and Qualitative Disclosures About Market Risk                                                       |  | 55  
|Item 8                     |  | Financial Statements and Supplementary Data                                                                      |  | 57  
|Item 9                     |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                             |  | 105 
|Item 9A                    |  | Controls and Procedures                                                                                          |  | 105 
|Item 9B                    |  | Other Information                                                                                                |  | 106 
|PART III                  
|Item 10                    |  | Directors, Executive Officers and Corporate Governance                                                           |  | 108 
|Item 11                    |  | Executive Compensation                                                                                           |  | 108 
|Item 12                    |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                   |  | 108 
|Item 13                    |  | Certain Relationships and Related Transactions, and Director Independence                                        |  | 108 
|Item 14                    |  | Principal Accountant Fees and Services                                                                           |  | 109 
|PART IV                   
|Item 15                    |  | Exhibits and Financial Statement Schedules                                                                       |  | 110 
|                           |  | Signatures                                                                                                       |  | 111 

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Forward-Looking Statements

The following discussion should be read in conjunction with the combined and consolidated financial statements and notes thereto included elsewhere in this Annual
Report on Form 10-K. This report contains forward-looking statements including, without limitation, statements regarding the transition of our volume manufacturing activities
related to our 93000 Series platform to China, increases in revenue from the Asia-Pacific region, manufacturing operations, research and development activities, variations in quarterly
revenues and operating results, trends, cyclicality, seasonality and growth in the markets we sell into, our strategy and strategic direction, expenditure in research and development, anticipated
benefits from our operating model, anticipated benefits from our manufacturing model, our future effective tax rate, new product introductions, product pricing, changes to our manufacturing processes,
our liquidity position, our ability to generate cash from continuing operations, our expected growth, the potential impact of adopting new accounting pronouncements, our potential future financial
results, our purchase commitments, our obligation and assumptions about our retirement and post-retirement benefit plans, the impact of our variable cost structure and our lease payment
obligations that involve risks and uncertainties. Additional forward-looking statements can be identified by words such as "anticipated," "expect," "believes," "plan," "predicts," and similar terms.
Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including those discussed in Item 1A and elsewhere in this
Form 10-K.

PART I

Item 1.Business

Overview

Verigy designs, develops, manufactures, sells and supports advanced test systems and solutions for the semiconductor industry. We offer a single platform for each
of the two general categories of devices 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 our Versatest V5000 Series platform, designed to test memory devices, including flash
memory and multi-chip packages containing a mix of memory devices. Our test solutions are both scalable and flexible. Our test platforms are scalable across different frequency ranges,
different pin counts and different numbers of devices. Our test platforms' flexibility allows for a single test system to test a wide range of applications for semiconductor devices. Our scalable
platform architecture provides us with internal operating model efficiencies such as reduced research and development costs, engineering headcount, support requirements and inventory risk. The
scalability and flexibility of our test solutions also provide economic benefits to our customers by allowing them to get their complex, feature-rich semiconductor devices to market
quickly and to reduce their overall costs. We also provide test and application expertise, service and support through our worldwide service organization.

We
have a broad installed customer base, having sold over 1,650 of our 93000 Series systems and over 2,500 Versatest Series systems. Our customers include integrated device
manufacturers, or IDMs, test subcontractors, also referred to as subcontractors, which includes specialty assembly, package and test companies as well as wafer foundries, and fabless design companies.
Verigy became an independent company on June 1, 2006, when we separated from Agilent Technologies Inc. As of October 31, 2007, we had approximately 1,550 employees worldwide.

The Semiconductor Test Equipment Industry

Industry Background.Semiconductor devices, also referred to as integrated circuits, or ICs, are the fundamental building
blocks used in all electronic systems. They have played an important role in

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enabling
the proliferation of computing, communications and consumer electronic products. As technology continues to penetrate most aspects of daily life, semiconductor devices are playing an
increasingly important role in a growing number and variety of products. Consequently, the global semiconductor industry, while experiencing significant cyclical fluctuations in its growth rate, has
exhibited strong overall growth over the last 30 years. With the continued development of new growth segments within the semiconductor market, we believe the semiconductor market should
continue to experience periods of strong growth.

The
design and manufacture of semiconductor devices is a complex and capital-intensive multi-step process. This process involves different types of equipment used to
manufacture, assemble and test semiconductor devices. Semiconductor test equipment and services are a critical part of this complex design and manufacturing process and are utilized in each of the key
design and manufacturing stages.

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

Due
to the different architectures and functionalities of semiconductors, semiconductor test equipment and services are generally categorized by the type of semiconductors tested. The
two general categories are equipment used to test memory semiconductors, referred to as memory testing, and equipment used to test non-memory semiconductors, which includes testers for
testing less complex, discrete semiconductors, and testers designed to test very 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 the functionality of multiple individual ICs onto a single IC or package of ICs, and often contain both digital and analog
functionalities, including radio frequency (RF) capabilities, communication interfaces and embedded memory. By combining multiple technologies onto a single, more complex chip or package, these
devices provide the benefits of lower cost, smaller size, higher performance and lower power consumption and facilitate faster time-to-market that is critical, particularly for
products targeted to the consumer electronics market.

Memory
devices, particularly flash memory devices, represent a significant and growing portion of the semiconductor industry. The flash memory market for NAND and NOR flash, as measured
by megabits
shipped, has doubled every year since 2000. This growth has been fueled largely by the extensive use of flash memory in consumer products such as MP3 players, cell phones, digital cameras and other
handheld devices. There are two key types of flash memory: NAND flash, which is suited to the storage of large amounts of data in devices such as MP3 players and digital cameras, and NOR flash, which
is typically used for the storage of basic operating instructions and programs that enable devices such as cell phones to start-up and function. Given the compact nature of consumer
electronics products and the increasing need for more memory in these products, complex and more compact memory device packaging techniques, such as stacked and multi-chip packages, or
MCPs, are being adopted. Verigy tests devices using NOR, NAND and MCPs, that provide memory for the cellular handset, MP3 players, digital still cameras and gaming. Increasingly, flash is being used
in laptop computers and DTV accessories, where the attributes of flash add to consumer enjoyment of devices.

Semiconductor
test equipment plays an important role by enabling semiconductor designers and manufacturers to lower their overall costs and get products to market quickly in addition to
improving the quality and reliability of their end products. By detecting and sometimes repairing manufacturing defects, test equipment enables semiconductor designers and manufacturers to improve
manufacturing yield, meaning the proportion of semiconductor devices that perform to specifications. In addition, we believe that scalable and flexible test equipment represents a key competitive
advantage because it reduces test time, assists in achieving faster time to market and lowers capital investment requirements

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by
allowing semiconductor designers and manufacturers to test different types of semiconductors with the same test equipment.

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

Production Prototype.Once an initial design of a semiconductor has been created, the first stage in bringing an actual IC to
market is to produce a small quantity of prototype ICs to validate the design and ensure that it performs according to its specifications. What the semiconductor designer needs most from the test
equipment and services provider at this stage is advanced test equipment and test strategy expertise. The engineering validation and device characterization that occurs at this stage requires high
precision test equipment to ensure accuracy and high flexibility to modify test procedures and parameters, because the IC design may iterate multiple times. Test strategies and methodologies are
developed early to ensure that the test solution implemented is capable of testing the ICs across the entire manufacturing process. Of all the stages of bringing a new semiconductor to market, it is
at this stage that the most advanced test equipment is required.

Production Ramp.Once a semiconductor passes the production prototype stage, the next stage in bringing it to market is the
ramp to high volume production. In the production ramp stage the
semiconductor designer and manufacturer is focused on transitioning as quickly as possible to the high-volume production stage. What the semiconductor designer and manufacturer needs from
the test equipment and services provider at this stage is application expertise and an understanding of manufacturing processes. Test solutions at this stage are no longer focused on validating the
product design, but are focused on fine-tuning the manufacturing process to optimize yield. Test optimization is critical in this step, with software analysis being used to determine which
tests are unnecessary and can be streamlined or eliminated in order to save time in the manufacturing process while maintaining the appropriate thoroughness of the test process.

High Volume Production.The final stage in bringing a semiconductor to market is high-volume production. The key
focus for the semiconductor manufacturer at this stage is to reduce the overall cost of test by achieving high throughput of quality semiconductor devices. To achieve this goal, semiconductor
manufacturers require high-reliability test equipment with maximum up-time, and tailored service and support, from their semiconductor test equipment and services provider.
Integration of the test equipment into the production process is optimized to improve efficiency and minimize the time that test equipment is not utilized. In order to achieve high throughput, test
equipment that is not only fast but can test multiple devices at the same time is critical, especially in the testing of memory devices.

Semiconductor Test Market Challenges

Because of the competitiveness of the broader consumer electronics market, semiconductor designers and manufacturers are increasingly focused on bringing high
quality complex ICs to market faster and at lower costs. As a result, semiconductor test equipment and services suppliers are facing new challenges confronted by semiconductor designers and
manufacturers due to:

Increased pressure to reduce overall cost of test

Continued cost pressures are driving semiconductor designers and manufacturers to demand higher utilization of test systems, as well as test systems that can be
re-used across different types and generations of ICs. Test systems are required to demonstrate the scalability and flexibility necessary to permit desired levels of utilization and extend
their useful life. Rapid technology change within the semiconductor industry can quickly render non-scalable test equipment obsolete for the testing of new generations of semiconductors.

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Increased pressure to improve time-to-market

Today's semiconductor market is characterized by shortening product life cycles as a result of increased exposure to and reliance on the consumer electronics
market. Semiconductor designers and manufacturers that are first to market and that quickly adapt to changing technological advances gain a significant competitive advantage. The complex nature of
manufacturing semiconductor devices requires that test solutions providers offer their customers more than just delivery of test equipment. Semiconductor designers and manufacturers require tailored
test solutions and a breadth of application expertise in order to accelerate their time-to-market with new ICs and maximize their revenue opportunity. Equipment suppliers that
are not able to complement their hardware systems with application expertise have limited ability to impact their customers' time to market.

Increased complexity and performance requirements of test

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

Meeting the needs of test subcontractors

Test subcontractors face specific test challenges. Subcontractors provide test services to a diverse group of semiconductor designers and manufacturers, which
include both fabless design companies and integrated device manufacturers, referred to as IDMs. As a result, subcontractors are continually challenged to provide the capabilities to test a wide
range of ICs. Optimizing the utilization of a subcontractor's installed capital equipment is therefore important to its success. In order to optimize this utilization, subcontractors require flexible
semiconductor test systems that are capable of testing a broad spectrum of ICs. Additionally, subcontractors require systems that can test ICs with varying pin counts while maintaining cost
efficiencies and high throughput levels. For this reason, test solutions providers who fail to offer scalable and flexible architectures, as well as a breadth of application expertise, may fall short
in meeting the needs of subcontractors.

Our Solution

We design, develop, manufacture, sell and support advanced test systems and solutions for the semiconductor industry. Unlike competitors who provide multiple
platforms for SOC/SIP/high-speed memory and memory test, we provide a single platform for each of the two general categories of devices being tested. As part of our single scalable
platform strategy, we develop and offer performance and capability enhancements to our platforms as part of our product development roadmap. Our 93000 Series platform is designed to test SOC,
SIP and high-speed memory devices, and our Versatest V5000 Series platform is designed to test memory devices, including flash memory and MCPs. We also provide a range of services
that assist our customers in quickly and cost effectively delivering the innovative, feature-rich products demanded by their end users.

More
than a decade ago, we introduced the concept of a scalable platform architecture for semiconductor testing, and we are continuing to capitalize on the benefits of that strategy
today. Our scalable platform architecture provides us with internal operating model efficiencies, such as reduced research and development costs, engineering headcount, support requirements and
inventory risk. The scalability and flexibility of our solution also provide economic benefits to our customers by allowing them to get their complex, feature-rich semiconductor devices to
market quickly and to reduce overall costs. We believe our advanced SOC/SIP/high-speed memory and memory test solutions provide

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optimal
combinations of flexibility, cost and performance to a wide range of designers and manufacturers in the semiconductor industry at all stages of bringing a semiconductor product to market, from
design to production prototype to high-volume manufacturing. The key elements of our solutions are:

Scalable platform across a broad range of performance levels

Reducing the overall cost of test is critical for our customers. Our test platforms are scalable in a number of ways, including frequency range of the applied
test signals, the number of pins to accommodate ICs with different pin counts and the number of devices that can be tested in parallel. This scalability allows semiconductor manufacturers considerable
flexibility in selecting the right test solution to meet their needs, at an optimal level of capital investment. In addition, our test systems can be quickly reconfigured or upgraded as requirements
change. The combination of scalability, speed and ease of reconfiguration of our test systems enables our customers to reduce their long-term capital equipment requirements and minimize
manufacturing downtime.

The
scalability of our test platforms is enabled by a "tester-per-pin" architecture, in the case of our 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 of each device being tested, enabling each pin to be tested independently and in parallel to the testing of other pins. Our "tester-per-site"
architecture is tailored to make use of the parallel structure of memory devices to test a large number of devices in parallel because it utilizes a separate and independent test processor for each
physical interface of the test system to a device under test. We refer to those interfaces as test sites. With our optional Programmable Interface Matrix, our Versatest V5500 System for the final test
of packaged devices can further capitalize on the parallel structure of memory devices to test multiple devices per test site, thereby increasing its parallel testing capabilities. For our
SOC/SIP/high-speed memory test systems, 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 a test 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 for more extensive scaling. The per-pin architecture of our SOC/SIP/high-speed memory test systems also enables us to offer customers
innovative licensing models. For example, we currently offer our customers the unique ability to purchase and share performance licenses across different devices on a per-pin basis. As a
result, our customers are able to buy only the performance they need for each pin of the system.

Flexible platforms across a breadth of applications

Our test platforms are also highly flexible in that they allow a single test system to test a wide range of applications for semiconductor devices. The high level
of software reconfigurability of our test platforms, and the support and enhancements we offer, enable our customers to implement a broad range of application tests tailored to their needs, including
tests for high-speed digital, analog/mixed signal, flash memory, RF and high-speed memory devices. In addition to enabling our customers to test a broad range of products, our
test systems also support through software reconfiguration a number of advanced 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 increasing our customers' throughput as well as improving their time to market.
We are continually developing additional enhancements to our test platforms to support additional application tests and test methodologies.

Competing
test platforms often require an IC device manufacturer to have devices tested by multiple test systems in order to complete the tests required for different applications
contained in the devices. This process is not only expensive, cumbersome and time-consuming, but it also takes up

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valuable
floor space in the manufacturing facility. In comparison, our test platforms are able to run the tests for a significant number of different applications without having to move devices to
different test systems. The flexible test capabilities of our 93000 Series and V5000 Series test platforms enable our customers to reduce their overall cost of equipment acquisition, employee training
and test equipment maintenance while simultaneously increasing equipment utilization.

Advanced, innovative test technology

As a result of the competitive pressures our customers face, they continually need to develop and bring to market increasingly complex products. We develop
advanced technology solutions in order to assist our customers in accomplishing this goal in a cost effective and timely manner. From our history as part of Agilent, which was part of Hewlett Packard
until its spin-off in 1999, we have a legacy of introducing new and innovative designs to market. Some of these key innovations include the development of scalable platforms for both
SOC/SIP/high-speed memory and memory test through our "tester-per-pin" and "tester-per-site" architectures, our test processors utilizing
high performance application-specific integrated circuits, or ASICs, and our liquid cooling technology for our test system hardware.

Since
1991, we have used ASICs for our test processors in place of larger, less integrated and less sophisticated designs, allowing our test processors to be very small and providing our
test systems with the high performance and accuracy expected from an ASIC-based design. The small size of our ASIC-based test processors enables our
"tester-per-pin" and "tester-per-site" architectures. Along with the additional performance, scalability and flexibility benefits of those
architectures, our ASIC-based architectures result in test systems that are able to test large numbers of devices in parallel in a small test platform footprint.

Our
products use liquid cooling technology, which provides lower operating temperatures, greater system reliability, reduced operating costs, improved accuracy and speed and quieter and
cooler operation than the traditional air cooled technology used in some competitive products. This allows our test platforms to achieve high performance, accuracy, reliability and parallelism while
simultaneously achieving a small test platform footprint. We released our first liquid cooled tester in 1991 and have extensive experience in the application of liquid cooling technology to
semiconductor test systems.

Global delivery of expert application knowledge

Getting semiconductors to market quickly is vital for our customers. Our worldwide professional staff of highly trained applications engineers provides our
customers with a high level of technical expertise to assist our customers as they develop test applications for their semiconductor devices. Our extensive expertise spans a broad range of
semiconductor devices, including chipsets and graphics, wireless and wired communication, flash memory, video and audio, high-speed memory and complex multi-chip memory
packages. We also produce leading-edge innovative test technologies and deliver, on a global basis, superior expertise across a wide range of applications to assist our customers in
quickly delivering new feature-rich products to the market.

Lowered overall cost of test for customers

We have designed our platforms to be versatile and reconfigurable. As a result, our customers are able to select a configuration to meet their current test
requirements and, as those requirements change, to upgrade the capabilities of their test equipment to meet their future needs without having to purchase completely new systems. Our high quality and
reliable test solutions provide high uptime as measured by the reliability of the test equipment. Additionally, our ability to provide innovative solutions and technical expertise across a wide
variety of applications helps our customers optimize test equipment performance for the specific semiconductor device being tested, which reduces test times

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and
increases both yield and cost efficiencies. Consequently, we believe our solutions lower our customers' cost of test in high volume manufacturing.

Shortened time-to-market

To achieve fast time to market, our customers require scalable and flexible test platforms and application expertise and support at each stage of the
manufacturing process. We provide scalable and flexible test platforms based on our established architectures, which can be changed and reconfigured quickly to address new test technologies. Our
highly trained applications engineers provide support for the development of test strategies, test applications analysis and optimization and test equipment utilization for our customers.

Our Strategy

Our objective is to be the leading semiconductor test solutions and services supplier, providing the highest return on our customers' investment in test
operations. We will continue to maintain our focus on our customers' evolving needs by offering innovative and versatile semiconductor test solutions that address the challenges facing semiconductor
designers and manufacturers, and we will remain committed to providing outstanding service and support to our customers. We intend to maintain efficiency in our business and capitalize on our research
and development resources in an effort to sustain profitable growth in excess of the broader semiconductor test industry. We are executing on our flexible operating model and cost structure to enable
us to increase and decrease our capabilities and spending in response to cycles in the semiconductor industry, and thereby deliver continued customer responsiveness as well as improved overall
profitability. Key elements of our strategy include:

Maintaining the rapid pace of product innovation on scalable platforms

We believe scalable platforms offer our customers the best return on their investment in test equipment. The scalable architecture of our solutions coupled with
the proven stability 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 that performance doubles roughly every 18 months. Semiconductor companies thus require substantial technical expertise and constant innovation to
successfully compete. We believe that with our scalable product architecture, wide-ranging technical capabilities and expertise and established global delivery platform, we are well
positioned to be an innovator in the semiconductor test market and to assist our customers in competing successfully in the semiconductor market.

Continuing to focus on emerging opportunities for profitable growth

We will continue to seek increased market penetration by focusing on market opportunities where we can capitalize on our technical expertise and add value to our
customers who demand the most advanced and cost-effective test solutions. We believe that these opportunities have attractive characteristics, such as the potential for increased customer
adoption of our solutions and the potential for high returns on our investment. Recent examples of such emerging opportunities include single-chip cell phone devices that feature radio
frequency circuits integrated into CMOS die and other portable consumer electronics that utilize high-speed memory and complex SOCs, SIPs and MCPs.

Capitalizing on our success with test subcontractors to increase our success with IDMs

The scalability and flexibility of our platform architecture has led to our success in attracting subcontractors to our test solutions. We believe that the same
advantages of our solutions that subcontractors find compelling will continue to drive the increased adoption of our solutions by IDM customers. Today, all of the top ten IDMs utilize Verigy
platforms for either engineering or production

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applications,
or both. IDMs are facing increasingly intense competition, time-to-market pressures and shorter product lifecycles associated with consumer driven demand,
which has led them to begin to outsource an increasing percentage of their semiconductor test business. We believe that our success with our subcontractor customers will drive IDMs to direct a
greater percentage of their test business to us, as IDMs have an interest in maintaining consistency across their internal and external test platforms. These factors, combined with the cost and
capital expenditures restrictions that many IDMs experience, are increasing the need for better asset utilization by IDMs.

Continuing to deliver an outstanding total customer experience throughout the product life cycle

Application support through all phases of the product life cycle is critical to our customers' ability to achieve fast time-to-market for
their products while achieving a high return on their test solution investments. We will strive to continue to provide our customers with extensive application expertise, to maintain the global
delivery capabilities of our customer-facing teams, and to efficiently service our customers with an emphasis on responsiveness. We will continue to expand our presence in Asia in the areas of
applications engineering, research and development and order fulfillment in order to maintain favorable proximity to and 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 an effort to continually enhance our customers'
experience.

Optimizing our operating model to generate sustainable profitability

The semiconductor industry has historically been cyclical. This cyclicality requires semiconductor test suppliers to have flexible cost structures in order to
sustain profitability through the peaks and troughs of the industry's cycles. We continue to focus on increasing our profit margins and managing our business for sustained profitability. To accomplish
this, we employ flexible supply agreements, flexible compensation structures for all employees and an optimized business infrastructure. We rely on several
contract manufacturers that have a global presence and expect to continue to achieve greater economies of scale through our global supply chain, our leveraged research and development model and our
efficient global delivery system. These efficiencies will support our efforts to be profitable notwithstanding the cyclical industry that we compete in.

Our Products and Services

We offer a single platform for 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 our Versatest V5000 Series platform, designed to test memory devices, including flash memory and multi-chip packages. Each of these platforms is
highly scalable and flexible and contains advanced, innovative test technology. We also provide high levels of test application expertise, services and support for our customers who use these
platforms.

93000 Series PlatformSOC, SIP and High-Speed Memory Test

Our 93000 Series platform, introduced in 1999, tests SOCs, SIPs and high-speed memory devices, which are used in a very wide range of consumer
electronics products including MP3 players, digital televisions, television set-top boxes, PCs, gaming consoles and cell phones and other wireless communication devices. Verigy
substantially refreshed the 93000 Series platform in fiscal year 2007 with a range of instruments to deliver customer-driven solutions in several markets. We targeted high-performance
instrumentation to address high-integration radio frequency devices requiring multi-site efficiency and multiple ports. We extended our audio-video test capability. We
increased our ability to support design-for-test strategies to help our customers improve their manufacturing yield, and we have broadened our offering to support
cost-effective consumer electronics manufacturing.

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The
scalability and flexibility of the 93000 Series platform, enabled by its advanced, innovative test technology, allows it to cover the testing requirements for a wide range of devices
and applications in all stages of bringing a semiconductor product to market, from production prototype to high-volume manufacturing, assisting device manufacturers in speeding time to
market and lowering the overall cost of test.

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, the number of pins to accommodate ICs with different pin counts and the number of devices that can be
tested in parallel. The 93000 Series platform with our latest generation Pin Scale digital cards is scalable in frequency performance from 400 Mbits/second to 12 Gbits/second, addressing the test
needs for a wide range 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 64 cards per system, the 93000 Series platform can scale in the number of pins that it tests simultaneously,
from 128 to 2,048 pins, enabling it to test large numbers of devices in parallel. Our 93000 Series platform's scalability allows a customer to initially buy a 93000 Series platform with just a few
test pins and moderate frequency performance capabilities today and then upgrade to more pins and greater frequency performance capabilities as test requirements change.

Our
93000 Series platform's scalability is enabled by its "tester-per-pin" architecture. SOCs, SIPs and high-speed memory devices are complex and
sophisticated, and each device pin may need to be tested independently for a thorough and complete test. Different SOCs, SIPs and high-speed memory devices have different numbers of pins.
By being able to select the number of digital cards and pins in the system, the exact test system can be specified. A single 93000 Series system can test both different types and different numbers of
devices by loading different test programs onto the test processor. This ability to quickly change the type and number of devices being tested makes our test systems particularly well suited for
subcontractors who test a wide range of products.

Flexibility.Our 93000 Series platform can test a wide range of applications with only one test system. Some competitors
require a device manufacturer to switch between different test systems in order to run the tests required for different applications. This is a cumbersome and time-consuming process. Not
only can this process take hours to perform, which raises the overall cost of test, but the extra test system required to run the different application tests takes up valuable floor space within the
manufacturing facility. In contrast, a single 93000 Series system is able to test the high-speed digital, analog/mixed signal, RF, embedded memory, high-speed memory and high
speed interface I/O buses found in a wide range of applications without having to move devices between different test systems. Our 93000 Series platform also supports a number of advanced test
methodologies such as BIST, DFT and concurrent test. As a result, our customers can test their portfolio of devices on a single platform, enabling them to cost-effectively address the
changing test needs common in the semiconductor industry. This flexibility is particularly well suited to subcontractors, who test a wide variety of products.

In
addition to our 93000 Series platform's ability to adapt to a constantly changing test environment, the platform was built to be ready for future requirements. This means as devices
get faster, interfaces and specifications of devices change or more capabilities are integrated into devices, the 93000 Series platform can be quickly updated or upgraded to accommodate the new
technology as it becomes available. This is critically important to large, cutting-edge device manufacturers who constantly seek to remain at the head of the technology curve. When
companies have to invest in new test systems, rather than simply upgrade their existing systems, their cost of test inevitably increases. The flexibility of the 93000 Series platform means that our
customers' investments in our test platforms are protected as they can continue to use the 93000 Series platform over several generations of products.

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Enabled by advanced, innovative test technology.Our 93000 Series platform's "tester-per-pin"
architecture enabled by its ASIC-based and liquid cooled design is what makes the platform scalable, flexible and able to achieve high performance and accuracy in a small test platform
footprint. Its "tester-per-pin" architecture provides for an ASIC-based test processor which tests each pin of each device, with all test processing done locally in
the test processors and each test processor operating independently and in parallel to the other test processors testing the other pins of the devices. The use of high performance ASICs in the test
processors is what allows the test processors to achieve high performance and test a large number of devices in parallel while being capable of fitting into a test system that occupies a relatively
small footprint on the floor of the manufacturing facility.

Our
use of liquid cooling technology is another key element of the 93000 Series platform's design. The combination of the 93000 Series' "tester-per-pin"
architecture and small test platform footprint means that there is a very large number of high performance ASICs concentrated into a small amount of space. Maintaining the test system's high
performance, accuracy and reliability for sustained periods of time in real world operating conditions requires an efficient means of dissipating the considerable amount of heat generated by the high
performance ASICs. To address this issue, we introduced our first liquid cooled tester in 1991 and have continued to utilize liquid cooling in the 93000 Series platform because it provides lower
operating temperatures, greater system reliability, reduced operating costs, improved accuracy and speed and quieter and cooler operation than the traditional air cooling used in many of our
competitors' products. As a result, our 93000 Series systems provide our customers with a high-performance and reliable test solution which, when compared to some of our competitors' air
cooled products, utilizes a relatively small amount of space on the semiconductor test floor and is quiet and cool in its operation.

Versatest V5000 Series PlatformFlash, SRAM, DRAM and Mixed Memory Test

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

Scalability.Our Versatest V5000 Series platform, with its "tester-per-site" architecture, is a
highly scalable test solution designed specifically for the testing of memory devices to enable highly parallel and efficient testing to lower customers' overall cost of test and shorten customers'
time to market. Low cost of test is achieved through testing efficiency and parallelism. Testing more devices in parallel can significantly reduce cost of test, especially in high volume
manufacturing, but only if the tester architecture does not result in increased test times. The Versatest Series platform's "tester-per-site" architecture enables increased
parallelism without any effect on test time, thus supporting highly parallel tests with high throughput. As a result of the scalability of our Versatest Series platforms, customers can buy test
systems to meet their current exact requirements at the lowest capital cost, and then upgrade as their test requirements change.

We
have three Versatest V5000 Series systems, each with a distinct purpose in semiconductor testing and with different levels of scalability depending on that purpose:



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The
scalability of our Versatest V5000 Series systems is enabled by a patented "tester-per-site" architecture. Designed specifically for memory testing, this
architecture enables highly parallel and efficient testing of memory devices as well as a high level of scalability by utilizing a separate and independent test processor for each test site of the
system. This test processor contains a dedicated set of resources, including power supplies, test pattern generators, test sequence controllers and error detection circuitry, that can be independently
applied to each device under test. This independent control of each device under test ensures the flexibility of testing a wide variety of different memory types without a change in tester hardware.
In addition, we believe our tester-per-site architecture is more efficient than some competitive systems that share resources across several devices under test. Competing
systems that do not apply a tester-per-site architecture must test these devices sequentially, causing test times to increase compared to our parallel approach.

Flexibility.There are fewer pure NOR and NAND flash manufacturers, and the test mix for most manufacturers now includes
several 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 to test Flash, DRAM, SRAM and stacked memory devices on a single platform, and can provide a wide variety of test methodologies, including RPC, DFT and BIST. This
flexibility enables our customers to cost-effectively test a wide range of parts without having to change test platforms.

Enabled by advanced, innovative test technology.Our Versatest V5000 Series system's
"tester-per-site" architecture enabled by its ASIC-based design is what makes the platform scalable, flexible and able to achieve high performance and accuracy in a
small test platform footprint. The "tester-per-site" architecture of the Versatest V5000 Series system provides for an ASIC-based test processor for the testing of
devices at each test site of the system. All test processing is done locally in the test processors at each test site, with each test processor operating independently and in parallel to the other
test processors testing devices at the other test sites. As in the 93000 Series platform, the test processors use high performance ASICs to achieve high performance and test a large number of devices
in parallel while being capable of fitting into a test system that occupies a relatively small footprint on the floor of the manufacturing facility. Through the provision of additional test sites and
test processors, the Versatest V5000 Series system can be easily scaled to test more devices in parallel as customers' requirements change, and the use of a separate and independent test processor at
each site of the system means that the speed of the test will stay the same as sites are added for additional parallel testing.

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Our
optional Programmable Interface Matrix, another of our advanced innovative technologies, helps to further boost the parallelism of our Versatest V5500 Series system for high volume
production testing of packaged devices. Much like a telephone switching system routes callers to their destinations, the Programmable Interface Matrix routes testing resources to the individual memory
or MCP that requires testing. The switching is purely electronic, resulting in a faster and more reliable resource switching than mechanical relays, with less downtime. It enables testing of up to 512
devices in parallel for complex and high-pin-count MCPs and the flash memory prevalent in mobile devices. The Programmable Interface Matrix's 24,576 pins ensure that even
highly complex memory devices can be tested with high parallelism and thus at lower cost.

Like
our 93000 Series systems, our Versatest V5000 Series systems utilize liquid cooling technology that provides them with lower operating temperatures, greater system reliability,
reduced operating costs, improved accuracy and speed and quieter and cooler operation than the traditional air cooling used in many of our competitors' products. In addition to enabling our Versatest
V5000 Series systems to utilize a relatively small amount of space on the semiconductor test floor and be quiet and cool in the operation compared to some of our competitors' air cooled products, our
liquid cooling technology enables the very high tester density, and hence the high parallelism of test, of our Versatest V5000 Series systems and our optional Programmable Interface Matrix.

Addressing unique challenges of multi-chip packages.The rapid emergence of multi-chip packages, or
MCPs, creates special testing challenges for memory device manufacturers in the final test of packaged devices. State-of-the-art consumer devices, especially mobile
devices, continue to pack more functionality into smaller spaces. We are able to test concurrently the flash memory, SRAM and DRAM devices that are often stacked into a single multi-chip
package. All of the memory types in an MCP must be tested, but each memory type requires very different test capabilities. We believe that competing test solutions providers cannot effectively or
efficiently test all memory types in MCPs without multiple insertions of the devices, usually on different test systems. In these situations, the increased test time and test floor complexity can
significantly increase the cost of test. The scalable "tester-per-site" architecture of our Versatest V5000 Series platform has allowed us to develop product enhancements and
upgrades to enable our Versatest V5000 Series systems to test each MCPs with flash memory, SRAM and DRAM, the most common memory devices contained in MCPs, without repeated insertions, providing our
customers with high tester utilization and lower cost of test. The Versatest V5000 Series platform's scalable architecture and software tools shared across different test systems have further
benefited MCP testing as programs previously created for testing single memories can be reused for testing the same type of memory on MCPs, reducing engineering time and thereby lowering overall cost
of test.

Test and Application Expertise, Services and Support

Our worldwide service organization performs a wide variety of services for our customers including professional test expertise services and total system support
and professional services. Professional services include value-added, proactive services such as yield optimization and test program development assistance. On a global basis, we provide expertise
across a wide range of applications to assist our customers in quickly delivering their new, feature-rich products to the market. System support includes ongoing and reactive services such
as repair, calibration and relocation as well as education and training.

We
strive to provide high levels of support and services through the life-cycle of our products. To this end, generally we provide a standard one-year warranty
which can be extended by our customers on an annual basis.

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Introduction of New Platform Families

We believe that our test platforms are among the most highly scalable platforms in the semiconductor test industry. At the same time, in an effort to keep our
test platforms as technologically advanced as possible, we have in the past introduced and expect to introduce in the future new test platforms, such as our introduction in 1999 of the 93000 Series
platform which succeeded our 83000 Series platform. We also expect that from time to time we may make upgrades to our test platforms that are so significant that upgrading older platform
versions through simply replacing the test processors will not be cost effective. While these new introductions and significant upgrades give our platforms a finite lifespan as the technology in
devices being tested continues to advance, we generally provide continued support for our test platforms for a number of years after we have introduced a new or upgraded test platform and believe that
we offer among the most scalable test platforms in the semiconductor test industry,
enabling manufacturers to purchase only the amount and performance level of hardware that they are able to use while retaining the ability to upgrade that hardware as the need arises later.

Research and Development

Our scalable platform architectures provide for operating model efficiencies such as streamlined research and development and more efficient engineering team. Our
research and development strategy focuses on designing test solutions that lower the overall cost of test for semiconductor designers and manufacturers. We strive to design high performance, low
overall cost per test semiconductor test equipment that has high 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 of HP until its spin-off in 1999, we have a legacy of introducing new and innovative designs to market. We have a highly
structured approach to maximize research and development efficiency. A group of internal advisors formulates a long-term technology plan with clear objectives. Through our direct
engagement with customers, high-priority projects are identified and appropriate resources are allocated. Engineering resources are organized by area of competence to effectively develop
expertise and to share technologies across product lines.

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

Our
expenditures for research and development for fiscal years 2007, 2006 and 2005 were $91 million, $99 million and $101 million, representing 12.0%, 12.7% and
22.1% of net revenue in each year, respectively. As part of our separation from Agilent, we have consolidated our R&D teams in Boeblingen, Germany, for our principal SOC development activities and in
Cupertino, California, for our memory test development activities. We believe this will help us concentrate on our technology innovation and decrease our time to market for new products.

Sales and Support

We employ a direct worldwide sales and support model that enables us to meet strategic support commitments. Our experienced sales personnel have the knowledge to
address the technical benefits as well as the economic advantages of our systems. Our sales organization is tightly integrated with our services and support organization, which allows us to better
understand our customers' needs and to tailor solutions to meet those needs. We believe an ongoing service and support business is critical to providing sustained value to customers and maintaining
customer loyalty.

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We sell our products and services directly to our customers. We have established specialized sales and services teams to meet the needs of our different types of customers, including
IDMs, subcontractors and fabless design companies. Our sales organization is structured to foster collaboration between us and our customers. This collaboration allows us to better address our
customers' semiconductor test needs and positions us to help IDMs find solutions to their outsourced provider requirements and to help introduce subcontractors to IDMs who may need their
services. As of October 31, 2007, we had approximately 110 people in our sales organization with offices located in all of the major semiconductor manufacturing markets.

Applications
engineers work as part of the sales team before a sale is made and assist customers in the use of the product after a sale is made. In the pre-sale role they
provide in-depth technical communication with customers, writing complex test programs and performing demonstrations to show how our products solve specific test problems.
Post-sale, our sales team assists in the creation of final test programs, and in the integration of the test cell into the customer's environment. We believe that the quality of our
applications sales force is a key differentiator in our ability to generate sales and provide customer satisfaction.

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

Customers

Our customers are broadly distributed across geographic and product markets. In fiscal year 2007, two customers, ChipMos Technologies (Bermuda) Ltd. and
Spansion Inc., accounted for more than 10% of our net revenue. In fiscal year 2006, one customer, ChipMos Technologies (Bermuda) Ltd., accounted for more than 10% of our net revenue. In
fiscal year 2005, no single customer accounted for more than 10% of our net revenue.

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

Year Ended October 31,2007

2006

2005($ in millions)North America

$
222

$
246

$
124As a percent of total net revenue


29.2
%

31.6
%

27.2
%Europe

$
32

$
48

$
43As a percent of total net revenue


4.2
%

6.2
%

9.4
%Asia-Pacific, excluding Japan

$
455

$
405

$
195As a percent of total net revenue


59.8
%

52.0
%

42.8
%Japan

$
52

$
79

$
94As a percent of total net revenue


6.8
%

10.2
%

20.6
%Total net revenue

$
761

$
778

$
456


Although
we continued to have strong revenues in North America in fiscal year 2007, we expect the trend of an increasing portion of our revenue coming from customers located in the
Asia-Pacific region to continue as semiconductor manufacturing activities continue to concentrate in the Asia-Pacific region.

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Manufacturing

Through June 2006, we relied upon two manufacturing models: a hybrid internal and contract manufacturing model for our 93000 Series products and a
completely outsourced contract manufacturing model for our Versatest series products. In connection with our separation from Agilent in June 2006, we transitioned the manufacturing processes
for the 93000 Series platform products that we previously conducted internally to Flextronics Telecom Services Ltd. ("Flextronics"). As a result of this transition, we now rely entirely on
contract manufacturers. As of October 31, 2007, Flextronics is manufacturing our Versatest V5000 Series platform in China and our 93000 Series platform in Germany. Our volume manufacturing
activities related to our 93000 Series platform will ultimately transition to Flextronics in China. However, given the recent increased demand for our SOC products, coupled with our customers' tight
delivery schedule requirements, we have decided to maintain additional manufacturing capacity at Flextronics in Germany. We expect this model to improve our ability to manage costs in a cyclical
market, drive down inventory costs and exposure, improve our responsiveness to customer demand and place us closer to emerging markets.

We
will continue to maintain direct relationships with our key component suppliers and to control procurement of critical system components. This will allow us to respond quickly to
changes in market demand and assure availability of parts. Effective component procurement is also critical to product quality, manufacturing cycle time and cost. We believe that the timely
availability of low-cost, quality components provided by our planning and procurements teams, coupled with the large and variable capacity of our contract manufacturers, is an effective
manufacturing strategy for our cyclical market.

Our
scalable platform architecture means we can reuse many component and subsystems in many different test system configurations. Component reuse helps us keep lower inventory levels,
while
helping us get better prices for the higher volumes of parts we buy. This is true both for the 93000 Series and the Versatest V5000 Series platforms.

Our
quality assurance program focuses on continuous improvement in product quality. Engineering teams assess quality at critical manufacturing stages to identify potential problems.
Manufacturing engineers work with our contract manufacturers to fine-tune the production process, improve quality and efficiency and solve problems as they arise. Customer service
personnel extend the quality process into the field by monitoring the quality and reliability of systems at customer sites.

Competition

The market for semiconductor test systems is highly competitive, rapidly evolving and subject to changing technology, customer needs and new product
introductions. We face substantial competition throughout the world in each of our product areas. Our primary competitors include Advantest Corporation, Credence Systems Corporation, LTX Corporation,
Nextest System Corporation, Teradyne, Inc. and Yokogawa Electric Corporation. We also compete with products developed internally by our customers.

The
competitive factors affecting the market for our products include:



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We
believe that we compete effectively with our competitors on the basis of these factors. Our ability to remain competitive will depend to a great extent upon our ongoing performance in
the areas of product development and customer support. To be successful in the future, we believe that we must respond promptly and effectively to the challenges of technical change and our
competitors' innovations by continually enhancing our product offerings.

Employees

As of October 31, 2007, we had approximately 1,550 employees, of which approximately 450 were located in Europe, approximately 580 were located in Asia and
approximately 520 were located in North America. Of our total employees, approximately 330 were principally dedicated to research and development, 370 were dedicated to sales, general and
administrative, 710 were dedicated to customer service, marketing, applications and services and support and 140 were dedicated to manufacturing. We consider our relationship with our employees to be
good. None of our domestic employees is represented by a labor union or covered by a collective bargaining agreement, although works councils exist in various foreign jurisdictions where we have
employees.

Backlog

At October 31, 2007, and 2006, Verigy's backlog of unfilled orders for products and services were as follows:

Year Ended October 31,2007

2006(in millions)Products backlog

$
129

$
152Services backlog


95


97Total backlog

$
224

$
249


We
define products backlog as systems for which we have received purchase orders which we have not yet delivered, but we expect to deliver within six months of our fiscal period end.
Services backlog is defined as total outstanding orders for product support and services not yet rendered. We expect 80% of our services backlog as of October 31, 2007 to be fulfilled within
twelve months of our fiscal year end.

While
backlog is calculated on the basis of open orders, such orders may be subject to cancellation or delay by the customer with limited or no penalty. Our backlog at any particular
date, therefore, is not necessarily indicative of actual sales which may be generated for any succeeding period. Historically, our backlog levels have fluctuated based upon the ordering pattern of our
customers and limitations in our manufacturing capacity.

Intellectual Property

We do not depend on any individual patent but, instead, rely on a combination of patents, copyrights, trademarks, trade secrets, know how, confidentiality
provisions and licensing arrangements to establish and protect our proprietary rights. We may be required to spend significant resources to monitor and protect our intellectual property rights. We may
not be able to detect infringement and may lose our competitive decision in the market before we do so. In addition, competitors may design

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around
our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to
capture market share. We often rely on licenses of intellectual property useful for our business. We cannot be sure that these licenses will be available in the future on favorable terms or at all.

Financial Information about Geographic Areas

For information on the geographic concentration of our net revenues and long-lived assets, please see note 23 "Segment and Geographic
Information" of our combined and consolidated financial statements.

Investor Information

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

You
can access our financial and certain other information at our Investor Relations website. The address ishttp://investor.verigy.com.

The
charters of our Audit Committee, our Compensation Committee, our Nominating and Governance Committee, as well as our Standards of Business Conduct (including code of ethics
provisions that apply to our principal executive officer, principal financial officer, controller and senior financial officers) are available on our website at http://investor.verigy.com/governance.cfmunder "Documents and Charters". This information is also available to shareholders by writing to us at the
address on the cover of this Annual Report on Form 10-K.

Item 1A.Risk Factors

A description of the risk factors associated with our business is set forth below. You should carefully consider the risks described below and the other
information in this report before investing in our ordinary shares. Our business could be seriously harmed by any of these risks. The trading price of our ordinary shares could decline due to any of
these risks, and you may lose all or part of your investment.

Risks Relating to Our Business

Our dependence on sole source suppliers may prevent us from delivering our products on a timely basis.

We
rely on sole source suppliers, some of whom are relatively small in size, for many of the components we use in our products, including custom integrated circuits, relays and other
electronic components. In the past, we experienced, and in the future may experience, delays in shipping our products due to our dependence on sole source suppliers. Another sole source supplier
substantially extended the order lead times for the components we rely upon, and those components were difficult to source in the market. While neither of these situations had a material impact on our
results, any future failure of other sole source suppliers to meet our requirements in a timely manner could impair our ability to ship products and to realize the related revenues when anticipated,
which could adversely affect our business and operating results.

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Our dependence on contract manufacturers may prevent us from delivering our products on a timely basis.

We
rely entirely on contract manufacturers, which gives us less control over the manufacturing process and exposes us to significant risks, especially inadequate capacity, late delivery,
substandard quality and high costs. Moreover, because our products are very complex to manufacture, transitioning manufacturing activities from one location to another, or from one manufacturing
partner to another, is complicated. Flextronics commenced production of our Versatest series products in China in July 2006 and assumed our manufacturing activities for the 93000 Series
products in Germany in June 2006. Our volume manufacturing activities related to our 93000 Series platform will ultimately transition to Flextronics in China. However, given the recent
increased demand for our SOC products, coupled with our customers' tight delivery schedule requirements, we have decided to maintain additional manufacturing capacity at Flextronics in Germany. We
cannot be certain that existing or future contract manufacturers will be able to manufacture our products on a timely and cost-effective basis, or to our quality and performance
specifications. If our contract manufacturers are unable to meet our manufacturing requirements in a timely manner, whether as a result of transitional issues or otherwise, our ability to ship
products and to realize the related revenues when anticipated could be materially affected.

Our quarterly operating results may fluctuate significantly from period to period and this may cause our share price to decline.

In
the past, we have experienced, and in the future we expect to continue to experience, fluctuations in revenue and operating results from quarter to quarter for a variety of reasons,
including the risk factors described in this report. As a result of these and other risks, we believe that quarter-to-quarter comparisons of our revenue and operating results
may not be meaningful, and that these comparisons may not be an accurate indicator of our future performance. In addition, sales of a relatively limited number of our test systems account for a
substantial portion of our net revenue in any particular quarter. In contrast, our costs are relatively fixed in the short-term. Thus, changes in the timing or terms of a small number of
transactions could disproportionately affect our operating results in any particular quarter. Moreover, our operating results in one or more future quarters may fail to meet the expectations of
securities analysts or investors. If this occurs, we would expect to experience an immediate and significant decline in the trading price of our ordinary shares.

Our business and operating results could be harmed by the highly cyclical nature of the semiconductor industry.

Our
business and operating results depend in significant part upon capital expenditures of semiconductor designers and manufacturers, which in turn depend upon the current and
anticipated market demand for products incorporating semiconductors from these designers and manufacturers. Historically, the semiconductor industry has been highly cyclical with recurring periods of
diminished product demand. During these periods, semiconductor designers and manufacturers, facing reduced demand for their products, have significantly reduced their capital and other expenditures,
including expenditures for semiconductor test equipment and services such as those we offer. These periods of reduced product and services demand have been characterized by excessive inventory levels,
cancellation of customer orders and erosion of selling prices, as well as excessive semiconductor test capacity. As a consequence, during these periods, we have experienced 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 delays
in collecting accounts receivable. Furthermore, because we have a high proportion of customers that are subcontractors, which during market downturns tend to reduce or cancel orders for new test
systems and test services more quickly and dramatically than other customers, any downturn may cause a quicker and more significant adverse impact on our business than on the broader semiconductor

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industry.
In addition, although a decline in orders for semiconductor capital equipment, including test equipment, may accompany or precede the timing of a decline in the semiconductor market as a
whole, any recovery in spending for semiconductor capital equipment, including test equipment, may lag any recovery by the semiconductor industry.

We have a limited ability to quickly or significantly reduce our costs, which makes us particularly vulnerable to the highly cyclical nature of the semiconductor
industry.

Historically,
downturns in the semiconductor industry have affected the test equipment and services market more significantly than the overall semiconductor industry. A significant
portion of our overall costs are fixed. Because a high proportion of our costs are fixed, we have a limited ability to reduce expenses and manufacturing inventory purchases quickly in response to
decreases in orders and revenues. Moreover, to remain competitive, even during downturns in the semiconductor industry or generally, we are required to maintain significant fixed costs for research
and development. As a consequence, in a downturn, we may not be able to reduce our costs quickly, or by a sufficient amount, and our financial performance may suffer.

The market for semiconductor test equipment and services is highly concentrated, and we have limited opportunities to sell our test equipment and
services.

The
semiconductor industry is highly concentrated in that a small number of semiconductor designers and manufacturers and subcontractors account for a substantial portion of the
purchases of semiconductor test equipment and services generally, including our test equipment and services. Consolidation in the semiconductor industry may increase this concentration. Accordingly,
we expect that sales of our products will be concentrated with a limited number of large customers for the
foreseeable future. We believe that our financial results will depend in significant part on our success in establishing and maintaining relationships with, and effecting substantial sales to, these
potential customers. Even if we establish these relationships, our financial results will depend in large part on these customers' sales and business results.

The loss of, or a significant reduction in the number of sales to, our significant customers could materially harm our business.

For
fiscal year 2007, revenue from our top ten customers accounted for approximately 63.9% of our total net revenue, with two customers accounting for 31.8% of our total net revenue. In
comparison, for fiscal year 2006, revenue from our top ten customers accounted for approximately 51.6% of our total net revenue, with one customer accounting for 10.1% of our total net revenue.

Our
relationships with our significant customers, who frequently evaluate competitive products prior to placing new orders, could be adversely affected by a number of factors, including:



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Generally,
our customers may cancel orders with little or no penalty. Our business and operating results could be materially adversely affected by the loss of, or any reduction in orders
by, any of our significant customers, particularly if we are unable to replace that lost revenue with additional orders from new or existing customers.

If we do not maintain and expand existing customer relationships and establish new customer relationships, our ability to generate revenue growth will be
adversely affected.

Our
ability to increase our sales will depend in large part upon our ability to obtain orders for new test systems, enhancements for existing test systems and services from our existing
and new customers. Maintaining and expanding our existing relationships and establishing new ones can require substantial investment without any assurance from customers that they will place
significant orders. Moreover, if we are unable to provide new test systems, enhancements for existing test systems and services to our customers in a timely fashion or in sufficient quantities, our
business will be harmed. In the past we have experienced, and in our industry it is not unusual to experience, difficulty in delivering new test equipment, as well as product enhancements and
upgrades. When we encountered difficulties in the past, our customer relationships and our ability to generate additional revenue from customers were harmed. Our inability to meet the demands of
customers would severely damage our reputation, which would make it more difficult for us to sell test equipment, enhancements and services to existing, as well as new, customers and would adversely
affect our ability to generate revenue.

In
addition, we face significant obstacles in establishing new customer relationships. It is difficult for us to establish relationships with new customers because such companies may
have existing relationships with our competitors, may be unfamiliar with our product and service offerings, may have an installed base of test equipment sufficient for their current needs or may not
have the resources necessary to transition to, and train their employees on, our test equipment. Even if we do succeed in establishing new relationships, these new customers may nonetheless continue
to favor our competitors, as our competitors may have had longer relationships with these customers or may maintain a larger installed
base of their competing test equipment in the facilities of new customers and only purchase limited quantities from us. In addition, we could face difficulties in our efforts to develop new customer
relationships abroad as a result of buying practices that may favor local competitors or non-local competitors with a larger presence in local economies than we have. As a result, we may
be forced to partner with local companies in order to compete for business and such arrangements, if available, may not be achieved on economically favorable terms, which could negatively affect our
financial performance.

Failure to accurately estimate our customers' demand and plan the production of our new and existing products could adversely affect our inventory levels and our
income.

Given
the cyclical nature of the semiconductor industry, we cannot reliably forecast the timing and size of our customers' orders. In order to meet anticipated demand, we must order
components and build some inventory before we actually receive purchase orders. Our results could be harmed if we do not accurately estimate our customers' product demands and are unable to adjust our
purchases with market fluctuations, including those caused by the cyclical nature of the semiconductor industry. During a market upturn, our results could be materially and adversely affected if we
cannot increase our purchases of components, parts and services quickly enough to meet increasing demand for our products, and during a market downturn, we could have excess inventory that we would
not be able to sell, likely resulting in inventory write-offs. Either of these results could have a material adverse effect on our business, financial condition and results of operations.

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Further,
if we do not successfully manage the introduction of our new products and estimate customer demand for such products, our ability to sell existing inventory may be adversely
affected. If demand for our new products exceeds our projections, we might have insufficient quantities of products for sale to our customers, which could cause us to miss opportunities to increase
revenues during market upturns. If our projections exceed demand for our new products or if some of our customers cancel their current orders for our old products in anticipation of our new products,
we may have excess inventories of our new products and excess obsolete inventories, which could result in inventory write-offs that would adversely affect our financial performance.

Failure to accurately predict our customers' varying ordering patterns could adversely affect our inventory levels and our income.

Our
customers tend to make large purchases of our products on an inconsistent basis, rather than smaller purchases on a consistent basis, which makes it difficult to predict the timing
of customer orders. Failure to accurately predict our customers' varying ordering patterns may cause us to experience insufficient or excess product inventories. If our competitors are more successful
than us at
timing new product introductions and inventory levels to customers' ordering patterns, we may lose important sales opportunities and our business and results of operations may be harmed.

Existing customers may be unwilling to bear expenses associated with transitioning to new and enhanced products.

In
order to grow our business, we need to sell enhancements and upgrades for our existing test equipment, in addition to selling new test equipment. Certain customers may be unwilling,
or unable, to bear the costs of implementing enhancements and upgrades to our test equipment platforms, particularly during semiconductor industry downturns. As a result, it may be difficult to market
and sell enhancements and upgrades to customers. In addition, as we introduce new enhancements and upgrades, we cannot predict with certainty if and when our customers will transition to those
enhancements or upgrades. Any delay in or failure of our customers to transition to new enhancements or upgrades could result in excess inventories or our new or enhanced products, which could result
in inventory write-offs that would adversely affect our financial performance.

If we do not introduce new test equipment platforms and upgrade existing test equipment platforms in a timely manner, and if we do not offer comprehensive and
competitive services for our test equipment platforms, our test equipment and services will become obsolete, we will lose existing customers and our operating results will
suffer.

The
semiconductor design and manufacturing industry into which we sell our test equipment is characterized by rapid technological changes, frequent new product introductions, including
upgrades to existing test equipment, and evolving industry standards. The success of our new or upgraded test equipment offerings will depend on several factors, including our ability to:



23

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In
many cases, our test equipment and services are used by our customers to develop, test and manufacture their new products. We therefore must anticipate industry trends and develop new
test equipment platforms or upgrade existing test equipment platforms in advance of the commercialization of our customers' products. In addition, new methods of testing integrated circuits, such as
self-testing integrated circuits, may be developed which would render our test equipment uncompetitive or obsolete if we failed to adopt and incorporate these new methods into our new or
existing test equipment platforms. Developing new test equipment platforms and upgrading existing test equipment platforms requires a substantial investment before we can determine the commercial
viability of the new or upgraded platform.

As
our customers' product requirements are diverse and subject to frequent change, we will also need to ensure that we have an adequate mix of products that meet our customers' varying
requirements. If we fail to adequately predict our customers' needs and technological advances, we may invest heavily in research and development of test equipment that does not lead to significant
revenue, or we may fail to invest in technology necessary to meet changing customer demands. Without the timely introduction of new or upgraded test equipment that reflects technological advances, our
test equipment and services will likely become obsolete, we may have difficulty retaining customers and our revenue and operating results would suffer.

Our long and variable sales cycle depends upon factors outside of our control, could cause us to expend significant time and resources prior to our ever earning
associated revenues and may therefore cause fluctuations in our operating results.

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



The
decision to purchase our equipment and services generally involves a significant commitment of capital. As a result, our test equipment has lengthy and variable sales cycles during
which we may expend substantial funds and management effort to secure a sale prior to receiving any commitment from a customer to purchase our test equipment or services. Prior to completing sales to
our customers, we are often subject to a number of significant risks, including the risk that our competitors may compete for the sale or that the customer may change its technological requirements.
Our business, financial condition and results of operations may be materially adversely affected by our long and variable sales cycle and the uncertainty associated with expending substantial funds
and effort with no guarantee that sales will be made.

Test systems that contain defects that harm our customers could damage our reputation and cause us to lose customers and revenue.

Our
test equipment is highly complex and employs advanced technologies. The use of complex technology in our test equipment increases the likelihood that we could experience design,
performance or manufacturing problems. If any of our products have defects or reliability or quality problems, we may, in some circumstances, be exposed to liability, our reputation could be damaged
significantly and

24

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customers
might be reluctant to buy our products, which could result in a decline in revenues, an increase in product returns and the loss of existing customers and the failure to attract new
customers.

We face substantial competition which, among other things, may lead to price pressure and adversely affect our sales and revenue.

We
face substantial competition throughout the world in each of our product areas. Our most significant competitors historically have included Advantest Corporation, Credence Systems
Corporation, LTX Corporation, Nextest Systems Corporation, Teradyne, Inc. and Yokogawa Electric Corporation. Some of our competitors have substantially greater financial resources, broader
product offerings, more extensive engineering, manufacturing, marketing and customer support capabilities or a greater presence in certain countries than we do. We may have less leverage with
component vendors than some of our competitors. Also, some of our competitors have greater resources and may be more willing or able than we are to put capital at risk to win business. Price
reductions by our competitors may force us to lower our prices. We also expect our current competitors to continue to improve the performance of their current products and to introduce new products,
technologies or services that could adversely affect sales of our current and future test equipment and services. Additionally, current and future competitors may introduce testing technologies,
equipment and services, which may in turn reduce the value of our own test equipment and services. Any of these circumstances may limit our opportunities for growth and negatively impact our financial
performance.

We may face competition from Agilent in the future.

Pursuant to the intellectual property matters agreement between us and Agilent in connection with our separation from Agilent, except as described below, until
October 31, 2009, three years after the date on which Agilent distributed to its stockholders all of our ordinary shares that it held, Agilent agreed not to develop, manufacture, distribute,
support or service automated semiconductor test systems for providing high-volume functional test of ICs (including memory and high speed memory devices and SOCs) or SIPs, or components
for such products. However, during this three-year period, Agilent may compete with us with respect to:



While
none of the product types for which Agilent reserved the right to compete with us has provided material revenue to us in the past, we can provide no assurance that the limitations
contained in the intellectual property matters agreement, which was entered into in the context of a parent-subsidiary relationship and may be less favorable to us than if it had been negotiated
between unaffiliated third parties, will be effective at protecting us from competition from Agilent.

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In
addition, the intellectual property matters agreement permits Agilent to fulfill its obligations under contracts in existence as of March 1, 2006, even though fulfilling such
obligations would otherwise have been precluded during the non-competition period and even if fulfilling such obligations would result in Agilent competing with us. This exception will
allow Agilent to fulfill its obligations to a semiconductor manufacturer pursuant to which Agilent will develop and sell components to the manufacturer for use in the manufacturer's semiconductor test
systems purchased from a competitor of Verigy. While we do not believe that Agilent fulfilling these obligations will have a material effect on our business or prospects, we may in the future be less
successful at selling test systems to this semiconductor manufacturer than would have been the case were the manufacturer not able to combine products from Agilent with the test systems of our
competitor.

Although
under the intellectual property matters agreement Agilent transferred all of the intellectual property rights Agilent held that relate exclusively to our products to us, Agilent
retained and only licensed to us the intellectual property rights to underlying technologies used in both our products and the products of Agilent. Under the agreement, Agilent remains free to use the
retained underlying technologies without restriction (other than as described above with respect to the three-year non-compete period).

After
October 31, 2009, Agilent will be 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. Agilent will not be permitted to use the intellectual property rights transferred to us, and licensed from us back to Agilent, to compete with us with respect to our core business of
developing, manufacturing, selling and supporting automated semiconductor test systems for high-volume functional test of ICs or SIPs. Agilent will, however, be able to use such
intellectual property rights to develop and sell components for such systems, including systems developed and sold by us as well as those developed and sold by our competitors. While selling
components has not represented a material portion of our business in the past and is not expected to be an area of focus for the near future, our business could be adversely affected if systems
offered by our competitors become more competitive as a result of Agilent supplying components for our competitors' systems or if, by buying components from Agilent, our customers are able to delay or
bypass altogether purchasing newer systems from us.

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

Third parties may compete with us by using intellectual property that Agilent licensed to us under the intellectual property matters
agreement.

Under
the intellectual property matters agreement, Agilent retained and only licensed to us the intellectual property rights to underlying technologies used in both our products and the
products of Agilent. Under the agreement, Agilent remains free to license the intellectual property rights to the underlying technologies to any party, including our competitors. Any unaffiliated
third party that is licensed to use such retained intellectual property would not be subject to the non-competition provisions of the intellectual property matters agreement and could
compete with us at any time using the underlying technologies. The intellectual property that Agilent retained and that can be licensed in this manner does not relate solely or primarily to one or
more of our products, or groups of products; rather, the intellectual property that Agilent licensed to us is generally used broadly across our entire product portfolio. Competition by third parties
using the underlying technologies retained by Agilent could harm our business and operating results.

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Third parties may claim we are infringing their intellectual property, and we could suffer significant litigation or licensing expenses or be prevented from
selling our products or services.

Our
industry has been and continues to be characterized by uncertain and conflicting intellectual property claims and vigorous protection and pursuit of these rights. As a result, third
parties may claim that we are infringing their intellectual property rights, and we may be unaware of intellectual property rights of others that may cover some of our technology, products and
services. Any litigation regarding patents or other intellectual property could be costly and time-consuming, and divert our management and key personnel from our business operations. The
complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement might also require us to enter into
costly royalty or license agreements. However, we may not 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 against development and sale of certain of our products and services.

In
addition, there may be third parties who have refrained from asserting intellectual property infringement claims against our products while we were a wholly owned subsidiary of
Agilent that elect to pursue such claims against us now that our separation from Agilent is complete because we no
longer have the benefit of being able to counterclaim based on Agilent's patent portfolio, and we are no longer able to provide licenses of Agilent's patent portfolio in order to resolve such claims.

Third parties may infringe our intellectual property, and we may expend significant resources enforcing our rights or suffer competitive
injury.

Our
success depends in large part on our proprietary technology. We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality provisions and licensing
arrangements to establish and protect our proprietary rights. If we fail to protect our intellectual property rights, our competitive position could suffer, which could harm our operating results. Our
pending patent and trademark registration applications may not be allowed or competitors may challenge the validity or scope of these patent applications or trademark registrations. In addition, our
patents may not provide us with a significant competitive advantage.

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

In
addition, our agreements with Agilent, and in particular the intellectual property matters agreement, set forth the terms and provisions under which we received the intellectual
property rights necessary to operate our business. Under our agreements with Agilent, we do not have the right to enforce against third parties intellectual property rights we license from Agilent,
and Agilent is under no obligation to enforce such rights on our behalf.

Intellectual property rights are difficult to enforce in the certain countries, which may inhibit our ability to protect our intellectual property rights or those
of our suppliers and customers in those countries.

Commercial
law in certain countries is relatively undeveloped compared to the commercial law in the U.S. Limited protection of intellectual property is available under local law.
Consequently, operating in certain countries may subject us to an increased risk that unauthorized parties may attempt to copy or otherwise obtain or use our intellectual property or the intellectual
property of our suppliers, customers or business partners. We cannot assure you that we will be able to protect our

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intellectual
property rights or those of our suppliers and customers or have adequate legal recourse in the event that we encounter difficulties with infringements of intellectual property under local
law.

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

We
may acquire, or make significant or minority investments in, complementary businesses, products or technologies. Any future acquisitions or investments could be accompanied by risks
such as:



We
cannot guarantee that we will realize any benefit from the integration of any business, products or technologies that we might acquire in the future, and our failure to do so could
harm our business.



Our future operating results will depend substantially upon the performance of our executive officers and key personnel. Our future operating results also depend
in significant part upon our ability to attract and retain qualified management, manufacturing, technical, application engineering, marketing, sales and support personnel. Competition for qualified
personnel is intense, and we cannot ensure success in attracting or retaining qualified personnel. Our business is particularly dependent on expertise which only a very limited number of engineers
possess and it may be increasingly difficult for us to hire personnel over time. We operate in several geographic locations, including parts of Asia and Silicon Valley, where the labor markets,
especially for application engineers, are particularly competitive. Our business, financial condition and results of operations could be materially adversely affected by the loss of any of our key
employees, by the failure of any key employee to perform in his or her current position, or by our inability to attract and retain skilled employees, particularly engineers.

Our effective tax rate may vary significantly from period to period, and we could owe significant taxes even during periods when we experience low operating
profit or operating losses.

We
have negotiated tax incentives with the Singapore Economic Development Board, an agency of the Government of Singapore, which have been approved by Singapore's Ministry of Finance and
Ministry of Trade and Industry. Under the incentives, a portion of the income we earn in Singapore during these ten to fifteen year incentive periods is subject to reduced rates of Singapore income
tax. The incentive tax rates will expire in various fiscal years beginning in fiscal 2011. The Singapore corporate income tax rate that would apply, absent the incentives, is 18% and 20% for fiscal
years 2007

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and
2006, respectively. As a result of these incentives, income taxes decreased by $18 million or $0.30 per share (diluted) and $8 million or $0.15 per share (diluted) in fiscal years
2007 and 2006, respectively. In order to receive the benefit of the incentives, we must develop and maintain in Singapore certain functions such as procurement, financial services, order management,
credit and collections, spare parts depot and distribution center, a refurbishment center and regional activities like an application development center. In addition to these qualifying activities, we
must hire specified numbers of employees and maintain minimum levels of investment in Singapore. We have from two to nine years to phase-in the qualifying activities and to hire the
specified numbers of employees. If we do not fulfill these conditions for any reason, our incentive could lapse, our income in Singapore would be subject to taxation at higher rates, and our overall
effective tax rate could be between fifteen to twenty percentage points higher than would have been the case had we maintained the benefit of the incentives.

In
addition, our effective tax rate may vary significantly from period to period because, for example, we may owe significant taxes in jurisdictions other than Singapore during periods
when we are profitable in those jurisdictions even though we may be experiencing low operating profit or operating losses on a consolidated basis. Our effective tax rate varies based on a variety of
factors, including overall profitability, the geographical mix of income before taxes and the related tax rates in the jurisdictions where we operate, as well as discrete events, such as settlements
of future audits. Certain combinations of these factors could cause us to owe significant taxes even during periods when we experience low income before taxes or loss before taxes.

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

Our
headquarters are in Singapore, our manufacturing is outsourced largely to Flextronics, and we sell our products and services worldwide. As a result, our business is subject to risks
associated with doing business internationally. Revenue from customers in Japan accounted for approximately 6.8%, 10.2% and 20.6% of total net revenue for fiscal years 2007, 2006 and 2005,
respectively. Revenue from customers in Asia-Pacific, excluding Japan, accounted for approximately 59.8%, 52.0% and 42.8% for fiscal years 2007, 2006 and 2005, respectively. The economies
of Asia have been highly volatile and recessionary in the past, resulting in significant fluctuations in local currencies. Our exposure to the business risks presented by the economies of Asia will
increase to the extent that we continue to expand our operations in that region, including continuing to transition our volume contract manufacturing processes to Flextronics in China.

Our
international activities subjects us to a number of risks associated with conducting operations internationally, including:



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In
addition, we are exposed to foreign currency exchange movements versus the U.S. dollar, particularly the Japanese Yen and the Euro. With respect to revenue, our primary exposure
exists during the period between execution of a purchase order denominated in a foreign currency and collection of the related receivable. During this period, changes in the exchange rates of the
foreign currency to the U.S. Dollar will affect our revenue, cost of sales and operating margins and could result in exchange gains or losses. While a significant portion of our purchase orders to
date have been denominated in U.S. Dollars, competitive conditions may require us to enter into an increasing number of purchase orders denominated in foreign currencies. We incur a variety of costs
in foreign currencies, including some of our manufacturing costs, component costs and sales costs. Therefore, as we expand our operations in Asia, we may become more exposed to a strengthening of
currencies in the region against the U.S. dollar. We cannot assure you that any hedging transactions we may enter into will be effective or will not result in foreign exchange hedging gains or losses.
As a result, we are exposed to greater risks in currency fluctuations.

Funds associated with certain of our auction rate securities may not be accessible for in excess of 12 months and our auction rate securities may
experience an other than temporary decline in value, which would adversely affect our income.

Our
marketable securities portfolio, which totals $402 million at October 31, 2007, includes auction rate securities of $142 million (at cost). Auction rate securities are
securities that are structured with short-term interest rate reset dates of generally less than ninety days, but with contractual maturities that can be well in excess of ten years. At the end of each
reset period, which occurs every seven to thirty-five days, investors can sell or continue to hold the securities at par. In the fourth quarter of fiscal year 2007, certain auction rate securities
with a cost value of $49 million failed auction due to sell orders exceeding buy orders. Based on an analysis of other-than-temporary impairment factors, we recorded a temporary impairment
within other comprehensive loss, a component of shareholders' equity, of approximately $1.4 million (net of tax of $0.3 million) at October 31, 2007 related to these auction rate
securities. Although we believe that the decline in the fair market value of these securities is temporary, there is a risk that the decline in value may ultimately be deemed to be other than
temporary. In the future, should we determine that the decline in value of these auction rate securities is other than temporary, it would result in a loss being recognized in our statement of
operations, which could be material. The funds associated with failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process or the
underlying securities have matured. As a result, we have classified those securities with failed auctions as long-term assets in our consolidated balance sheet. Other auction rate securities within
our investment portfolio at October 31, 2007 with a cost value and carrying value of $93 million continue to auction as scheduled and are classified as current assets on our consolidated
balance sheet. If conditions in the credit markets deteriorate further causing auctions to fail on these securities, the funds associated with these securities may also not be accessible for in excess
of 12 months.

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

Our
facilities and the facilities of our contract manufacturers could be subject to a catastrophic loss caused by natural disasters, including fires and earthquakes. We and our contract
manufacturers

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have
significant facilities in areas with above average seismic activity, such as California, Japan and Taiwan. If any of these facilities were to experience a catastrophic loss, it could disrupt our
operations, delay production and shipments, reduce revenue and result in large expenses to repair or replace the facility. We do not carry catastrophic insurance policies that cover potential losses
caused by earthquakes.

Risks Related to the Securities Markets and Ownership of Our Ordinary Shares

Our securities have a limited trading history, and the price of our ordinary shares may fluctuate significantly.

There
has been a public market for our ordinary shares for a short period of time. An active public market for our ordinary shares may not be sustained, which would adversely impact the
liquidity and market price of our ordinary shares. The market price of our ordinary shares may fluctuate significantly. Among the factors that could affect the market price of our ordinary shares are
the risk factors described in this section and other factors including:



We may become involved in securities litigation that could divert management's attention and harm our business.

The
stock market in general, and The NASDAQ Global Select Market and the securities of semiconductor capital equipment companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating performance of the affected companies. Further, the market prices of securities of semiconductor test system companies
have been particularly volatile. These market and industry factors may materially harm the market price of our ordinary shares, regardless of our operating performance. In the past, following periods
of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. We may become involved in this type of
litigation in the future. Such litigation, whether or not meritorious, could result in the expenditure of substantial funds, divert management's attention and resources, and harm our reputation in the
industry and the securities markets, which would reduce our profitability and harm our business.

It may be difficult for investors to affect service of process within the United States on us or to enforce civil liabilities under the federal securities laws of
the United States against us.

We
are incorporated in Singapore under the Companies Act, Chapter 50 of Singapore, or Singapore Companies Act. Some of our officers and directors reside outside the United States. A
substantial portion of our assets is located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon us. Similarly,
investors may be unable to enforce judgments obtained in U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States against us in U.S. courts.
Judgments of U.S. courts based upon the civil liability provisions of the federal securities laws of the United States are not directly enforceable in Singapore courts and are not given the same
effect in Singapore as judgments of a Singapore court. Accordingly, there can be no assurance as to whether Singapore courts will enter

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judgments
in actions brought in Singapore courts based upon the civil liability provisions of the federal securities laws of the United States.

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 Code on Take-overs and Mergers, generally when a person (or a group of persons acting together) acquires shares having 30% or more of the voting rights of
a company or holds at least 30% but not more than 50% of the voting rights of a company and thereafter acquires in any period of six months additional shares carrying more than 1% of the voting
rights, then such person is required by law to make an offer to acquire the remaining voting shares of the company. Consequently, the Code of Take-overs and Mergers may discourage
potential acquirers from purchasing substantial but non-majority ownership positions of our ordinary shares, which could, in turn, impede takeovers of our company by a third party.

For a limited period of time, our directors have general authority to issue new shares on terms and conditions and with any preferences, rights or restrictions as
may be determined by our board of directors in its sole discretion.

Under
Singapore law, new shares may be issued only with the prior approval of our shareholders in a general meeting. At our 2007 annual general meeting of shareholders, our shareholders
provided our directors general authority to issue new shares until the earlier to occur of the conclusion of our 2008 annual general meeting or the expiration of the period within which the next
annual general meeting is required to be held. Subject to the shareholders' approval, the provisions of the Singapore Companies Act and our amended and restated memorandum and articles of association,
our board of directors may allot and issue new shares on terms and conditions and with the rights and restrictions as they may think fit to impose. Any additional issuances of new shares by our
directors may adversely impact the market price of our ordinary shares.

Our shareholders may have more difficulty protecting their interests than they would as shareholders of a U.S. corporation.

Our
corporate affairs are governed by our amended and restated memorandum and articles of association and by the laws governing corporations incorporated in Singapore. The rights of our
shareholders and the responsibilities of the members of our board of directors under Singapore law are different from those applicable to a corporation incorporated in the United States. Therefore,
our public shareholders may have more difficulty in protecting their interests in connection with actions taken by our management, members of our board of directors or our controlling shareholder than
they would as shareholders of a corporation incorporated in the United States. For example, controlling shareholders in U.S. corporations are subject to fiduciary duties while controlling shareholders
in Singapore corporations are not subject to such duties.

Item 1B.Unresolved Staff Comments

None.

Item 2.Properties

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

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

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The
following table provides certain information as to Verigy's general offices and manufacturing 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     |  | (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                      

---

We
believe that all of our facilities are in good condition, are well maintained and are able to operate at present levels.

Item 3.Legal Proceedings

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

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

There were no matters submitted to a vote of securities holders during the fourth quarter of fiscal year 2007.

33

---





PART II

Item 5.Market for the Registrant's Common Equity, Related Shareholders Matters and Issuer Purchases of Equity  Securities

Price Range of Our Ordinary Shares

Our ordinary shares are listed on the The NASDAQ Global Select Market under the ticker symbol "VRGY". The following table sets forth the high and low per share
price of our ordinary shares, as reported by The NASDAQ Global Select Market.

Fiscal Year 2007

High

LowFirst Quarter (ended January 31, 2007)

$
19.00

$
15.05Second Quarter (ended April 30, 2007)

$
26.21

$
18.21Third Quarter (ended July 31, 2007)

$
29.95

$
24.46Fourth Quarter (ended October 31, 2007)

$
26.75

$
20.94


Fiscal Year 2006

High

LowFirst Quarter (ended January 31, 2006)


Not Applicable


Not ApplicableSecond Quarter (ended April 30, 2006)


Not Applicable


Not ApplicableThird Quarter (ended July 31, 2006)

$
16.50

$
13.55Fourth Quarter (ended October 31, 2006)

$
19.52

$
14.37


As
of October 31, 2007, there were 37,198 shareholders of record of our ordinary shares. The closing share price for our ordinary shares on October 31, 2007, as reported by
the NASDAQ Global Select Market, was $22.99 per share.

Holders

As of December 13, 2007, there were 37,163 shareholders of record.

Dividend Policy

We have never paid any cash dividends, and we currently intend to retain and reinvest any future earnings to fund the development and growth of our business. We
do not anticipate paying any cash dividends in the foreseeable future.

34

---



Stock Performance Graph

The graph below shows the cumulative total stockholder return of an investment of $100 (and the reinvestment of any dividends thereafter) on October 31,
2007, in (i) our ordinary shares (ii) the S&P Smallcap 600 and (iii) a peer group comprised of companies with standard industrial code 3825Instruments for
Measurement & Testing of Electricity & Electrical Signal. Our share price performance shown in the graph below is not indicative of future share price performance.

COMPARISON OF 16 MONTH CUMULATIVE TOTAL RETURN*Among Verigy Ltd., The S&P Smallcap 600 Index  and A Peer Group

GRAPHIC

6/12/2006

10/31/2006

10/31/2007Verigy Ltd.

$
100.00

$
106.80

$
153.27S&P Smallcap 600

$
100.00

$
104.05

$
116.06Peer Group

$
100.00

$
109.68

$
126.40


35

---





Item 6.Selected Financial Data

SELECTED FINANCIAL DATA

The selected financial data set forth below is derived in part from and should be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our combined and consolidated financial statements and related notes thereto included elsewhere in this report on Form 10-K. We have derived
our combined and consolidated statement of operations data for the fiscal years ended October 31, 2007, 2006, and 2005, and consolidated balance sheets data as of October 31, 2007 and
2006 from the audited combined and consolidated financial statements included elsewhere in this Form 10K. The combined statement of operations data for the fiscal year ended October 31,
2004 and 2003 and combined balance sheet data as of October 31, 2005, 2004, and 2003 were derived from our unaudited financial statements that are not included in this report on
Form 10K. Historical results are not necessarily indicative of results to be expected for future periods and may not reflect what our financial position and results of operations would have
been had we been a separate, stand-alone entity during the historical periods presented.

|                                                                                             |                                     | Fiscal Year Ended October 31, |       
|-------------------------------------------------------------------------------------------- | ----------------------------------- | ----------------------------- | ------
|
|
|Combined and Consolidated Statement of Operations Data:                                      |                                     |                               |       
|Net revenue:                                                                                 |                                     |                               |       
|                                                                                             | Products                            |                               | $     
|                                                                                             | Services                            |                               |       
|                                                                                             |                                     |                               |       
|                                                                                             |                                     | Total net revenue             |       
|Cost of sales:                                                                               |                                     |                               |       
|                                                                                             | Cost of products                    |                               |       
|                                                                                             | Cost of services                    |                               |       
|                                                                                             |                                     |                               |       
|                                                                                             |                                     | Total cost of sales           |       
|                                                                                             |                                     |                               |       
|Gross profit                                                                                 |                                     |                               | 340   
|Operating expenses:                                                                          |                                     |                               |       
|                                                                                             | Research and development            |                               |       
|                                                                                             | Selling, general and administrative |                               |       
|                                                                                             | Restructuring charges               |                               |       
|                                                                                             | Separation costs                    |                               |       
|                                                                                             |                                     |                               |       
|                                                                                             |                                     | Total operating expenses      |       
|Income (loss) from operations                                                                |                                     |                               | 99    
|Other income (expense), net                                                                  |                                     |                               | 15    
|                                                                                             |                                     |                               |       
|Income (loss) before taxes                                                                   |                                     |                               | 114   
|Provision for taxes                                                                          |                                     |                               | 17    
|                                                                                             |                                     |                               |       
|Net income (loss)                                                                            |                                     | $                             | 97    
|                                                                                             |                                     |                               |       
|Basic net income (loss) per share                                                            |                                     | $                             | 1.63  
|Diluted net income (loss) per share                                                          |                                     | $                             | 1.61  
|Weighted average shares (in thousands) used in computing basic net income (loss) per share   |                                     |                               | 59,190
|Weighted average shares (in thousands) used in computing diluted net income (loss) per share |                                     |                               | 59,883

36

---



October 31,2007

2006

2005

2004

2003(in millions)Combined and Consolidated Balance Sheet Data:Cash and cash equivalents and short-term investments

$
375

$
300

$


$


$
Working capital

$
378

$
300

$
41

$
69

$
123Total assets

$
771

$
674

$
260

$
265

$
309Shareholders' equity

$
498

$
389

$
87

$
119

$
169


Financial
statements prior to June 1, 2006 were derived from the accounting records of Agilent using the historical basis of assets and liabilities of Verigy. We engaged in
extensive intercompany transactions with Agilent. As such, the combined financial statements prior to June 1, 2006 include allocations of certain Agilent corporate expenses, including
information technology resources and support; finance, accounting, and auditing services; real estate and facility management services; human resources activities; certain procurement activities;
treasury services, customer contract administration, legal advisory services, and Agilent Labs services. The amounts recorded for these transactions and allocations are not necessarily representative
of the amounts that would have been reflected in the financial statements had the company been an entity operated independently of Agilent.

Verigy
adopted SFAS No. 123(R) beginning in the first quarter of fiscal year 2006. SFAS No. 123(R), superseded our prior accounting for share based compensation awards
under APB No. 25 and required us to recognize compensation expense for all share based compensation awards based on fair value.

Verigy
also adopted SFAS No. 158 which became effective for us as of October 31, 2007 and requires recognition of an asset or liability in the statement of financial
position reflecting the funded status of pension and postretirement benefit plans such as retiree health and life, with current year changes recognized in shareholders' equity.

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

Overview

Basis of Presentation

The accompanying financial data has been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). For a full
understanding of our financial position and results of operations, this discussion should be read in conjunction with the combined and consolidated financial statements and related notes presented in
this report on Form 10-K.

Our
fiscal year end is October 31, and our fiscal quarters end on January 31, April 30, and July 31. Unless otherwise stated, all dates refer to our fiscal
years and fiscal periods.

Amounts
included in the accompanying combined and consolidated financial statements are expressed in U.S. dollars.

Prior
to June 1, 2006, we had operated as part of Agilent, and not as a stand-alone company. Therefore, the accompanying combined and consolidated financial statements prior to
June 1, 2006, were derived from the accounting records of Agilent using the historical basis of assets and liabilities of Verigy. The expense and cost allocations prior to June 1, 2006,
have been determined on a basis we consider to be a reasonable reflection of the utilization of services provided by Agilent or the benefit received by us from Agilent.

37

---



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

Business Summary

We design, develop, manufacture and sell advanced test systems and solutions for the semiconductor industry. As part of our single scalable platform strategy, we
develop and offer performance and capability enhancements to our platforms as part of our product development roadmap. We offer a single platform for 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 our Versatest V5000 Series platform, designed to test memory devices, including
flash memory and multi-chip packages. We also provide a range of services that assist our customers in quickly and cost effectively delivering the innovative, feature-rich
products demanded by their end users.

More
than a decade ago, we introduced the concept of scalable platform architecture for semiconductor testing, and we are continuing to capitalize on the benefits of that strategy today.
Our scalable platform architecture provides us with internal operating model efficiencies such as reduced research and development costs, engineering headcount, support requirements and inventory
risk.

We
sell our products and services directly to a wide range of customers, including integrated device manufacturers, or IDMs, test subcontractors, which includes specialty assembly,
package and test companies as well as wafer foundries, and fabless design companies. We have a broad installed customer base, having sold over 1,650 of our 93000 Series systems and over 2,500 of our
Versatest Series systems.

Overview of Results

In fiscal year 2007, two customers, ChipMos Technologies (Bermuda) Ltd. and Spansion Inc., accounted for more than 10% of our net revenue. In fiscal
year 2006, one customer, ChipMos Technologies (Bermuda) Ltd., accounted for more than 10% of our net revenue. In fiscal year 2005, no single customer accounted for more than 10% of our net
revenue.

We
derive a significant percentage of our net revenue from outside North America. Net revenue from customers located outside of North America represented 70.8%, 68.4% and 72.8% of total
net revenue in fiscal years 2007, 2006, and 2005, respectively. Net revenue in North America was lower by 9.8% in fiscal year 2007, compared to fiscal year 2006, due to the continuing outsourcing by
our North American customers to contract manufacturers in Asia. Net revenue in Asia (including Japan) was higher by 4.8% in fiscal year 2007, compared to fiscal year 2006. We expect this trend of
increasing sales in Asia (including Japan) to continue as semiconductor manufacturing activities continue to concentrate in that region.

The
sales of our products and services are dependent, to a large degree, on customers who are subject to cyclical trends in the demand for their products. These cyclical periods have had
and will have significant impacts on our business since our customers often delay or accelerate purchases in reaction to changes in their businesses and to demand fluctuations in the semiconductor
industry. Historically, these demand fluctuations have resulted in significant variations in our results of operations. Upturns and downturns in the semiconductor industry in recent years have
generally affected the semiconductor test equipment and services industry more significantly than the overall capital equipment sector. Furthermore, we sell to a variety of customers, including
subcontractors. Because we sell to subcontractors, which during market downturns tend to reduce or cancel orders for new test systems and test services more quickly and dramatically than other
customers, any downturn

38

---



may
cause a quicker and more significant adverse impact on our business than on the broader semiconductor industry. In addition, although a decline in orders for semiconductor capital equipment may
accompany or precede the timing of a decline in the semiconductor market as a whole, recovery in semiconductor capital equipment spending may lag the recovery by the semiconductor industry.

In
connection with our separation from Agilent in June 2006, we transitioned the manufacturing processes for the 93000 Series products that we previously conducted internally to
Flextronics Telecom Services Ltd. ("Flextronics"). As a result of this transition, we now rely entirely on contract manufacturers. Flextronics commenced production of our Versatest series
products in China in July 2006 and assumed our manufacturing activities for the 93000 Series products in Germany in June 2006. Our volume manufacturing activities related to our 93000
Series platform will ultimately transition to Flextronics in China. However, given the recent increased demand for our SOC products, coupled with our customers' tight delivery schedule requirements,
we have decided to maintain additional manufacturing capacity at Flextronics in Germany. We expect this manufacturing model to improve our ability to manage costs in a cyclical market, drive down
inventory costs and exposure, improve our responsiveness to customer demand and place us closer to emerging markets.

We
believe that relying upon independent contract manufacturers will decrease our fixed costs and better position us to respond to changes in the demand for our products. With our
selection of Flextronics as our primary independent manufacturing supplier, we are leveraging their worldwide processes, tools and infrastructure and are expanding our manufacturing in Asia, where
Flextronics already has a significant capability for manufacturing complex technologies. As a result of this outsourcing arrangement, we expect to lower our fixed costs by reducing our capital
investments and manufacturing equipment and by reducing the size of our manufacturing work force located in high-cost geographies. In addition, although we will continue to retain some key
strategic procurement activities, we expect to reduce our material costs by leveraging Flextronics' tactical supply chain expertise and securing local suppliers. As a result of these actions, we
expect to have improved gross margins and reduced inventory when compared to historical levels.

Our
third and fourth fiscal quarters tend to be our strongest quarters for new orders, while our first fiscal quarter tends to be our weakest quarter for orders. We believe that the most
significant factor driving these seasonal patterns is the holiday buying season for consumer electronics products. The
seasonality of our business is often masked to a significant extent, however, by the high degree of cyclicality of the semiconductor industry.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") requires management to make
estimates and assumptions that affect the amounts reported in our combined and consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and
various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and of actions that may impact the company in the future,
actual results may be different from the estimates. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by
management. Those policies include revenue recognition, restructuring charges, inventory valuation, warranty, share-based compensation, retirement and post-retirement plan assumptions,
valuation of goodwill and intangible assets and accounting for income taxes.

Revenue recognition.Net revenue is derived from the sale of products and services and is adjusted for returns and
allowances, which historically have been insignificant. Consistent with the SEC's Staff Accounting Bulletin No. 104, or "SAB 104," we recognize revenue on the sale of semiconductor test
equipment when there is persuasive evidence of an arrangement, delivery has occurred or services have

39

---



been
rendered, the sales price is fixed or determinable and collectibility is reasonably assured. Delivery is considered to 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 fixed or determinable when the price is not subject to refund or adjustments. At the time we take an order, we evaluate
the creditworthiness of our customers to determine the appropriate timing of revenue recognition. For sales or arrangements that include customer-specified acceptance criteria, including those where
acceptance is required upon achievement of performance milestones or fulfillment of other future obligations, revenue is recognized after the acceptance criteria have been met. If the criteria are not
met, then revenue is deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. To the extent that a contingent payment exceeds the fair value of
the undelivered element, we defer the contingent payment.

Our
product revenue is generated predominantly from the sales of various types of test equipment. Software is embedded in many of our test equipment products, but the software component
is considered to be incidental. For revenue arrangements that include multiple elements, we recognize revenue in accordance with EITF 00-21. For products that include installation, if we
have previously successfully installed similar equipment, product revenue is recognized upon delivery, and recognition of installation revenue is delayed until the installation is complete. Otherwise,
neither
the product nor the installation revenue is recognized until the installation is complete. Revenue from services includes extended warranty, customer support, consulting, training, and education
services. Service revenue is deferred and recognized over the contractual 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, all of the revenue recognition criteria described above must be met before service
revenue is recognized. We use objective evidence of fair value to allocate revenue to elements in multiple element arrangements and recognize revenue when the criteria for revenue recognition have
been met for each element. In the absence of objective evidence of fair value of a delivered element, we allocate revenue to the fair value of the undelivered elements and the residual revenue to the
delivered elements. The price charged when an element is sold separately generally determines fair value.

Restructuring charges.We recognize a liability for restructuring costs at fair value only when the liability is incurred.
The three main components of our restructuring charges are workforce reductions, consolidating facilities and asset impairments. Workforce-related charges are accrued when it is determined that a
liability has been incurred, which is generally when individuals have been notified of their termination dates and expected severance payments. Plans to eliminate excess facilities result in charges
for lease termination fees and future commitments to pay lease charges, net of estimated future sublease income. We recognize charges for elimination of excess facilities when we have vacated the
premises. Asset impairments primarily consist of property, plant and equipment associated with excess facilities being eliminated, and are based on an estimate of the amounts and timing of future cash
flows related to the expected future remaining use and ultimate sale or disposal of the property, plant and equipment. The charges associated with consolidating facilities and asset impairment charges
incurred by Agilent prior to our separation were allocated to Verigy to the extent the underlying benefits related to our business. These estimates were derived using the guidance of Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for 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 an Activity (Including Certain Costs Incurred in a
Restructuring)" ("EITF 94-3") and lastly, SFAS No. 146 "Accounting for Exit or Disposal Activities" ("SFAS No. 146") which was effective for exit and disposal activities
initiated after December 31, 2002. If the amounts and timing of cash flows from restructuring activities are significantly different from what we have estimated, the actual amount of
restructuring and asset impairment charges could be materially different, either higher or lower, than those we have recorded.

40

---



Inventory valuation.We assess the valuation of our inventory, including demonstration inventory, on a quarterly basis based
upon estimates about future demand and actual usage. To the 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. Such write-downs are reflected in cost of products and can be material in amount. We recorded net inventory charges of $8 million, $7 million and $18 million in fiscal
years 2007, 2006 and 2005, respectively. Our inventory assessment involves difficult estimates of future events and, as a result, additional write-downs may be required. If actual market conditions
are more favorable than anticipated, inventory previously written down may be sold to customers, resulting in lower cost of products and higher income from operations than expected in that period.
Excess and obsolete
inventory resulting from shifts in demand or changes in market conditions for raw materials and components can result in significant volatility in our costs of products.

In
our inventory valuation analysis, we also include inventory that we could be obligated to purchase from our suppliers based on our production forecasts. To the extent that our
committed inventory purchases exceed our forecasted productions needs, we write down the value of those inventories by taking a charge to our cost of products and increasing our supplier liability.

Warranty.We generally provide a one-year warranty on products commencing upon installation or delivery. We
accrue for warranty costs in accordance with Statement of Financial Standards No. 5, "Accounting for Contingencies" ("SFAS No. 5"), based on historical trends in warranty charges as a
percent of gross product shipments. Estimated warranty charges are recorded within cost of products at the time revenue is recognized and the liability is reported in other current liabilities on the
combined balance sheet. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. For some products we also offer extended warranties beyond one year.
Costs associated with our extended warranty contracts beyond one year are expensed as incurred.

Separation costs.Separation costs are one-time internal and external spin-off related costs, such as
information technology set-up costs and consulting and legal and other professional fees. We do not expect any significant separation costs after October 31, 2007.

Share-based compensation.We account for share-based awards in accordance with Statement of Financial Accounting Standards
No. 123(R), Shared-Based Payment ("SFAS No. 123(R)") which was effective November 1, 2005 for Verigy. Under this standard, share-based compensation expense is primarily based on
estimated grant date fair value using the Black-Scholes option pricing model and is recognized on a straight-line basis for awards granted after November 1, 2005 over the vesting
period of the award. For awards issued prior to November 1, 2005, we recognize share-based compensation expense based on FASB Interpretation 28 "Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans an interpretation of APB Opinions No. 15 and 25", which provides for accelerated expensing. Our estimate of share-based compensation expense requires
a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), future forfeitures and related tax effects. The
assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment.
Although we believe the assumptions and estimates we have made are reasonable and appropriate, changes in assumptions could materially impact our reported financial results. We incurred
$14 million and $10 million in share-based compensation expense during fiscal 2007 and 2006. We did not incur any share-based compensation expense in 2005. Also see Note 8
"Share-based compensation" of the combined and consolidated financial statements.

Retirement and post-retirement plan assumptions.Retirement and post-retirement benefit plan costs
are a significant cost of doing business. They represent obligations that will ultimately be settled sometime in the future and therefore are subject to estimation. Pension accounting is intended to
reflect the recognition of future benefit costs over the employees' average expected future service based

41

---



on
the terms of the plans and the investment and funding decisions made by us. To estimate the impact of these future payments and our decisions concerning funding of these obligations, we are
required to make assumptions using actuarial concepts within the framework of U.S. GAAP. Two critical assumptions are the discount rate and the expected long-term return on plan assets.
Other important assumptions include the health care cost trend rate, expected future salary increases, expected future increases to benefit payments, expected retirement dates, employee turnover and
retiree mortality rates. We evaluate these assumptions at least annually.

The
discount rate is used to determine the present value of future benefit payments at each measurement date (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 for high quality corporate bonds. The discount rate for non-U.S. plans was generally
determined in a similar manner. Differences between the expected future cash flows of our plans and the maturities of the high quality corporate bonds are not expected to have a material impact on the
selection of discount rates. As discount rates decrease, we would expect our net plan costs to increase and as discount rates increase we would expect our net plan costs to decrease. 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"), became effective for us as of October 31, 2007 and requires recognition of an asset or liability in the statement of financial position reflecting the funded status of pension
and postretirement benefit plans such as retiree health and life, with current year changes recognized in shareholders' equity. At October 31, 2007, in order to recognize the funded status of
its pension and post-retirement benefit plans in accordance with SFAS No. 158, the Company recorded additional liabilities by a cumulative amount of $18 million of which
$12 million (net of tax of $6 million) was recorded as an increase to accumulated other comprehensive loss. These losses are being recognized over the expected average future service
lives of plan participants. Also see Note 18 "Retirement plans and Post-Retirement Benefits".

The
expected long-term return on plan assets is estimated using current and expected asset allocations, as well as historical and expected returns. Declining rate of return
assumptions generally result in increased pension expense while increasing rate of return assumptions generally result in lower pension expense. A one percent change in the estimated
long-term return on our pension plan assets would result in a $0.3 million impact on pension expense for our fiscal year 2007. There are no plan assets related to our
post-retirement health care plans.

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

Valuation of goodwill and intangible assets.We performed our annual goodwill impairment analysis in the fourth quarter of
2007. Based on our estimates of forecasted discounted cash flows, we concluded that we did not have any impairment at that time.

Our
accounting for goodwill and purchased intangible assets complies with SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). We test goodwill for
possible impairment on an annual basis and at any other time that impairment indicators arise. Circumstances that could trigger an impairment test include but are not limited to: significant decrease
in market price of an asset, significant adverse changes in the extent or use or physical condition of an asset, significant adverse change in legal or regulatory factors affecting an asset,
unanticipated competition, loss of key personnel, accumulation of costs significantly in excess of expected costs to acquire or construct an asset, operating or cash flow losses (or projections of
losses) that demonstrates continuing losses associated with the use of an asset, or a current expectation that more likely than not, an asset will be sold or disposed of significantly before the end
of its previously estimated useful life. Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over the
economic lives of the respective assets, generally three to five years.

42

---



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

Accounting for income taxes.We record a tax provision for the anticipated tax consequences of the reported results of
operations. In accordance with SFAS No. 109,Accounting for Income Taxes, the provision for income taxes is computed using the asset and
liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of
assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in
effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not
to be realized.

We
are required to assess the realization of our net deferred tax assets and the need for a valuation allowance. This assessment requires that our management make judgments about
benefits that could be realized from future taxable income, as well as other positive and negative factors influencing the realization of deferred tax assets. We had no valuation allowance against any
net deferred tax assets as of October 31, 2007 and 2006. Prior to our separation, we maintained a full valuation allowance for losses we incurred in the U.S. and Japan, prior to fiscal year
2003.

Undistributed
earnings of our Domestic (US) and Foreign Subsidiaries are indefinitely reinvested in the respective operations. No provision has been made for taxes that might be payable
upon remittance of such earnings, nor is it practicable to determine the amount of this liability.

Our
effective tax rate varies based on a variety of factors, including overall profitability, the geographical mix of income before taxes and the related tax rates in the jurisdictions
where we operate, restructuring and other one-time charges, as well as discrete events, such as settlements of future audits. We are subject to audits and examinations of our tax returns
by tax authorities in various jurisdictions, including the Internal Revenue Service. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy
of our provision for income taxes.

43

---



Results of Operations

The following table sets forth certain operating data as a percent of net revenue for the periods presented.

Year Ended October 31,2007

2006

2005Net revenue:Products

80.8
%
83.0
%
77.9
%Services

19.2

17.0

22.1Total net revenue

100.0

100.0

100.0Cost of sales:Cost of products

41.8

42.5

50.0Cost of services

13.5

12.5

19.3Total cost of sales

55.3

55.0

69.3Gross margin

44.7

45.0

30.7Operating expenses:Research and development

12.0

12.7

22.1Selling, general and administrative

19.1

19.2

29.4Restructuring charges

0.1

2.1

1.5Separation costs

0.5

8.9

0.7Total operating expenses

31.7

42.9

53.7Income (loss) from operations

13.0

2.1

(23.0
)Other income (expense), net

2.0

0.6

(0.2
)Income (loss) before income taxes

15.0

2.7

(23.2
)Provision for income taxes

2.2

2.7

2.9Net income (loss)

12.8
%
0.0
%
(26.1
)%


Net Revenue

|                           |                           | Year Ended October 31,    |     |     |     |     |    
|-------------------------- | ------------------------- | ------------------------- | --- | --- | --- | --- | ---
|
|
|
|Net revenue from products: |                           |                           |     |     |     |     |    
|                           | SOC/SIP/High-Speed Memory |                           | $   | 333 |     | $   | 442
|                           | Memory Test               |                           |     | 282 |     |     | 204
|                           |                           |                           |     |     |     |     |    
|                           |                           | Net revenue from products |     | $   | 615 |     | $  
|Net revenue from services  |                           |                           | 146 |     |     | 132 |    
|                           |                           |                           |     |     |     |     |    
|                           | Total net revenue         |                           | $   | 761 |     | $   | 778
|                           |                           |                           |     |     |     |     |    

44

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Our
revenues by geographic region for fiscal years 2007, 2006 and 2005 are as follows:

|                              |                                   | Year Ended October 31, |     |      |   |     |     
|----------------------------- | --------------------------------- | ---------------------- | --- | ---- | - | --- | ----
|
|
|
|North America                 |                                   | $                      | 222 |      | $ | 246 |     
|                              | As a percent of total net revenue |                        |     | 29.2 | % |     | 31.6
|Europe                        |                                   | $                      | 32  |      | $ | 48  |     
|                              | As a percent of total net revenue |                        |     | 4.2  | % |     | 6.2 
|Asia-Pacific, excluding Japan |                                   | $                      | 455 |      | $ | 405 |     
|                              | As a percent of total net revenue |                        |     | 59.8 | % |     | 52.0
|Japan                         |                                   | $                      | 52  |      | $ | 79  |     
|                              | As a percent of total net revenue |                        |     | 6.8  | % |     | 10.2
|                              |                                   |                        |     |      |   |     |     
|Total net revenue             |                                   | $                      | 761 |      | $ | 778 |     
|                              |                                   |                        |     |      |   |     |     

Net Revenue.Net revenue is derived from the sale of products and services and is adjusted for returns and allowances, which
historically have been insignificant. Our product revenue is generated predominantly from the sales of our test equipment products. Revenue from services includes extended warranty, customer support,
consulting, training and education activities. Service revenue is recognized over the contractual period or as services are rendered to the customer.

Net
revenue for fiscal year 2007 was $761 million, a decrease of $17 million, or 2.2%, from the $778 million achieved in fiscal year 2006. Net product revenue for
fiscal year 2007 was $615 million, a decrease of $31 million, or 4.8%, from $646 million achieved in fiscal year 2006. The decrease in product revenue was primarily due to lower
sales volume of our SOC/SIP test systems, partially offset by higher revenue from sales of our memory test systems, spurred by continued strong demand for hand-held consumer products as
well as the expansion of the markets that we serve into NAND flash and flash final test.

Net
product revenue from sales of our SOC/SIP/High-speed memory test systems decreased by $109 million, or 24.7%, in fiscal year 2007, compared to fiscal year 2006,
primarily due to weakness in demand for our SOC/SIP/High-speed memory test systems during the first
half of fiscal year 2007, particularly from sub-contractors. During the second half of fiscal year 2007, however, we did experience an increase in demand for our
SOC/SIP/High-speed memory test systems, driven by our new product introductions. Net product revenue from sales of our memory test systems increased by $78 million, or 38.2%, in
fiscal year 2007, compared to fiscal year 2006, primarily due to strong sales of flash memory devices as a result of greater demand for hand-held consumer products, as well as expansion of
our addressable markets into NAND flash and flash final test.

Service
revenue in fiscal year 2007 accounted for $146 million, an increase of $14 million, or 10.6%, compared to the $132 million achieved in fiscal year 2006. The
increase in service revenue is primarily attributable to our growing installed base.

Net
revenue in fiscal year 2006 was $778 million, an increase of $322 million, or 70.6%, from the $456 million achieved in fiscal year 2005. Net product revenue in
fiscal year 2006 was $646 million, an increase of $291 million, or 82.0%, from the $355 million achieved in fiscal year 2005. The increase in net product revenue was primarily a
result of a higher volume of sales enabled by increased overall demand for our products. Net product revenue from our SOC/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 our penetration in a
breadth of applications, from next generation graphics and wireless gaming, to high-end SOC applications and digital consumer applications as well as SOC solutions with RF capabilities.
During

45

---



the
fourth quarter of fiscal 2006, we experienced some weakness in demand for our SOC/SIP/high-speed memory test systems, particularly from sub-contractors. As a result, a
higher portion of our net revenue during the latter part of fiscal 2006 has come from our IDM customers. Sales of our memory test systems also contributed to the net product revenue increase, with net
product revenue from our memory test systems increasing by $116 million, or 131.8%. Substantially all of these sales were of the enhanced version of our Versatest V5000 Series platform, which
was introduced in late fiscal year 2004. This demand was primarily a result of strong sales of flash memory devices as a result of greater demand for hand-held consumer products, as well
as expansion of our addressable markets into 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 increase in service revenue is attributed to our growing installed base and increased services associated with a strong demand
for products at the end of fiscal year 2006.

We
derive a significant percentage of our net revenue from outside North America. Net revenue from customers located outside of North America represented 70.8%, 68.4% and 72.8% of total
net revenue in fiscal years 2007, 2006, and 2005, respectively. Net revenue in North America was lower by 9.8% in fiscal year 2007, compared to fiscal year 2006, due to the continuing outsourcing by
our North American customers to contract manufacturers in Asia. Net revenue in Asia (including Japan) was higher by 4.8% in fiscal year 2007, compared to fiscal year 2006. We expect this trend of
increasing
sales in Asia (including Japan) to continue as semiconductor manufacturing activities continue to concentrate in that region.

Cost of Sales

Cost of Products

|                 |                                 | Year Ended October 31, |     |      |   |     |     
|---------------- | ------------------------------- | ---------------------- | --- | ---- | - | --- | ----
|
|
|
|Cost of products |                                 | $                      | 318 |      | $ | 331 |     
|                 | As a percent of product revenue |                        |     | 51.7 | % |     | 51.2

Cost of Products.Cost of products consists primarily of manufacturing materials, outsourced manufacturing costs, direct
labor, manufacturing and administrative overhead, warranty costs and provisions for excess and obsolete inventory, partially offset, when applicable, by benefits from sales of previously
written-down inventory.

The
decrease in cost of products of approximately $13 million, or 3.9%, in fiscal year 2007, compared to fiscal year 2006, was primarily due to a decrease in product shipments,
cost savings realized from the streamlining of our infrastructure costs, $8 million lower restructuring and separation costs and $6 million lower excess and obsolete inventory-related
charges. These decreases were partially offset by $5 million higher freight and duty expenses and $4 million higher warranty costs. Cost of products as a percent of net product revenue
increased by 0.5 percentage points in fiscal year 2007, compared to fiscal year 2006, primarily as a result of a decrease in product shipments and product mix, partially offset by less
inventory write-offs for discontinued products and cost savings realized from the streamlining of our infrastructure costs. Excess and obsolete inventory-related charges in fiscal year
2007 were $12 million, compared to $18 million in fiscal year 2006. In addition, we sold previously written down inventory of $4 million and $11 million in fiscal years
2007 and 2006, respectively. The sales of previously written down inventory reduced cost of products as a percentage of product revenue by approximately 0.3 and 0.9 percentage points for fiscal
years 2007 and 2006, respectively.

Our
cost of products included approximately $4.4 million of restructuring and separation charges in fiscal year 2007, compared to approximately $12 million in fiscal year
2006. Our cost of products also included approximately $1.7 million of SFAS No. 123(R) share-based compensation expense in both

46

---



fiscal
years 2007 and 2006. As of October 31, 2007, we held inventory that was previously written down by $35 million and is primarily composed of component raw material. We continue to
dispose of the remaining inventory on a recurring basis.

The
increase in cost of products of $103 million, or 45.2%, in fiscal year 2006, compared to fiscal year 2005, was directly related to the increase in products shipped in 2006.
The decrease in cost of products as a percent of net product revenue, compared to fiscal year 2005, was a result of higher revenue, higher margins from both our product lines, less inventory
write-offs for discontinued products as well as our cost savings realized from our move to a new manufacturing model. This decrease was partially offset by higher performance-based
variable compensation costs in fiscal year 2006. Excess and obsolete inventory-related charges in fiscal year 2006 were $18 million, compared to $25 million in fiscal year 2005. In
addition, we sold previously written down inventory of $11 million and $7 million in fiscal years 2006 and 2005, respectively. The sales of previously written down inventory reduced cost
of products as a percentage of product revenue by approximately 0.9 and 1.3 percentage points for fiscal years 2006 and 2005, respectively.

Our
costs of products in absolute amount are expected to increase or decrease with revenue. As a percent of net product revenue, these costs will vary depending on a variety of factors,
including the mix of system configurations in a particular period, competitive and other pressures on pricing and our
ability to manage inventory levels to avoid excess and obsolete inventory charges. In order to mitigate the risk and to manage our costs through the peaks and troughs of the semiconductor industry, we
have streamlined our cost structure by reducing our fixed costs and adding more flexibility to our manufacturing model through the outsourcing of our manufacturing. We believe our efforts will provide
us with the flexibility to respond more rapidly to changes in industry conditions and to better capitalize on market opportunities during market upturns, and will provide us with more consistent cost
of products.

Cost of Services

|                 |                                  | Year Ended October 31, |     |      |   |    |     
|---------------- | -------------------------------- | ---------------------- | --- | ---- | - | -- | ----
|
|
|
|Cost of services |                                  | $                      | 103 |      | $ | 97 |     
|                 | As a percent of services revenue |                        |     | 70.5 | % |    | 73.5

Cost of Services.Cost of services includes cost of field service and support personnel, spare parts consumed in service
activities and administrative overhead allocations.

Cost
of services increased by $6 million, or 6.2%, in fiscal year 2007, compared to fiscal year 2006, primarily due to the $14 million increase in services revenue and our
increased costs needed to support a higher installed base, partially offset by cost savings realized from the streamlining of our infrastructure costs. Cost of services as a percent of service revenue
decreased by 3 percentage points, from 73.5% in fiscal year 2006 to 70.5%, reflecting our better utilization of our service personnel as our installed base has increased as well as the benefit
of the improved reliability and quality of our current product offering. Our cost of services also included approximately $0.8 million of SFAS No. 123(R) share-based compensation expense
in fiscal year 2007, compared to approximately $0.2 million in fiscal year 2006.

Cost
of services increased by $9 million, or 10.2%, in fiscal year 2006, compared to fiscal year 2005, primarily due to higher service revenue being generated from product
shipments. Cost of services as a percent of service revenue decreased by 13.6 percentage points, from 87.1% in fiscal year 2005 to 73.5% in fiscal year 2006. The improvement in the cost of
services margin is primarily due to the $31 million higher services revenue as well as better utilization of our service personnel as our installed base increased and benefits from the improved
reliability and quality of our products. Our cost of

47

---



services
also included approximately $0.4 million of restructuring charges in fiscal year 2006, compared to no such charges in fiscal year 2005 and approximately $0.2 million of SFAS
No. 123(R) share-based compensation expense in fiscal year 2006, compared to no such charges for fiscal year 2005.

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

Operating Expenses

Research and Development Expenses

|                         |                             | Year Ended October 31, |    |      |   |    |     
|------------------------ | --------------------------- | ---------------------- | -- | ---- | - | -- | ----
|
|
|
|Research and development |                             | $                      | 91 |      | $ | 99 |     
|                         | As a percent of net revenue |                        |    | 12.0 | % |    | 12.7

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



R&D
costs have generally been expensed as incurred.

Research
and development expense declined by $8 million, or 8.1%, in fiscal year 2007, compared to fiscal year 2006, primarily due to lower project materials as well as cost
savings realized from the streamlining of our infrastructure costs, partially offset by $0.4 million higher share-based compensation expenses. R&D expenses included approximately
$1.7 million of SFAS No. 123(R) share-based compensation expenses in fiscal year 2007, compared to approximately $1.3 million for fiscal year 2006.

Research
and development expense declined by $2 million, or 2.0%, in fiscal year 2006, compared to fiscal year 2005, primarily due to lower allocated cost from Agilent prior to
our separation as well as our continued progress in lowering our post-separation cost structure partially offset by higher performance-based variable compensation expenses and share-based
compensation expenses that were recorded in accordance with SFAS No. 123(R). R&D expenses decreased significantly as a percent of net revenue in fiscal year 2006, compared to fiscal year 2005,
primarily due to the increase in revenue despite higher performance-based variable compensation expenses and share-based compensation expenses that were recorded in accordance with SFAS
No. 123(R). R&D expenses included approximately $1.3 million of SFAS No. 123(R) share-based compensation expenses in fiscal year 2006, compared to no such expenses for fiscal year
2005.

We
believe that we need to maintain a significant level of research and development spending in order to remain competitive and, as a result, our research and development expenses have
varied only modestly in dollars but vary more significantly as a percent of revenue. As part of our separation from Agilent, we have consolidated our R&D teams in Boeblingen, Germany, for our
principal SOC

48

---



developments
and in Cupertino, California, for our memory test products. We believe this will help us concentrate on our technology innovation and decrease our time to market with new products.

Selling, General and Administrative Expenses

|                                    |                             | Year Ended October 31, |     |      |   |     |     
|----------------------------------- | --------------------------- | ---------------------- | --- | ---- | - | --- | ----
|
|
|
|Selling, general and administrative |                             | $                      | 145 |      | $ | 149 |     
|                                    | As a percent of net revenue |                        |     | 19.1 | % |     | 19.2

Selling, General and Administrative.Selling, general and administrative ("SG&A") expense includes costs related to:



Selling,
general and administrative expenses decreased by $4 million, or 2.7%, in fiscal year 2007, compared to fiscal year 2006 primarily as a result of cost savings realized
from the streamlining of our infrastructure costs, partially offset by wage increases, higher performance-based variable compensation expenses and higher share-based compensation expenses. SG&A
expenses included approximately $9.6 million of SFAS No. 123(R) share-based compensation expenses in fiscal year 2007, compared to approximately $7.2 million for fiscal year 2006.

Selling,
general and administrative expenses increased by $15 million, or 11.2%, in fiscal year 2006, compared to fiscal year 2005. This increase was primarily a result of higher
performance-based variable compensation expenses, wage increases, higher commission costs on increased sales, and higher share-based compensation expenses that were recorded in accordance with SFAS
No. 123(R). These increases were partially offset by cost savings from lower IT and infrastructure costs we experienced subsequent to our separation from Agilent. SG&A expenses included
approximately $7.2 million of SFAS No. 123(R) share-based compensation expenses in fiscal year 2006, compared to no such expenses for fiscal year 2005.

In
general, we believe our SG&A expenses will decrease in absolute amount compared to prior periods due to our efforts to streamline our infrastructure and consolidate excess facilities.
The expected savings realized from our cost reduction efforts will be partially offset by incremental costs associated with operating as a stand-alone public company, including professional fees such
as legal, regulatory and accounting compliance costs that we will incur and share-based compensation expenses that are now being recorded in accordance with SFAS No. 123(R). SG&A expenses can
fluctuate due to changes in commission expenses which are tied to changes in sales volume and customer mix.

49

---





Restructuring Charges

A summary of the statement of operations impact of the charges resulting from all restructuring plans for fiscal years ended October 31, 2007, 2006 and
2005 is shown below:

Year Ended October 31,2007

2006

2005(in millions)Restructuring charges (included in cost of sales)

$
3

$
7

$
1Restructuring charges (included in operating expenses)


1


17


7Total restructuring charges

$
4

$
24

$
8


We
incurred restructuring charges of $4 million, $24 million and $8 million for fiscal years 2007, 2006 and 2005, respectively. These charges were a result of
Agilent's 2005 restructuring plan and Verigy's continued efforts aimed at reducing operational costs, primarily through closing, consolidating and relocating some sites and reducing and realigning our
workforce.

As
of October 31, 2007, we had approximately $1.8 million accrued restructuring liabilities, compared to no accrued restructuring liability as of October 31, 2006.
In accordance with the separation agreements with Agilent, Agilent retained and paid for all restructuring liabilities associated with its 2005 restructuring plan, except for those liabilities related
to 85 employees who were transferred to Flextronics for whom we paid approximately $3 million and are recognizing as expense over the transferred employees requisite service period.

See
Note 17 "Restructuring" of the combined and consolidated financial statements for a description of the restructuring and asset impairment activity.

Separation Costs

The following table presents the components of separation costs for fiscal years 2007, 2006 and 2005, respectively.

Year Ended October 31,2007

2006

2005(in millions)Separation costs (included in cost of sales)

$
1

$
8

$
Separation costs (included in operating expense)


4


75


3Total of separation costs


5


83


3Net curtailment and settlement gains (included in costs of sales)





(4
)

Net curtailment and settlement gains (included in operating expenses)





(6
)

Total net curtailment and settlement gains





(10
)

Net separation costs

$
5

$
73

$
3


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

For
fiscal year 2007, we incurred $5 million in separation costs, of which approximately $1 million was recorded in costs of sales. For fiscal year 2006, we incurred
$83 million in separation costs, of which approximately $8 million was recorded in costs of sales. For fiscal year 2005, we incurred

50

---



$3 million
in separation costs, all of which were recorded in operating expenses. We do not expect any significant separation costs on a go-forward basis.

In
fiscal year 2006, we also had a net curtailment and settlement gain of approximately $10 million which pertained to Agilent's U.S. Retirement Plans and Agilent's Post
Retirement Benefit Plan. These net curtailment and settlement gains which resulted from the separation of our business from Agilent and the significant workforce reductions we incurred during fiscal
year 2006, were recorded by Agilent in accordance with SFAS No. 88 and were pushed down to our business.

Provision for Income Taxes

Year Ended October 31,2007

2006

2005(in millions)Provision for income taxes

$
17

$
21

$
13


We
recorded income tax provisions of $17 million, $21 million and $13 million for fiscal years ended 2007, 2006 and 2005, respectively. Through June 1, 2006,
Verigy's income tax expense reflected amounts based on Agilent's consolidated tax profile, thus our income tax expense for the first seven months consisted of allocated expense from Agilent. Since our
separation from Agilent on June 1, 2006, our tax expense is based on our new business model and tax status in the countries where we do business.

As
of October 31, 2007 and 2006, we had $46 million and $57 million of deferred tax assets due to temporary differences between the book and tax basis of the net
assets, most of which were acquired upon our separation from Agilent. Upon our separation from Agilent, we did not retain any pre-separation deferred tax assets or liabilities which had
resulted from historical temporary differences, net operating losses and credit carryforwards. We did, however, retain approximately $4 million of prepaid tax assets upon our separation.

Our
effective tax rate varies based on a variety of factors, including overall profitability, the geographical mix of income before taxes and the related tax rates in the jurisdictions
where we operate, restructuring and other one-time charges, as well as discrete events, such as settlements of future audits. We are subject to audits and examinations of our tax returns
by tax authorities in various jurisdictions, including the Internal Revenue Service. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy
of our provision for income taxes.

Financial Condition

Liquidity and Capital Resources

As of October 31, 2007, we had $146 million in cash and cash equivalents, compared to $300 million as of October 31, 2006. This
decrease was primarily a result of cash used for the purchase of available-for-sale marketable securities partially offset by cash generated from our operations and financing
activities.

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

51

---



Net Cash Provided By (Used in) Operating Activities

Net cash provided by operating activities was $121 million in fiscal year 2007, compared to $164 million of net cash provided by operating
activities in fiscal year 2006. The $121 million cash generated during fiscal year 2007 was primarily due to net income from our operations of $97 million, a $9 million decrease
in our receivables, a $10 million increase in employee compensation and benefits and a $7 million increase in deferred revenue. These were partially offset by a decrease of
$31 million in payables to Agilent, a decrease in income taxes and other taxes payable of $9 million and a decrease in other current and long-term assets and liabilities of
approximately $5 million. Also, in fiscal year 2007, we had non-cash charges of $13 million from depreciation and amortization, $12 million of inventory
write-offs, and $14 million of SFAS No. 123(R) non-cash share-based compensation costs.

Net
cash provided by operating activities was $164 million in fiscal year 2006, compared to $74 million of net cash used for operating activities in fiscal year 2005. The
significant net cash generation in fiscal year 2006, compared to fiscal year 2005, was primarily due to our breakeven position in fiscal year 2006 versus a net loss of $119 million in fiscal
year 2005. In addition, an increase in our accounts payable and payables to Agilent of $85 million and net liabilities retained by Agilent of $82 million, and a $16 million
increase in deferred revenue contributed to the higher cash generation on fiscal year 2006. Also, in fiscal year 2006, we had non-cash charges of $18 million from inventory
write-offs, $10 million of SFAS No. 123(R) non-cash share-based compensation costs, and $9 million in depreciation expense. These impacts were partially
offset by a $41 million increase in our accounts receivable, $9 million decrease in income taxes payable, and
$42 million decrease in the net change of current assets and accrued liabilities. Also, in fiscal year 2006, we had a non-cash net $10 million curtailment and settlement
gain.

Net Cash Used in Investing Activities

Net cash used in investing activities for the fiscal year 2007 was $290 million, compared to $37 million in fiscal year 2006. The
$290 million of net investment was primarily related to $568 million invested in available-for-sale securities and $12 million of cash payments for site
set-ups and leasehold improvements, partially offset by $290 million of proceeds from sales and maturities of available-for-sale marketable securities. Our
marketable securities include commercial paper, corporate bonds, government securities and auction rate securities, and reported at fair value with the related unrealized gains and losses included in
accumulated other comprehensive income (loss), a component of shareholders' equity, net of tax. In the fourth quarter of fiscal year 2007, certain auction rate securities failed auction due to sell
orders exceeding buy orders. Based on an analysis of other-than-temporary impairment factors, Verigy recorded a temporary impairment within other comprehensive loss of
approximately $1.4 million (net of tax of $0.3 million) at October 31, 2007 related to these auction rate securities. Verigy's marketable securities portfolio as of
October 31, 2007 was $402 million. The portfolio includes $142 million (at cost) invested in auction rate securities of which, $49 million (at cost) are currently
associated with failed auctions, all of which have been in a loss position for less than 12 months. The funds associated with failed auctions will not be accessible until a successful auction
occurs, a buyer is found outside of the auction process or the underlying securities have matured. As a result, we have classified those securities with failed auctions as long-term assets
in our consolidated balance sheet.

Net
cash used in investing activities for the fiscal year 2006 was $37 million, compared to $14 million in fiscal year 2005. The investing activity in fiscal year 2006 was
comprised of approximately $20 million for the new ERP and IT infrastructure set-up costs, $10 million relating primarily to capital expenditures for test and computer
equipment, office furniture as well as new research and development equipment for use in product and application development and approximately $5 million for new site set-ups as
well as leasehold improvements.

52

---



Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities for fiscal year 2007 was $14 million, compared to $173 million in fiscal year 2006. The $14 million
of net cash proceeds was comprised of approximately $7 million from the exercise of employee stock options, $5 million from contributions by participants of our ESPP Plan,
and approximately $2 million for excess tax benefits associated with the exercise of stock options and the vesting of restricted share units.

Net
cash provided by financing activities for the fiscal 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 was primarily comprised of $121 million of initial public offering proceeds, $19 million of capital contributions from Agilent, plus additional
cash infusion from Agilent of $41 million that our business required prior to our separation.

On
June 16, 2006, we used a part of our initial public offering proceeds to repay Agilent $25 million plus accrued interest that we had borrowed from Agilent under a
short-term revolving credit facility that we entered into with Agilent on June 2, 2006. This credit facility has been terminated as of October 31, 2006. On October 1,
2006, we completed the organizational structure of our China legal entity as well as the purchase of the net assets of our China operations from Agilent, which were valued at approximately
$14 million.

Other

Following our separation from Agilent, Agilent had provided us services and access to resources necessary for our operations. These services and resources
included facilities management, site information technology infrastructure, use of various applications and support systems, as well as employee related services for transitional employees remaining
with Agilent. The total transition services we received from Agilent totaled $4.4 million and $38 million for fiscal years 2007 and 2006, respectively. As of October 31, 2007,
these transition services had ended.

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

We
have contractual commitments for non-cancelable operating leases and vendor financing arrangements. We have in the past provided lease residual value guarantees on these
financing arrangements and we have no other material guarantees or commitments.

Our
liquidity is affected by many factors, some of which are based on normal ongoing operations of our business and some of which arise from fluctuations related to global economics and
markets. Our cash balances are generated and held in many locations throughout the world. Local government
regulations may restrict our ability to move cash balances to meet cash needs under certain circumstances. We do not currently expect such regulations and restrictions to impact our ability to pay
vendors and conduct operations throughout our global organization.

We
believe that existing cash, cash equivalents and short-term marketable securities of approximately $375 million, together with cash generated from operations, will
be sufficient to satisfy our working capital, capital expenditure and other liquidity needs at least through the next twelve months. We may require or choose to obtain debt or equity financing in the
future. We cannot assure you that additional financing, if needed, will be available on favorable terms or at all.

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Contractual Obligations and Commitments



Our cash flows from operations are dependent on a number of factors, including fluctuations in our operating results, accounts receivable collections, inventory
management and the timing of tax and other payments. As a result, the impact of contractual obligations on our liquidity and capital resources in future periods should be analyzed in conjunction with
such factors.

The
following table summarizes our contractual obligations at October 31, 2007 (in millions):

Total

Less than
one year

One to
three years

Three to
five years

More than
five yearsOperating leases

$
57

$
10

$
17

$
11

$
19Commitments to contract manufacturers and suppliers


117


117








Other purchase commitments


24


24








Long term liabilities


47





15


32Total

$
245

$
151

$
32

$
43

$
19


Operating leases.Commitments under operating leases relate primarily to leasehold property. Following our separation, we
have entered into long term lease arrangements for our corporate headquarters in Singapore, our U.S. headquarters in Cupertino, California, and our Boeblingen, Germany facility, the site of our 93000
Series platform development. We have also entered into long-term lease arrangements for our ASIC development office in Colorado, as well as other sales and support facilities around the
world.

Commitments to contract manufacturers and suppliers.We purchase components from a variety of suppliers and historically we
have used several contract manufacturers to provide manufacturing services for our products. During the normal course of business, we issue purchase orders with estimates of our requirements several
months ahead of the delivery dates. However, our agreements with these suppliers usually allow us the option to cancel, reschedule, or adjust our requirements based on our business needs prior to firm
orders being placed. Typically purchase orders outstanding with delivery dates within 30 days are non-cancelable. Therefore, only approximately 27% of
our purchase commitments arising from these agreements are firm, non-cancelable, and unconditional commitments. We expect to fulfill the purchase commitments for inventory within one year.

In
addition, we record a liability for firm, non-cancelable, and unconditional purchase commitments for quantities in excess of our future demand forecasts. Such liabilities
were $5 million as of October 31, 2007, and $6 million as of October 31, 2006. These amounts are included in other current liabilities in our combined balance sheets at
October 31, 2007 and October 31, 2006.

Other purchase commitments.These commitments relate primarily to contracts with professional services suppliers, which
include third-party consultants for legal, finance, engineering and other administrative services. With the exception of our IT service providers, our purchase commitments from professional service
providers are typically cancelable with a notice of 90-days or less without significant penalties. Our agreement with our primary IT service provider requires a notification period of
120 days and includes a termination charge of up to approximately $1.6 million in order to cancel our long-term contract.

Long-term liabilities.Long-term liabilities relate primarily to $32 million of defined
benefit and defined contribution retirement obligations, $12 million of extended warranty and deferred revenue obligations and approximately $3 million of other long-term
liabilities. Upon our separation from Agilent, the defined benefit plans for our employees located in Germany, Korea, Taiwan, France and

54

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Italy
were transferred to us. With the exception of Italy and France, which involve relatively insignificant amounts, Agilent completed the funding of these transferred plans, based on 100% of the
accumulated benefit obligation level as of the separation date, by contributing approximately $3 million into our pension trust accounts during fiscal year 2007. Verigy made approximately
$2 million of contributions to the retirement plans during fiscal year 2007. We expect expenses of approximately $7 million in fiscal year 2008 for the retirement plans that have been
transferred to us.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of October 31, 2007 or October 31, 2006.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk

With the exception of Japan, where products are sold primarily in Yen, our products are generally sold in U.S. Dollars. Services and support sales are sold
primarily in local currency when sold after the initial product sale. As such, our revenue, costs and expenses, and monetary assets and liabilities are somewhat exposed to changes in foreign currency
exchange rates as a result of our global operating and financing activities.

We
have implemented a hedging strategy that is intended to mitigate our currency exposures by entering into foreign currency forward contracts that have maturities of three months or
less. These contracts are used to reduce our risk associated with exchange rate movements, as gains and losses on these contracts are intended to offset exchange losses and gains underlying exposures.
Not withstanding our efforts to mitigate some foreign currency exposures, we do not hedge all of our foreign currency exposures, and there can be no assurances that our efforts will adequately protect
us against the risks associated with foreign currency fluctuations. Verigy does not use derivative financial instruments for speculative or trading purposes.

We
performed a sensitivity analysis assuming a hypothetical 10 percent adverse movement in foreign exchange rates to the hedging contracts and the underlying exposures described
above. As of October 31, 2007 and October 31, 2006, the analysis indicated that these hypothetical market movements would not have a material effect on our consolidated financial
position, results of operations or cash flows.

Prior
to our separation from Agilent, Agilent hedged net cash flow and balance sheet exposures that were not denominated in the functional currencies of its subsidiaries on a
short-term and anticipated basis and gains or losses associated with Agilent's derivative instrument contracts that had been allocated to us. As such, the historical results of our
business prior to June 1, 2006, reflected the hedging program in place at Agilent.

Investment and Interest Rate Risk

We account for our investment instruments in accordance with SFAS No. 115,Accounting for Investments in Debt and Equity
Securities. All of our cash and cash equivalents and marketable securities are treated as "available for sale" under SFAS No.115. Our marketable securities include commercial
paper, corporate bond and government securities and auction rate securities.

Our
cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate interest securities may have their market value
adversely impacted due to a a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment
income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in the market value due to changes in
interest rates. However because we classify

55

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our
debt securities as "available for sale", no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are
determined to be other than temporary. Should interest rates fluctuate by 10 percent, the value of our marketable securities would have changed by approximately $0.1 million as of
October 31, 2007 and our interest income would have changed by approximately $2 million for our fiscal year 2007.

Auction
rate securities are securities that are structured with short-term interest rate reset dates of generally less than ninety days but with contractual maturities that
can be well in excess of ten years. At the end of each reset period, which occurs every seven to thirty-five days, investors can sell or continue to hold the securities at par. These
securities are subject to fluctuations in fair value depending on the supply and demand at each auction. In the fourth quarter of fiscal year 2007, certain auction rate securities failed auction due
to sell orders exceeding buy orders. Based on an analysis of other-than-temporary impairment factors, Verigy recorded a temporary impairment within other comprehensive loss of
approximately $1.4 million (net of tax of $0.3 million) at October 31, 2007 related to these auction rate securities. Verigy's marketable securities portfolio as of
October 31, 2007 was $402 million. The portfolio includes $142 million (at cost) invested in auction rate securities of which, $49 million (at cost) are currently
associated with failed auctions, all of which have been in a loss position for less than 12 months. The funds associated with the securities for which auctions have failed will not be
accessible until a successful auction occurs, a buyer is found outside of the auction process or the underlying securities have matured.

56

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Item 8.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                                                                      |     
|                                                        | Combined and Consolidated Statement of Operations for each of the three years in the period ended October 31, 2007           |     
|                                                        | Consolidated Balance Sheets at October 31, 2007 and 2006                                                                     |     
|                                                        | Combined and Consolidated Statement of Cash Flows for each of the three years in the period ended October 31, 2007           |     
|                                                        | Combined and Consolidated Statement of Stockholders' Equity for each of the three years in the period ended October 31, 2007 |     
|                                                        | Notes to Combined and Consolidated Financial Statements                                                                      |     
|                                                        | Quarterly Summary (unaudited)                                                                                                |     

57

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Shareholders and Board of Directors of Verigy Ltd.:

In
our opinion, the combined and consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Verigy Ltd.
and its subsidiaries at October 31, 2007 and 2006 and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2007 in conformity
with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed under Item 15 (a) 2 presents fairly, in all
material respects, the information set forth therein when read in conjunction with the related combined and consolidated financial statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of October 31, 2007, based on criteria established inInternal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and
financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on
Internal Control over Financial Reportingappearing under Item 9A. Our responsibility is to express opinions on these financial
statements and on the Company's internal control over financial reporting based on our audits (which was an integrated audit in fiscal 2007). We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As
discussed in Note 2 to the combined and consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in fiscal 2006 and
the manner in which it accounts for its defined benefit pension and other postretirement plans in fiscal 2007.

/s/
PricewaterhouseCoopers LLP

San
Jose, California
December 20, 2007

58

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VERIGY LTD.        COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                        |                                     | Year Ended October 31,   |         
|------------------------------------------------------------------------------------------------------- | ----------------------------------- | ------------------------ | --------
|
|
|Net revenue:                                                                                            |                                     |                          |         
|                                                                                                        | Products                            |                          | $       
|                                                                                                        | Services                            |                          |         
|                                                                                                        |                                     |                          |         
|                                                                                                        |                                     | Total net revenue        |         
|Cost of sales:                                                                                          |                                     |                          |         
|                                                                                                        | Cost of products                    |                          |         
|                                                                                                        | Costs of services                   |                          |         
|                                                                                                        |                                     |                          |         
|                                                                                                        |                                     | Total cost of sales      |         
|Operating expenses:                                                                                     |                                     |                          |         
|                                                                                                        | Research and development            |                          |         
|                                                                                                        | Selling, general and administrative |                          |         
|                                                                                                        | Restructuring charges               |                          |         
|                                                                                                        | Separation costs                    |                          |         
|                                                                                                        |                                     |                          |         
|                                                                                                        |                                     | Total operating expenses |         
|Income (loss) from operations                                                                           |                                     |                          | 99      
|Other income (expense), net                                                                             |                                     |                          | 15      
|                                                                                                        |                                     |                          |         
|Income (loss) before taxes                                                                              |                                     |                          | 114     
|Provision for taxes                                                                                     |                                     |                          | 17      
|                                                                                                        |                                     |                          |         
|Net income (loss)                                                                                       |                                     | $                        | 97      
|                                                                                                        |                                     |                          |         
|Net income (loss) per sharebasic:                                                                      |                                     | $                        | 1.63    
|Net income (loss) per sharediluted:                                                                    |                                     | $                        | 1.61    
|Weighted average shares (in thousands) used in computing basic and diluted net income (loss) per share: |                                     |                          |         
|                                                                                                        |                                     |                          | Basic:  
|                                                                                                        |                                     |                          | Diluted:

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

59

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VERIGY LTD.        CONSOLIDATED BALANCE SHEETS

|                                        |                                                                                                                                        | October 31,
2007                           |    | October 31,
2006 |    
|--------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -- | ---------------- | ---
|
|ASSETS                                  |                                                                                                                                        |                                            |    |                  |    
|Current assets:                         |                                                                                                                                        |                                            |    |                  |    
|                                        | Cash and cash equivalents                                                                                                              |                                            | $  | 146              |    
|                                        | Short-term marketable securities                                                                                                       |                                            |    | 229              |    
|                                        | Trade accounts receivable, net                                                                                                         |                                            |    | 107              |    
|                                        | Receivables from Agilent                                                                                                               |                                            |    |                 |    
|                                        | Inventory                                                                                                                              |                                            |    | 68               |    
|                                        | Other current assets                                                                                                                   |                                            |    | 54               |    
|                                        |                                                                                                                                        |                                            |    |                  |    
|                                        |                                                                                                                                        | Total current assets                       |    |                  | 604
|Property, plant and equipment, net      |                                                                                                                                        |                                            | 42 |                  |    
|Long-term marketable securities         |                                                                                                                                        |                                            | 48 |                  |    
|Goodwill                                |                                                                                                                                        |                                            | 18 |                  |    
|Other long term assets                  |                                                                                                                                        |                                            | 59 |                  |    
|                                        |                                                                                                                                        |                                            |    |                  |    
|                                        |                                                                                                                                        | Total assets                               |    | $                | 771
|                                        |                                                                                                                                        |                                            |    |                  |    
|LIABILITIES AND SHAREHOLDERS' EQUITY    |                                                                                                                                        |                                            |    |                  |    
|Current liabilities:                    |                                                                                                                                        |                                            |    |                  |    
|                                        | Accounts payable                                                                                                                       |                                            | $  | 76               |    
|                                        | Payables to Agilent                                                                                                                    |                                            |    | 1                |    
|                                        | Employee compensation and benefits                                                                                                     |                                            |    | 53               |    
|                                        | Deferred revenue, current                                                                                                              |                                            |    | 65               |    
|                                        | Income taxes and other taxes payable                                                                                                   |                                            |    | 12               |    
|                                        | Other current liabilities                                                                                                              |                                            |    | 19               |    
|                                        |                                                                                                                                        |                                            |    |                  |    
|                                        |                                                                                                                                        | Total current liabilities                  |    |                  | 226
|Long-term liabilities                   |                                                                                                                                        |                                            | 47 |                  |    
|                                        |                                                                                                                                        |                                            |    |                  |    
|                                        |                                                                                                                                        | Total liabilities                          |    |                  | 273
|                                        |                                                                                                                                        |                                            |    |                  |    
|Commitments and contingencies (Note 21) |                                                                                                                                        |                                            |    |                  |    
|Shareholders' equity                    |                                                                                                                                        |                                            |    |                  |    
|                                        | Ordinary shares, no par value; 59,704,629 and 58,651,559 issued and outstanding at October 31, 2007 and October 31, 2006, respectively |                                            |    |                  |    
|                                        | Additional paid in capital                                                                                                             |                                            |    | 381              |    
|                                        | Retained earnings                                                                                                                      |                                            |    | 131              |    
|                                        | Accumulated other comprehensive loss                                                                                                   |                                            |    | (14              | )  
|                                        |                                                                                                                                        |                                            |    |                  |    
|                                        | Total shareholders' equity                                                                                                             |                                            |    | 498              |    
|                                        |                                                                                                                                        |                                            |    |                  |    
|                                        |                                                                                                                                        | Total liabilities and shareholders' equity |    | $                | 771
|                                        |                                                                                                                                        |                                            |    |                  |    

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

60

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VERIGY LTD.        COMBINED AND CONSOLIDATED STATEMENTS OF CASHFLOWS

|                                                   |                                                                                           | Year Ended October 31,                                                         |                                                 
|-------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ------------------------------------------------
|
|
|Cash flows from operating activities:              |                                                                                           |                                                                                |                                                 
|                                                   |                                                                                           | Net income (loss)                                                              |                                                 
|                                                   | Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                                                                |                                                 
|                                                   |                                                                                           | Depreciation and amortization                                                  |                                                 
|                                                   |                                                                                           | Excess and obsolete inventory-related charges                                  |                                                 
|                                                   |                                                                                           | Loss on disposal of property, plant and equipment                              |                                                 
|                                                   |                                                                                           | Share-based compensation                                                       |                                                 
|                                                   |                                                                                           | Excess tax benefits from share-based compensation                              |                                                 
|                                                   |                                                                                           | Asset impairment and other exit costs                                          |                                                 
|                                                   |                                                                                           | Pension curtailment and settlement net gains                                   |                                                 
|                                                   |                                                                                           | Restructuring charges pushed down by Agilent                                   |                                                 
|                                                   |                                                                                           | Assets and liabilities retained by Agilent due to separation                   |                                                 
|                                                   |                                                                                           | Changes in assets and liabilities:                                             |                                                 
|                                                   |                                                                                           |                                                                                | Trade accounts receivable, net                  
|                                                   |                                                                                           |                                                                                | Receivables from Agilent                        
|                                                   |                                                                                           |                                                                                | Inventory (Note 10)                             
|                                                   |                                                                                           |                                                                                | Accounts payable                                
|                                                   |                                                                                           |                                                                                | Employee compensation and benefits              
|                                                   |                                                                                           |                                                                                | Payables to Agilent                             
|                                                   |                                                                                           |                                                                                | Deferred revenue, current                       
|                                                   |                                                                                           |                                                                                | Income taxes and other taxes payable            
|                                                   |                                                                                           |                                                                                | Other current assets and accrued liabilities    
|                                                   |                                                                                           |                                                                                | Other long term assets and long term liabilities
|                                                   |                                                                                           |                                                                                |                                                 
|                                                   |                                                                                           |                                                                                |                                                 
|Cash flows from investing activities:              |                                                                                           |                                                                                |                                                 
|                                                   |                                                                                           | Purchases of investments                                                       |                                                 
|                                                   |                                                                                           | Purchases of available-for-sale marketable securities                          |                                                 
|                                                   |                                                                                           | Proceeds from sales and maturities of available-for-sale marketable securities |                                                 
|                                                   |                                                                                           | Investments in property, plant and equipment, net (Note 12)                    |                                                 
|                                                   |                                                                                           |                                                                                |                                                 
|                                                   |                                                                                           |                                                                                |                                                 
|Cash flows from financing activities:              |                                                                                           |                                                                                |                                                 
|                                                   |                                                                                           | Net proceeds from sale of ordinary shares (IPO Proceeds)                       |                                                 
|                                                   |                                                                                           | Capital contributions by Agilent                                               |                                                 
|                                                   |                                                                                           | Borrowings from Agilent                                                        |                                                 
|                                                   |                                                                                           | Repayment of debt to Agilent                                                   |                                                 
|                                                   |                                                                                           | Distribution of share-based compensation (Note 8)                              |                                                 
|                                                   |                                                                                           | Issuance of ordinary shares under employee stock plans                         |                                                 
|                                                   |                                                                                           | Excess tax benefits from share-based compensation                              |                                                 
|                                                   |                                                                                           | Cash receipts from Agilent related to sale of net assets                       |                                                 
|                                                   |                                                                                           | Cash payments to Agilent related to sale of net assets                         |                                                 
|                                                   |                                                                                           | Net Agilent invested equity                                                    |                                                 
|                                                   |                                                                                           |                                                                                |                                                 
|                                                   |                                                                                           |                                                                                |                                                 
|Effect of exchange rate movements                  |                                                                                           |                                                                                | 1                                               
|                                                   |                                                                                           |                                                                                |                                                 
|Net increase in cash and cash equivalents          |                                                                                           |                                                                                | (154                                            
|Cash and cash equivalents at beginning of period   |                                                                                           |                                                                                | 300                                             
|                                                   |                                                                                           |                                                                                |                                                 
|Cash and cash equivalents at end of period         |                                                                                           | $                                                                              | 146                                             
|                                                   |                                                                                           |                                                                                |                                                 
|Supplemental disclosures of cash flow information: |                                                                                           |                                                                                |                                                 
|                                                   |                                                                                           | Cash paid for income taxes                                                     |                                                 
|Other non-cash activities:                         |                                                                                           |                                                                                |                                                 
|                                                   |                                                                                           | Deferred tax assets acquired upon separation                                   |                                                 
|                                                   |                                                                                           | Fixed assets (included in payables to Agilent) purchased from Agilent          |                                                 

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

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VERIGY LTD.        COMBINED AND CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

|                                    |                                                                       | Ordinary Shares            |        |   |     |     |   |     |      |   |    
|----------------------------------- | --------------------------------------------------------------------- | -------------------------- | ------ | - | --- | --- | - | --- | ---- | - | ---
|
|
|
|Balance at October 31, 2004         |                                                                       |                           |        | $ |    |     | $ | 117 |      | $ |   
|Components of comprehensive loss:   |                                                                       |                            |        |   |     |     |   |     |      |   |    
|                                    | Net loss                                                              |                            |       |   |     |    |   |     | (119 | ) |    
|                                    | Foreign currency translation, net of tax                              |                            |       |   |     |    |   |     |      |   |    
|                                    |                                                                       |                            |        |   |     |     |   |     |      |   |    
|                                    |                                                                       | Total comprehensive loss   |        |   |     |     |   |     |      |   |    
|                                    |                                                                       |                            |        |   |     |     |   |     |      |   |    
|                                    | Net investment by Agilent                                             |                            |       |   |     |    |   |     | 88   |   |    
|                                    |                                                                       |                            |        |   |     |     |   |     |      |   |    
|Balance as of October 31, 2005      |                                                                       |                           |        |   |    |     |   | 86  |      |   |   
|                                    |                                                                       |                            |        |   |     |     |   |     |      |   |    
|Components of comprehensive loss:   |                                                                       |                            |        |   |     |     |   |     |      |   |    
|                                    | Net loss (pre-separation)                                             |                            |       |   |     |    |   |     | (36  | ) |    
|                                    | Net income (post separation)                                          |                            |        |   |     |     |   |     |      |   |    
|                                    | Change in minimum pension liability, net of tax                       |                            |       |   |     |    |   |     |     |   |    
|                                    | Change in foreign currency translation, net of tax                    |                            |       |   |     |    |   |     |     |   |    
|                                    |                                                                       |                            |        |   |     |     |   |     |      |   |    
|                                    |                                                                       | Total comprehensive loss   |        |   |     |     |   |     |      |   |    
|                                    |                                                                       |                            |        |   |     |     |   |     |      |   |    
|                                    | Capital contribution from Agilent (Pre-separation)                    |                            | 50,000 |   |     | 186 |   |     | (50  | ) |    
|                                    | Capital contribution from Agilent (post separation)                   |                            |       |   |     | 19  |   |     |     |   |    
|                                    | Net repayments to Agilent (post separation)                           |                            |       |   |     | (13 | ) |     |     |   |    
|                                    | Issuance of ordinary shares, net (IPO)                                |                            | 8,652  |   |     | 121 |   |     |     |   |    
|                                    | Loss on initialization of pension liability position                  |                            |       |   |     |    |   |     |     |   |    
|                                    | Deferred tax assets acquired upon separation                          |                            |       |   |     | 43  |   |     |     |   |    
|                                    | Share-based compensation (Verigy options)                             |                            |       |   |     | 2   |   |     |     |   |    
|                                    |                                                                       |                            |        |   |     |     |   |     |      |   |    
|Balance as of October 31, 2006      |                                                                       | 58,652                     |        |   | 358 |     |   |    |      |   | 34 
|                                    |                                                                       |                            |        |   |     |     |   |     |      |   |    
|Components of comprehensive income: |                                                                       |                            |        |   |     |     |   |     |      |   |    
|                                    | Net income                                                            |                            |       |   |     |    |   |     |      |   |    
|                                    | Change in unrealized gain (loss) on marketable securities, net of tax |                            |        |   |     |     |   |     |      |   |    
|                                    | Change in minimum pension liability, net of tax                       |                            |       |   |     |    |   |     |     |   |    
|                                    | Change in foreign currency translation, net of tax                    |                            |       |   |     |    |   |     |     |   |    
|                                    |                                                                       |                            |        |   |     |     |   |     |      |   |    
|                                    |                                                                       | Total comprehensive income |        |   |     |     |   |     |      |   |    
|                                    |                                                                       |                            |        |   |     |     |   |     |      |   |    
|                                    | Adjustment to initially apply SFAS No. 158, net of tax                |                            |       |   |     |    |   |     |     |   |    
|                                    | Issuance of ordinary shares under employee stock plans                |                            | 711    |   |     | 7   |   |     |     |   |    
|                                    | Issuance of ordinary shares under the employee stock purchase plan    |                            | 341    |   |     | 5   |   |     |     |   |    
|                                    | Excess tax benefits from stock option exercises                       |                            |       |   |     | 2   |   |     |     |   |    
|                                    | Share-based compensation                                              |                            |       |   |     | 14  |   |     |     |   |    
|                                    | Changes in deferred taxes related to separation from Agilent          |                            |       |   |     | (5  | ) |     |     |   |    
|                                    |                                                                       |                            |        |   |     |     |   |     |      |   |    
|Balance as of October 31, 2007      |                                                                       | 59,704                     |        | $ | 381 |     | $ |    |      | $ | 131
|                                    |                                                                       |                            |        |   |     |     |   |     |      |   |    

---

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

62

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1. OVERVIEW

Overview

Verigy ("we," "us" or the "Company") designs, develops, manufactures and supports semiconductor test equipment and provides test system solutions 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 to test equipment, our solutions include consulting, service and support offerings such as start-up assistance, application services and system calibration and repair.

Prior
to our initial public offering, we were a wholly owned subsidiary of Agilent. On June 16, 2006, we completed our initial public offering and became a separate stand-alone
publicly-traded company incorporated in Singapore focused on technology and innovation in semiconductor testing. Effective October 31, 2006 ("the distribution date"), Agilent distributed the
50 million Verigy ordinary shares it owned to its shareholders. See Note 4, "IPO, Separation from Agilent and Distribution" for further information regarding our initial public offering,
our separation from Agilent and Agilent's distribution of our ordinary shares to its shareholders.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation.The accompanying financial data has been prepared by us pursuant to the rules
and regulations of the U.S. Securities and Exchange Commission ("SEC"). Our fiscal year end is October 31, and our fiscal quarters end on January 31, April 30, and July 31.
Unless otherwise stated, all dates refer to our fiscal years and fiscal periods. Amounts included in the accompanying combined and consolidated financial statements are expressed in U.S. dollars.

Prior
to June 1, 2006, we had operated as part of Agilent, and not as a stand-alone company. Therefore, the accompanying combined and consolidated financial statements prior to
June 1, 2006, were derived from the accounting records of Agilent using the historical basis of assets and liabilities of Verigy. The expense and cost allocations prior to June 1, 2006,
have been determined on a basis we consider to be a reasonable reflection of the utilization of services provided by Agilent or the benefit received by us from Agilent.

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

See
Note 5, "Transactions with Agilent" for further information regarding the relationships we have with Agilent.

Reclassifications.Certain amounts in the combined and consolidated financial statements as of and
for the years ended October 31, 2005 and October 31, 2006, were reclassified to conform with the presentation used in 2007.

Principles of combination.Our combined and consolidated financial statements include the global
historical assets, liabilities and operations of Verigy. All significant intra-company transactions within Verigy have been eliminated. All significant transactions between us and other Agilent
businesses are included in these combined and consolidated financial statements. All transactions with Agilent, prior to our separation from Agilent, were considered to be effectively settled for cash
in the combined and consolidated statements of cash flows at the time the transaction is recorded.

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Principles of consolidation.The combined and consolidated financial statements include the accounts
of the company and our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Use of estimates.The preparation of financial statements in accordance with accounting principles
generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in our combined financial statements and accompanying notes. Management bases its
estimates on historical experience and various other assumptions believed to be reasonable. Although
these estimates are based on management's best knowledge of current events and actions that may impact us in the future, actual results may be different from the estimates. Our critical accounting
policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, restructuring and asset
impairment charges, inventory valuation, warranty, share-based compensation, retirement and post-retirement plan assumptions, valuation of goodwill and intangible assets and accounting for
income taxes.

Revenue recognition.Net revenue is derived from the sale of products and services and is adjusted
for returns and allowances, which historically have been insignificant. Consistent with the SEC's Staff Accounting Bulletin No. 104, or "SAB 104," we recognize revenue on the sale of
semiconductor test equipment when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is fixed or determinable and collectibility is
reasonably assured. Delivery is considered to 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
fixed or determinable when the price is not subject to refund or adjustments. At the time we take an order, we evaluate the creditworthiness of our customers to determine the appropriate timing of
revenue recognition. For sales or arrangements that include customer-specified acceptance criteria, including those where acceptance is required upon achievement of performance milestones or
fulfillment of other future obligations, revenue is recognized after the acceptance criteria have been met. If the criteria are not met, then revenue is deferred until such criteria are met or until
the period(s) over which the last undelivered element is delivered. To the extent that a contingent payment exceeds the fair value of the undelivered element, we defer the contingent payment.

Product revenue.Our product revenue is generated predominantly from the sales of various types of
test equipment. Software is embedded in many of our test equipment products, but the software component is considered to be incidental. For sales or arrangements that include customer-specified
acceptance criteria, including those where acceptance is required upon achievement of performance milestones or fulfillment of other future obligations, revenue is recognized after the acceptance
criteria have been met. For products that include installation, if we have previously successfully installed similar equipment, product revenue is recognized upon delivery, and recognition of
installation revenue is delayed until the installation is complete. Otherwise, neither the product nor the installation revenue is recognized until the installation is complete.

Service revenue.Revenue from services includes extended warranty, customer support, consulting,
training and education. Service revenue is deferred and recognized over the contractual 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 met
before service revenue is recognized.

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Multiple element arrangements.We use objective evidence of fair value to allocate revenue to
elements in multiple element arrangements and recognize revenue when the criteria for revenue recognition have been met for each element. If the criteria are not met, then revenue is deferred until
such criteria are met or until the period(s) over which the last undelivered element is delivered. In the absence of objective evidence of fair value of a delivered element, we allocate revenue to the
fair value of the undelivered elements and the residual revenue to the delivered elements. The price charged when an element is sold separately determines fair value. To the extent that a contingent
payment exceeds the fair value of the undelivered element, we defer the contingent payment.

Warranty revenue and cost.We generally provide a one-year warranty on products
commencing upon installation or delivery. We accrue for warranty costs in accordance with Statement of Financial Standards No. 5, "Accounting for Contingencies" ("SFAS No. 5"), based on
historical trends in warranty charges as a percentage of gross product shipments. Estimated warranty charges are recorded within cost of products at the time revenue is recognized and the liability is
reported in other current liabilities on the combined and consolidated balance sheet. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. For
some products we also sell extended warranties beyond one year. Revenue related to our extended warranty contracts beyond one year is recorded as long-term deferred revenue in the combined
and consolidated balance sheet and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred.

Deferred revenue.Deferred revenue is primarily comprised of extended warranty, revenue deferred for
installations yet to be completed, and advanced billing and customer deposits for service, support and maintenance agreements.

Trade accounts receivable, net.Trade accounts receivable are recorded at the invoiced amount and do
not bear interest. Our accounts receivable have been reduced by an allowance for doubtful accounts, which is our best estimate of the amount of probable credit losses in our existing accounts
receivable. We determine the allowance based on customer specific experience and the aging of our receivables, among other factors. We do not have any off-balance-sheet credit exposure
related to our customers. Our allowance for doubtful accounts was $0.1 million, $0.1 million and $0.2 million as of October 31, 2007, 2006, and 2005, respectively.

Restructuring.We recognize a liability for restructuring costs at fair value only when the liability
is incurred. The three main components of our restructuring charges are workforce reductions, consolidating facilities and asset impairments. Workforce-related charges are accrued when it is
determined that a liability has been incurred, which is generally after individuals have been notified of their termination dates and expected severance payments. Plans to eliminate excess facilities
result in charges for lease termination fees and future commitments to pay lease charges, net of estimated future sublease income. We recognize charges for elimination of excess facilities when we
have vacated the premises. Asset impairments primarily consist of property, plant and equipment associated with excess facilities being eliminated, and are based on an estimate of the amounts and
timing of future cash flows related to the expected future remaining use and ultimate sale or disposal of the property, plant and equipment. Prior to our separation from Agilent, the charges
associated with consolidating facilities and asset impairment charges incurred by Agilent were allocated to Verigy to the extent the underlying benefits related to our business. These estimates were
derived using the guidance of Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for 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 an Activity (Including Certain
Costs Incurred in a Restructuring)" ("EITF 94-3") and lastly, SFAS No. 146 "Accounting for Exit or Disposal Activities" ("SFAS No. 146"). If the amounts and

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timing
of cash flows from restructuring activities are significantly different from what we have estimated, the actual amount of restructuring and asset impairment charges could be materially
different, either higher or lower, than those we have recorded.

Share-based compensation.We account for share-based awards in accordance with Statement of Financial
Accounting Standards No. 123(R), Shared-Based Payment ("SFAS No. 123(R)") which was effective November 1, 2005 for Verigy. Under this standard, share-based compensation expense is
primarily based on estimated grant date fair value using the Black-Scholes option pricing model and is recognized on a straight-line basis for awards granted after November 1, 2005
over the vesting period of the award. For awards issued prior to November 1, 2005, we recognize share-based compensation expense based on FASB Interpretation 28 "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans an interpretation of APB Opinions No. 15 and 25", which provides for accelerated expensing. Our estimate of share-based
compensation expense requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), future forfeitures and
related tax effects. The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of
management judgment. Although we believe the assumptions and estimates we have made are reasonable and appropriate, changes in assumptions could materially impact our reported financial results. We
incurred $14 million and $10 million in share-based compensation expense during fiscal 2007 and 2006. We did not incur any share-based compensation expense in 2005. Also see
Note 8 "Share-based compensation" of the combined and consolidated financial statements.

Retirement and post-retirement plan assumptions.Retirement and
post-retirement benefit plan costs are a significant cost of doing business. They represent obligations that will ultimately be settled sometime in the future and therefore are subject to
estimation. Retirement and post-retirement accounting is intended to reflect the recognition of future benefit costs over the employees' average expected future service based on the terms
of the plans and the investment and funding decisions made by us. To estimate the impact of these future payments and our decisions concerning funding of these obligations, we are required to make
assumptions using actuarial concepts within the framework of U.S. GAAP. Two critical assumptions are the discount rate and the expected long-term return on plan assets. Other important
assumptions include the health care cost trend rate, expected future salary increases, expected future increases to benefit payments, expected retirement dates, employee turnover and retiree mortality
rates. We evaluate these assumptions at least annually.

The
discount rate is used to determine the present value of future benefit payments at each measurement date (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 for high quality corporate bonds. The discount rate for non-U.S. plans was generally
determined in a similar manner. Differences between the expected future cash flows of our plans and the maturities of the high quality corporate bonds are not expected to have a material impact on the
selection of discount rates. As discount rates decrease we would expect our net plan costs to increase and as discount rates increase we would expect our net plan costs to decrease. 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"), became effective for us as of October 31, 2007 and requires recognition of an asset or liability in the statement of financial position reflecting the funded status of pension
and postretirement benefit plans such as retiree health and life, with current year changes recognized in shareholders' equity. At October 31, 2007, in order to recognize the funded status of
its pension and post-retirement benefit plans in accordance with SFAS No. 158, the Company recorded additional liabilities by a cumulative amount of $18 million of which
$12 million (net of tax of $6 million) was recorded as a

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increase
to accumulated other comprehensive loss. These losses are being recognized over the expected average future service lives of plan participants. Also see Note 18 "Retirement plans and
Post-Retirement Benefits".

The
expected long-term return on plan assets is estimated using current and expected asset allocations, as well as historical and expected returns. Declining rate of return
assumptions generally result in increased pension expense while increasing rate of return assumptions generally result in lower pension expense. A one percent change in the estimated
long-term return on pension plan assets would result in a $0.3 million impact on pension expense for our fiscal year 2007. There are no plan assets related to our
post-retirement health care plans.

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

Goodwill and purchased intangible assets.We adopted SFAS No. 142 "Goodwill and Other
Intangible Assets" ("SFAS No. 142") on November 1, 2002 and recorded an allocation of goodwill from Agilent. Goodwill is not amortized but is reviewed annually (or more frequently if
impairment indicators arise) for impairment. Impairment indicators include the significant decrease in market price of an asset, significant adverse changes in the extent or use or physical condition
of an asset, significant adverse change in legal or regulatory factors affecting an asset, accumulation of costs significantly in excess of expected costs to acquire or construct an asset, operating
or cash flow losses (or projections of losses) that demonstrates continuing losses associated with the 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 its previously estimated useful life. Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed using
the straight-line method over the economic lives of the respective assets, generally three to five years.

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

Separation costs.Separation costs are one-time internal and external
spin-off related costs, such as information technology set-up costs and consulting and legal and other professional fees.

Shipping and handling costs.Our shipping and handling costs charged to customers are included in net
revenue and the associated expense is recorded in cost of products in the combined statements of operations for all years presented.

Advertising.Business specific advertising costs are expensed as incurred. Advertising costs were
insignificant for all three years presented. Prior to our separation from Agilent, some corporate advertising expenses were allocated to us by Agilent as part of corporate allocations described in
Note 5 "Transactions with Agilent" but are not separately identifiable.

Research and development.Costs related to research, design and development of our products are
charged to research and development expense as they are incurred.

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Net income (loss) per share.Basic net loss per share is computed by dividing net
lossthe numeratorby the weighted average number of common shares outstandingthe denominatorduring the period excluding the dilutive effect of stock
options and other employee stock plans. Diluted net loss per share gives effect to all potentially dilutive common stock equivalents outstanding during the period. In computing diluted net loss per
share, the average stock price for the period is used in determining the number of shares assumed to be purchased from the proceeds of stock option exercises and unamortized share based compensation.
The calculation of dilutive net loss per share excludes shares of potential ordinary shares if the effect is anti-dilutive.

Cash and cash equivalent.We classify highly liquid investments as cash equivalents if their original
or remaining maturity is three months or less at the date of purchase. Cash and cash equivalents consist of cash deposited in checking and money market accounts.

Marketable Securities.We account for our short-term marketable securities in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities"("SFAS No. 115"). We classify our marketable
securities as available-for-sale at the time of purchase and re-evaluate such designation as of each consolidated balance sheet date. Our marketable securities
include commercial paper, corporate bond and government securities and auction rate securities. Auction rate securities are securities that are structured with short-term interest rate
reset dates of generally less than ninety days but with contractual maturities that can be well in excess of ten years.

Our
marketable securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of shareholders'
equity, net of tax. Realized gains or losses on the sale of marketable securities are determined using the specific-identification method and were not material for fiscal year 2007. We evaluate our
investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis,
the financial condition of the issuer and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value. We record an impairment
charge to the extent that the carrying value of our available for sale securities exceeds the estimated fair market value of the securities and the decline in value is determined to be
other-than-temporary.

Accounting for income taxes.We record a tax provision for the anticipated tax consequences of the
reported results of operations. In accordance with SFAS No. 109, "Accounting for Income Taxes"("SFAS No. 109"), the provision for income
taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the
financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax
rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled.

We
are required to assess the realization of our net deferred tax assets and the need for a valuation allowance. This assessment requires that our management make judgments about
benefits that could be realized from future taxable income, as well as other positive and negative factors influencing the realization of deferred tax assets. We had no valuation allowance against any
net deferred tax assets as of October 31, 2007 and 2006. Prior to our separation from Agilent, we maintained a full valuation allowance for losses we incurred in the U.S. and Japan, prior to
fiscal year 2003.

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Undistributed
earnings of our Domestic (US) and Foreign Subsidiaries are indefinitely reinvested in the respective operations. No provision has been made for taxes that might be payable
upon remittance of such earnings, nor is it practicable to determine the amount of this liability.

Our
effective tax rate varies based on a variety of factors, including overall profitability, the geographical mix of income before taxes and the related tax rates in the jurisdictions
where we operate, restructuring and other one-time charges, as well as discrete events, such as settlements of future audits. We are subject to audits and examinations of our tax returns
by tax authorities in various jurisdictions, including the Internal Revenue Service. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy
of our provision for income taxes.

Fair value of financial instruments.The carrying values of accounts receivable, accounts payables,
accrued employee compensation and benefits and other accrued liabilities approximate fair value because of their short maturities. The fair values of marketable securities are reported in
Note 9 "Marketable Securities".

Concentration of credit risk.We sell our products through our direct sales force. In fiscal year
2007, two customers accounted for 10% or more of our net revenue. In fiscal year 2006, one customer accounted for 10% or more of our net revenue. In fiscal year 2005, no single customer accounted for
10% or more of our net revenue. As of October 31, 2007, two customers accounted for 27.8% of our accounts receivable balance with one accounting for 15.4% and another accounting for 12.4%. As
of October 31, 2006, one customer accounted for 20.2% of our accounts receivable balance. We perform ongoing credit evaluations of our customers' financial conditions, and require collateral,
such as letters of credit and bank guarantees, in certain circumstances.

Concentration of suppliers and contract manufacturers.Certain components and parts used in our
products are procured from a single or a limited group of suppliers, some of whom are relatively small in size. The failure of these suppliers to meet our requirements in a timely manner could impair
our ability to ship products and to realize the related revenues when anticipated which could adversely affect our business and operating results. We rely entirely on contract manufacturers, which
gives us less control
over the manufacturing process and exposes us to significant risks, especially inadequate capacity, late delivery, substandard quality and high costs.

Derivative instruments.We have implemented a hedging strategy that is intended to mitigate our
foreign currency exposure by entering into foreign currency forward contracts that have maturities of three months or less. These contracts are used to reduce our risk associated with exchange rate
movement, as gains and losses on these contracts are intended to offset exchange losses and gains underlying exposures. In addition, Agilent had historically used such instruments and prior to our
separation, part of its gain or loss has been allocated to us. Prior to our separation, Agilent had entered into foreign exchange contracts, primarily forward contracts and purchased options, to hedge
exposures to changes in foreign currency exchange rates. These contracts were designated at inception as hedges of the related foreign currency exposures, which include committed and anticipated
revenue and expense transactions and assets and liabilities that are denominated in currencies other than the functional currency of the entity that has the exposure. To achieve hedge accounting,
contracts must reduce the foreign currency exchange rate risk otherwise inherent in the amount and duration of the hedged exposures and comply with established risk management policies. Verigy does
not use derivative financial instruments for speculative or trading purposes.

Inventory.We assess the valuation of our inventory, including demonstration inventory, on a
quarterly basis based upon estimates about future demand and actual usage. To the extent that we

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determine
that we are holding excess or obsolete inventory, we write down the value of our inventory to its net realizable value. Such write-downs are reflected in cost of products and can be material
in amount. Our inventory assessment involves difficult estimates of future events and, as a result, additional write-downs may be required. If actual market conditions are more favorable than
anticipated, inventory previously written down may be sold to customers, resulting in lower cost of products and higher income from operations than expected in that period. Excess and obsolete
inventory resulting from shifts in demand or changes in market conditions for raw materials and components can result in significant volatility in our costs of products.

In
our inventory valuation analysis, we also include inventory that we could be obligated to purchase from our suppliers based on our production forecasts. To the extent that our
committed inventory purchases exceed our forecasted productions needs, we write down the value of those inventories by taking a charge to our cost of products and increasing our supplier liability.

Property, plant and equipment.Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Additions, improvements and major renewals are capitalized; maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or disposed of, the
assets and related accumulated depreciation and amortization are removed from our general ledger and the resulting gain or loss is reflected in the combined statement of operations. Buildings and
improvements are depreciated over ten to forty years, or the lease term if lower, and machinery and equipment over three to ten years. We are currently using the straight-line method to
depreciate assets. However, prior to November 1, 2001, assets were being depreciated principally using accelerated methods and will continue to be depreciated under those methods until they are
fully depreciated or retired.

Capitalized software.We capitalize certain internal and external costs incurred to acquire or create
internal use software in accordance with AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Capitalized software is
included in property, plant and equipment and is depreciated over three to six years when development is complete.

Impairment of long-lived assets.We continually monitor events and changes in
circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances occur, we assess
the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the
undiscounted future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.

Foreign currency translation.We follow SFAS No. 52 "Foreign Currency Translation" for both
the translation and remeasurement of balance sheet and income statement items into U.S. Dollars. For those business units that operate in a local currency functional environment, all assets and
liabilities are translated into U.S. Dollars using the exchange rates in effect at the end of the period; revenue and expenses are translated using average exchange rates in effect during each period.
Resulting translation adjustments are reported as a separate component of accumulated comprehensive income (loss) in shareholders' equity.

For
those business units that operate in a U.S. Dollar functional environment, foreign currency assets and liabilities are remeasured into U.S. Dollars using the exchange rates in effect
at the end of the period except for nonmonetary assets and capital accounts, which are remeasured at historical exchange rates. Revenue and expenses are generally remeasured at monthly exchange rates
which

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approximate
average exchange rates in effect during each year, except for those expenses related to balance sheet amounts that are remeasured at historical exchange rates. An allocation from Agilent
of the applicable gains or losses from foreign currency remeasurement for periods prior to June 1, 2006 is included in other income (expense), net in the combined and consolidated statements of
operations.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income TaxesAn Interpretation of FASB
Statement No. 109" ("FIN 48"). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement
No. 109, "Accounting for Income Taxes." It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position as well as
provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal
years beginning after December 15, 2006 and are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the
more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of
applying the provisions of FIN 48 should be reported as an adjustment to the opening balance of retained earnings (or other appropriate components of equity) for that fiscal year. We expect to adopt
this pronouncement beginning in our fiscal year 2008 and we have not yet determined the potential financial impact of adopting FIN 48.

In
September 2006, the Staff of the SEC issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements" (SAB 108). SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of
determining whether the current year's financial statements are materially misstated. Verigy applied the provisions of SAB 108 beginning in the first quarter of fiscal 2007 and there was no impact to
the combined and consolidated financial statements.

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
framework for measuring fair value and enhance disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We are currently assessing the impact that SFAS No. 157 may have on our combined and consolidated financial statements
upon adoption in fiscal 2009.

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 the funded status of their defined benefit pension and other
postretirement benefit plans on their balance sheets as well as recognize changes in the funded status of a defined benefit post-retirement plan in the year in which the changes occur
through comprehensive income. The pronouncement also specifies that a plan's assets and obligations that determine its funded status be measured as of the end of Company's fiscal year, with limited
exceptions. Under SFAS No. 158, certain previously unrecognized actuarial gains and losses and previously unrecognized prior service costs for both the pension and other
post-retirement benefit plans as well as a previously unrecognized transition obligation for the other post-retirement benefit plan are required to be recognized. These amounts
were not required to be recorded on the Company's Consolidated Balance Sheet before the adoption of SFAS No. 158, but were instead amortized over a period of time. In accordance with SFAS
No. 158, the Company has

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recognized
the funded status of its benefit plans and implemented the disclosure requirements of SFAS No. 158 at October 31, 2007. The requirement to measure the plan assets and benefit
obligations as of the Company's fiscal year-end date will not be effective until fiscal years ending after December 15, 2008 and will be adopted by the Company by the end of fiscal
2009. At October 31, 2007, in order to recognize the funded status of its pension and post-retirement benefit plans in accordance with SFAS No. 158, the Company recorded
additional liabilities by a cumulative amount of $18 million of which $12 million (net of tax of $6 million) was recorded as a increase to accumulated other comprehensive loss.
These losses are being recognized over the expected average future service lives of plan participants. Also see Note 18 "Retirement plans and Post-Retirement Benefits".

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159") which permits entities to
choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently assessing the impact that SFAS No. 157 may have on
our combined and consolidated financial statements upon adoption in fiscal 2009.

4. IPO, SEPARATION FROM AGILENT, AND DISTRIBUTION

On June 16, 2006, we completed our initial public offering ("IPO") of 8.5 million ordinary shares at a price of $15 per share, which less
underwriting discount and commission, resulted in aggregate net proceeds of approximately $118.6 million. On July 6, 2006, the underwriters of the IPO exercised a portion of their
over-allotment option which resulted in the issuance of additional 151,559 shares and generated approximately $2.1 million in net proceeds. The remaining portion of the
underwriters' 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 our net proceeds from the IPO were approximately $140 million.

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

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 and distribution agreement. These agreements cover a variety of matters, including the transfer, ownership and licensing of intellectual property and other assets and
liabilities relating to our business, the use of shared facilities, employee and tax-related matters and the transitional services. In addition, a loan agreement between Agilent and
Verigy, provided for a $25 million revolving credit facility from Agilent to Verigy on the separation date with interest at one-month LIBOR plus 50 basis points. As of
October 31, 2006, all amounts were paid back and the agreement was terminated. The agreements relating to the separation from Agilent were negotiated and 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 on our behalf and also released Agilent from all guarantees and security obligations
that they had made for us on our behalf. These guarantees and security arrangements related to real property lease deposits and guarantees, security for company credit card programs and other credit
arrangements and required deposits with governmental trade and tax agencies.

72

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Following
our separation from Agilent, Agilent had provided us services and access to resources necessary for our operations. These services and resources included facilities management,
site information technology infrastructure, use of various applications and support systems, as well as employee related services for transitional employees remaining with Agilent. The total
transition services we received from Agilent totaled $4.4 million and $38 million for fiscal years 2007 and 2006, respectively. As of October 31, 2007, these transition services
had ended.

See
Note 5, "Transactions with Agilent" for further information regarding the relationships we have with Agilent.

Indemnifications to Verigy

In connection with our spin-off, Agilent has agreed to indemnify us for certain liabilities that were excluded from the separation and were not
transferred to us, for specified IPO-related liabilities and other specified items.

5. TRANSACTIONS WITH AGILENT

Prior to our separation, we were a wholly owned subsidiary of Agilent, and thus, our transactions with Agilent were considered inter-company. After our separation
date and prior to November 1, 2006, our transactions with Agilent were considered related party transactions since Agilent still owned approximately 85% of our outstanding ordinary shares until
October 31, 2006.

Inter-company and Related Party Transactions

During fiscal year 2007, we did not generate any revenue from the sale of products to Agilent. For fiscal years 2006 and 2005, revenue from the sale of products
to Agilent was $1.1 million and $2.0 million, respectively. Net revenue from Agilent, prior to June 1, 2006, was recorded using a cost plus methodology and may not necessarily
represent a price an unrelated third party would pay.

We
purchased materials from Agilent during fiscal years 2007, 2006 and 2005 of $11 million, $5 million and $9 million, respectively. Purchases from Agilent prior to
June 1, 2006, were recorded in cost of sales based on cost plus methodology.

Allocated Costs

The combined and consolidated statements of operations include our direct expenses as well as allocations of expenses arising from shared services and
infrastructure provided to us by Agilent during fiscal year 2006 and 2005. These allocated expenses include costs of centralized research and development, legal and accounting services, employee
benefits, real estate and facilities, corporate advertising, insurance services, information technology, treasury and other corporate and infrastructure services. These expenses were allocated to us
using estimates that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by us. The allocation methods
include headcount, square footage, actual consumption and usage of services, adjusted invested capital and others.

Since
our separation from Agilent became effective on June 1, 2006, fiscal year 2006 includes only seven months of allocated costs. During fiscal year 2007, there were no
allocated costs from Agilent to us.

73

---



Allocated costs during fiscal year 2006 and 2005 that were included in the accompanying combined statements of operations are as follows:

Year Ended October 31,2006

2005(in millions)Cost of products

$
16

$
26Research and development


10


21Selling, general and administrative


39


55Other (income) expense, net


1


Total allocated costs

$
66

$
102


Receivables from and Payables to Agilent

Year Ended October 31,2007

2006

2005(in millions)Receivables from Agilent

$


$
8

$
Payables to Agilent

$
1

$
37

$



As
of October 31, 2007, we had no receivables from Agilent. During fiscal year 2007, we received approximately $3 million from Agilent for cash collected by Agilent from
our customers from sales of our products that occurred prior to November 1, 2006. In addition, during fiscal year 2007, Agilent contributed approximately $3 million into our pension
trust accounts, completing its obligation to fund our Germany, Taiwan and Korea defined benefit plans at 100% of the accumulated benefit obligation level as the separation date in accordance with the
employee matters agreement between Agilent and us. Also in fiscal year 2007, Agilent completed its obligation to fund the transferred Germany flexible time-off plan by contributing
approximately $2 million into our Germany flexible time-off trust account.

As
of October 31, 2007, we had $1 million of payables to Agilent primarily related to transition-related services provided to us by Agilent during the second half of fiscal
year 2007. As of October 31, 2006, payables to Agilent consisted of approximately $26 million accrued liabilities for transition-related services provided to us by Agilent, approximately
$8 million for capitalized costs relating to new site set ups as well as leasehold improvement for our new U.S. headquarters facilities and approximately $3 million accrued liabilities
for the purchase of assets related to our China operations. The total transition services we received from Agilent totaled $4.4 million and $38 million for fiscal years 2007 and 2006,
respectively.

See
Note 17, Separation Costs, for separation cost details and net gains associated with curtailment and settlement.

Agreements with Agilent

We shared and operated under numerous agreements executed by Agilent with third parties, including but not limited to purchasing, manufacturing, supply, and
distribution agreements; use of facilities owned, leased, and managed by Agilent; and software, technology and other intellectual property agreements.

74

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6. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of ordinary shares outstanding. The weighted-average
number of ordinary shares outstanding does not include the dilutive effect of ordinary equivalent shares, such as share options and restricted share units. Diluted net income (loss) per share is
calculated by dividing net income (loss) by the weighted-average ordinary shares outstanding plus the dilutive effect of ordinary equivalent shares, such as share options and other employee stock
plans. The calculation of diluted net income (loss) per share excludes shares of potential ordinary shares if the effect is anti-dilutive.

The
following is a reconciliation of the basic and diluted net income (loss) per share computations for the periods presented below:

|                                    |                                                                                               | Year Ended October 31, |  
|----------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------- | -
|
|Basic Net income (loss) per share   |                                                                                               |                        |  
|                                    | Net income (loss) (in millions)                                                               |                        | $
|                                    | Weighted average number of ordinary shares(1)                                                 |                        |  
|                                    | Basic net income (loss) per share                                                             |                        | $
|Diluted net income (loss) per share |                                                                                               |                        |  
|                                    | Net income (loss) (in millions)                                                               |                        | $
|                                    | Weighted average number of ordinary shares(1)                                                 |                        |  
|                                    | Potentially dilutive common stock equivalentsstock options and other employee stock plans(1) |                        |  
|                                    |                                                                                               |                        |  
|                                    | Total shares for purpose of calculating diluted net income (loss) per share(1)                |                        |  
|                                    |                                                                                               |                        |  
|                                    | Diluted net income (loss) per share                                                           |                        | $

---

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

The
following table presents those options to purchase ordinary shares and restricted share units outstanding which were not included in the computation of diluted net income (loss) per
share because they were anti-dilutive.

|                            |                                                              | Year Ended October 31,
|--------------------------- | ------------------------------------------------------------ | ----------------------
|
|Non-qualified share options |                                                              |                       
|                            | Number of options to purchase ordinary shares (in thousands) |                       
|                            | Weighted-average exercise price                              |                       
|Average common stock price  |                                                              | $                     
|Restricted share units      |                                                              |                       
|                            | Number of restricted share units (in thousands)              |                       
|                            | Weighted-average exercise price                              |                       
|                            | Average common stock price                                   |                       

Pursuant
to the Master Separation and Distribution Agreement and the Employee Matters Agreement entered into between Verigy Ltd. and Agilent Technologies, Inc. in
connection with Verigy's

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---



separation
from Agilent (collectively the "Separation Agreements"), on October 31, 2006, Agilent cancelled the unvested Agilent equity awards
held by Verigy employees as of October 31, 2006 (the "Original Agilent Awards"). In accordance with the Separation Agreements, and in connection
with the cancellation of the Original Agilent Awards, the compensation committee of the board of directors of Verigy Ltd. approved and issued under the Verigy Ltd. 2006 Equity Incentive
Plan replacement Verigy equity awards to Verigy employees whose Original Agilent Awards were cancelled (the "Replacement Awards").

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

On
October 31, 2006, the board of directors of Verigy approved and issued approximately 2.2 million and 0.05 million replacement options and restricted shares units,
respectively. The replacement of the Agilent options with Verigy options was accounted for as a stock option modification in accordance with SFAS No. 123(R).

7. PROVISION FOR TAXES

We recorded income tax provisions of approximately $17 million, $21 million and $13 million for fiscal years ended October 31, 2007,
2006 and 2005, respectively.

Through
June 1, 2006, Verigy's income tax expense reflected amounts based on Agilent's consolidated tax profile so our income tax expense for the first seven months consisted of
allocated expense from Agilent. Since our separation from Agilent on June 1, 2006, our tax expense is based on our new operating structure and tax status in the countries where we do business.

Prior
to June 1, 2006, we considered the U.S. entities as our domestic entities as did Agilent. Following our separation from Agilent, we consider our Singapore entities as our
domestic entities since that is where we are incorporated.

We
have negotiated tax incentives with the Singapore Economic Development Board, an agency of the Government of Singapore, which have been approved by Singapore's Ministry of Finance and
Ministry of Trade and Industry. Under the incentives, a portion of the income we earn in Singapore during these ten to fifteen year incentive periods is subject to reduced rates of Singapore income
tax. The incentive tax rates will expire in various fiscal years beginning in fiscal 2011. The Singapore corporate income tax rate that would apply, absent the incentives, is 18% and 20% for fiscal
years 2007 and 2006, respectively. As a result of these incentives, income taxes decreased by $18 million or $0.30 per share (diluted) and $8 million or $0.15 per share (diluted) in
fiscal years 2007 and 2006, respectively. In order to receive the benefit of the incentives, we must develop and maintain in Singapore certain functions such as procurement, financial services, order
management, credit and collections, spare parts depot and distribution center, a refurbishment center and regional activities like an application development center. In addition to these qualifying
activities, we must hire specified numbers of employees and maintain minimum levels of investment in Singapore. We have from two to nine years to phase-in the qualifying activities and to
hire the specified numbers of employees. If we do not fulfill these conditions for any reason, our incentive could lapse, our income in Singapore would be subject to taxation at higher rates, and our
overall effective tax rate could be between fifteen to twenty

76

---



percentage
points higher than would have been the case had we maintained the benefit of the incentives.

Our
provision for income taxes for fiscal years 2007, 2006, and 2005 are as follows:

|                    |                      |   |    | Five Months Ended
October 31, |   | Seven Months
Ended May 31, |     |   |    |    |  
|------------------- | -------------------- | - | -- | ----------------------------- | - | -------------------------- | --- | - | -- | -- | -
|
|
|Current:            |                      |   |    |                               |   |                            |     |   |    |    |  
|                    | Domestic (U.S.)      |   | $  | 4                             |   | $                          |    |   | $  |   |  
|                    | Domestic (Singapore) |   |    | 4                             |   |                            | 1   |   |    |   |  
|                    | Foreign              |   |    | 8                             |   |                            | 22  |   |    | 10 |  
|Deferred:           |                      |   |    |                               |   |                            |     |   |    |    |  
|                    | Domestic (U.S.)      |   |    | (3                            | ) |                            |    |   |    |   |  
|                    | Domestic (Singapore) |   |    | 2                             |   |                            |    |   |    |   |  
|                    | Foreign              |   |    | 2                             |   |                            | (13 | ) |    | 1  |  
|                    |                      |   |    |                               |   |                            |     |   |    |    |  
|Total tax provision |                      | $ | 17 |                               | $ | 10                         |     | $ | 11 |    | $
|                    |                      |   |    |                               |   |                            |     |   |    |    |  

The
table below shows the geographical mix of our pre-tax profit and loss positions for fiscal year 2007, our pre and post separation income and losses for fiscal year 2006,
and fiscal year 2005.

|                                     |                      |   |     | Five Months Ended
October 31, |   | Seven Months
Ended May 31, |    |   |     |     |  
|------------------------------------ | -------------------- | - | --- | ----------------------------- | - | -------------------------- | -- | - | --- | --- | -
|
|
|                                     | Domestic (U.S.)      |   | $   | (7                            | ) | $                          |   |   | $   | (6  | )
|                                     | Domestic (Singapore) |   |     | 107                           |   |                            | 24 |   |     |    |  
|                                     | Foreign              |   |     | 14                            |   |                            | 22 |   |     | (19 | )
|                                     |                      |   |     |                               |   |                            |    |   |     |     |  
|Total net income (loss) before taxes |                      | $ | 114 |                               | $ | 46                         |    | $ | (25 | )   | $
|                                     |                      |   |     |                               |   |                            |    |   |     |     |  

77

---



The
table below reconciles the differences between our domestic statutory income tax rates and our effective tax rate:

|                                                                  |  |       |   | Five Months Ended
October 31, |   | Seven Months
Ended May 31, |    |       |   |       |   
|----------------------------------------------------------------- |  | ----- | - | ----------------------------- | - | -------------------------- | -- | ----- | - | ----- | --
|
|
|Notional U.S. federal tax rate                                    |  | 35.0  | % | 35.0                          | % | 35.0                       | %  | 35.0  | % | 35.0  | % 
|State income taxes, net of federal benefit                        |  | (0.8  | ) | 1.0                           |   |                           |    | 2.1   |   |      |   
|Foreign income taxed at different rates                           |  | (14.6 | ) | (6.7                          | ) | (70.8                      | )  | 68.9  |   | (21.6 | ) 
|Nontaxable gain from reversal of prior years' retirement expenses |  |      |   | (7.6                          | ) |                           |    | (16.6 | ) |      |   
|R&D credits                                                       |  | (1.2  | ) |                              |   |                           |    |      |   | 1.3   |   
|Other, net                                                        |  | (3.5  | ) |                              |   |                           |    | 0.5   |   | 0.7   |   
|Valuation allowanceothers                                        |  |      |   |                              |   | (8.6                       | )  | 10.1  |   | (27.5 | ) 
|                                                                  |  |       |   |                               |   |                            |    |       |   |       |   
|                                                                  |  | 14.9  | % | 21.7                          | % | (44.4                      | )% | 100.0 | % | (12.1 | )%
|                                                                  |  |       |   |                               |   |                            |    |       |   |       |   

Our
income taxes payable were approximately $11 million, $15 million and $31 million, at October 31, 2007, 2006 and 2005 respectively. These amounts are
included within income taxes and other taxes payable. The payables as of fiscal year end October 31, 2006 and 2005 represent amounts that had not been settled through the Agilent invested
equity account at the respective fiscal years.

Deferred
income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities used for financial reporting and tax purposes. We had no net
deferred tax liabilities as of fiscal years ended October 31, 2007 and 2006. The significant components of deferred tax assets included in the combined and consolidated balance sheets as of
October 31, 2007 and 2006 are:

Year Ended October 31,2007

2006Deferred
Tax Assets

Deferred
Tax Assets(in millions)Inventory

$
7

$
7Property, plant and equipment


3


6Intangible


15


25Pension liabilities


6


1Employee benefits, other than retirement


3


5Other retirement benefits


4


9Net operating losses and credit carryforwards


1


Other


7


4Total deferred tax asset

$
46

$
57


The
provisions for income taxes in the combined and consolidated financial statements have been determined on a separate return basis. We are required to assess the realization of our
net deferred tax assets and the need for a valuation allowance. This assessment requires that our management make judgments about benefits that could be realized from future taxable income, as well as
other positive and negative factors influencing the realization of deferred tax assets.

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We
had $46 million and $57 million of deferred tax assets as of October 31, 2007 and 2006, respectively, due primarily to temporary differences between the book and
tax basis of the net assets which were acquired upon our separation from Agilent. Upon our separation from Agilent, we did not retain any pre-separation deferred tax assets or liabilities
which had resulted from historical temporary differences, net operating losses and credit carryforwards. We did, however, retain approximately $4 million of prepaid tax assets upon our
separation.

Our
effective tax rate varies based on a variety of factors, including overall profitability, the geographical mix of income before taxes and the related tax rates in the jurisdictions
where we operate, completion of separation, restructuring and other one-time charges, as well as discrete events, such as settlements of future audits. We are subject to audits and
examinations of our tax returns by tax authorities in various jurisdictions, including the Internal Revenue Service. We regularly assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes.

Undistributed
earnings of our domestic (US) and foreign subsidiaries are indefinitely reinvested in the respective operations. No provision has been made for taxes that might be payable
upon remittance of such earnings, nor is it practicable to determine the amount of this liability.

8. SHARE-BASED COMPENSATION

2006 Equity Incentive Plan

On June 7, 2006, our board of directors adopted the Verigy Ltd. 2006 Equity Incentive Plan (the "2006 EIP"). A total of 10,300,000 ordinary shares
were authorized for issuance under the plan. The 2006 EIP provides for grants of incentive stock options, nonqualified stock options, stock appreciation rights and restricted share units. At
October 31, 2007, there were approximately 5.4 million ordinary shares available for issuance under the 2006 EIP.

Except
for replacement options granted in connection with Verigy's separation from Agilent, employee nonqualified stock options have an exercise price no less than 100% of the fair
market value of a share on the date of grant, and generally vest at a rate of 25% per year over 4 years. The maximum allowable term is 10 years. Restricted share units awarded to
employees pay out in an equal number of shares of stock, and generally vest at a rate of 25% per year over 4 years. Options and restricted share units cease to vest upon termination of
employment. If an employee terminates employment due to death, disability or retirement due to age, then the vested portion of the employee's option and restricted share unit award is determined by
adding 12 months to the length of his or her actual service, and the option is exercisable 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 options vest on the first anniversary of the date of grant and have a maximum term of 5 years. Outside director restricted share units vest on the first
anniversary of the date of grant and are payable on the third anniversary of the date of grant. All awards granted to an outside director become
fully vested upon the director's termination of services because of death, disability, retirement at or after age 65, or the termination is in connection with a change in control.

Ordinary
shares are issued for restricted share units on the date the restricted share units vest. The majority of shares issued are net of the minimum statutory withholding
requirements, as shares are withheld to cover the tax withholding obligation. As a result, the actual number of shares issued will be less than the number of restricted share units granted. Prior to
vesting, restricted share units do not have dividend equivalent or voting rights.

79

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2006 Employee Shares Purchase Plan

On June 7, 2006, our board of directors adopted the 2006 Employee Shares Purchase Plan (the "ESPP Plan"). The ESPP Plan is intended to qualify for
favorable tax treatment under section 423 of the U.S. Internal Revenue Code. The total number of shares that were authorized for purchase under the plan is 1,700,000.

Under
the ESPP Plan, eligible employees may elect to purchase shares from payroll deductions up to 10% of eligible compensation during 6-month offering periods. The purchase
price is (i) 85% of the fair market value per ordinary share on the trading day before the beginning of an offering period or, in the case of the 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 trading day of an offering period, whichever is lower. The maximum number of shares that an employee
can purchase is 2,500 shares each offering period and $25,000 in fair market value of ordinary shares each calendar year.

As
of October 31, 2007, a total of 341,481 ordinary shares had been issued as a result of purchases made by participants in our ESPP Plan. On the purchase date, May 31,
2007, we issued 197,000 ordinary shares to participants in our ESPP Plan. On the purchase date, November 30, 2006, we issued 144,481 ordinary shares to participants in our ESPP Plan.

Share-Based Compensation for Verigy Options and ESPP Plan

As of November 1, 2005, we adopted the provisions of SFAS No. 123(R), which requires the measurement and recognition of compensation expense for all
share-based payment awards made to
our employees and directors, including employee stock option awards and employee stock purchases made under the ESPP Plan.

Subsequent
to June 12, 2006, the effective date of our registration statement on from S-1, certain of our employees and directors were granted
non-qualified share options and restricted share units ("RSU"). For the newly issued Verigy options, we have recognized compensation expense based on the estimated grant date fair value
method required under SFAS No. 123(R) using a straight-line amortization method. As SFAS No. 123(R) requires that share-based compensation expense be based on awards that are
ultimately expected to vest. Estimated share-based compensation for the period from June 1, 2006 to October 31, 2007 has been reduced for estimated forfeitures. Verigy expenses
restricted share units based on fair market value of the shares at the date of grant over the period during which the restrictions lapse.

In
addition, pursuant to the Master Separation and Distribution Agreement and the Employee Matters Agreement entered into between Verigy Ltd. and Agilent Technologies, Inc.
in connection with Verigy's separation from Agilent (collectively the "Separation Agreements"), on October 31, 2006, Agilent cancelled the
unvested Agilent equity awards held by Verigy employees as of October 31, 2006 (the "Original Agilent Awards"). In accordance with the Separation
Agreements, and in connection with the cancellation of the Original Agilent Awards, the compensation committee of the board of directors of Verigy Ltd. approved and issued under the
Verigy Ltd. 2006 Equity Incentive Plan replacement Verigy equity awards to Verigy employees whose Original Agilent Awards were cancelled (the "Replacement Awards"). The ratio that was used for
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 of Verigy ordinary shares on
October 31, 2006 (the day of the distribution).

Those
awards that were provided to employees outside of the United States where options are impractical and/or infeasible due to local requirement or where other awards may obtain more
favorable treatment under Applicable Local Law, were cancelled and immediately replaced with Verigy

80

---



restricted
share units. The number of replaced restricted share units was based on the intrinsic value of the closing price of Agilent stock option on distribution date divided by the closing price of
Verigy ordinary share on distribution date.

We
have recognized compensation expense based on the estimated grant date fair value method required under SFAS No. 123(R) using a straight-line amortization method.
As SFAS No. 123(R) requires that share-based compensation expense be based on awards that are ultimately expected to vest, estimated share-based compensation is reduced for estimated
forfeitures. We expense restricted share units based on fair market value of the shares at the date of grant over the period during which the restrictions lapse.

Share-Based Payment Award Activity Related to Verigy Options

The following table summarizes activities related to stock options for fiscal years 2007 and 2006:

OptionsShares

Weighted
Average
Exercise Price(in thousands)Outstanding as of October 31, 2005



$
Granted

1,240

$
15.03Exercised



$
Replacement awards

2,267

$
13.53Cancelled/Forfeited/Expired

(3
)
$
14.71Outstanding as of October 31, 2006

3,504

$
14.06Granted

465

$
22.75Exercised(1)

(626
)
$
13.60Cancelled/Forfeited/Expired

(63
)
$
13.91Outstanding as of October 31, 2007

3,280

$
15.38




81

---





The
following table summarizes activities related to restricted share units for fiscal years 2007 and 2006:

Restricted Share Units (RSU)Shares

Weighted
Average Grant
Date Share
Price(in thousands)Outstanding as of October 31, 2005



$
Granted

143

$
14.97Vested and paid out



$
Replacement awards

54

$
16.80Forfeited



$
Outstanding as of October 31, 2006

197

$
15.47Granted

817

$
19.06Vested and paid out

(134
)
$
17.54Forfeited

(10
)
$
18.59Outstanding as of October 31, 2007(2)

870

$
18.49


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

The
following table summarizes information about all outstanding options to purchase shares of Verigy ordinary shares at October 31, 2007:

Options OutstandingRange of Exercise Prices

Number Outstanding

Weighted Average
Remaining
Contractual Life

Weighted Average
Exercise Price

Aggregate
Intrinsic Value(in thousands)





(in thousands)$  7.48 - 15.00

1,630

6.12 years

$
12.93

$
16,392$15.01 - 20.00

1,356

7.38 years

$
16.06


9,392$20.01 - 25.00

78

6.14 years

$
23.42


$25.01 - 30.00

216

5.85 years

$
26.71


3,280

6.62 years

$
15.38

$
25,784


The
aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on Verigy's closing stock price of $22.99 at October 31, 2007, which would have
been received by award holders had all award holders exercised their awards that were in-the-money as of that date. As of October 31, 2007, approximately 638,000
outstanding options were vested and exercisable and the weighted average exercise price was $13.30. As of October 31, 2007, the total number of in-the-money stock
options exercisable was 637,602, and the weighted average exercise price was $13.30.

82

---



The
following table summarizes information about all outstanding restricted share unit awards of Verigy ordinary shares at October 31, 2007:

Restricted Share Units OutstandingRange of Grant Date Share Prices

Number Outstanding

Weighted Average
Grant Date Share Price(in thousands)$14.75 - 15.00(2)

103

$
14.97$15.01 - 20.00

714

$
18.35$20.01 - 25.00

7

$
24.71$25.01 - 30.00

46

$
27.53870

$
18.49




As
of October 31, 2007, the total grant date fair value of our outstanding restricted share units was approximately $16.1 million and the aggregate market value of the
unvested outstanding restricted share units was $19.5 million, and the aggregate market value of vested units outstanding was $0.5 million.

Share-Based Compensation for Agilent Options Held by Verigy Employees

Prior to our separation from Agilent, some of our employees participated in Agilent's stock-based compensation plans. Until November 1, 2005, we accounted
for stock-based awards, based on Agilent's stock, using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. Under the intrinsic value method, we recorded compensation expense related to stock options in our condensed combined and consolidated statements of
operations when the exercise price of our employee stock-based award was less than the market price of the underlying Agilent stock on the date of the grant. We had no stock option expenses resulting
from an exercise price that was less than the market price on the date of the grant in any of the periods presented.

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Share-Based Payment Award Activity Related to Agilent Options Held by Verigy Employees

The following table summarizes equity share-based payment award for the fiscal years 2006 and 2005:

Shares

Weighted Average
Exercise Price(in thousands)Outstanding as of October 31, 2004

4,109

$
28.69Granted

682

$
18.56Exercised

(282
)
$
22.13Cancellations

(11
)
$
19.31Outstanding as of October 31, 2005

4,498

$
28.12Granted

584

$
33.77Exercised

(1,358
)
$
25.10Cancellations

(241
)
$
28.52Net Transfer-OutsAgilent employees

(1,034
)
$
29.08Vested options remaining with Agilent

(1,135
)
$
29.94Unvested options replaced with Verigy options and restricted share units

(1,314
)
$
31.08Outstanding as of October 31, 2006



$



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

Agilent adopted SFAS No. 123(R) using the modified prospective transition method beginning November 1, 2005. Accordingly, for the periods prior to
our separation, we recorded share-based compensation 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. 123(R) was in effect for expense recognition purposes, adjusted for estimated forfeitures. For these awards, we have continued to recognize compensation expense using
the accelerated amortization method under FIN 28. For share-based awards granted after November 1, 2005, we have recognized compensation expense based on the estimated grant date fair value
method required under SFAS No. 123(R). For these awards, we have recognized compensation expense using a straight-line amortization method. As SFAS No. 123(R) requires that
share-based compensation expense be based on awards that are ultimately expected to vest, estimated share-based compensation for all periods presented has been reduced for estimated forfeitures.

We
recorded the allocation of share-based compensation expenses for Agilent options as an increase in Agilent's invested equity Verigy.

84

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Impact of the Adoption of SFAS No. 123(R) Related to Verigy Options

The impact on our results for share-based compensation for Verigy options during fiscal years 2007 and 2006, respectively, were as follows:

Year Ended October 31,2007

2006(3)(in millions, except per share data)Cost of products and services

$
2.5

$
1.8Research and development


1.7


1.3Selling, general and administrative


9.6


7.3$
13.8

$
10.4Impact of share-based compensation expense related to Verigy options on our net income (loss) per share:Basic

$
(0.23
)
$
(0.19
)Diluted

$
(0.23
)
$
(0.19
)


---

For
fiscal years 2007 and 2006, share-based compensation capitalized within inventory was insignificant.

The
weighted average grant date fair value of awards related to Verigy options granted during fiscal year 2007 was $9.16 per share, respectively, and was determined using the Black
Scholes option pricing model. For fiscal year 2006, the weighted average grant date fair value of awards related to Verigy options and Agilent options were $7.28 and $10.38 per share, respectively.
For fiscal year 2007, the tax benefit realized from exercised stock options and similar awards was $2.1 million, whereas the tax benefit realized for fiscal years 2006 and 2005 was
insignificant.

As
of October 31, 2007 and 2006, the total compensation cost related to share-based awards not yet recognized, net of expected forfeitures, was approximately $26.0 million
and $19.0 million, respectively. We expect to recognize these share-based awards over 2.36 years on a weighted average basis.

Valuation Assumptions for Verigy Options

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

Year Ended October 31,2007

2006Risk-free interest rate for options

4.54
%
4.99
%Dividend yield

0.0
%
0.0
%Volatility for options

41.5
%
55.9
%Expected option life

4.39 years

4.09 years


85

---



Valuation Assumptions for the ESPP Plan

Year Ended October 31,2007

2006Risk-free interest rate for ESPP

5.25
%
5.00
%Dividend yield

0.0
%
0.0
%Volatility for options

39.1
%
38.7
%Expected option life

6 months

6 months


The
Black-Scholes model requires the use of highly subjective and complex assumptions, including the option's expected life and the price volatility of the Company's underlying stock.
The price volatility of our stock price was determined on the date of grant using a combination of the average daily historical volatility and the average implied volatility of publicly traded options
of our ordinary shares. Management believes that using a combination of historical and implied volatility is more reflective of market conditions and the most appropriate measure of the expected
volatility of our stock price. Because we have limited historical data, we used data from peer companies to determine our assumptions for the expected option life. For the risk-free
interest rate, we used the rate of return on US Treasury Strips as of the grant dates.

Valuation Assumptions for Verigy "Replacement Award" Options

The table below summarizes sets of weighted average assumptions used to estimate the fair values, using a Black-Scholes option-pricing model, of those replacement
options which were issued to employees at distribution date.

Year Ended October 31, 2006Original Agilent
Award

Original Agilent
Award Immediately
Before
Modification

Verigy Modified
Replacement AwardRisk-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 model requires the use of highly subjective and complex assumptions, including the option's expected life and the price volatility of the Company's underlying stock.
For the risk-free interest rate, we used the rate of return on US Treasury Strips as of October 31, 2006 with maturities commensurate with expected option life assumptions. The
calculation of fair value of those original Agilent options was based the assumptions chosen by Agilent at grant date. The calculation of fair value immediately before modification was based on
Agilent's assumptions at grant date and updated to reflect Agilent's specific experience. The estimated fair value calculations for the replacement options were based on the assumptions chosen by
Agilent at the granted date for each option grant and were updated to reflect anticipated Verigy-specific experience.

86

---



Valuation Assumptions for Agilent Options Held by Verigy Employees

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

Years Ended October 31,2006

2005Risk-free interest rate for options

4.4
%
3.55
%Risk-free interest rate for the ESPP

4.5
%
2.42
%Dividend yield

0
%
0
%Volatility for options

29
%
39
%Volatility for the ESPP

29
%
37
%Expected option life

4.25 years

4 yearsExpected life for the ESPP

6 months  1.5 years

6 months  2 years


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

Pro forma information.Pro forma net income (loss) information, as required by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") has been determined as if we had accounted for the employee stock options we granted, including shares issuable to
our employees under the Agilent Employee Stock Purchase Plan, and the Option Exchange Program, under SFAS No. 123's fair value method.

The
pro forma information for fiscal 2005 was as follows:

Years Ended October 31,2005(in millions, except per share data)Net loss as reported

$
(119
)SFAS No. 123(R) based compensation


(17
)Tax benefit


1Net losspro forma

$
(135
)Net loss per share, basic and diluted:As reported

$
(2.38
)Pro forma

$
(2.70
)


9. MARKETABLE SECURITIES

We account for our short-term marketable securities in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities"("SFAS No. 115"). We classify our marketable securities as available-for-sale at the time of purchase
and re-evaluate such designation as of each consolidated balance sheet date. We amortize premiums and discounts against interest income over the life of the investment. Our marketable
securities are classified as cash equivalents if the

87

---



original
maturity, from the date of purchase, is ninety days or less, and as short-term investments if the original maturity, from the date of purchase, is in excess of ninety days since
we intend to convert them into cash as necessary to meet our liquidity requirements.

Our
marketable securities include commercial paper, corporate bond and government securities and auction rate securities. Auction rate securities are securities that are structured with
short-term interest rate reset dates of generally less than ninety days but with contractual maturities that can be well in excess of ten years. At the end of each reset period, which
occurs every seven to thirty-five days, investors can sell or continue to hold the securities at par. In the fourth quarter of fiscal year 2007, certain auction rate securities failed
auction due to sell orders exceeding buy orders. Based on an analysis of other-than-temporary impairment factors, Verigy recorded a temporary impairment within other
comprehensive loss of approximately $1.4 million (net of tax of $0.3 million) at October 31, 2007 related to these auction rate securities. Verigy's marketable securities
portfolio as of October 31, 2007 was $402 million. The portfolio includes $142 million (at cost) invested in auction rate securities of which, $49 million (at cost) are
currently associated with failed auctions, all of which have been in a loss position for less than 12 months. The funds associated with failed auctions will not be accessible until a successful
auction occurs, a buyer is found outside of the auction process or the underlying securities have matured. As a result, we have classified those securities with failed auctions as
long-term assets in our consolidated balance sheet.

Our
marketable securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of shareholders'
equity, net of tax. Realized gains or losses on the sale of marketable securities are determined using the specific-identification method and were not material for fiscal year 2007. We evaluate our
investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis,
the financial condition of the issuer and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value. We record an impairment
charge to the extent that the carrying value of our available for sale securities exceeds the estimated fair market value of the securities and the decline in value is determined to be
other-than-temporary.

88

---



The
following table summarizes our marketable security investments as of October 31, 2007:

Cost

Gross Unrealized
Gains (Losses)

Estimated Fair
Market Value(in millions)Short-term marketable securities:Money market funds

$
125

$


$
125U.S. treasury securities and government agency securities


81





81Corporate debt securities


55





55Auction rate securities


93





93Total short-term available-for-sale investments

$
354

$


$
354


Cost

Gross Unrealized
Gains (Losses)

Estimated Fair
Market Value(in millions)Long-term marketable securities:Auction rate securities

$
49

$
(1
)
$
48Total long-term available-for-sale investments

$
49

$
(1
)
$
48As Reported:Cash equivalents







$
125Short-term marketable securities








229Long-term marketable securities








48Total at October 31, 2007







$
402


The
amortized cost and estimated fair value of cash equivalents and marketable securities classified as available-for-sale at October 31, 2007 are shown in
the table below based on their contractual maturity dates:

Cost

Gross Unrealized
Gains (Losses)

Estimated Fair
Market Value(in millions)Less than 1 year

$
211

$


$
211Due in 1 to 2 years


50





50Due after 2 years


142


(1
)

141Total at October 31, 2007

$
403

$
(1
)
$
402


89

---



10. INVENTORY

Inventory, net of related reserves, consists of the following:

October 31,
2007

October 31,
2006(in millions)Raw materials

$
25

$
37Work in progress


6


8Finished goods


37


42Total inventory

$
68

$
87


Finished
goods inventory includes demonstration products of $17 million for 2007 and $18 million for 2006. Effective June 1, 2006, we sold approximately
$19 million of raw material inventory to Flextronics for approximately net book value. See Note 20 "Flextronics" for further details.

The
total cost of products in the combined and consolidated statements of operations for 2007, 2006 and 2005 included inventory-related gross charges of $12 million,
$18 million and $25 million, respectively, for excess and obsolete inventory on our site as well inventory at our contract manufacturers and suppliers where we have
non-cancelable purchase commitments. In addition, we sold previously written down inventory of $4 million, $11 million, and $7 million, respectively, for the same
periods.

11. OTHER CURRENT ASSETS

October 31,
2007

October 31,
2006(in millions)Current deferred tax assets

$
16

$
16Transaction tax receivable


19


17Prepaid taxes


6


2Other prepayments


7


9Sundry receivables


3


3Other


3


1Total other current assets

$
54

$
48


12. PROPERTY, PLANT AND EQUIPMENT, NET

October 31,
2007

October 31,
2006(in millions)Leasehold improvements

$
13

$
12Software


21


22Machinery and equipment


40


46Total property, plant and equipment


74


80Accumulated depreciation and amortization


(32
)

(36
)Total property, plant and equipment, net

$
42

$
44


We
recorded approximately $13 million, $9 million and $6 million of depreciation and amortization expenses for fiscal years 2007, 2006, and 2005, respectively.

90

---



13. OTHER LONG TERM ASSETS

October 31,
2007

October 31,
2006(in millions)Deferred tax assets, non-current

$
30

$
41Flexible time off assets


15


11Investments


3


4Defined benefit contribution assets


2


1Lease deposits


5


Other


4


4Total other long term assets

$
59

$
61


Our
investments consist of investments in private companies accounted for using the cost method as we have no significant influence over the investee. All of our investments are subject
to periodic impairment review, which requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the future use of the investment. In
fiscal year 2007, we had a $2 million charge related to the write-off of a cost-based equity investment that was determined to be impaired on other than a temporary
basis. This impairment charge was included in other income (expense), net in the combined and consolidated statements of operations. No impairment charges were recorded in the other periods presented.

The
flexible time off assets relate to amounts set aside to fund vacation, holiday and flexible time-off benefits for our employees in Germany.

Information
about our pension plans and associated assets are presented in Note 18, "Retirement and Post-Retirement Pension Plans".

14. GOODWILL

A summary of our goodwill activity for fiscal years 2007 and 2006 is shown in the table below:

October 31,
2007

October 31,
2006(in millions)Beginning balance at November 1

$
18

$
17Currency translation adjustment





1Ending balance at October 31

$
18

$
18


91

---



15. GUARANTEES

Standard Warranty

A summary of our standard warranty accrual activity for fiscal years ended October 31, 2007 and 2006 is shown in the table below; also see Note 19,
"Other Current Liabilities and Long-Term Liabilities":

Year Ended October 31,2007

2006(in millions)Beginning balance at November 1

$
6

$
6Accruals for warranties issued during the period


13


10Accruals related to pre-existing warranties (including changes in estimates)


6


Settlements made during the period


(16
)

(10
)Ending balance at October 31

$
9

$
6


In
our consolidated balance sheets, standard warranty accrual is presented in other current liabilities.

Extended Warranty

A summary of our extended warranty deferred revenue activity for October 31, 2007 and 2006 is shown in the table below:

Year Ended October 31,2007

2006(in millions)Beginning balance at November 1

$
20

$
13Recognition of revenue


(10
)

(6
)Deferral of revenue for new contracts


11


13Ending balance at October 31

$
21

$
20


In
our consolidated balance sheets, current deferred revenue is reported separately and long-term deferred revenue is included in long-term liabilities. See
Note 19 "Other Current Liabilities and Long-Term Liabilities".

Indemnifications

As is customary in our industry and as provided for in local law in the U.S. and other jurisdictions, many of our standard contracts provide remedies to our
customers and others with whom we enter into contracts, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of our products. From time to time, we
indemnify customers, as well as our suppliers, contractors, lessors, lessees, companies that purchase our businesses or assets and others with whom we enter into contracts, against combinations of
loss, expense, or liability arising from various triggering events related to the sale and the use of our products, the use of their goods and services, the use of facilities and state of our owned
facilities, the state of the assets and businesses that we sell and other matters covered by such contracts, usually up to a specified maximum amount. In addition, from time to time we also provide
protection to these parties against claims related to undiscovered liabilities, additional product liability or environmental obligations. In our experience, claims made under such indemnifications
are rare and the associated estimated fair value of the liability is not material.

92

---



Under
the agreements with Agilent, Verigy will indemnify Agilent in connection with Verigy activities conducted prior to and following its separation from Agilent in connection with the
businesses that constitute Verigy and the liabilities that Verigy will be specifically assuming under the agreements. These indemnifications will cover a variety of aspects of Verigy's business,
including, but not limited to, employee, tax, intellectual property and environmental matters.

On
December 20, 2006, our Board of Directors and the Board of Directors of our primary U.S. subsidiary approved a form of Indemnity Agreement to be entered into between the U.S.
subsidiary and each officer and director of the company and each of it's direct and indirect subsidiaries. This Indemnity Agreement is substantially similar to the indemnity agreements previously
approved and entered into between the company and each officer and director of the company and its direct and indirect subsidiaries. The U.S. indemnity agreement is intended to supplement the existing
indemnity agreements. The laws of the State of Delaware, where the company's primary U.S. subsidiary is incorporated, permit indemnification of directors and officers under a broader range of
circumstances than is permitted under the laws of Singapore, where the company is incorporated. As a result of these differences in law, directors and officers of the company and its subsidiaries may
be entitled to indemnification under the U.S. Indemnity Agreements in circumstances where the company itself would not be permitted to provide indemnification. The form of U.S. Indemnity Agreement is
attached hereto as Exhibit 10.11, and is incorporated by reference in this description.

16. RESTRUCTURING

Agilent initiated several restructuring plans that have affected Verigy. These plans were designed to reduce costs and expenses in order to return Agilent to
profitability. The two main components of these plans are workforce reduction and consolidation of excess facilities.

We
directly incurred and recorded charges relating to these plans. In addition, we recorded charges allocated to us by Agilent for our share of the expenses they incurred to reduce costs
for support services such as finance, information technology, and workplace services. Our allocated portion of these costs is included in our combined and consolidated financial statements and the
schedules below. All accrued liabilities associated with the allocated costs were recorded by Agilent.

Summary information for Agilent's 2005 Plan

In fiscal year 2005, Agilent launched a new restructuring program to align its workforce with its smaller organization size after the announced sale of its
semiconductor products business and intention to spin us off. As part of this plan, we further reduced our operational costs, primarily through closing, consolidating, and relocating some sites and
reducing and realigning our workforce ("2005 Plan"). Under this plan, we took an $22 million charge in fiscal year 2006, $15 million of which related to a reduction in headcount,
$4 million of which related to headcount reduction by Agilent for corporate and administrative personnel that had supported our business and $3 million of which related to consolidation
of facilities. In accordance with the separation agreements with Agilent, Agilent retained and paid for all restructuring liabilities associated with the 2005 Plan and as such, as of
October 31, 2006, we did not record any accrued liabilities relating to this restructuring plan.

93

---





Summary of Verigy restructuring charges

In connection with the transfer of our manufacturing activities to Flextronics in fiscal year 2006, we have transferred approximately 85 employees to Flextronics,
and Flextronics has assumed certain pension and other employee liabilities associated with these employees. We are responsible for any liabilities associated with known future severance payments for
the transferred employees and will benefit from the future services of these employees as they will be working exclusively on our products. On June 1, 2006, Agilent paid into a trust account
approximately $3 million, on our behalf, for the severance payments associated with the transferred employees. On July 14, 2006, we reimbursed Agilent for all these payments, in
accordance with the master separation and distribution agreement. Also, we have potential obligation in the future of approximately $2 million associated with these transferred employees. We
have deferred these costs and are recognizing them ratably over the employees' period of service until the respective dates of the employees' termination from Flextronics. For fiscal year 2007 and
2006, we recorded $3 and $2 million respectively of these charges in fiscal 2007 in our cost of products and recorded approximately $1 million in charges in our operating expenses
relating to headcount reductions as we move our operations to lower cost regions. As of October 31, 2007, we had approximately $2 million in accrued restructuring liability.

A
summary of the statement of operations impact of the charges resulting from all restructuring plans for fiscal years ended October 31, 2007, 2006 and 2005 is shown below:

Year Ended October 31,2007

2006

2005(in millions)Restructuring charges (included in cost of sales)

$
3

$
7

$
1Restructuring charges (included in operating expenses)


1


17


7Total restructuring charges

$
4

$
24

$
8


The
restructuring costs allocated to us by Agilent during fiscal 2006 and 2005 included in the table above are shown separately below:

Year Ended October 31,2006

2005(in millions)Restructuring charges (included in cost of sales)

$
2

$
Restructuring charges (included in operating expenses)


9


3Total restructuring charges

$
11

$
3


94

---



17. SEPARATION COSTS

The following table presents the components of separation costs for fiscal years 2007, 2006, and 2005, respectively.

Year Ended October 31,2007

2006

2005(in millions)Separation costs (included in cost of sales)

$
1

$
8

$
Separation costs (included in operating expense)


4


75


3Total of separation costs


5


83


3Net curtailment and settlement gains (included in cost of sales)





(4
)

Net curtailment and settlement gains (included in operating expenses)





(6
)

Total net curtailment and settlement gains





(10
)

Net separation costs

$
5

$
73

$
3


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

For
fiscal year 2007, we incurred $5 million in separation costs, of which approximately $1 million was recorded in cost of sales. For fiscal year 2006, we incurred
$83 million in separation costs, of which approximately $8 million was recorded in cost of sales. For fiscal year 2005, we incurred $3 million in separation costs, all of which
were recorded in our operating expenses.

In
fiscal year 2006, we also had a net curtailment and settlement gain of approximately $10 million which pertained to Agilent's U.S. Retirement Plans and Agilent's Post
Retirement Benefit Plan. These net curtailment and settlement gains which resulted from the separation of our business from Agilent and the significant workforce reductions we incurred during fiscal
year 2006, were recorded by Agilent in accordance with SFAS No. 88 and were pushed down to our business.

18. RETIREMENT PLANS AND POST-RETIREMENT BENEFITS

Verigy adopted the provisions of 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)"as of October 31, 2007. Upon adoption, SFAS No. 158 requires that the funded status of defined
benefit postretirement plans be recognized on the company's consolidated balance sheets, and changes in the funded status be reflected in comprehensive income. SFAS No. 158 also requires the
measurement date of the Plan's funded status to be the same as the company's fiscal year-end. The requirement to measure the plan assets and benefit obligations as of the Company's fiscal
year-end date will not be effective until fiscal years ending after December 15, 2008 and will be adopted by the Company by the

95

---



end
of fiscal 2009. The incremental effect of applying SFAS No. 158 on individual line items on the consolidated balance sheet as of October 31, 2007 was as follows:

Before
Application of
SFAS No. 158

Adjustments

After
Application of
SFAS No. 158(In millions)Other long-term assets

$
53

$
6

$
59Other long-term liabilities

$
29

$
18

$
47Accumulated other comprehensive loss

$
2

$
12

$
14


Amounts
recognized in accumulated other comprehensive loss of $12 million (net of tax of $6 million) consists of unrealized net actuarial losses, of which we expect to
recognize approximately $1.2 million as components of net periodic benefit costs over fiscal year ended 2008. Other long-term assets include deferred tax assets relating to pension
liabilities.

General.Substantially all of our employees are covered under various Verigy defined benefit and/or defined contribution
plans. Additionally, we sponsor retiree medical accounts for certain eligible U.S. employees. Prior to the separation, Agilent had sponsored post-retirement health care benefits and a
death benefit under the Retiree Survivor's Benefit Plan for our eligible U.S. employees.



Effective June 1, 2006, Verigy established a new defined contribution benefit plan ("Verigy 401(k) plan") for its U.S employees. Verigy's 401(k) plan
provides matching contribution of up to 4% of eligible compensation. Eligible compensation consists of base and variable pay. In addition, we also
adopted the profit sharing plan for our U.S. employees, whereby the Company will make a maximum 2% contribution to the employee's 401(k) plan if certain annual financial targets are achieved. A small
number of our U.S. employees meeting certain age and service requirements will also receive an additional 2% profit sharing contribution to their 401(k) accounts if certain annual financial targets
are achieved.

Effective
June 1, 2006, Verigy made available certain retiree benefits to U.S. employees meeting certain age and service requirements upon termination of employment through
Verigy's Retiree Medical Account (RMA) Plan. At the date of separation, the present value of Verigy's responsibility for the retiree medical benefit obligation was approximately $2.3 million.
We are ratably recognizing this obligation over a period of 6.4 years, the shorter of the estimated average working lifetime or retirement eligibility of these employees. There are no plan
assets related to these obligations and we do not expect to make any contributions in the next fiscal year. For fiscal year 2007 and 2006, the expenses amount recognized under the RMA plan was
approximately $0.6 million and $0.2 million, respectively.

Prior
to the separation date, June 1, 2006, the former U.S. Agilent employees newly employed by Verigy benefited from Agilent 401(k) matching contributions. These amounts were
reflected in the respective costs of sales, research and development, and selling, general and administrative in the accompanying combined and consolidated statement of operations. Agilent allocated
the 401(k) matching amounts to Verigy on a headcount basis.

For
fiscal year 2007 and 2006, we incurred expenses of $2.2 million, $0.7 million, respectively, for the Company's matching expenses for our U.S. employees under the Verigy
401(k) and $1.2 million and $0.5 million, respectively, for the same respective periods for the additional 2% profit sharing contribution provided to a small number of U.S. employees
that have met certain requirements.

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---



Non-U.S. Retirement Benefit Plans.Eligible employees outside the U.S. generally receive retirement benefits
under various retirement plans based upon factors such as years of service and employee compensation levels. Eligibility is generally determined in accordance with local statutory requirements.

Change in Plans.Upon our separation from Agilent, the defined benefit plans for our employees in Germany, Korea, Taiwan,
France and Italy were transferred to us. With the exception of Italy and France, which involve relatively insignificant amounts, Agilent completed the funding of these transferred plans, based on 100%
of the accumulated benefit obligation level as of the separation date, by contributing approximately $3.3 million into our pension trust accounts during fiscal year 2007.

Costs for All U.S. and Non-U.S. Plans.The following tables provide the principal components of total retirement
related benefit plans impact on income (loss) of Verigy:

|                                          |  | U.S. Plans |   | Non-U.S. Plans |   | Total
|----------------------------------------- |  | ---------- | - | -------------- | - | -----
|
|
|
|Defined benefit pension plan costs        |  | $          |  |                | $ | 2    
|Defined contribution pension plan costs   |  |            | 3 |                |   |     
|Non-pension post-retirement benefit costs |  |            | 1 |                |   |     
|                                          |  |            |   |                |   |      
|Total retirement-related plans costs      |  | $          | 4 |                | $ | 2    
|                                          |  |            |   |                |   |      

Non-U.S. Defined Benefit.For fiscal years ended October 31, 2007, 2006 and 2005, the net pension costs
related to our employees participating in our non-U.S. defined benefit plans were comprised of:

Year Ended October 31,2007

2006

2005(in millions)Service costbenefits earned during the year

$
4.1

$
3.8

$
2.9Interest cost on benefit obligation


2.6


2.0


2.2Expected return on plan assets


(2.0
)

(1.7
)

(2.3
)Amortization and deferrals:Actuarial loss


1.2


0.9


0.8Total net plan costs

$
5.9

$
5.0

$
3.6


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

97

---



Funded statusAs of our 2007 and 2006 fiscal year ends, the funded status of our non-U.S. defined benefit plans
were:

Non-U.S. Defined
Benefit PlansYear Ended October 31,2007

2006(in millions)Change in fair value of plan assets:Fair valuebeginning of period

$
30.9

$
37.1Actual return on plan assets


0.6


1.6Employer contributions


5.6


Participants' contributions


1.7


Change in plan assets due to separation from Agilent





(7.3
)Currency impact


4.2


(0.5
)Fair valueend of period

$
43.0

$
30.9Change in benefit obligation:Benefit obligationbeginning of period

$
55.9

$
53.5Service cost


4.1


3.8Interest cost


2.6


2.0Participants' contributions


1.7


Actuarial (gain)/loss


(1.0
)

(4.7
)Benefits paid





(0.2
)Currency impact


6.7


1.5Benefit obligationend of period

$
70.0

$
55.9Funded status of the plans

$
(27.0
)
$
(25.0
)Unrecognized prior service cost





16.0(Accrued) prepaid benefit cost -end of year

$
(27.0
)
$
(9.0
)Assets (liabilities) recorded in the balance sheet:Liabilities

$
(27.0
)
$
(9.0
)


As
of October 31, 2007 and 2006, the amounts of the obligations for our non U.S. Defined benefit plans were as follows:

Year Ended October 31,2007

2006(in millions)Aggregate projected benefit obligation ("PBO")

$
70

$
56Aggregate accumulated benefit obligation ("ABO")

$
46

$
40


Assumptions.The assumptions used to determine the benefit obligations and expense for all of Verigy's defined benefit and
post-retirement benefit plans are presented in the tables below. The impacts of the assumptions listed for the fiscal years 2007, 2006 and 2005 have already been recognized in our combined
and consolidated statement of operations. The expected long-term return on assets

98

---



below
is based on the historical rate of return for our chosen asset mix of equities and fixed income investments adjusted for anticipated future movements.

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

|                                     |                                                            | Year Ended October 31, |            
|------------------------------------ | ---------------------------------------------------------- | ---------------------- | -----------
|
|U.S. defined benefit plans:          |                                                            |                        |            
|                                     | Discount rate                                              |                        |           
|                                     | Average increase in compensation levels                    |                        |           
|                                     | Expected long-term return on assets                        |                        |           
|Non-U.S. defined benefit plans:      |                                                            |                        |            
|                                     | Discount rate                                              |                        | 2.25 - 5.25
|                                     | Average increase in compensation levels                    |                        | 3.0 - 4.5  
|                                     | Expected long-term return on assets                        |                        | 2.75 - 6.0 
|U.S. post-retirement benefits plans: |                                                            |                        |            
|                                     | Discount rate                                              |                        | 6.25       
|                                     | Expected long-term return on assets                        |                        |           
|                                     | Current medical cost trend rate                            |                        | 8.0        
|                                     | Ultimate medical cost trend rate                           |                        | 5.0        
|                                     | Medical cost trend rate decreases to ultimate rate in year |                        | 2010       

Assumptions
used to calculate the benefit obligations and the resulting additional minimum pension liability were as follows:

Year Ended
October 31,
2007

Year Ended
October 31,
2006

Year Ended
October 31,
2005Non-U.S. defined benefit plans:Discount rate

2.25 - 5.25
%
2.25 - 6.0
%
3.5 - 6.0
%Average increase in compensation levels

3.75 - 4.5
%
2.5 - 5.0
%
3.0 - 5.0
%Expected long-term return on assets

2.75 - 6.0
%
2.75 - 7.5
%
6.75
%


19. OTHER CURRENT LIABILITIES AND LONG-TERM LIABILITIES

Other current liabilities at October 31, 2007 and 2006 were as follows:

October 31,
2007

October 31,
2006(in millions)Supplier liabilities

$
5

$
6Accrued warranty costs


9


6Other


5


3Total other current liabilities

$
19

$
15


Supplier
liabilities reflect the amount by which our firmly committed inventory purchases from our suppliers exceed our forecasted production needs. See Note 15, "Guarantees" for
additional information regarding warranty accruals.

99

---



Long-term
liabilities at October 31, 2007 and 2006 were as follows:

October 31,
2007

October 31,
2006(in millions)Long-term extended warranty and deferred revenue

$
12

$
15Retirement plan accruals


32


15Other


3


4Total long-term liabilities

$
47

$
34


See
Note 18, "Retirement and Post Retirement Pension Plans" for additional information regarding retirement plan accruals.

20. FLEXTRONICS

In March 2006, we selected Flextronics Telecom Services Ltd. ("Flextronics") as our primary contract manufacturer and signed several asset purchase
agreements with them in connection with the transfer of our manufacturing activities to Flextronics, as well as a global manufacturing services agreement. All of these agreements were entered into by
Agilent, but upon the separation date, Verigy assumed all of Agilent's rights and obligations under these agreements. Our agreements with Flextronics will expire in March 2010 although it may
be automatically extended for subsequent terms of one year, absent nine-month notice of an intention to terminate the agreement from us or Flextronics. The agreements may also be
terminated by us or Flextronics for other customary reasons, including if the other party becomes subject to bankruptcy proceedings or materially breaches the agreement. In addition, generally, we may
terminate the agreements if Flextronics fails to make a timely delivery on more than 15% of our placed orders in any three-month period. We are not obligated to use Flextronics exclusively to
manufacture our products, nor is Flextronics obligated to manufacture test equipment exclusively for us. However, the agreement does require our consent for Flextronics to sell any of our products to
unaffiliated third parties.

Effective
June 1, 2006, we sold to Flextronics approximately $19 million of inventory and approximately $2 million of machinery and equipment for approximately net
book value. In addition, on October 16, 2006, we paid Flextronics $1.5 million for transition-related services, which we are recognizing as an expense ratably over the manufacturing
contract period of approximately 4 years. Also, in connection with these agreements, Flextronics paid us $1.5 million on October 19, 2006 and another $1.5 million on
January 16, 2007 that we have deferred and are recognizing ratably over the manufacturing period.

See
Note 16 "Restructuring" for information pertaining to the transfer of approximately 85 employees to Flextronics in fiscal year 2006.

100

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21. COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments:Following our separation from Agilent, we entered into various operating lease arrangements with
unrelated third parties. The following table reflects our non-cancelable operating lease commitments as of October 31, 2007:

Fiscal Year

Amount(in millions)2008

$
9.32009


10.02010


6.82011


6.12012


4.9Thereafter


19.4Total

$
56.5


Rent
expense was approximately $5.7 million, $4.6 million, and $2.0 million for fiscal years 2007, 2006, and 2005, respectively. Prior to our separation from
Agilent, 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 on our behalf and also released Agilent from all guarantees and security obligations
that they had made for us on our behalf. These guarantees and security arrangements related to real property lease deposits and guarantees, security for company credit card programs and other credit
arrangements and required deposits with governmental trade and tax agencies.

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

22. OTHER INCOME AND EXPENSE

The following table presents the components of other income (expense), net for fiscal years ended October 31, 2007, 2006, and 2005:

Year Ended October 31,2007

2006

2005(in millions)Interest and other income

$
17

$
4

$
Impairment of cost-based investments


(2
)




Other expense





1


(1
)Other income (expense), net

$
15

$
5

$
(1
)


Interest
and other income consists primarily of interest on cash, cash equivalents and investments as well as gains and losses from foreign exchange transactions. The increase in
interest and other income during fiscal year 2007, compared to fiscal year 2006, is primarily a result of increased interest income from higher cash, cash equivalents and investment balances.

Also
during fiscal year 2007, we incurred a $2 million charge related to the write-off of a cost-based equity investment that was determined to be impaired
on an other-than-temporary basis.

101

---



23. SEGMENT & GEOGRAPHIC INFORMATION

SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," requires us to identify the segment or segments we operate in. Based
on the standards set forth in SFAS No. 131, we operate as one reportable segment; that is, we provide test system solutions that are used in the manufacture of semiconductor devices. Below is
the revenue detail for the two product platforms within this segment:

Year Ended October 31,2007

2006

2005(in millions)Net revenue from productsSOC/SIP/High-Speed Memory

$
333

$
442

$
267Memory


282


204


88Net revenue from products


615


646


355Net revenue from services


146


132


101Total net revenue

$
761

$
778

$
456


Major customers

In fiscal year 2007, two customers accounted for 31.8% of our net revenue, with one customer accounting for 21.7% and the other accounting for 10.1% of our net
revenue. In fiscal year 2006, one customer accounted for 10.1% of our net revenue. In fiscal year 2005, no single customer accounted for 10% or more of our net revenue.

Geographic Net Revenue Information:

Year Ended October 31,2007

2006

2005(in millions)United States

$
215

$
245

$
118Singapore


428


376


180Japan


52


79


94Rest of the World


66


78


64Total net revenue

$
761

$
778

$
456


Net
revenue is attributed to geographic areas based on the country in which the customer takes title to our products.

Geographic Property, Plant and Equipment Information:

October 31,
2007

October 31,
2006(in millions)United States

$
13

$
13Singapore


17


20Germany


4


4China


3


4Rest of the World


5


3Total geographic property, plant and equipment

$
42

$
44


102

---



24. SUBSEQUENT EVENTS

Employee Shares Purchase Plan

Effective November 30, 2007, we issued 155,030 shares as part of the semi-annual Employee Shares Purchase Plan ("ESPP").

Pending Business Combination

On December 5, 2007, we entered into a definitive agreement to acquire Inovys. Inovys, a privately held company, provides innovative solutions for design
debug, failure analysis and yield acceleration for complex semiconductor devices and processes. The acquisition is expected to close in the first quarter of fiscal 2008 and will be accounted for under
the purchase method of accounting.

Share Repurchase Program

On November 27, 2007, the Board of Directors of the Company approved the use of up to $150 million to repurchase up to 10 percent of Verigy's
outstanding ordinary shares. The Company will seek to obtain shareholder approval for this repurchase program at its 2008 Annual General Meeting of Shareholders expected to be held in
April 2008.

103

---





QUARTERLY SUMMARY  (Unaudited)

The following table presents our unaudited quarterly results of operations, in millions, for each of our last eight quarters through the quarter ended
October 31, 2007. This table should be read in conjunction with the combined and consolidated audited annual financial statements and related notes contained elsewhere in this
Form 10-K. We have prepared the unaudited information on the same basis as our audited combined and consolidated financial statements. Results of operations for any quarter are not
necessarily indicative of results for any future quarters or years.

|                                                                                      |                                     | Quarter Ended            |       
|------------------------------------------------------------------------------------- | ----------------------------------- | ------------------------ | ------
|
|
|Net revenue:                                                                          |                                     |                          |       
|                                                                                      | Products                            |                          | $     
|                                                                                      | Services                            |                          |       
|                                                                                      |                                     |                          |       
|                                                                                      |                                     | Total net revenue        |       
|Cost of sales:                                                                        |                                     |                          |       
|                                                                                      | Cost of products                    |                          |       
|                                                                                      | Cost of services                    |                          |       
|                                                                                      |                                     |                          |       
|                                                                                      |                                     | Total cost of sales      |       
|Gross profit                                                                          |                                     |                          | 97    
|Operating expenses:                                                                   |                                     |                          |       
|                                                                                      | Research and development            |                          |       
|                                                                                      | Selling, general and administrative |                          |       
|                                                                                      | Restructuring charges               |                          |       
|                                                                                      | Separation costs                    |                          |       
|                                                                                      |                                     |                          |       
|                                                                                      |                                     | Total operating expenses |       
|                                                                                      |                                     |                          |       
|Income (loss) from operations                                                         |                                     |                          | 35    
|Other income (expense), net                                                           |                                     |                          | 5     
|                                                                                      |                                     |                          |       
|Income (loss) before taxes                                                            |                                     |                          | 40    
|Provision for taxes                                                                   |                                     |                          | 8     
|                                                                                      |                                     |                          |       
|Net income (loss)                                                                     |                                     | $                        | 32    
|                                                                                      |                                     |                          |       
|Weighted average net income (loss) per share:                                         |                                     |                          |       
|Basic:                                                                                |                                     | $                        | 0.53  
|Diluted:                                                                              |                                     | $                        | 0.52  
|Weighted average shares (in thousands) used in computing net income (loss) per share: |                                     |                          |       
|Basic:                                                                                |                                     |                          | 59,696
|Diluted:                                                                              |                                     |                          | 60,483

104

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The
following table presents our historical results for the periods indicated as a percent of net revenue:

|                              |                                     | Quarter Ended            |     
|----------------------------- | ----------------------------------- | ------------------------ | ----
|
|Net revenue:                  |                                     |                          |     
|                              | Products                            |                          | 82.3
|                              | Services                            |                          | 17.7
|                              |                                     |                          |     
|                              |                                     | Total net revenue        |     
|Cost of sales:                |                                     |                          |     
|                              | Cost of products                    |                          | 40.7
|                              | Cost of services                    |                          | 12.9
|                              |                                     |                          |     
|                              |                                     | Total cost of sales      |     
|                              |                                     | Gross margin             |     
|Operating expenses:           |                                     |                          |     
|                              | Research and development            |                          | 11.0
|                              | Selling, general and administrative |                          | 18.2
|                              | Restructuring charges               |                          | 0.5 
|                              | Separation costs                    |                          |    
|                              |                                     |                          |     
|                              |                                     | Total operating expenses |     
|Income (loss) from operations |                                     | 16.7                     |     
|Other income (expense), net   |                                     | 2.4                      |     
|                              |                                     |                          |     
|Income (loss) before taxes    |                                     | 19.1                     |     
|Provision for taxes           |                                     | 3.8                      |     
|                              |                                     |                          |     
|Net income (loss)             |                                     | 15.3                     | %   
|                              |                                     |                          |     

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

None.

Item 9A.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of
our disclosure controls and procedures as of October 31, 2007, pursuant to and as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the "Exchange Act").
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of October 31, 2007, the company's disclosure controls and procedures, as defined by
Rule 13a-15(b) under the Exchange Act, were effective and designed to ensure that (i) information required to be disclosed in the company's reports filed under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (ii) information is accumulated and communicated to management, including
the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Based on their evaluation, Verigy's Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are effective.

105

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Inherent Limitations on Effectiveness of Controls

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

Management's Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of
the effectiveness of our internal control over financial reporting based on the framework inInternal ControlIntegrated Frameworkissued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of this evaluation, our management concluded that our internal control over financial reporting was effective
as of October 31, 2007.

Our
independent registered public accounting firm, PricewaterhouseCoopers LLP, has issued an attestation report on our internal control over financial reporting. The report on the audit
of internal control over financial reporting appears on page 59 of this Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended October 31, 2007, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.Other Information

Appointment of New Director

On December 19, 2007, Verigy's board of directors appointed a new director to the Company's board, bringing the total number of directors on Verigy's board
to eight. Steven W. Berglund joins the board, effective as of January 1, 2008. Mr. Berglund will be a Class III director and will be subject to re-election at
the Company's 2008 annual general meeting of shareholders. Mr. Berglund will also serve as a member of the Verigy's Audit Committee. In connection with his appointment, Mr. Berglund will
receive Verigy's standard non-employee director cash and equity compensation. Specifically, Mr. Berglund will receive a pro rata portion of the $55,000 annual retainer for his
service to April 15, 2008 (the estimated date of the 2008 annual general meeting of shareholders and the point at which fiscal 2008 director compensation will be paid). Upon his appointment,
pursuant to the Company's 2006 Equity Incentive Plan, Mr. Berglund will receive a one-time grant of (i) a non-statutory stock option to purchase that number of
whole ordinary shares equal to an accounting value of $110,000 and (ii) restricted shares with an accounting value of $110,000, under the automatic equity grant provisions of the company's 2006
Equity Incentive Plan. The initial one-time grants will be granted automatically on January 1, 2008.

106

---



In
connection with his appointment to the board, on December 19, 2007, Mr. Berglund entered into Verigy's standard form of director Indemnification Agreement with
Verigy Ltd. and its primary US subsidiary, Verigy US, Inc. The indemnification agreements are effective as of January 1, 2008, and are in the same form as the existing
indemnification agreements that the company has entered into previously with each of its directors and executive officers. The form of indemnification agreement between Verigy Ltd. and each of
its directors and executive officers was filed as Exhibit 10.1 to the company's registration statement on Form S-1, filed with the Securities and Exchange Commission, or
"SEC", on May 23, 2006, and is incorporated in this Item 9B by reference. The form of indemnification agreement between Verigy US, Inc. and each of Verigy Ltd.'s directors and
executive officers was filed as Exhibit 10.11 to Verigy Ltd.'s annual report on Form 10-K, filed with the Securities and Exchange Commission, or "SEC", on
December 22, 2006, and is incorporated in this Item 9B by reference.

On
December 19, 2007, Verigy issued a press release announcing the appointment of Mr. Berglund. The press release is attached hereto as Exhibit 99.1.

107

---





PART III

Item 10:Directors and Executive Officers and Corporate Goverance

Certain information relating to our directors and executive officers, committee information, reports and charters, executive compensation, security ownership of
certain beneficial owners and management and related stockholder matters, and certain relationships and related transactions is incorporated by reference herein from our definitive proxy statement in
connection with our 2008 Annual General Meeting of Shareholders, which proxy statement will be filed with the Commission not later than 120 days after the close of our fiscal year. For this
purpose, the Compensation Committee Report and Performance Graph included in such proxy statement are specifically not incorporated herein.

Standards of Business Conduct

We have adopted Standards of Business Conduct that apply to all of our employees and our Directors. The Standards 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 (as defined by the SEC) of a provision of the Standards of Business Conduct that applies to our principal executive officer, principal financial officer, principal accounting
officer, controller or persons performing similar functions and relates to elements of the Standards of Business Conduct specified in the rules of the SEC will be posted on our website.

Item 11:Executive Compensation.

Certain information relating to our directors and executive officers, executive compensation, security ownership of certain beneficial owners and management and
related stockholder matters, and certain relationships and related transactions will be incorporated by reference herein from our definitive proxy statement in connection with our 2008 Annual General
Meeting of Shareholders, which proxy statement will be filed with the Commission not later than 120 days after the close of the fiscal year. For this purpose, the Compensation Committee Report
and Performance Graph included in such proxy statement are specifically not incorporated herein.

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

Certain information relating to our directors and executive officers, executive compensation, security ownership of certain beneficial owners and management and
related stockholder matters, and certain relationships and related transactions will be incorporated by reference herein from our definitive proxy statement in connection with our 2008 Annual General
Meeting of Shareholders, which proxy statement will be filed with the Commission not later than 120 days after the close of the fiscal year. Also see "Item 7: Management's Discussion and
Analysis of Financial Condition and Results of OperationsEquity Compensation Plans."

Item 13:Certain Relationships and Related Transactions, and Director Independence.

Certain information relating to our directors and executive officers, executive compensation, security ownership of certain beneficial owners and management and
related stockholder matters, and certain relationships and related transactions will be incorporated by reference herein from our definitive proxy statement in connection with our 2008 Annual General
Meeting of Shareholders, which proxy statement will be filed with the Commission not later than 120 days after the close of the fiscal year.

108

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Item 14:Principal Accountant Fees and Services.

Certain information relating to fees of Verigy's independent registered public accounting firm will be incorporated by reference herein from our definitive proxy
statement in connection with our 2008 Annual General Meeting of Shareholders, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the
close of the fiscal year.

109

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PART IV

Item 15.Exhibits and Financial Statement Schedules





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
|------------------------------- |  | ------------------------------ | ----- | -------------------------------------------------------- | - | ----------- |  | ------------------------
|
|2007                            |  |                                |       |                                                          |   |             |  |                         
|Allowance for doubtful accounts |  | $                              | 0.1   |                                                          | $ |            |  | $                       
|Tax valuation allowance(***)    |  | $                              |      |                                                          | $ |            |  | $                       
|2006                            |  |                                |       |                                                          |   |             |  |                         
|Allowance for doubtful accounts |  | $                              | 0.2   |                                                          | $ |            |  | $                       
|Tax valuation allowance(***)    |  | $                              | 135.0 |                                                          | $ |            |  | $                       
|2005                            |  |                                |       |                                                          |   |             |  |                         
|Allowance for doubtful accounts |  | $                              | 0.3   |                                                          | $ |            |  | $                       
|Tax valuation allowance         |  | $                              | 105.6 |                                                          | $ | 29.4        |  | $                       

---

110

---





SIGNATURES

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

| |  | VERIGY LTD.
| |  | -----------
| |  | By:        

Date:
December 20, 2007

111

---



POWER OF ATTORNEY

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

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

|Signature                               |  | Title                                                                         |  | Date             
|--------------------------------------- |  | ----------------------------------------------------------------------------- |  | -----------------
|                                        |  |                                                                               |  |                  
|/s/KEITH L. BARNESKeith L. Barnes       |  | Chairman, Chief Executive Officer
and President
(Principal Executive Officer) |  | December 20, 2007
|/s/ROBERT J. NIKLRobert J. Nikl         |  | Chief Financial Officer
(Principal Financial and Accounting Officer)          |  | December 20, 2007
|/s/EDWARD C. GRADYEdward C. Grady       |  | Director                                                                      |  | December 20, 2007
|/s/PAUL CHAN KWAI WAHPaul Chan Kwai Wah |  | Director                                                                      |  | December 20, 2007
|/s/C. SCOTT GIBSONC. Scott Gibson       |  | Lead Independent Director                                                     |  | December 20, 2007
|/s/ERNEST GODSHALKErnest Godshalk       |  | Director                                                                      |  | December 20, 2007
|/s/ERIC MEURICEEric Meurice             |  | Director                                                                      |  | December 20, 2007
|/s/CLAUDINE SIMSONClaudine Simson       |  | Director                                                                      |  | December 20, 2007

112

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3.     Exhibits.

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

EXHIBIT INDEX

|         |  |                                                                                                                             |  | Incorporated By Reference
|-------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | -------------------------
|
|2.1      |  | Master Separation and Distribution Agreement between Agilent and Verigy Ltd., effective May 31, 2006                        |  | S-1/A                    
|2.2      |  | General Assignment and Assumption Agreement between Agilent and Verigy Ltd., effective June 1, 2006                         |  | S-1/A                    
|2.3      |  | Intellectual Property Matters Agreement among Agilent, Verigy (Singapore) Pte. Ltd. and Verigy Ltd., effective June 1, 2006 |  | S-1/A                    
|2.4      |  | Employee Matters Agreement between Agilent and Verigy Ltd., effective June 1, 2006                                          |  | S-1/A                    
|2.5      |  | Tax Sharing Agreement between Agilent and Verigy Ltd., effective June 1, 2006                                               |  | S-1/A                    
|2.6      |  | Transition Services Agreement between Agilent and Verigy Ltd., effective June 1, 2006                                       |  | S-1/A                    
|2.7      |  | Manufacturing Trademark License Agreement between Agilent and Verigy Ltd., effective June 1, 2006                           |  | S-1/A                    
|3.1      |  | Amended and Restated Memorandum and Articles of Association of Verigy Ltd.                                                  |  | S-1/A                    
|4.1      |  | Form of Specimen Share Certificate for Verigy Ltd.'s Ordinary Shares                                                        |  | S-1/A                    
|10.1**   |  | Form of Indemnity Agreement entered into by Verigy Ltd.with each of its directors and executive officers                    |  | S-1/A                    
|10.2**   |  | 2006 Equity Incentive Plan, as amended December 13, 2006                                                                    |  | 10-K                     
|10.2.1** |  | Form of Employee Share Option Grant Agreement, as amended December 20, 2006                                                 |  | 10-K                     
|         |  |                                                                                                                             |  |                          

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|10.2.2**  |  | Form of Non-Employee Director Share Option Grant Agreement, as amended December 20, 2006                                                               |  | 10-K |  | 333-132291 |  | 10.2.2  |  | 12/22/06  |  | 
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- |  | ---------- |  | ------- |  | --------- |  | 
|10.2.3**  |  | Form of Employee Share Unit Agreement, as amended December 20, 2006                                                                                    |  | 10-K |  | 333-132291 |  | 10.2.3  |  | 12/22/06  |  | 
|10.2.4**  |  | Form of Non-Employee Director Share Unit Agreement, as amended December 20, 2006                                                                       |  | 10-K |  | 333-132291 |  | 10.2.4  |  | 12/22/06  |  | 
|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 |  | 10-K |  | 333-132291 |  | 10.2.5  |  | 12.22/06  |  | 
|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   |  | 10-K |  | 333-132291 |  | 10.2.6  |  | 12.22/06  |  | 
|10.2.7**  |  | Form of Verigy Ltd. 2006 Equity Incentive Plan Share Option Agreement for Employees Located in France, as amended December 20, 2006                    |  | 10-K |  | 333-132291 |  | 10.2.7  |  | 12.22/06  |  | 
|10.2.8**  |  | Form of Verigy Ltd. 2006 Equity Incentive Plan Share Unit Agreement for Employees Located in France, as amended December 20, 2006                      |  | 10-K |  | 333-132291 |  | 10.2.8  |  | 12.22/06  |  | 
|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                                                                                                    |  | 10-K |  | 333-132291 |  | 10.2.12 |  | 12/22/06  |  | 
|10.2.13** |  | Form of Four-Tranche Officer Share Option Agreement for France-Based Officers                                                                          |  | 10-K |  | 333-132291 |  | 10.2.13 |  | 12/22/06  |  | 
|          |  |                                                                                                                                                        |  |      |  |            |  |         |  |           |  | 

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|10.2.14** |  | Form of Four-Tranche Officer Share Option Agreement for Non-U.S. and Non-France based Officers                                                         |  |       |  |            |  |       |  |           |  | X
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----- |  | ---------- |  | ----- |  | --------- |  | -
|10.3**    |  | 2006 Employee Shares Purchase Plan, as amended December 20, 2006                                                                                       |  | 10-K  |  | 333-132291 |  | 10.3  |  | 12/22/06  |  |  
|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 |  |  
|10.5.1**  |  | Employment Offer Letter to Keith L. Barnes, dated April 4, 2006                                                                                        |  | S-1/A |  | 333-132291 |  | 10.11 |  | 5/1/2006  |  |  
|10.5.2**  |  | Letter of Amendment to Employment Offer Letter to Keith L. Barnes, dated May 30, 2007                                                                  |  | 8-K   |  | 000-52038  |  | 99.1  |  | 5/31/07   |  |  
|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 |  |  
|10.7.1**  |  | Employment Offer Letter to Robert Nikl, dated May 26, 2006                                                                                             |  | S-1/A |  | 333-132291 |  | 10.14 |  | 6/1/2006  |  |  
|10.7.2**  |  | Letter of Amendment to Employment Offer Letter to Robert Nikl, dated October 1, 2007                                                                   |  | 8-K   |  | 000-52038  |  | 99.1  |  | 10/2/07   |  |  
|10.8      |  | Lease Agreement by and between Verigy US, Inc. and Pau Moulds CPP-A LLC, dated May31, 2006                                                             |  | 10-K  |  | 333-132291 |  | 10.8  |  | 12/22/06  |  |  
|10.9.1**  |  | Form of Severance Agreement for U.S.-based Officers                                                                                                    |  | 10-K  |  | 333-132291 |  | 10.9  |  | 12/22/06  |  |  
|10.9.2**  |  | Form of Equity Award Modification Agreement (Severance Agreement) for officers based in France                                                         |  |       |  |            |  |       |  |           |  | X
|10.9.3**  |  | Form of Equity Award Modification Agreement (Severance Agreement) for officers based in Germany                                                        |  |       |  |            |  |       |  |           |  | 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                                                     |  | 10-K  |  | 333-132291 |  | 10.11 |  | 12/22/06  |  |  
|21.1      |  | Verigy Ltd.'s Subsidiaries                                                                                                                             |  |       |  |            |  |       |  |           |  | X
|          |  |                                                                                                                                                        |  |       |  |            |  |       |  |           |  |  

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|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
|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
|99.1 |  | Press Release, dated December 19, 2007, titled Verigy Adds Steven Burglund to Board of Directors                                                                                  |  |  |  |  |  |  |  |  |  | X

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