10-K

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FORM 10-K TABLE OF CONTENTS
Item 8. Financial Statements and Supplementary Data
PART IV

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

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 3, 2007
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                to

0-22366
(Commission file number)

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

Delaware (State or other jurisdiction of incorporation or organization)	94-2878499 (I.R.S. Employer Identification No.)
1421 California Circle, Milpitas, California (Address of principal executive office)	95035 (Zip Code)

(408) 635-4300
(Registrant's telephone number, including area code)

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

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

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

Common Stock, $0.001 par value

          Indicate by check mark if the registration 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 registered 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 the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý

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

Large accelerated filer o                Accelerated filer ý                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 voting stock held by non-affiliates of the Registrant, as of May 4, 2007 was approximately $182,982,514 (based upon the closing price for shares of the Registrant's common stock as reported by the NASDAQ Global Market as of that date of $3.60). Shares of common stock held by each officer, director and holder of 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

          On December 31, 2007, approximately 101,753,383 shares of the Registrant's common stock, $0.001 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the Registrant's Proxy Statement for the 2008 Annual Meeting of Stockholders to be held on March 18, 2008 are incorporated by reference into Part III of this report. Except as expressly incorporated by reference, the Registrant's Proxy Statement shall not be deemed to be a part of this report.

FORM 10-K

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	6
Item 1A.	Risk Factors	14
Item 1B.	Unresolved Staff Comments	29
Item 2.	Properties	30
Item 3.	Legal Proceedings	30
Item 4.	Submission of Matters to a Vote of Security Holders	30
PART II
Item 5.	Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	33
Item 6.	Selected Financial Data	34
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	36
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 8.	Financial Statements and Supplementary Data	55
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	99
Item 9A.	Controls and Procedures	99
Item 9B.	Other Information	100
PART III
Item 10.	Directors and Executive Officers of the Registrant	101
Item 11.	Executive Compensation	101
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	101
Item 13.	Certain Relationships and Related Transactions	103
Item 14.	Principal Independent Registered Public Accounting Firm Fees and Services	103
PART IV
Item 15.	Exhibits and Financial Statement Schedule	104
	Signatures	105

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PART I

        This Annual Report on Form 10-K contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements using terminology such as "believes," "may," "will," "expects," "plans," "anticipates," "goals," "estimates," "potential," or "continue," or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. The cautionary statements made in this Annual Report on Form 10-K should be read as being applicable to all related forward-looking statements whenever they appear in this Annual Report on Form 10-K. Forward-looking statements include statements regarding our objective to be the leading supplier of semiconductor test and diagnostic solutions; the increasing importance of assembly and test service companies in the ATE market; our intention to prioritize our research and development activities in the Diamond and ASL platforms to accelerate their deployment; our intention to focus Sapphire platform development on the high-end consumer semiconductor markets; our intention to double our sales and support headcount in Asia and our expectation that this will better serve the unique needs of this base; our intention to divest or reduce our commitment to businesses and products that are unrelated to our consumer semiconductor market focus; our intention to scale down our service infrastructure and align with a self-service model; our intention to increase our services resources in Asia; our intention to continue outsourced manufacturing activities; our estimate of headcount reductions resulting from the restructuring activities; our dependence upon the success of our major customers; our dependence on obtaining orders from new and current customers and the general global economy; international business continuing to account for a significant portion of our net sales; our belief that order cancellations and customer-requested shipment delays will occur in the future; our development of long-term relationships with major customers; our focus on increased cycle time, accuracy and pin counts of our tester products and co-development of technology between our product groups; our continued efforts to provide solutions that allow a more rapid, cost-effective development of ATE test programs; our dedication to continue to invest significant resources in the development of new products and enhancements; the possibility that litigation may be necessary to enforce our patents and other intellectual property rights; our manufacturing objective to produce engineering validation test systems and ATE that conform to our customers' requirements at the lowest commercially practical manufacturing cost; management of our inventory through agreements with both suppliers and subcontractors; our belief that we compete favorably with respect to throughput, tools for reducing customer product time-to-market, product performance and total cost of ownership; our future results being dependent on attracting and retaining highly skilled workers; our dependence on continued significant expenditures related to new products, capital equipment purchases and worldwide training and customer service and support; our belief that our net sales and operating results will continue to fluctuate; our intention to introduce new products and product enhancements; our belief that our gross margins on systems sales will continue to vary significantly; our expectation that our top ten customers in the aggregate will continue to account for a large portion of our net sales for the foreseeable future, and the loss of one or more of these customers will harm our business and operating results; our intent to continue to address the need to develop new products and enhance existing products through acquisitions of other companies, product lines, technologies and personnel; our existing cash and short-term investments being sufficient to meet our cash requirements for the foreseeable future; our dependence on the capital expenditures of manufacturers of semiconductors and other companies; significant portions of our new orders being dependent upon demand from semiconductor device manufacturers building or expanding fabrication facilities and new device testing requirements; our dependence upon obtaining orders for systems to be shipped in the same quarter in which the order is received; the continued acceptance, volume production, timely delivery and customer satisfaction of our newer digital and mixed signal memory testers being of critical importance to our future financial results; investment of significant resources in the development and completion of new products and product enhancements and to maintain customer service and support centers worldwide;

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investment of significant resources in property and equipment, purchased and leased facilities, inventory and other costs; the possibility that we may repatriate additional cash from our foreign subsidiaries; our ability to maintain or increase sales levels in Taiwan; our anticipation that international sales will continue to account for a significant portion of our total net sales; our expectation that we will continue to receive notice of third party claims for infringement and that litigation expenses with respect to those claims may continue to be an expensive and time consuming process for us; our dependence on the continued service of our executive officers and key personnel; our dependence upon our ability to attract and retain qualified personnel; our existing properties, including both owned and leased sites, being in good condition and adequate to meet our current and foreseeable future requirements; our belief that our tax positions are consistent with the tax positions in the jurisdictions in which we conduct business; our belief that none of the claims brought in the ordinary course of business will have a materially adverse impact on our business, financial condition or results of operation; our anticipation that net sales will be $58.0 million to $62.0 million in the first quarter of fiscal year 2008; our anticipation that restructuring charges will be $15.5 to $17.0 million in the first quarter of fiscal 2008; our anticipation of reducing our net worldwide headcount by 400 people by the end of fiscal 2008; our belief that gross margin percent could be lower in the first quarter of fiscal year 2008 compared to the fourth quarter of fiscal year 2007; our anticipation that R&D expenses in absolute dollars for fiscal 2008 will be lower in the first quarter of fiscal year 2008 compared to the fourth quarter of fiscal 2007; our expectation that SG&A expenses in absolute dollars will be flat to lower in the first quarter of fiscal year 2008 compared to the fourth quarter of fiscal 2007; our anticipation that our annual amortization for purchased intangible assets will be $15.9 million and $13.5 million for the fiscal years ending in 2008 and 2009, respectively; our belief that investment in inventory will continue to represent a significant portion of our working capital; the highly cyclical semiconductor industry which experiences downturns; our expectation that a 10% change in the interest rate will not have any material effect on our interest income or expense; our revenue recognition practices regarding new products; our expectation that we will not recognize any significant tax benefits in our results of operations; our belief that our current cash positions will be sufficient to meet our anticipated business requirements for the next fiscal year; estimated future restructuring charges; our uncertainty regarding generating sufficient taxable income in future years to realize net deferred tax assets; future minimum lease payments; minimum contractual cash obligations and the effect of such obligations in future periods; the highly competitive nature of the automatic test equipment industry which is subject to rapid technological change; the impact of the adoption of certain accounting pronouncements on our financial positions or results of operations; our expectation of continuing volatility in order activity; our belief that it is probable that orders will be canceled and delayed in the future; our intent to maintain the rapid pace of product innovation on scalable platforms; our improving yield and increasing throughput; our intent to continue focusing on the high growth opportunities of the SoC ATE market; our intent to continue focusing on emerging opportunities for profitable growth; our intent to leverage our relationships with industry leaders to enhance market position; our intent to lower total cost of ownership; our intent to continue delivering an outstanding total customer experience throughout the product life cycle; our intent to optimize our operating model to generate sustainable profitability; our belief that a significant portion of investments will provide the marketing, administration and after-sales service and support required for these new products; our intent to maintain the Disclosure Controls as dynamic systems that change as conditions warrant; our intent to make public disclosure of changes to our Code of Ethics by posting information on our website in accordance with SEC rules; our plan to continue recognizing compensation expense for all share-based payment awards; our intent to outsource in the future and our expectation that we will achieve operational flexibility and costs savings as a result of outsourcing; our expectation that the Sarbanes-Oxley Act of 2002 will continue to make it more difficult and more expensive for us to obtain director and officer liability insurance; that we do not anticipate paying any dividends on our common stock in the foreseeable future; our expected revenue recognition practice; our recording of the impairment loss related to goodwill; that we will continue to assess the need for derivatives in the

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future; that there will be an expected loss during the first fiscal quarter of 2008 related to the Hillsboro facility; expectation that our business, financial condition and results of operations would be materially adversely affected by our long and variable sales cycle; that our business, financial condition or results of operations will continue to be materially adversely affected by continuing competitive pressure and continued intense price-based competition; that the increases in inventory on hand for new product development and customer support requirements will continue to increase the risk of significant inventory write-offs; that any success we may have in developing new and enhanced systems and new features to our existing systems will depend upon a variety of factors; and provisions in the New Notes known as net share settlement which required that, upon conversion of the New Notes, we will pay holders in cash for up to the principal amount of the converted New Notes and under which an amount in excess of this cash will be settled in shares of our common stock, or at our option, cash.

        These forward-looking statements involve important factors that could cause our actual results to differ materially from those in the forward-looking statements. Such important factors involve risks and uncertainties including, but not limited to difficulties in utilizing different technologies; delays in bringing products to market due to development problems; difficulties in developing new engineering validation test systems; the possibility that our existing systems will become obsolete; excessively high costs in the future related to enhancing our existing systems; significant changes in customer preferences; difficulties in integrating acquired technology with our product lines; the possibility that competitors will introduce products faster than us; unanticipated difficulties in building close working relationships with vendors; difficulties in developing the Sapphire platform; less sales of the Sapphire, Diamond or ASL platform products than anticipated; product defects sustained during the manufacturing process; the risk that we may not be successful in obtaining new orders from major customers; unanticipated decreases in demand for our products in foreign countries; difficulties in providing extensive support to major customers; unanticipated difficulties in manufacturing and delivering new products, enhancement tools; unanticipated difficulties in integrating our products with customers' operations; unanticipated difficulties in integrating developed technology; substantial technological changes in the semiconductor industry; a lack of the required resources to invest in the development of new products; uncertainties as to the current products provided by our competitors; unanticipated difficulties in locating and evaluating potential product lines, technologies and business to acquire; the viability of legal claims brought against us; our failure to accurately predict the effect of the ultimate outcome of claims on our business, financial condition or results of operations; lower than expected revenues; the risk that we may be required to expend more cash in the future than anticipated; difficulties in obtaining orders from manufacturers of semiconductors and companies that specialize in contract packaging and/or testing of semiconductors; the timing of orders; an unanticipated lack of resources to invest in property, plant and equipment, purchased and leased facilities, inventory, personnel and other costs; changing market conditions in Taiwan; inaccuracies in our assumptions regarding our tax positions; uncertainties as to the nature and extent of any potential cyclical downturn in the semiconductor industry; uncertainties as to the prospect of future orders and sales levels; changes in laws applicable to us regarding revenue recognition practices relating to our new products; uncertainties as to the future level of sales and revenues; unanticipated budgetary constraints; uncertainties as to the assumptions underlying our calculations regarding estimated annual amortization expenses for purchased intangible assets; uncertainties as to the effects of the adoption by us of certain accounting policies; the risk that our future working capital will not be sufficient to invest significant portions of such working capital in inventories; uncertainties as to the effect of the adoption of certain accounting pronouncements; unanticipated difficulties in the remediation of internal control deficiencies; our ability to maintain the requisite level of assets under our deferred compensation plan; increased fragmentation in the ATE industry; cost overruns, delayed deliveries, shortages, quality issues or other problems resulting from outsourcing; and other factors set forth in "Risk Factors" and elsewhere herein. Reference is made to the discussion of risk factors detailed in our filings with the Securities and Exchange Commission, including our reports on Form 10-K and 10-Q. All projections in this annual report on Form 10-K are

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based on limited information currently available to us, which is subject to change. Although any such projections and the factors influencing them will likely change, we will not necessarily update the information, since we are only to provide guidance at certain points during the year. Actual events or results could differ materially and no reader of this annual report on Form 10-K should assume that the information provided today will still be valid in the future. Such information speaks only as of the date of this annual report on Form 10-K.

Item 1.    Business

        Today, most electronic products contain a combination of integrated circuits (ICs). Each of these ICs has electrical circuitry that requires validation or testing, before, during and after it is manufactured. The future of the IC, whether it will end up in a final product or on the scrap floor, is determined by Automated Test Equipment (ATE).

        We are a provider of ATE solutions for a wide range of semiconductor companies. We design, manufacture, sell and service engineering validation test equipment, diagnostics and failure analysis products and ATE used for testing ICs. We utilize our proprietary technologies to design products that enable the flexibility needed by our customers to meet their challenging time to market, cost and high yield needs. Our products help bridge the communication gap between design teams, the foundries used to manufacture their products, and the test and diagnostics groups involved in characterization and debug of their products. This improves their ability to bring products from concept to yield in today's challenging "nano-chip" environment. By applying leading-edge technology to create flexibility and lower the overall cost-of-test, we are committed to delivering innovative technology at a competitive cost and performance advantage to integrated device manufacturers (IDMs), wafer foundries, outsource assembly and test suppliers or OSATs and fabless chip companies worldwide.

        We were incorporated in California in March 1982 and were reincorporated in Delaware in October 1993. "Credence" or the "Company," "we," "us" and "our" refers to Credence Systems Corporation and our subsidiaries. Our principal executive offices are located at 1421 California Circle, Milpitas, California and our telephone number is (408) 635-4300. Our worldwide website address is www.credence.com. On our Investor Relations page on this web site we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All such filings on our Investor Relations web page are available to be viewed on this page free of charge. Information contained on our web site is not part of this annual report on Form 10-K or our other filings with the Securities and Exchange Commission. We assume no obligation to update or revise any forward-looking statements in this annual report on Form 10-K, whether as a result of new information, future events or otherwise, unless we are required to do so by law. A copy of this annual report on Form 10-K is available without charge upon written request to: Mr. Kevin C. Eichler, our Senior Vice President, Chief Financial Officer and Secretary, at our headquarters at 1421 California Circle, Milpitas, California 95035. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. "Credence Systems Corporation," "Credence," "IMS," "Fluence," "SC," "ValStar," "Quartet," "Octet," "Sapphire," "ITS9000," "ASAP," "SPP," "Electra," "Vanguard," "Kalos," "DUO," "TMT," "MVNA," "Virtual Test," "Optonics," "Emiscope" and "SZ" are certain of our trademarks. This Annual Report on Form 10-K also includes trademarks of other companies.

Industry Overview

        The design and manufacture of semiconductor devices is a complex and capital-intensive multi-step process, involving many different types of equipment to manufacture, assemble and test semiconductor

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devices. The continuing evolution of semiconductor devices to smaller line width geometries, higher in unit production and more complex multi-level circuitry has significantly increased the cost and performance requirements of the capital equipment used to manufacture these devices. Semiconductor designers and manufacturers are under increasing pressure to bring high quality, smaller and increasingly complex ICs to market faster and at lower cost. Semiconductor test equipment plays an important role in 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 the end product. As a direct result of the increasing pressure placed on semiconductor designers and manufacturers, semiconductor test equipment and services suppliers are facing new challenges in meeting the demand for equally sophisticated test equipment.

        The rapid growth in consumer electronics targeted end-user products requires the development of next generation device technologies. For example, access to information is migrating from the stand-alone desktop computer, which might be physically linked to a local network, to the seamless, virtual network of the Internet, which is accessible from anywhere by a variety of new portable electronic communication products. To enable the rapid introduction of new system capability, designers utilize system in package (SIP) technologies that support the changing configurations needed at a lower cost, smaller size and higher performance by combining advanced digital, analog and embedded memory technologies on a single package. These discrete technologies were historically available only on several separate semiconductor devices, each performing a specific function. By integrating these functions in a single package, SIP enables lower cost, smaller size, higher performance, and lower power consumption while supporting rapid innovation. Our flexible platform allows for high flexibility in device configuration while our high performance IC engineering validation test systems enable customers to bring next generation device technologies quickly, cost-efficiently and successfully to market.

        Semiconductor manufacturers continue to strive for manufacturing and process improvements in order to satisfy the demand for smaller, better performing and lower cost semiconductors. Semiconductor manufacturers are aggressively pursuing strategies to reduce their overall cost-of-test by increasing the throughput of their test systems. Cost-of-test includes the initial ATE and ancillary equipment purchase price, as well as set-up and operating costs, and is often the most significant manufacturing cost, particularly for high-volume, low-cost devices. For these types of devices, ATE throughput, or the number of devices that can be tested in a given unit of time on a single test system, is a key determinant of cost-of-test per device and of a manufacturer's ability to compete profitably.

The Credence Solution and Strategy

        Our objective is to be a leading supplier of semiconductor test and diagnostics solutions for consumer ICs, providing the highest return on our customers' investment in test equipment. This includes high performance IC engineering validation test systems and high flexibility cost-effective ATE for production testing of ICs used in high volume applications. Semiconductors tested by our systems are incorporated into a wide range of products in high-growth markets, including consumer markets such as digital cameras, MP3 players, cellular telephones, video/ multimedia products, automotive electronics, computer peripherals, and notebook and desktop computers.

        Key aspects of our solution and strategy are:

•

maintaining the rapid pace of product innovation on flexible scalable platforms;



•

improving yield and increase throughput;



•

focusing on the high growth opportunities of the system-on-chip (SoC) ATE market such as the high volume consumer market and computing, networking and wireless products;



•

continuing to focus on emerging opportunities for profitable growth;

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•

leveraging relationships with industry leaders to enhance market position;



•

lowering total cost of ownership;



•

continuing to deliver an outstanding total customer experience throughout the product life cycle; and



•

optimizing our operating model to generate sustainable profitability.

        In January 2008, we outlined significant corporate changes intended to build on core technology strengths while simplifying our operations to meet increasing opportunities in Asia-driven consumer semiconductor markets. We intend to prioritize our research and development activities in the Diamond and industry-standard ASL platforms to accelerate our deployment in mainstream consumer semiconductor markets. We intend to focus Sapphire platform development on configurations that support leading-edge applications for the high end of the consumer semiconductor markets. With the highest concentration of consumer semiconductor manufacturers located in Asia, we will seek to double our sales and support headcount in the region by the end of 2008.

        We intend to divest or otherwise reduce our commitment to businesses and products that are unrelated to our consumer semiconductor market focus, including our Diagnostics and Characterization business and Sapphire DPI solution. We also intend to scale down our service infrastructure and align with the self-service model commonly used by our major North American IDM customers. Additionally, the increase in service resources in Asia will enable the company to better serve the unique needs of this base.

        We anticipate that these restructuring initiatives will result in a net worldwide headcount reduction of 400 people, or approximately 30% of the workforce by end of fiscal 2008. We expect to incur restructuring charges of $15.5 million to $17.0 million in the first fiscal quarter of 2008.

Products

        We offer an array of test products including mixed-signal analog to digital applications and wireless and SoC devices. Our production and diagnostics test portfolio delivers increased reliability and superior functionality. Furthermore, our suite of world-class debug, characterization and production test systems helps ensure quality and cost management through every stage of design, first-silicon validation and high-volume manufacturing.

Analog Mixed Signal Products

        Diamond.    Introduced in fiscal year 2005, the Diamond platform is the industry's most cost effective test solution addressing the more cost driven markets such as personal consumer devices, micro-controllers, digital-baseband and display driver technologies. Utilizing a cPCI based architecture, the Diamond platform is highly configurable and supports high extendibility and scalability. Its Ethernet ring based communication architecture supports massive multi-site testing with very low overhead, which results in a superior cost of test model for our customers. The Diamond platform leverages electronics integration and air-cooling to produce a compact form factor and utilizes high density technology in a variety of instruments for digital, mixed signal and RF tests. It is used for engineering as well as wafer sort and final production testing. The Diamond platform includes the Diamond 10 mixed signal ATE.

        ASL 3000.    Introduced in fiscal year 2002, the ASL 3000 is an extension of the ASL product line featuring an increased number of mixed signal instruments, expansion to 64 pins of digital capability and DSP based mixed signal test. The ASL 3000 is capable of testing more complex devices and more devices in parallel and targets a wide range of ICs used in personal communications. Our RF wireless test products provide tools to IC manufacturers for use in characterization and production test of high

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performance, cost sensitive RF devices. Incorporating our proprietary Modulated Vector Network Analysis (MVNA) technology to test RF devices, the ASL 3000RF is targeted at cost effective testing of RF front-end devices that are typically manufactured using Gallium Arsenide (GaAs), Bi-polar (Bi-CMOS) technology. The devices, power amplifiers (PAs) low noise amplifiers (LNAs) synthesizers, mixers and switches and integrated combinations of these, or base band chips, are used in both digital and analog cell phones. Providing capability to test devices compliant with Bluetooth and 802.11 standards, the ASL 3000RF delivers high performance, high throughput and leading cost of test economics.

        ASL 1000.    The ASL 1000 product line tests the traditional analog function blocks such as amplifiers, regulators, switches and converters either as individual ICs or as larger function ICs such as battery power management devices in portable electronics devices. The ASL 1000 was introduced in fiscal year 1996. This system is highly configurable and targeted at testing the traditional analog building block ICs. As the traditional analog or linear device producers move to more efficient manufacturing, the multi-site test capability of the ASL 1000 has proven to be very effective at reducing their cost of test.

        Falcon.    The Falcon is a high-performance analog and mixed-signal test system that offers unique analog, Digital Signal Processing (DSP) and other digital capabilities for automotive, smart power and consumer devices. Falcon delivers high throughput with a 200 MHz digital sequencer per channel architecture and reduces test costs through its high-speed computer/tester interface, and parallel, multi-site and concurrent test capabilities. The Falcon offers an innovative tester-per-pin technology for analog and digital applications, as well as special automotive pins offering a voltage swing up to 30 volts. The Falcon also features Gigalink, a new high-speed serial bus system and AWT, a new analog wave tool.

        Piranha.    The Piranha is an analog and mixed-signal test system that provides a cost-effective solution for high volume devices with low and medium pin counts. The Piranha uses the same technology as the Falcon in a smaller housing without a test head. With frequencies up to 50 MHz digital and up to 64 pins, the Piranha also features multi-site and parallel test capabilities to lower test costs.

System on Chip Products

        Sapphire.    Sapphire is the first scalable platform to be brought to market for testing high performance microprocessors, chipsets and consumer devices. This high performance SoC configurable test platform first shipped in December 2003. It is designed to be a highly reconfigurable and scalable functional and structural tester for a wide range of high performance ICs. All of Sapphire's test electronics are integrated in the test head and interconnected by a proprietary high bandwidth bus, which results in a lower cost platform and a smaller footprint. Sapphire is used for silicon debug and validation, characterization, wafer sort and final test. The scalable platform allows a variety of digital and mixed signal instruments to be easily configured to test devices demanding compelling performance (e.g., PCI Express 2 on graphics chips or very high-speed serial front side buses on state of the art microprocessors).

Diagnostics & Characterization Products

        EmiScope.    A configurable, expandable platform for non-invasive, transistor-level internal signal probing of silicon ICs. The EmiScope is an industry-leading solution for debug of flip-chip packaged and multi-metal layer devices. Using innovative time-resolved photon emission detection technology, the system enables semiconductor manufacturers to perform debug and characterization more quickly and effectively, thus bringing products to market faster, with fewer design re-spins. The system's high-bandwidth electronics, high-resolution imaging, and data management capabilities enable

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semiconductor manufacturers to perform timely design debug, failure analysis and characterization. The EmiScope offers multiple user options, including five lens sets for a variety of package types, high-power cooling, flexible fixture and software data analysis modules.

        OptiFIB.    The OptiFIB is a Focused Ion Beam product used for circuit edit and repair. The OptiFIB is unique because it combines ion and photon optics in a single coaxial column with a CAD navigation interface, which enables the user to align FIB and CAD images simultaneously, increasing the accuracy of circuit modification. In failure analysis, the OptiFIB can identify and repair circuit layout at inner metal layers. The system can provide the option to edit 300mm wafers.

        Meridian.    The Meridian is a next generation electrical failure analysis platform combining an emission microscope and a laser scanning microscope that provide unmatched sensitivity in fault identification and defect localization for developers of advanced, low-voltage, high-density semiconductor devices.

        Ruby.    The Ruby is an integrated back side laser voltage probing tool used for design debug and failure analysis. The system includes laser scanning microscope, IR laser, PDP optical blocks and imaging optics. It is configured with GaAs SIL which provides a superior optical resolution for advanced process technology.

Customers, Markets and Applications

        We focus on digital logic, analog, mixed-signal, RF and device manufacturers that serve the fast growing consumer electronics IC market. Our customers design, manufacture and test semiconductors in high volume for use in applications such as automobiles, appliances, personal computers, mobile consumer electronics, digital televisions, wireless Local Area Network (LAN) and multimedia hardware.

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

        Advanced Micro Devices, Inc., headquartered in the United States, accounted for 27%, 23% and 14% of our net sales in fiscal years 2007, 2006 and 2005, respectively. Intel Corporation, headquartered in the United States, accounted for 16%, 15% and 25% of our net sales in fiscal years 2007, 2006 and 2005, respectively. In addition, one of our major distributors, Spirox Corporation, accounted for 16%, 13% and 13% of our net sales in fiscal years 2007, 2006 and 2005, respectively.

        We believe that our success depends in large part upon the success of our major customers. The loss of, or any reduction in, orders by a significant customer (including the potential for reductions in orders by assembly and test services companies which that customer may utilize), including reductions due to market, economic or competitive conditions in the semiconductor industry or in other industries that manufacture products utilizing semiconductors has materially adversely affected and may continue to materially adversely affect our business, financial condition and results of operations. Our restructuring effort announced in January 2008 is intended to focus our research and development activities on products that are designed to address the needs of a broader base of customers. Our ability to increase sales in the future will depend in part upon our ability to obtain orders from new customers as well as upon the financial condition and success of our customers and the general global economy. There can be no assurance that our sales will not decrease in the future or that we will be able to retain existing customers or to attract new ones. See "Risk Factors—Some of our net sales are generated from a small number of key customers and the loss of a key customer or material reductions in capital spending by a key customer could substantially reduce our revenues and be perceived as a

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loss of momentum in our business and; we rely on Spirox Corporation and customers in Taiwan and China for a significant portion of our revenues and the termination of this distribution relationship would materially adversely affect our business."

        For information on our geographic data and major customers, see Note 13—"Industry Segments and Concentration of Risks," of the Notes to the Consolidated Financial Statements included elsewhere herein. Our international sales are primarily denominated in United States dollars. We anticipate that our international business will continue to account for a significant portion of net sales in the foreseeable future. See "Risk Factors—Our international business exposes us to additional risks."

Backlog

        We schedule production of our systems based upon order backlog and order forecast. Backlog includes customer orders for systems (including upgrades) for which we have accepted purchase orders and assigned shipment dates in approximately the following six months, spare parts, service and support. Substantially all of our orders are subject to cancellation or rescheduling by the customer with limited or no penalties. Our backlog at any particular date may not necessarily be representative of actual sales for any succeeding period due to orders received for systems to be shipped in the same quarter, possible changes in system delivery schedules, cancellation of orders and potential delays in system shipments. As of November 3, 2007, our order backlog was approximately $43.4 million plus an additional $27.7 million of deferred revenue as compared with $141.9 million and $21.9 million, respectively, as of October 31, 2006. We have historically experienced order cancellations and customer-requested shipment delays in connection with cyclical downturns in the semiconductor industry. We believe it is probable that order cancellations and customer-requested shipment delays will continue to occur in the future.

Sales, Service and Support

        We currently market and sell our products in the United States, Europe and Asia principally through our direct sales organization, with direct sales, service and support employees and representatives in over 22 locations. We utilize both direct sales employees and a broad network of distributors located in over 16 countries. Shipments through distributors represented approximately 19%, 18% and 20%, of net sales during fiscal years 2007, 2006 and 2005, respectively.

        We and our distributors have sales and support centers located in the United States, Middle East, Europe and Asia from which both direct Credence personnel and independent sales and service representatives sell and support our products. We believe that field support is critical to our customers. Support encompasses many of the components of the total cost of ownership for test equipment. We seek to develop long-term relationships with major customers through extensive support consisting of teams of professional sales, applications, training and service personnel. These personnel are located in close physical proximity to key customer sites in order to provide the required support in a timely fashion. The sales process includes consultations with customers to help them purchase the most cost-effective equipment for their needs, to help develop custom test programs to optimize production throughput, to assist in long-term self-sufficiency through training of customer test engineering personnel and to provide the service capacity and preventive maintenance to reduce downtime for customers' systems. Customer support includes field personnel and in-house applications personnel who work closely with design engineering groups to modify existing equipment to meet the latest performance requirements. In January 2008, we announced our intention to scale down our service infrastructure and to align with the self service model commonly used by our major North American customers.

        Our standard policy is to warrant our new systems against defects in design, materials and workmanship for one year for parts and labor. We offer customers additional support after the

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warranty period in the form of maintenance contracts for specified time periods. Such contracts include various options such as board replacement, priority response, planned preventive maintenance, scheduled one-on-one training, daily on-site support and monthly system and performance analysis.

Research and Development

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

        Our ongoing research and development efforts include focusing on increased cycle speed, accuracy, jitter and pin counts of our testers, as well as the joint use of technology among our products group. We will continue to focus efforts on providing solutions that allow more rapid, cost-effective development of ATE test programs that reduce time-to-market of customer integrated circuit designs. We will continue to invest significant resources in the development of new products and enhancements for the foreseeable future.

        Research and development expenses were $77.2 million in fiscal year 2007, $91.4 million in fiscal year 2006 and $92.5 million in fiscal 2005.

Proprietary Rights

        We attempt to protect our intellectual property rights through patents, copyrights, trademarks and maintenance of trade secrets and other measures. Our current patent portfolio includes approximately 304 United States patents, and various foreign counterparts. Our patent portfolio reflects a combination of pursuing our ongoing patent filing and prosecution activities and the acquisition of patents as part of our merger activities. Our patents relate to a range of technologies that include features of our products. From time to time we grant licenses under our patents and technology and receive licenses under patents and technology from others.

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

Manufacturing and Suppliers

        Our manufacturing objective is to produce engineering validation test systems and ATE that conform to our customers' requirements at the lowest commercially practical manufacturing cost. We rely on outside vendors to manufacture certain components and subassemblies including several custom ICs. We have commenced initiatives to outsource much of our manufacturing to third party contract

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manufacturers by the end of fiscal 2008. We seek to manage our inventory levels through agreements with both suppliers and subcontractors that provide just-in-time delivery of these components and subassemblies. We assemble these components and subassemblies to create finished testers in the configurations specified by our customers. In general, we use standard components and prefabricated parts available from numerous suppliers. However, some components and subassemblies necessary for the manufacture of our testers are obtained from a sole supplier or a limited group of suppliers. Our reliance on a sole or a limited group of suppliers and on outside subcontractors involves certain risks, including a potential inability to obtain an adequate supply of required components, and reduced control over pricing and timely delivery of components. See "Risk Factors—There are limitations on our ability to find the supplies and services necessary to run our business."

Competition

        The ATE industry is intensely competitive. We face substantial competition throughout the world, primarily from ATE manufacturers located in the United States and Japan. These competitors include, among others, Advantest Corporation, Eagle Test Systems, Inc., LTX Corporation, Teradyne Inc. and Verigy Ltd. and, with respect to certain of our diagnostics and characterization products, FEI Company and Hamamatsu Corporation.

        The principal elements of competition in our markets and the basis upon which our customers select engineering validation testers and ATE include throughput, tools for reducing customer product time-to-market, local support, product performance and total cost of ownership. We believe that we compete favorably with respect to these factors. See "Risk Factors—The ATE industry is intensely competitive which can adversely affect our ability to maintain our current net sales and our revenue growth."

Employees

        As of November 3, 2007, we had a total of 1,324 direct employees and 208 temporary or contract employees. Of the 1,324 direct employees, 476 employees are in manufacturing and customer service, 446 employees are in research and development and 402 employees are in selling, general and administrative functions. We anticipate reducing our net worldwide headcount by 400 people by the end of fiscal year 2008. Our employees are highly skilled, and we believe our future results of operations will depend in large part on our ability to attract and retain such employees. None of our domestic employees are represented by a labor union, and we have not experienced any work stoppages. We consider our employee relations to be good.

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Item 1A.    Risk Factors

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

Operating Results

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

•

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



•

loss of certain key customers who account for large portions of our revenue;



•

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



•

the costs and risk inherent in the restructuring of our business to focus on the consumer IC business;



•

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



•

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



•

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



•

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



•

labor and materials supply constraints;



•

expenses associated with acquisitions and alliances, including expenses charged for any impaired acquired intangible assets and goodwill;

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•

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



•

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



•

natural disasters, political and economic instability, currency fluctuations, regulatory changes and outbreaks of hostilities, especially in Asia.

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

•

long-term pricing decreases by us and our competitors and pricing by our suppliers;



•

the success of efforts to outsource our manufacturing activities to third party contract manufacturers;



•

manufacturing volumes;



•

hardware product sales mix;



•

absorption levels and the rate of capacity utilization;



•

inventory write-downs;



•

product reliability;



•

possible sale of inventory previously written-down;



•

international and domestic sales mix and field service margins; and



•

ceasing investment in underperforming or redundant product lines.

        New and enhanced products typically have lower gross margins in their early stages of commercial introduction and production, and we may build substantial finished goods inventories of such new products. If delays in or cancellations of orders for those products occur, it may require a future inventory write-down, which would negatively affect our future financial performance. Although we have recorded and continue to record inventory write-downs, product warranty costs, and deferred revenue, we cannot be certain that our estimates will be adequate.

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

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We have a limited backlog and obtain most of our net sales from products that typically range in price from $80,000 to $3.0 million and generally ship products generating most of our net sales near the end of each quarter, which can result in fluctuations of quarterly results.

        We obtain most of our net sales from the sale of a relatively few number of systems that typically range in selling price from $80,000 to $3.0 million. This has resulted and could continue to result in our net sales and operating results for a particular period being significantly impacted by the timing of recognition of revenue from a single transaction. Our net sales and operating results for a particular period could also be materially adversely affected if an anticipated order from just one customer is not received in time to permit shipment during that period. Backlog at the beginning of a quarter typically does not include all orders necessary to achieve our sales objectives for that quarter. Orders in backlog are subject to cancellation, delay, deferral or rescheduling by customers with limited or no penalties. Throughout the recent fiscal years, we have experienced customer-requested shipment delays and order cancellations, and we believe it is probable that orders will be canceled and delayed in the future. Consequently, our quarterly net sales and operating results have in the past, and will in the future, depend upon our obtaining orders for systems to be shipped in the same quarter in which the order is received.

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

If our restructuring activities are unsuccessful, our business could be harmed.

        After the end of the fourth quarter of fiscal 2007, we announced a series of restructuring activities, including our intention to prioritize our research and development activities on our Diamond and ASL platforms, to focus our Sapphire platform development on high end consumer markets, to double our sales and support headcount in Asia, to reduce our commitment to businesses and products unrelated to the consumer semiconductor markets, to modify our service business and to reduce our headcount world-wide on a net basis by approximately 400 employees. We cannot be certain that we will successfully anticipate the product needs of our customers or that the products and features we develop as a result of this change in focus will gain customer acceptance. In addition, there can be no assurance that we will not experience delays in product and enhancement development as a result of the changes in our staffing and headcount. Customers may curtail purchases as a result of these changes in focus, delays in product and enhancement development and changes in our service model. Any curtailment of purchases by customers could have a material adverse effect on our business and financial condition.

Some of our net sales are generated from a small number of key customers and the loss of a key customer or material reductions in capital spending by a key customer could substantially reduce our revenues and be perceived as a loss of momentum in our business.

        Over time, we have expanded our base of customers; however, a large portion of our net sales are generated from a small number of key customers. In particular, two customers, Advanced Micro Devices, Inc. and Intel Corporation accounted for 27% and 16% of our net sales for fiscal year 2007, respectively. For fiscal 2006, Advanced Micro Devices, Inc. and Intel Corporation accounted for 23% and 15% of our net sales, respectively. For fiscal year 2005, Intel Corporation and Advanced Micro

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Devices, Inc. accounted for 25% and 14% of our net sales, respectively. Our top ten customers accounted for 72%, 64% and 65% of our net sales for fiscal years 2007, 2006 and 2005 respectively. We expect that our top ten customers in the aggregate will continue to account for a large portion of our net sales for the foreseeable future, and the loss of one or more of these customers or collaborative partners or material reductions in capital spending by one or more of these customers or collaborative partners would harm our business and operating results. The loss of a significant customer could also be perceived as a loss of momentum in our business and an adverse impact on our financial results, and this may cause the market price of our common stock to fall.

Increased reliance on outsourced manufacturing and logistics may affect our business.

        We are increasingly outsourcing manufacturing and logistics activities to third-party service providers, which decreases our control over the performance of these functions.

        We have already outsourced certain manufacturing and spare parts logistics functions to third-party service providers, and we intend to outsource more of those functions in the future. While we expect to achieve operational flexibility and cost savings as a result of this outsourcing, outsourcing has a number of risks and reduces our control over the performance of the outsourced functions. Significant performance problems by these third-party service providers could result in cost overruns, delayed deliveries, shortages, quality issues or other problems that could result in significant customer dissatisfaction and could materially and adversely affect our business, financial condition and results of operations.

        If for any reason one or more of these third-party service providers becomes unable or unwilling to continue to provide services of acceptable quality, at acceptable costs and in a timely manner, our ability to deliver our products or spare parts to our customers could be severely impaired. We would quickly need to identify and qualify substitute service providers or increase our internal capacity, which could be expensive, time-consuming and difficult, and could result in unforeseen operations problems. Substitute service providers might not be available or, if available, might be unwilling or unable to offer services on acceptable terms.

Compliance with current and future environmental regulations may be costly which could impact our future earnings.

        We may be subject to environmental and other regulations due to our production and marketing of products in certain states and countries. We also face increasing complexity in our product design and procurement operations as we adjust to new and upcoming requirements relating to the materials composition of our products, including the restrictions on lead and certain other substances in electronics that apply to specified electronics products put on the market in the European Union as of July 1, 2006 (Restriction of Hazardous Substances in Electrical and Electronic Equipment Directive (EU RoHS)). The European Union has also finalized the Waste Electrical and Electronic Equipment Directive (WEEE), which makes producers of electrical goods financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. The deadline for enacting and implementing this directive by individual European Union governments was August 13, 2004 (WEEE Legislation), although extensions were granted in some countries. Producers became financially responsible under the WEEE Legislation beginning in August 2005. Other countries, such as the United States, China and Japan, have enacted or may enact laws or regulations similar to the EU RoHS or WEEE Legislation. These and other environmental regulations may require us to reengineer certain of our existing products and develop new strategies for the design of new products to utilize components which are more environmentally compatible. Such reengineering and component substitution may result in delays in product design and manufacture and could cause us to incur additional costs. Although we currently do not anticipate any material adverse effects based on the

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nature of our operations and the effect of such laws, there is no assurance that such existing laws or future laws will not have a material adverse effect on our business.

The semiconductor industry is cyclical.

        The semiconductor equipment industry is highly cyclical. Our business and results of operations depend largely upon the capital expenditures of manufacturers of semiconductors and companies that specialize in contract packaging and/or testing of semiconductors. This includes manufacturers and contractors that are opening new or expanding existing fabrication facilities or upgrading existing equipment, which in turn depends upon the current and anticipated market demand for semiconductors and products incorporating semiconductors. The timing, length and severity of the up-and-down cycles in the semiconductor equipment industry are difficult to predict. This cyclical nature of the industry in which we operate affects our ability to accurately predict future revenue and, thus, future expense levels. When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected and cost reduction measures may be necessary in order for us to remain competitive and financially sound. During a down cycle, we must be in a position to adjust our cost and expense structure to prevailing market conditions and to continue to motivate and retain our key employees. In addition, during periods of rapid growth, we must be able to increase manufacturing capacity and personnel to meet customer demand. We can provide no assurance that these objectives can be met in a timely manner in response to industry cycles. If we fail to respond to industry cycles, our business could be seriously harmed.

        As a result of the cyclical nature of the semiconductor industry, we have experienced shipment delays, delays in commitments and restructured purchase orders by customers and we expect this activity to continue. Accordingly, we cannot be certain that we will be able to achieve or maintain our current or prior level of sales or rate of growth. We anticipate that a significant portion of new orders may depend upon demand from semiconductor device manufacturers building or expanding fabrication facilities and new device testing requirements that are not addressable by currently installed test equipment, and there can be no assurance that such demand will develop to a significant degree, or at all. In addition, our business, financial condition or results of operations may continue to be materially adversely affected by any factor materially adversely affecting the semiconductor industry in general or particular segments within the semiconductor industry.

Implementation or changes to our enterprise resource planning system and other related systems may affect our business.

        We may experience difficulties in implementing, making changes to or enhancing our enterprise resource planning or ERP system and other related systems that could disrupt our ability to timely and accurately process and report key components of the results of our consolidated operations, our financial position and cash flows. Any disruptions or difficulties that may occur in connection with implementing, making changes to or enhancing our ERP system or any future systems could also adversely affect our ability to complete the evaluation of our internal controls and attestation activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. System failure or malfunctioning may result in disruption of operations and the inability to process transactions and could adversely affect our financial results.

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

        A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing standards or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

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        For example, the Financial Accounting Standards Board (FASB) issued changes to U. S. GAAP that requires us to record a charge to earnings for our various share-based compensation programs beginning on November 1, 2005 which resulted in us recording additional share-based compensation expenses of $3.5 million and $3.3 million for the fiscal years 2007 and 2006, respectively.

        In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109" (FIN 48) which clarifies the accounting for uncertainty in income tax positions. This interpretation requires that we recognize in our financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial position, cash flows, and results of operations. Changes to existing rules, including the adoption of FIN 48, or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

We may continue to experience delays in development, introduction, production in volume, and recognition of revenue from sales of our products.

        We have in the past experienced significant delays in the development, introduction, volume production and sales of our new systems and related feature enhancements. These delays related to our inability to successfully complete product hardware engineering within the time frame originally anticipated, including design errors and redesigns of ICs. As a result, some customers have experienced significant delays in receiving and using our testers in production. Delays in introducing a product or delays in our ability to obtain customer acceptance, if they occur in the future, will delay the recognition of revenue and gross profit by us. We cannot be certain that these or additional difficulties will not continue to arise or that delays will not continue to materially adversely affect customer relationships and future sales. Moreover, we cannot be certain that we will not encounter these or other difficulties that could delay future introductions or volume production or sales of our systems or enhancements. In the past, we have incurred and we may continue to incur substantial unanticipated costs to increase feature sets in our systems. If our systems experience reliability, quality or other problems, or the market perceives our products to be feature deficient, we may continue to suffer reduced orders, higher manufacturing costs, delay in collecting accounts receivable and higher service, support and warranty expenses, and/or inventory write-offs, among other effects. Our failure to have a competitive test system available when required by a customer could make it substantially more difficult for us to sell testers to that customer for a number of years. We believe that the continued acceptance, volume production, timely delivery and customer satisfaction of our newer digital and mixed signal testers are of critical importance to our future financial results. As a result, our inability to correct any technical, reliability, parts shortages or other difficulties associated with our systems or to manufacture and ship the systems on a timely basis to meet customer requirements could damage our relationships with current and prospective customers and would continue to materially adversely affect our business, financial condition and results of operations. In addition, the consolidation of our manufacturing operations in a single site exposes us to the increased risk of manufacturing delays or disruption in the event of natural disasters or other calamities at the site. Any delays or disruptions could materially adversely affect our business, financial condition and results of operations.

Competition in the ATE market requires rapid technological enhancements and new products and services.

        Our ability to compete in the ATE market depends upon our ability to successfully develop and introduce new products and enhancements with enhanced features on a timely and cost-effective basis, including products under development internally as well as products obtained in acquisitions. Our

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customers require test systems with additional features, higher performance and other capabilities. Therefore, it is necessary for us to develop new systems and/or enhance the performance and other capabilities of our existing systems to adequately address these requirements. Any success we may have in developing new and enhanced systems and new features to our existing systems will depend upon a variety of factors, including:

•

product selection;



•

timely and efficient completion of product design;



•

implementation of manufacturing and assembly processes;



•

product performance;



•

reliability in the field;



•

effective worldwide sales and marketing; and



•

labor and supply constraints.

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

We are continuing to invest significant resources in the expansion of our product lines and there is no certainty that our net sales will increase or remain at historical levels or that new products will contribute to revenue growth.

        We are currently devoting and intend to continue to devote significant resources to the development, enhancement, production and commercialization of new products and technologies. During fiscal years 2007 and 2006, we introduced several enhancements as well as new products that are evolutions or derivatives of existing products as well as products that were largely new. Under our revenue recognition policy adopted in accordance with SAB 104 we defer revenue for transactions that involve newly introduced products or when customers specify acceptance criteria that cannot be demonstrated prior to the shipment. This results in a delay in the recognition of revenue as compared to the historic norm of recognizing revenue upon shipment. Product introduction delays, if they occur in the future, will delay the recognition of revenue and gross profit and may result in delayed cash receipts by us that could materially adversely affect our business, financial condition and results of operations. We invested and continue to invest significant resources in property, plant and equipment, purchased and leased facilities, inventory, personnel and other costs to begin or prepare to increase production of these products. A significant portion of these investments will provide the marketing, administration and after-sales service and support required for these new products. Accordingly, we cannot be certain that gross profit margin and inventory levels will not continue to be materially adversely affected by delays in new product introductions or start-up costs associated with the initial production and installation of these new product lines. We also cannot be certain that we can manufacture these systems per the time and quantity required by our customers. The start-up costs include additional manufacturing overhead, additional inventory and warranty reserve requirements and

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the enhancement of after-sales service and support organizations. In addition, the increases in inventory on hand for new product development and customer support requirements continue to increase the risk of significant inventory write-offs. We cannot be certain that our net sales will increase or remain at historical levels or that any new products will be successfully commercialized or contribute to revenue growth or that any of our additional costs will be covered.

The ATE industry is intensely competitive which can adversely affect our ability to maintain or increase our net sales and revenues growth.

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

        We face substantial competition from ATE manufacturers throughout the world. A substantial portion of our net sales is derived from sales of mixed-signal testers. We face in some cases seven and in other cases nine competitors in our primary market segments of digital, mixed signal, and RF wireless ATE. We believe that the ATE industry in total has not been profitable for the last three years, indicating a very competitive and volatile marketplace. Several of these competitors have substantially greater financial and other resources with which to pursue engineering, manufacturing, marketing and distribution of their products. In addition, three of our competitors recently completed initial public offerings. The success of these companies could make the competitive environment substantially more severe. Certain competitors have introduced or announced new products with certain performance or price characteristics equal or superior to products we currently offer. These competitors have introduced products that compete directly against our products. We believe that if the ATE industry continues to consolidate through strategic alliances or acquisitions, we will continue to face significant additional competition from larger competitors that may offer product lines and services more complete than ours. Our competitors are continuing to improve the performance of their current products and to introduce new products, enhancements and new technologies that provide improved cost of ownership and performance characteristics. New product introductions by our competitors could cause a decline in our sales or loss of market acceptance of our existing products.

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

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

        We must develop and deliver customized hardware to meet our customers' specific test requirements. The market requires us to manufacture these systems on a timely basis. Our test equipment may fail to meet our customers' technical or cost requirements and may be replaced by competitive equipment or an alternative technology solution. Our inability to meet such hardware

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requirements could impact our ability to recognize revenue on the related equipment. Our inability to provide a test system that meets requested performance criteria when required by a device manufacturer would severely damage our reputation with that customer. This loss of reputation may make it substantially more difficult for us to sell test systems to that manufacturer for a number of years, which could have a material adverse effect on our business, financial condition or results of operations.

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

        Spirox Corporation, a distributor in Taiwan that sells to end-user customers in Taiwan and China, accounted for approximately 16%, 13% and 13% of our net sales for the fiscal years 2007, 2006 and 2005, respectively. Our agreement with Spirox has no minimum purchase commitment and can be terminated for any reason on 180 days prior written notice. On May 31, 2005, we entered into an agreement with Spirox to combine our Taiwan operation with Spirox's T1 division into a corporation named Credence Spirox Integration Corporation, an operation owned 90% by Spirox and 10% by us. This new corporation is dedicated to supporting our products in the Taiwan region. Consequently, our business, financial condition and results of operations could be materially adversely affected by the loss of or any reduction in orders by Spirox, any termination of the Spirox relationship, or the loss of any significant Spirox customer, including the potential for reductions in orders by assembly and tester service companies due to technical, manufacturing or reliability problems with our products or continued slow-downs in the semiconductor industry or in other industries that manufacture products utilizing semiconductors. Our ability to maintain or increase sales levels in Taiwan will depend upon:

•

our ability with Spirox to obtain orders from existing and new customers;



•

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



•

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



•

Spirox and its end-user customers' financial condition and success;



•

general economic conditions; and



•

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

We have substantial indebtedness and if we need additional financing, it could be difficult to obtain.

        As of November 3, 2007, we had $72.5 million principal amount of 1.5% Convertible Subordinated Notes, or 1.5% Notes, due in May 2008 and $122.5 million principal amount of 3.5% Convertible Senior Subordinated Notes, due 2010 (the New Notes). The New Notes contain net share settlement provisions which require that, upon conversion of the New Notes, we will pay holders in cash up to the principal amount of the converted New Notes. Any amounts in excess of this converted amount will be settled in shares of our common stock or, at our option, cash. The initial conversion price is $8.25.

        The level of indebtedness, among other things, could:

•

make it difficult for us to make payments on our debt and other obligations, particularly upon maturity of the 1.5% Notes in May 2008 and the maturity or conversion of the New Notes, due 2010 if we were unable to cause the conversion of this debt into equity;



•

make it difficult for us to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;

22

•

require the dedication of a substantial portion of any cash flow from operations to service the indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures;



•

limit our flexibility in planning for, or reacting to changes in our business and the industries in which we compete;



•

place us at a possible competitive disadvantage with respect to less leveraged competitors and competitors that have better access to capital resources; and



•

make us more vulnerable in the event of a further downturn in our business.

        There can be no assurance that we will be able to meet our debt service obligations, including our obligations under the 1.5% Notes or the New Notes.

        We expect that our existing cash and short-term investments will be sufficient to meet our cash requirements to fund operations and expected capital expenditures for the next 12 months. In the event we may need to raise additional funds, we cannot be certain that we will be able to obtain such additional financing on favorable terms if at all. Further, if we issue additional equity securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. Future financings may place restrictions on how we operate our business. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products and services, take advantage of future business opportunities, grow our business or respond to competitive pressures, which could seriously harm our business.

Changes in the accounting treatment of our 3.5% Convertible Senior Subordinated Notes could decrease our net income and earnings per share amounts.

        New or different accounting pronouncements or regulatory rulings may emerge which could impact the way we are required to account for our convertible debt instruments that would have an adverse impact on our results of operations and earnings per share amount. With respect to our 3.5% Convertible Senior Subordinated Notes, we are required under U.S. GAAP as presently in effect to include in outstanding shares for purposes of computing earnings per share only a number of shares underlying the convertible notes that, at the end of a given quarter, have a value in excess of the outstanding principal amount of the convertible notes. This is because of the "net share settlement" feature of the convertible notes, under which we are required to pay the principal amount of the convertible notes in cash. The recently issued exposure draft from the FASB, FSP ARB 14-A "Accounting for convertible debt that may be settled in cash upon conversion (including partial cash settlement)" is proposing a new method of accounting for net share settled convertible debt instruments under which the debt and equity components of the instrument would be bifurcated and accounted for separately. If the proposed position is adopted by the FASB it could impact our net income and earnings per share amounts. While the recently issued exposure draft from FASB contemplated that this change would take effect for fiscal years beginning after December 15, 2007, this change has not yet been adopted and we are unable to estimate the likelihood that the proposed change will be adopted, whether it will apply to the 3.5% Convertible Senior Subordinated Notes or the date it would be effective if adopted.

We require a significant amount of cash, and our ability to generate cash may be affected by factors beyond our control.

        Our business may not generate cash flow in an amount sufficient to enable us to fund our liquidity needs, including payment of the principal of, or interest on, our indebtedness, working capital, capital expenditures, product development efforts, strategic acquisitions, investments and alliances and other

23

general corporate requirements. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot be assured that our business will generate sufficient cash flow from operations or that future borrowings or other sources of funding will be available to us, in amounts sufficient to enable us to fund our liquidity needs or with terms that are favorable to us.

We may repatriate cash from our foreign subsidiaries, which could result in additional income taxes that could negatively impact our results of operations and financial position. In addition, if foreign countries' currency policies limit our ability to repatriate the needed funds, our business and results of operations could be adversely impacted.

        One or more of our foreign subsidiaries hold a portion of our cash and cash equivalents. If we need additional cash to acquire assets or technology, or to support our operations in the United States, and if the currency policies of these foreign countries allow us, we may repatriate some of our cash from these foreign subsidiaries to the United States. For example, during the first quarter of fiscal year 2007, we repatriated $7.1 million from our Hong Kong operations. Depending on our financial results and the financial results of our subsidiaries at the time that the cash is repatriated, we may incur additional income taxes from the repatriation, which could negatively affect our results of operations and financial position. In addition, if the currency policies of these foreign countries prohibit or limit our ability to repatriate the needed funds, our business and results of operations could be adversely impacted.

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

        Sales of our systems depend in part upon the decision of semiconductor manufacturers to develop and manufacture new semiconductor devices or to increase manufacturing capacity. As a result, sales of our products are subject to a variety of factors we cannot control. The decision to purchase our products generally involves a significant commitment of capital, with the attendant delays frequently associated with significant capital expenditures. For these and other reasons, our systems have lengthy sales cycles during which we may expend substantial funds and management effort to secure a sale, subjecting us to a number of significant risks, including a risk that our competitors may compete for the sale, a further downturn in the economy or other economic factors causing our customers to withdraw or delay their orders or a change in technological requirements of the customer. As a result, our business, financial condition and results of operations would 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 a sale will be made.

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

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

24

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

Our international business exposes us to additional risks.

        International sales accounted for approximately 71%, 69% and 69% of our total net sales for the fiscal years 2007, 2006 and 2005, respectively. We anticipate that international sales will continue to account for a significant portion of our total net sales in the foreseeable future. These international sales will continue to be subject to certain risks, including:

•

changes in regulatory requirements;



•

tariffs and other barriers;



•

political and economic instability;



•

adverse effects of fears surrounding any health risks on our business and sales and that of our customers, especially in Taiwan, Hong Kong and China;



•

outbreak of hostilities in markets where we sell our products, including Korea and Israel;



•

integration and management of foreign operations of acquired businesses;



•

foreign currency exchange rate fluctuations;



•

difficulties with distributors, outsourcing partners and supply chain, original equipment manufacturers, foreign subsidiaries and branch operations;



•

potentially adverse tax consequences;



•

possibility of difficulty in accounts receivable collection;



•

greater difficulty in complying with United States accounting standards; and



•

greater difficulty in protecting intellectual property rights.

        We are also subject to the risks associated with the imposition of domestic and foreign legislation and regulations relating to the import or export of semiconductor equipment products. We cannot predict whether the import and export of our products will be adversely affected by changes in or new quotas, duties, taxes or other charges or restrictions imposed by the United States or any other country in the future. Any of these factors or the adoption of restrictive policies could have a material adverse effect on our business, financial condition or results of operations. Net sales to the Asia-Pacific region accounted for approximately 52%, 50% and 46% of our total net sales for the fiscal years 2007, 2006 and 2005, respectively, and thus demand for our products is subject to the risk of economic instability in that region and health risks. No single end-user customer headquartered in Asia or Europe accounted for more than 10% of our net sales during the fiscal years 2007, 2006 and 2005.

        In addition, one of our major distributors, Spirox Corporation, which accounted for 16%, 13% and 13% of our net sales in the fiscal years 2007, 2006 and 2005, respectively, is a Taiwan-based company. This subjects a significant portion of our receivables and future revenues to the risks associated with doing business in a foreign country, including political and economic instability, currency exchange rate

25

fluctuations, fears related to health risks and regulatory changes. Disruption of business in Asia caused by the previously mentioned factors could continue to have a material impact on our business, financial condition or results of operations.

We operate in a volatile industry—indicators of goodwill and other long-lived assets impairment under SFAS 142 and SFAS 144 may be present from time-to-time.

        Effective November 1, 2002, we adopted Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), which was issued by the FASB in July 2001. Under this standard, we ceased amortizing goodwill and acquired workforce costs effective November 1, 2002.

        As mandated by SFAS 142, we test goodwill for possible impairment on an annual basis and at any other time if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Circumstances that could trigger an impairment test include but are not limited to: our market value falling below our net book value for a significant period of time, a significant adverse change in the business climate or legal factors; unanticipated competition; loss of key personnel; a significant change in direction with respect to investment in a product or market segment; the likelihood that a significant portion of the business will be sold or disposed of; or the results of testing for recoverability of a significant asset group within a reporting unit determined in accordance with SFAS 142.

        Based on a combination of factors that came into existence and were identified during the third quarter of fiscal year 2006, particularly: (1) our changed current and projected operating results reflecting lower demand from major customers; and (2) our current market capitalization which was significantly less than our book value for the preceding 10 weeks prior to the end of the third quarter, we concluded there were sufficient indicators to require us to assess whether any portion of our recorded goodwill balance was impaired. We determined, based on our estimates of forecasted discounted cash flows and our market capitalization, that our goodwill was impaired at July 31, 2006. Further analysis indicated that goodwill was impaired and charges of $423.9 million were recorded in the third quarter of fiscal year 2006. Other long-lived assets were assessed for impairment prior to the performance of the SFAS 142 analysis and were determined not to be impaired.

        If economic conditions in our industry continue to deteriorate and adversely affect our business, we could be required to record impairment charges related to our long-lived assets in accordance with SFAS 144, "Accounting for Impairment or Disposal for Long-Lived Assets" (SFAS 144) which could have a material adverse effect on our results of operations and financial condition.

Future acquisitions may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention.

        Our growth depends upon market growth, our ability to enhance our existing products, and our ability to introduce new products on a timely basis. We intend to continue to address the need to develop new products and enhance existing products through acquisitions of other companies, product lines, technologies, and personnel. Acquisitions involve numerous risks, including the following:

•

Difficulties in integrating the operations, technologies, products, and personnel of the acquired companies;



•

Diversion of management's attention from normal daily operations of the business;



•

Potential difficulties in completing projects associated with in-process research and development;



•

Difficulties in entering markets in which we may have no or limited direct prior experience and where competitors in such markets may have stronger market positions;

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•

Initial dependence on unfamiliar supply chains or relatively small supply partners;



•

Insufficient revenue to offset increased expenses associated with acquisitions; and



•

Potential loss of key employees of the acquired companies.

        Acquisitions may also cause us to:

•

Issue common stock that would dilute our current shareholders' percentage ownership;



•

Assume liabilities;



•

Record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges;



•

Incur amortization expenses related to certain intangible assets;



•

Incur large and immediate write-offs and restructuring and other related expenses; and



•

Become subject to intellectual property or other litigation.

        Mergers and acquisitions of high-technology companies are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions could materially harm our business and operating results. Prior acquisitions have resulted in a wide range of outcomes, from successful introduction of new products and technologies to an inability to do so. Even when an acquired company has already developed and marketed products, there can be no assurance that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such products.

        From time-to-time, we have made acquisitions that resulted in in-process research and development expenses being charged in a single quarter. These charges may occur in any quarter, contributing to variability in our quarterly earnings. Risks related to new product development also apply to acquisitions.

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

        Our future operating results depend substantially upon the continued service of our executive officers and key personnel. Our Chief Executive Officer, Lavi A. Lev, recently joined us and has limited experience in our business. Our future operating results also depend in significant part upon our ability to attract and retain qualified management, manufacturing, technical, engineering, marketing, sales and support personnel. Competition for qualified personnel is intense, and we cannot ensure success in attracting or retaining qualified personnel. There may be only a limited number of persons with the requisite skills to serve in these positions and it may be increasingly difficult for us to hire personnel over time. During fiscal year 2007, we experienced turnover in our chief executive officer, chief financial officer, sales and marketing executive and engineering executive positions. 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.

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

        We attempt to protect our intellectual property rights through patents, copyrights, trademarks, maintenance of trade secrets and other measures, including entering into confidentiality agreements. However, we cannot be certain that others will not independently develop substantially equivalent intellectual property or that we can meaningfully protect our intellectual property. Nor can we be

27

certain that our patents will not be invalidated, deemed unenforceable, circumvented or challenged, or that the rights granted there under will provide us with competitive advantages, or that any of our pending or future patent applications will be issued with claims of the scope we seek, if at all. Furthermore, we cannot be certain that others will not develop similar products, duplicate our products or design around our patents, or that foreign intellectual property laws, or agreements into which we have entered will protect our intellectual property rights. Inability or failure to protect our intellectual property rights could have a material adverse effect upon our business, financial condition and results of operations. In addition, from time to time we encounter disputes over rights and obligations concerning intellectual property, including disputes with parties with whom we have licensed technologies. We cannot assume that we will prevail in any such intellectual property disputes. We have been involved in extensive, expensive and time-consuming reviews of, and litigation concerning, patent infringement claims.

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

        We have at times been notified that we may be infringing intellectual property rights of third parties and we have litigated patent infringement claims in the past. We expect to continue to receive notice of such claims in the future. We cannot be certain of the success in defending patent infringement claims or claims for indemnification resulting from infringement claims.

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

We may be materially adversely affected by legal proceedings.

        We have been and may in the future be subject to various legal proceedings, including claims that involve possible infringement of patent or other intellectual property rights of third parties. It is inherently difficult to assess the outcome of litigation matters, and there can be no assurance that we will prevail in any litigation. Any such litigation could result in substantial cost and diversion of our efforts, which by itself could have a material adverse effect on our financial condition and operating results. Further, adverse determinations in such litigation could result in loss of our property rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties or prevent us from manufacturing or selling our products, any of which could materially adversely affect our business, financial condition or results of operations.

Recently enacted and proposed changes in securities laws and regulations have increased our costs.

        Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, have increased our expenses as we evaluate the implications of new rules and devote resources to respond to the new requirements. Sarbanes-Oxley Act mandates, among other things, that companies adopt new corporate governance measures and imposes comprehensive reporting and disclosure requirements, sets stricter independence and financial expertise standards for audit committee members and imposes increased civil and criminal penalties for companies, their chief executive officers and chief financial officers and directors for securities law violations. In addition, The NASDAQ Global Market, on which our common stock is listed, has also

28

adopted comprehensive rules and regulations relating to corporate governance. These laws, rules and regulations have increased the scope, complexity and cost of our corporate governance, reporting and disclosure practices, which could harm our results of operations and divert management's attention from business operations. We also expect these developments to continue to make it more difficult and more expensive for us to obtain director and officer liability insurance in the future, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Further, our board members, Chief Executive Officer and Chief Financial Officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which would adversely affect our business.

We are subject to the internal control evaluation and attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

        Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include in our annual report our assessment of the effectiveness of our internal control over financial reporting and our audited financial statements as of the end of each fiscal year. Furthermore, our independent registered public accounting firm (Firm) is required to report on whether it believes we maintained, in all material respects, effective internal control over financial reporting as of the end of the year. We successfully completed our assessment and obtained our Firm's attestation as to the effectiveness of our internal control over financial reporting as of November 3, 2007, October 31, 2006 and 2005. In future years, if we fail to timely complete this assessment, or if our Firm cannot timely attest, we could be subject to regulatory sanctions and a loss of public confidence in our internal control. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to timely meet our regulatory reporting obligations.

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

        The terrorist attacks in September 2001 in the United States and ensuing events and the resulting decline in consumer confidence had a material adverse effect on the economy.

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

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

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

Item 1B.    Unresolved Staff Comments

        None.

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Item 2.    Properties

        Our headquarters are located on a leased site in Milpitas, California. This headquarters facility consists of 180,000 square feet on approximately 14 acres of land. We also own our manufacturing facility in Amerang, Germany. Our manufacturing facility in Hillsboro, Oregon is located in an 180,000 square foot facility, comprised of two buildings on approximately twenty-six acres of land. In January 2008, we completed the sale and leaseback of our manufacturing facility, in Hillsboro, Oregon. In addition, we lease offices and facilities in several U.S. and international locations, including the United Kingdom, France, Singapore and Japan.

        We believe our existing properties, including both owned and leased sites, are in good condition and are adequate to meet our current and foreseeable future requirements.

        For additional information regarding obligations under leases, see Note 5—"Commitments and Contingencies," of the Consolidated Financial Statements.

Item 3.    Legal Proceedings

        We are involved in various claims arising in the ordinary course of business, none of which, in the opinion of management, if determined adversely against us, will have a material adverse effect on our business, financial condition or results of operations.

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

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

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EXECUTIVE OFFICERS AND KEY EMPLOYEES

        Our executive officers and key employees and their ages and positions as of January 7, 2008, are as follows:

Name	Age	Position
Executive Officers
Lavi A. Lev	51	President and Chief Executive Officer
Kevin C. "Casey" Eichler	48	Senior Vice President and Chief Financial Officer
Amir Aghdaei	49	Senior Vice President, World Wide Field Operations and Marketing
Rance Hale	47	Senior Vice President, Manufacturing Operations
Byron W. Milstead	51	Senior Vice President and General Counsel
Key Employees
Patrick J. Brady	61	Senior Vice President, Engineering
Kuhoo Edson	43	Vice President, Business Operations
Laura Owen	52	Vice President, Human Resources
Mukund Srinivasan	43	Vice President, Finance

Lavi A. Lev has served as President and Chief Executive Officer since December 2006. Prior to joining Credence, Mr. Lev served as Executive Vice President and General Manager at Cadence Design Systems from January 2000 to December 2004. Prior to that, Mr. Lev served as Senior Vice President, Engineering for MIPS Technologies from 1996 to 2000. Prior to joining MIPS Technologies, Mr. Lev held various engineering and management roles at Sun Microsystems, Intel and National Semiconductor.

Kevin C. Eichler has served as Senior Vice President and Chief Financial Officer since January 2008. Prior to joining Credence, Mr. Eichler served as Executive Vice President of Operations and Chief Financial Officer of MarketTools, Inc. from March 2006 to December 2007. Prior to that, Mr. Eichler served as Vice President and Chief Financial Officer of MIPS Technologies from May 1998 to February 2006. Prior to joining MIPS Technologies, Mr. Eichler served in various senior and executive level finance, operations and administrative positions with several companies including Visigenic Software, Inc., NeXt, Inc. and Microsoft.

Amir Aghdaei has served as Senior Vice President, World Wide Field Operations and Marketing since August 2007. Prior to joining Credence, Mr. Aghdaei served as Vice President and General Manager of the Measurement Systems Group, Electronic Measurement Division of Agilent Technologies from September 2000 until July 2007. Prior to that, Mr. Aghdaei held various executive level positions at Agilent Technologies and Hewlett-Packard.

Rance Hale has served as Senior Vice President, Manufacturing Operations since April 2006. Prior to joining Credence, Mr. Hale served in several key management positions at KLA-Tencor, including, Vice President of Operations, Electron Beam Inspection Technology; Vice President of Operations, Films and Surface Technology; Senior Director of NPI Operations, Wafer Inspection Group; Director of Operations, SEMSpec, Electron Microscope and Senior Manufacturing/Customer Acceptance Manager, Wafer Inspection. Prior to joining KLA-Tencor, Mr. Hale held various increasing roles in operations at XICOR, Inc.

Byron W. Milstead has served as Senior Vice President and General Counsel since December 2005. Prior to that, he was Vice President and General Counsel since November 2000. Prior to joining Credence, Mr. Milstead was a partner with the Portland, Oregon law firm of Ater Wynne LLP. Prior to joining Ater Wynne LLP in 1996, Mr. Milstead was an associate and partner in the Portland, Oregon office of Bogle & Gates PLLC. Mr. Milstead has practiced law since 1982.

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Patrick J. Brady has served as Senior Vice President, Engineering since April 2007. Prior to joining Credence, Dr. Brady served as Vice President and General Manager of Photon Dynamics from March 2005 to January 2007. Prior to that, Dr. Brady served as Vice President and General Manager at KLA-Tencor from October 1999 to March 2005. Prior to that, Dr. Brady served as President of Watkins-Johnson, SEG from June 1994 to June 1999. Prior to joining Watkins-Johnson, Dr. Brady served as a Program Manager with ETEC Systems from October 1983 to June 1994.

Kuhoo Edson has served as Vice President, Business Operations since March 2007. Prior to joining Credence, Ms. Edson served as Group Director of Corporate Strategy and Group Director of Corporate Marketing at Cadence Design Systems from June 2005 to February 2007. Prior to that, Ms. Edson served as President at Technology in Images from January 2000 to June 2007. Prior to that, Ms. Edson served as Director of Product Marketing at Cadence Design Systems from October 1995 to December 1999. Prior to that, Ms. Edson held various positions at Intergraph Electronics, Synopsys, Inc, and Chrysler Military Electronics from June 1987 to October 1995.

Laura Owen has served as Vice President, Human Resources since joining the Company in July 2007. Prior to joining Credence, Ms. Owen served as the Interim Senior Vice President, Human Resources at Vitria Technology from February 2007 to July 2007. Prior to that, Ms. Owen served as the Senior Vice President, Global Human Resources at Macrovision Corporation from October 2005 to February 2007. Prior to that, Ms. Owen was a director in the legal and human resources groups at Cisco Systems Corporation from August 2001 to October 2005. Before joining Cisco, Ms. Owen worked as the Vice President, Human Resources for Women.com from May 1999 to July 2001, when it was sold to iVillage. Prior to that, Ms. Owen was a labor and employment attorney with Cooley Godward LLP from September 1994 to May 1999. From May 1974 til September 1994, Ms. Owen held various positions with United Airlines in their Labor Relations, Customer Service and Inflight Services departments.

Mukund Srinivasan has served as Vice President, Finance since December 2007. Prior to that, he served as Director of Finance since May 2007 and Controller from April 2006 to May 2007. Prior to joining Credence, Dr. Srinivasan served as a Group Controller at KLA-Tencor from November 2003 to April 2006. Prior to that, Dr. Srinivasan held various finance roles at Media Arts Group, Inc., Global Customer Solutions, JP Morgan Chase and Hart Consultant Group.

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

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PART II

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

        Our common stock is traded on the NASDAQ Global Market under the symbol CMOS. High and low closing stock prices for the last two fiscal years were:

	2007				2006
Quarter Ended
	High		Low		High		Low
February 3 and January 31, respectively	$	5.33	$	3.04	$	9.05	$	6.72
May 5 and April 30, respectively	$	5.18	$	3.21	$	8.95	$	7.00
August 4 and July 31, respectively	$	3.96	$	3.01	$	7.24	$	2.74
November 3 and October 31, respectively	$	3.42	$	1.96	$	3.29	$	1.83

        There were approximately 210 stockholders of record at December 31, 2007. To date, we have not declared or paid any cash dividends on our common stock. We do not anticipate paying any dividends on our common stock in the foreseeable future.

        The information required by this item regarding securities authorized for issuance under equity compensation plans is incorporated by reference to the information set forth in Item 12 of this Form 10-K.

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Item 6.    Selected Financial Data

        The selected consolidated financial data below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes. The selected consolidated statements of operations data for the years ended November 3, 2007, October 31, 2006 and 2005 and the selected consolidated balance sheet data as of November 3, 2007 and October 31, 2006, are derived from, and are qualified by reference to, the audited consolidated financial statements included elsewhere in this annual report on Form 10-K. The financial information for fiscal year 2004 included results of operations of NPTest beginning on May 29, 2004. The financial information for fiscal year 2003 included results of operations of Optonics beginning on January 23, 2003. The selected consolidated statement of operations data for the fiscal years ended prior to October 31, 2004, and the selected consolidated balance sheet data prior to October 31, 2005, are derived from our audited consolidated financial statements that are not included in this annual report on Form 10-K. The historical results presented below are not necessarily indicative of future results.

		Fiscal Year Ended
		November 3, 2007			October 31, 2006			October 31, 2005			October 31, 2004			October 31, 2003
		(in thousands, except per share amounts)
Consolidated Statement of Operations Data:
	Net sales	$	461,139		$	493,374		$	446,639		$	439,803		$	182,414
	Operating income (loss)		17,147			(476,712	)		(110,160	)		(79,788	)		(114,278	)
	Income (loss) before income tax provision		15,948			(475,701	)		(108,543	)		(60,415	)		(112,059	)
	Net income (loss)		12,454			(481,585	)		(119,932	)		(64,478	)		(113,112	)
	Net income (loss) per basic share	$	0.12		$	(4.82	)	$	(1.28	)	$	(0.88	)	$	(1.80	)
	Net income (loss) per diluted share	$	0.12		$	(4.82	)	$	(1.28	)	$	(0.88	)	$	(1.80	)
Consolidated Balance Sheet Data:
	Working capital	$	206,806		$	153,760		$	207,086		$	277,887		$	349,260
	Total assets		589,312			517,594			1,046,305			1,173,106			698,493
	Long-term debt		119,728			145,000			180,000			180,000			181,058
	Accumulated deficits		(838,382	)		(850,836	)		(369,251	)		(249,319	)		(184,841	)
	Stockholders' equity	$	236,255		$	212,726		$	682,029		$	788,288		$	430,627

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Supplementary Consolidated Financial Information (Unaudited)

Quarterly 2007

	2007 Quarter Ended
	February 3,			May 5,			August 4,			November 3,
	(in thousands, except per share amounts)
Net sales	$	118,797		$	121,141		$	123,532		$	97,669
Gross margin		51,502			55,216			63,304			48,075
Research and development		21,178			20,362			18,696			16,919
Selling, general and administrative		25,839			29,114			27,042			23,483
Amortization of purchased intangibles and deferred stock compensation		4,455			4,454			4,451			4,512
Restructuring charges		492			526			(9	)		(564	)
Operating income (loss)		(462	)		760			13,124			3,725
Income (loss) before income tax provision		2,001			(1,584	)		11,961			3,570
Net income (loss)		(11	)		(3,454	)		10,338			5,581
Net income (loss) per basic share	$	(0.00	)	$	(0.03	)	$	0.10		$	0.05
Net income (loss) per diluted share	$	(0.00	)	$	(0.03	)	$	0.10		$	0.05

Quarterly 2006

	2006 Quarter Ended
	January 31,			April 30,			July 31,			October 31,
	(in thousands, except per share amounts)
Net sales	$	121,805		$	129,945		$	114,476		$	127,148
Gross margin		55,766			46,248			25,608			56,748
Research and development		24,148			24,123			22,576			20,505
Selling, general and administrative		29,311			29,758			30,782			27,745
Amortization of purchased intangibles and deferred stock compensation		4,254			4,117			4,338			4,528
Reduction of goodwill		—			—			423,875			—
Restructuring charges		314			1,060			1,792			7,836
Operating loss		(2,261	)		(12,810	)		(457,755	)		(3,886	)
Loss before income tax provision		(2,415	)		(13,128	)		(459,256	)		(902	)
Net loss		(4,046	)		(14,231	)		(461,366	)		(1,942	)
Net loss per basic share	$	(0.04	)	$	(0.14	)	$	(4.62	)	$	(0.02	)
Net loss per diluted share	$	(0.04	)	$	(0.14	)	$	(4.62	)	$	(0.02	)

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

Overview

        We design, manufacture, sell and service engineering validation test equipment, diagnostics and failure analysis products and ATE used for testing semiconductor ICs. We serve a broad spectrum of the semiconductor industry's testing needs through a wide range of products that test digital logic, mixed-signal, system-on-a-chip and radio frequency semiconductors. We utilize our proprietary technologies to design products which are intended to provide a lower total cost of ownership than many competing products currently available while meeting the increasingly demanding performance requirements of today's engineering validation test, diagnostics and failure analysis and ATE markets. Our hardware products are designed to test semiconductors at two stages of their lifecycle; first, at the prototype stage, and, second, as they are produced in high volume. Collectively, our customers include major semiconductor manufacturers, fabless design houses, foundries and assembly and test services companies.

        Major business developments during and subsequent to fiscal year 2007 include:

•

In December 2006, Lavi Lev was appointed President and Chief Executive Officer; in April 2007, Pat Brady was appointed Senior Vice President, Engineering; in July 2007, Laura Owen was appointed Vice President, Human Resources; in August 2007, Amir Aghdaei was appointed Senior Vice President, World Wide Field Operations and Marketing; and in January 2008, Casey Eichler was appointed Senior Vice President and Chief Financial Officer.



•

On December 20, 2006, we completed the exchange of an aggregate principal amount of $72.5 million of our 1.5% Convertible Subordinated Notes due in May 2008 for a new series of 3.5% Convertible Senior Subordinated Notes due in May 2010, as well as the issuance of new 3.5% Convertible Senior Subordinated Notes with an aggregate principal amount of $50.0 million.



•

On February 28, 2007, we completed the sale of our facilities located at 1355 and 1421 California Circle, Milpitas. The sales price for the property was $30.0 million. As part of the agreement, we entered into an agreement to lease back the property for a ten-year period, with renewal options.



•

On January 7, 2008, we completed the sale of our facilities located at 5975 NW Pinefarm Place, Hillsboro, Oregon. The sales price for the property was $20.0 million. As part of the agreement, we entered into an agreement to lease back the property for a two-year period, with renewal options.



•

In January 2008, we announced our plans to divest or otherwise reduce our commitment to business and products that are unrelated to our consumer semiconductor market focus, scale down our service infrastructure, and continue with outsourced manufacturing activities. We anticipate that these initiatives will result in a net worldwide headcount reduction of 400 people by the end of fiscal 2008. These actions will result in restructuring charges of approximately $15.5 to $17.0 million during the first fiscal quarter of 2008.

        Our net sales, gross margins and operating results have in the past fluctuated significantly and will, in the future, fluctuate significantly depending upon a variety of factors. The factors that have caused and will continue to cause our results to fluctuate include cyclicality or downturns in the semiconductor market and the markets served by our customers, the timing of new product announcements and releases by us or our competitors, market acceptance of new products and enhanced versions of our products, manufacturing inefficiencies associated with the start up of new products, changes in pricing by us, our competitors, customers or suppliers, the ability to volume produce systems and meet customer requirements, excess and obsolete inventory, patterns of capital spending by customers,

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delays, cancellations or rescheduling of orders due to customer financial difficulties or otherwise, expenses associated with acquisitions and alliances, our ability to effectively integrate acquisitions, product discounts, product reliability, the proportion of direct sales and sales through third parties, including distributors and original equipment manufacturers, the mix of products sold, the length of manufacturing and sales cycles, natural disasters, political and economic instability, new accounting pronouncements (e.g., SFAS 123(R)), regulatory changes and outbreaks of hostilities. Due to these and additional factors, historical results and percentage relationships discussed in this Annual Report on Form 10-K will not necessarily be indicative of the results of operations for any future period. For a further discussion of our business, and risk factors affecting our results of operations, please refer to the section entitled "Risk Factors" included elsewhere herein.

Critical Accounting Policies and Estimates

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, inventory valuation and residual values related to leased products, long-lived assets valuation, warranty accrual, deferred taxes, restructuring charges and share-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We discuss the development and selection of the critical accounting estimates with the audit committee of our board of directors on a quarterly basis, and the audit committee has reviewed our disclosure relating to them in this annual report on Form 10-K.

        We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition:

        Under Securities and Exchange Commission's SAB 104 we recognize revenue on the sale of semiconductor manufacturing equipment when title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is fixed or determinable, collectability is reasonably assured and customer acceptance criteria have been successfully demonstrated. Revenue recognition policies are applied consistently among our semiconductor manufacturing equipment product lines. Product revenue is recognized upon shipment only when achieving the customer acceptance criteria can be demonstrated prior to shipment, which generally occurs with mature products. Revenue related to the fair value of the installation obligation is recognized upon completion of the installation. Service revenues are generally recognized upon performance of the activities requested by the customers. Products are classified as mature after several different customers have accepted similar systems. When the customer acceptance criteria cannot be demonstrated prior to shipment, revenue and the related cost of goods sold are deferred until customer acceptance. For some customers in certain countries where collection may be an issue, we may require a letter of credit to be established or cash receipt in advance before revenue can be recognized. Lease revenue is recorded in accordance with Statement of Financial Accounting Standard No. 13, "Accounting for Leases," (SFAS 13), which requires that a lessor account for each lease by either the sales-type or operating method. Revenue from sales-type leases is recognized at the net present value of future lease payments. Revenue from operating leases is recognized over the lease period.

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        During fiscal years 2007, 2006 and 2005, we introduced several new enhancements, systems and products. Certain revenues from sales of these new enhancements, systems and products during fiscal years 2007, 2006 and 2005 were deferred until the revenue recognition requirements of our revenue recognition policy are satisfied. This practice will continue in the future. In the past, we experienced significant delays in the introduction and acceptance of new testers as well as certain enhancements to our existing testers. Delays in introducing a product or delays in our ability to obtain customer acceptance, if they occur in the future, will delay the recognition of revenue and gross profit by us.

        With respect to arrangements with multiple deliverables, we follow the guidance in Emerging Issue Task Force No. 00-21, "Revenue Arrangements with Multiple Deliverables" (EITF 00-21), to determine whether there is more than one unit of accounting. To the extent that the deliverables are separable into multiple units of accounting, we then allocate the total fee on such arrangements to the individual units of accounting using the residual method. We then recognize revenue for each unit of accounting depending on the nature of the deliverable(s) comprising the unit of accounting (principally following SAB 104).

        Sales in the United States are principally through our direct sales organization consisting of direct sales employees and representatives. Sales outside the United States utilize both direct sales employees and distributors. There are no significant differences in revenue recognition policies based on the sales channel, due to the business practices that have been adopted with our distributor relationships. Because of these business practices, we do not use "price protection," "stock rotation" or similar programs with our distributors. In general, we sell product to the distributor on the basis of a purchase order received from an end customer. We evaluate any revenue recognition issues, in such cases, based on the characteristics of the end customer.

        Our semiconductor manufacturing equipment includes embedded software. We believe this embedded software is incidental to our products and therefore it is excluded from the scope of Statement of Position 97-2, "Software Revenue Recognition," (SOP 97-2). Also, the embedded software in our products is not sold separately, cannot be used on another vendor's products, and we cannot fundamentally enhance or expand the capability of the equipment with new or revised embedded software. In addition, the equipment's principal performance characteristics are governed by digital speed and pin count which are primarily a function of the hardware.

        Deferred revenue includes deferred revenue related to maintenance contracts (and other undelivered services) and to extended warranties where products were sold with more than the standard one-year warranty. Deferred profit is related to equipment that was shipped to certain customers, but for which the revenue and cost of goods sold are not recognized because the customer-specified acceptance criteria has not been met as of the fiscal period end or because the customer is deemed to be a high credit risk and payment has not been received as of the fiscal period end.

        We warrant our products to our customers generally for one year from the date of shipment. In addition to the provision of standard warranties, we may offer customer paid extended warranty services with a fixed fee. The fixed fees are recognized as revenue on a straight-line basis over the applicable term of the contract. Related costs are recorded either as incurred or when related liabilities are determined to be probable and estimable.

        For certain customers, typically those with whom we have long-term relationships, we may grant extended payment terms. Certain of our receivables have due dates in excess of 90 days, and we have a history of successfully collecting these extended payment term accounts receivable.

Allowance for Doubtful Accounts:

        We, along with our sales and distribution partners, perform ongoing credit evaluations of our customers' financial condition. We maintain allowances for doubtful accounts for estimated losses

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resulting from the inability or unwillingness of our customers to make required payments. We record our bad debt expenses as selling, general and administrative expenses. Allowances are estimated on outstanding receivable balances based on credit risk assigned to the respective customer. The credit risk categories are determined by a variety of factors including, but not limited to, current financial position and payment history of the customer. We will also estimate additional allowances based on percentages on certain aged receivable balances. In addition, when we become aware that a specific customer is unable to meet its financial obligations to us, we record a specific allowance to reflect the level of credit risk in the customer's outstanding receivable balance. In addition, we record additional allowances based on certain percentages of our aged receivable balances. These percentages are determined by a variety of factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience. We are not able to predict changes in the financial condition of our customers or changes in general economic conditions, and if circumstances related to our customers deteriorate, our estimates of the recoverability of our trade receivables could be materially affected and we may be required to record additional allowances. Alternatively, if we provide more allowances than we need, we may reverse a portion of such provisions in future periods based on our actual collection experience.

Inventory Valuation and Residual Values Related to Leased Products:

        We evaluate our inventory levels and valuations based on our estimates and forecasts of the next cyclical period in our industry. These forecasts require us to estimate our ability to sell current and future products in the next cyclical industry period and compare those estimates with our current inventory levels. If these forecasts or estimates change, or our product roadmaps change, then we would need to adjust our assessment of the inventory valuations. Once inventories are written down, we carry that inventory at its reduced value until it is scrapped or otherwise disposed of.

        We monitor our inventory levels in light of product development changes and expectations of the cyclical period ahead. For the five year period ended November 3, 2007, we recorded a total of $146.1 million in write down of excess and obsolete inventories. We do not as a matter of course scrap all inventory that is identified as excess or obsolete. Our products are capital goods with potentially long economic lives and, historically, the opportunity to sell these products has both arisen and fallen unexpectedly. We have occasionally encountered unexpected demand for old products as well as the inability to transition customers to newer products. We closely monitor the inventories that have been written down but not scrapped, so that if any sales of these items occur and affect our reported gross margins, the effect, if material, is disclosed. We may be required to take additional charges for excess and obsolete inventory if a downturn causes further reductions to our current inventory valuations or if our current product development plans change.

        We consign a portion of our finished goods to both external and internal customers primarily for the purpose of customer demonstration or applications development. This inventory is categorized as other long-term assets on our consolidated balance sheets. We depreciate all consigned inventories during the period that they are held on consignment over periods ranging from 18 months to 36 months. The depreciation expense for consigned inventory is charged to selling, general and administrative expense.

        Residual values assigned to our products that are leased to customers are based on their remaining economic life at the end of the lease terms. The amounts assigned to the residual values are evaluated periodically based on technological change and the forecasted business cycle.

Long-Lived Asset Valuation:

        Our long-lived assets consist of property and equipment and identified intangible assets.

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        As required by Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets," (SFAS 142), we test goodwill for possible impairment on an annual basis and at any other time events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Circumstances that could trigger an impairment test include but are not limited to: our market value falling below our net book value for a significant period of time; a significant adverse change in the business climate or legal factors; unanticipated competition; loss of key personnel; a significant change in direction with respect to investment in a product or market segment; the likelihood that a significant portion of the business will be sold or disposed of; or the results of testing for recoverability of a significant asset group within a reporting unit determined in accordance with SFAS 142.

        The impairment test for goodwill involves a two-step process: step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to each reporting unit. If the carrying amount is in excess of the fair value, step two requires the comparison of the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. Any excess of the carrying value of the reporting unit goodwill over the implied fair value of the reporting unit goodwill will be recorded as an impairment loss.

        The determination as to whether a write down of goodwill is necessary involves significant judgment based on the short-term and long-term projections of our operations. The assumptions supporting the estimated future cash flows of the reporting unit, including profit margins, long-term forecasts of the amounts and timing of overall market growth and our percentage of that market, discount rates and terminal growth rates, reflect our best estimates.

        As mandated by SFAS 142, we completed our annual goodwill impairment test as of July 31, 2005 during the fourth quarter of the fiscal year. We determined that, based on market capitalization and on the test which indicated that the sum of the expected future discounted cash flows from the assets exceeded the earning value of those assets, the goodwill was not impaired.

        Based on a combination of factors that came into existence and were identified during the third quarter of fiscal year 2006, particularly: (1) our changed current and projected operating results reflecting lower demand from major customers; and (2) our current market capitalization which was significantly less than our book value for the preceding 10 weeks prior to the end of the third quarter, we concluded there were sufficient indicators to require us to assess whether any portion of our recorded goodwill balance was impaired. We determined, based on our estimates of forecasted discounted cash flows and our market capitalization, that our goodwill was impaired at July 31, 2006. Further analysis indicated that the entire goodwill balance was impaired and charges of $423.9 million were necessary in the third quarter of fiscal year 2006. Other long-lived assets were assessed for impairment prior to the performance of SFAS 142 analysis and were determined not to be impaired.

        We evaluate the carrying value of our long-lived assets, consisting primarily of purchased intangible assets, and property and equipment, in accordance with SFAS 144 whenever certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, or at least annually. Such events or circumstances include, but are not limited to, a prolonged industry downturn, a significant decline in our market value, or significant reductions in projected future cash flows. In assessing the recoverability of our long-lived assets, we compare the carrying value to the undiscounted future cash flows the assets are expected to generate. If the total of the undiscounted future cash flows is less than the carrying amount of the assets, we write down such assets based on the excess of the carrying amount over the fair value of the assets. Fair value is generally determined by calculating the discounted future cash flows using a discount rate based upon our weighted average cost of capital. Significant judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows, including profit margins, long-term forecasts of the amounts and timing of overall market growth and our percentage of that market, groupings of assets,

40

discount rates and terminal growth rates. In addition, significant estimates and assumptions are required in the determination of the fair value of our tangible long-lived assets, including replacement cost, economic obsolescence, and the value that could be realized in liquidation. Changes in these estimates could have a material adverse effect on the assessment of our long-lived assets, thereby requiring us to write down the assets. We make certain assessments with respect to the determination of all identifiable assets to be used in the business as well as research and development activities as of an acquisition date. Each of these activities was evaluated by both interviews and data analysis to determine our state of development and related fair value. The purchased intangibles consist of purchased technology, customer relations, trademarks, patents and non-compete agreements, and they typically have estimated useful lives of one to ten years.

Warranty Accrual:

        We provide reserves for the estimated costs of product warranties at the time revenue is recognized. We estimate the costs of our warranty obligations based on our historical experience of known product failure rates, use of materials to repair or replace defective products and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. Should our actual experience relative to these factors differ from our estimates, we may be required to record additional warranty reserves. Alternatively, if we provide more reserves than we need, we may reverse a portion of such provisions in future periods.

Deferred Taxes:

        When we prepare our consolidated financial statements, we calculate our income taxes based on the various jurisdictions where we conduct business. This requires us to calculate our actual current tax exposure and to assess temporary differences that result from different treatment of certain items for tax and accounting purposes. The temporary differences result in deferred tax assets and liabilities, which we show on our audited consolidated balance sheets. The net deferred tax assets are reduced by a valuation allowance if, based upon weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

        Our net deferred tax asset balance as of November 3, 2007 was $0.4 million which relates to taxable income generated at our foreign subsidiaries. Our domestic tax assets reflect a full valuation allowance due to uncertainties surrounding our ability to generate future taxable income and our corresponding ability to utilize our deferred tax assets.

        We are a U. S.-based multinational company subject to tax in multiple U. S. and foreign tax jurisdictions. Our effective tax rate is based on net income, statutory rates and enacted tax rules, including transfer pricing. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions on a worldwide basis. We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we conduct our business. It is possible that these positions may be challenged which may have an impact on our effective tax rate.

Restructuring Charges:

        During previous years, we have recorded restructuring charges as we rationalized operations in light of customer demand declines and the economic downturn. These measures, which included major changes in senior management, workforce reduction, facilities consolidation and changes to the strategic focus of a number of sites, were largely intended to align our capacity and infrastructure to anticipate customer demand and to transition our operations to lower cost regions. The restructuring charges include employee severance and benefit costs, write-offs of property and equipment and costs

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related to leased facilities vacated and subleased. Severance and benefit costs and other costs associated with restructuring activities were recorded in accordance with Statement of Financial Accounting Standard No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," (SFAS 146). We also record severance and benefit costs in accordance with Statement of Financial Accounting Standard No. 112, "Employer's Accounting for Post Employment Benefits," (SFAS 112), as we conclude that (a) we have a substantive post employment benefit obligation that is attributed to prior services rendered, (b) rights to those benefits have vested, and (c) payment is probable and the amount can be reasonably estimated. The current accounting for restructuring costs requires us to record provisions and charges when we have a formal and committed restructuring plan.

        Given the significance of, and the timing of the execution of such activities, this process is complex and involves periodic reassessments of original estimates. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that these estimates accurately reflect the costs of our restructuring and other plans, actual results may differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.

Share-Based Compensation:

        In December 2004, the FASB issued Statement of Financial Accounting Standard No. 123(R), "Share Based Payment," (SFAS 123(R)). This statement requires that the cost resulting from all share-based payment transactions be recognized in the consolidated financial statements. We adopted SFAS 123(R), utilizing the modified prospective method and will continue to evaluate the impact of SFAS 123(R) on our operating results and financial condition. Our assessment of the estimated compensation charges is affected by our stock price as well as assumptions regarding a number of complex and subjective variables and the related tax impacts. These variables include, but are not limited to, our stock price volatility and employee stock option exercise behaviors. See Note 7 "Share-Based Compensation" of the Notes to the consolidated financial statements for further discussion.

        We estimate the fair value of options granted using the Black-Scholes-Merton option valuation model and the assumptions discussed in Note 7, "Share-Based Compensation," of the consolidated financial statements. We estimate the expected term of options granted based on historical experience of similar awards, giving consideration to the contractual terms of the share-based awards, vesting schedules and expectations of future employee behavior. We estimate the volatility of our common stock at the date of grant based on a combination of historical and implied volatilities, consistent with SFAS 123(R). Prior to the adoption of SFAS 123(R), we relied exclusively on the historical prices of our common stock in the calculation of expected volatility. We base the risk-free interest rate that we use in the Black-Scholes-Merton option valuation model on the implied yield in effect at the time of option grant. We have never paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes-Merton option valuation model. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. For options granted before November 1, 2005, we estimated the fair value using the multiple option approach and we are amortizing the fair value on a graded vesting basis. For options granted on or after November 1, 2005, we estimate the fair value using a single option approach and amortize the fair value on a straight-line basis. All options are amortized over the requisite service periods of the awards, which are generally the vesting periods. We may elect to use different assumptions under the Black-Scholes-Merton option valuation model in the future if our current experience indicates that a different measure is preferable, which could materially affect our net income or loss and net income or loss per share.

        On November 10, 2005, the FASB issued FASB Staff Position No. SFAS 123(R)-3 "Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards" (FSP 123(R)-3). We adopted the alternative transition method provided in the FASB Staff Position for calculating the tax

42

effects of share-based compensation pursuant to SFAS 123(R) in fiscal year 2006. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows of the tax effects of employee share-based compensation awards that are outstanding upon adoption of SFAS 123(R). The adoption did not have a material impact on our results of operations and financial condition.

Results of Operations

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

			Fiscal Years Ended
			November 3, 2007		October 31, 2006		October 31, 2005
Net sales			100	%	100	%	100	%
Cost of goods sold			53		63		65
	Gross margin		47		37		35
Operating expenses:
	Research and development		16		19		21
	Selling, general and administrative		23		24		30
	Amortization of purchased intangible assets		4		3		5
	Reduction of goodwill		—		86		—
	Restructuring charges		—		2		4
		Total operating expenses	43		134		60
Operating income (loss)			4	%	(97	)%	(25	)%
Net income (loss)			3	%	(98	)%	(27	)%

2007 vs. 2006

        Net sales.    Net sales consist of revenues from systems sales, upgrades, spare parts sales, maintenance contracts and lease income. Net sales decreased 7% to $461.1 million in fiscal year 2007 from $493.4 million in fiscal year 2006. The decrease in net sales was due primarily to decreased demand of our analog mixed signal products. Sustainability of our revenue levels is dependent upon the economic and geopolitical climate as well as other risks described under the title "Risk Factors" herein. We anticipate net sales will be $58.0 million to $62.0 million for the first quarter of fiscal year 2008.

        Our net sales by product line in fiscal years 2007 and 2006 consisted of:

		2007		2006
SoC		41	%	34	%
Analog Mixed Signal		28		29
Memory		1		2
Design Characterization Group		8		8
Service		22		27
	Total	100	%	100	%

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        For the fiscal year 2007, net sales from our SoC and analog mixed signal products increased to $319.4 million representing an increase of 3% from $308.9 million from the same period of fiscal 2006. The increase in net sales was offset by a 23% decrease in net sales of our service from $134.6 million in fiscal year 2006 to $103.5 million during fiscal year 2007. Furthermore, our net sales for diagnostics and characterization products for the fiscal year 2007 decreased 14% to $35.1 million from $41.1 million during fiscal year 2006.

        International net sales accounted for approximately 71% of total net sales in fiscal years 2007 and 69% in fiscal year 2006. Our net sales to the Asia Pacific region accounted for approximately 52% of total net sales in fiscal year 2007 and 50% for fiscal year 2006.The demand for automated test and engineering capital equipment in Asian markets historically has been highly volatile, and in some Asian regions there has been geopolitical unrest, both of which have resulted in economic instabilities. These potential economic instabilities could materially adversely affect demand for our products.

        Gross Margin.    Our gross margin as a percentage of net sales increased to 47% in fiscal year 2007 from 37% for fiscal year 2006. Gross margin for the fiscal year 2007 increased due to improved manufacturing efficiencies resulting from the consolidation of our manufacturing facilities coupled with inventory write-down charges in fiscal year 2006 of $36.1 million attributable to decreased demand for our memory and other legacy products. Our gross margin has been and will continue to be affected by a variety of factors, including manufacturing efficiencies, excess and obsolete inventory write downs, sale through of previously written down inventory, pricing by competitors or suppliers, new product introductions, product sales mix, production volume, customization and reconfiguration of systems, international and domestic sales mix and field service margins. We believe gross margin percent could be lower in the first quarter of fiscal year 2008 compared to the fourth quarter of fiscal year 2007 due to various factors including product mix and anticipated restructuring charges. Our gross margin benefited by approximately $2.4 million or 0% and $2.2 million or 1% from the sale of fully reserved inventory during the fiscal years ended November 3, 2007 and October 31, 2006, respectively.

        Research and Development.    Research and development (R&D) expenses were $77.2 million in fiscal year 2007, compared to $91.4 million in fiscal year 2006, a decrease of 16%. The decrease in R&D expenses in fiscal year 2007 was primarily attributable to a decrease in compensation expense of approximately $8.7 million due to previous headcount reductions, $3.2 million in lower project costs from completed projects, a decrease in share-based compensation of $0.6 million and a decrease in travel expenses of $0.4 million. R&D expenses as a percentage of net sales were 17% and 19% in fiscal years 2007 and 2006, respectively. The decrease in R&D expenses as a percentage of net sales is primarily attributable to lower R&D expenses during fiscal year 2007 as compared to fiscal year 2006. We anticipate that R&D expenses in absolute dollars will be lower in the first quarter of fiscal year 2008 compared to the fourth quarter of fiscal year 2007 as we re-prioritize our project spend in conformance with our corporate objectives.

        Selling, General and Administrative.    Selling, general and administrative (SG&A) expenses were $105.5 million in fiscal year 2007, compared to $117.6 million in the prior fiscal year, a decrease of 10%. The decrease in SG&A expenses for fiscal year 2007 as compared to fiscal year 2006 was due to a decrease in consignment amortization of approximately $3.5 million, a decrease in compensation expense of approximately $2.5 million, and a decrease of $2.1 million in travel expenses, a decrease of $1.8 million in depreciation and a decrease in share-based compensation expense of $0.3 million related to employee stock options and employee stock purchases under SFAS 123(R) charged to SG&A. As a percentage of net sales, SG&A expenses were 23% and 24% in fiscal years 2007 and 2006, respectively. SG&A expenses decreased as a percentage of net sales primarily attributable to lower SG&A expenses coupled with lower net sales levels during fiscal year 2007 as compared to fiscal year 2006. We expect SG&A expenses in absolute dollars will be lower in the first quarter of fiscal year 2008 compared to the fourth quarter of fiscal year 2007.

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        Amortization of Purchased Intangible Assets.    Amortization of purchased intangible assets expenses were $17.9 million in fiscal year 2007, compared to $17.2 million in the prior fiscal year, an increase of 4%. The increase in amortization of purchased intangible assets in fiscal year 2007 from fiscal year 2006 was primarily attributable to the amortization of intangible assets acquired in May 2006. During fiscal 2007, a full year of amortization expense was recorded compared with approximately five months of amortization expense during fiscal 2006. Remaining estimated annual amortization expense for purchased intangible assets is expected to be $15.9 million and $13.5 million in fiscal years 2008 and 2009, respectively.

        Restructuring Charges.    In fiscal year 2007, we recorded total restructuring charges of approximately $0.4 million compared to $11.0 million in 2006, a decrease of 96%. The restructuring charges were for severance expenses related to headcount reduction, facilities, fixed assets write-off related to the overall alignment of our corporate strategy. The affected employees were across all business functions throughout the world. We anticipate that restructuring charges will be $15.5 million to $17.0 million during the first fiscal quarter of 2008. See Note 4—"Restructuring Charges" and Note 15—"Subsequent Events," of the notes to the consolidated financial statements for further discussion.

        Interest Income.    We generated interest income of $7.0 million and $3.7 million in fiscal years 2007 and 2006, respectively. The increase in fiscal year 2007 was primarily due to higher interest rates and cash, cash equivalents and short-term investments balances in fiscal year 2007 compared to fiscal year 2006.

        Interest Expense.    Interest expense was $8.1 million and $2.8 million in fiscal years 2007 and 2006, respectively. Our interest expense is a function of our debt obligations which increased in fiscal year 2007 compared to fiscal year 2006 due to the note offering completed in the first quarter of 2007. Interest expense in fiscal years 2007 and 2006 primarily represents interest on our convertible debt.

        Other Income and Expenses, Net.    Other expense, net was $79,000 for fiscal year 2007 and other expense income, net was $27,000 in fiscal year 2006, an expense increase of $106,000. The change in other expense in fiscal year 2007 from other income in fiscal year 2006 was attributable to various factors. We recorded a gain of approximately $3.0 million upon exchange of the convertible subordinated notes, partially offset by fees of $0.5 million related to the issuance of the new notes. We recorded a loss of approximately $1.0 million on the sale of land and approximately $1.0 million loss on other fixed assets. In addition, we experienced unfavorable foreign currency translation valuation fluctuations of approximately $0.7 million in fiscal year 2007 compared with fiscal year 2006.

        Income Taxes.    We recorded an income tax provision of $3.5 million and $5.9 million in fiscal years 2007 and 2006, respectively. The income tax expense for the periods consists primarily of foreign tax expense on earnings generated from our foreign operations.

        At November 3, 2007, we had unused net operating loss and research tax credit carryforwards for federal income tax purposes of approximately $456.8 million and $10.6 million, respectively, which expire in 2018 through 2027. At November 3, 2007, we had unused net operating loss and tax credit carryforwards for state income tax purposes of approximately $103.7 million and $16.3 million, respectively, with varying expiration dates beginning in 2008. At November 3, 2007, we also had unused foreign tax credits of $8.3 million primarily related to the prior year Singapore repatriation, which expires in 2016. Utilization of the net operating loss and tax credit carryforwards will be subject to annual limitations due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitations may result in expiration of net operating loss and tax credit carryforwards before full utilization.

        Realization of the net deferred tax assets is dependent on our generating sufficient taxable income in future years in appropriate tax jurisdictions to obtain reversals of temporary differences, net

45

operating loss and tax credit carryforwards. Our net deferred tax asset balance as of November 3, 2007 was $0.4 million which relates to taxable income generated at our foreign subsidiaries. Our domestic tax assets reflect a full valuation allowance due to uncertainties surrounding our ability to generate future taxable income and our corresponding ability to utilize our deferred tax assets. Until such time, we do not expect to recognize any significant tax benefits in our results of operations.

        For a full reconciliation of our effective tax rate to the U.S. federal statutory rate of 35% and further explanation of our provision for income taxes, see Note 9 "Income Taxes" of the Notes to the consolidated financial statements.

2006 vs. 2005

        Net sales.    Net sales increased 10% to $493.4 million in fiscal year 2006 from $446.6 million in fiscal year 2005. The increase in net sales was due primarily to increased demand of our analog mixed signal products. Furthermore, net sales have increased as our products gained market acceptance. The increase in net sales was offset by a decrease of net sales of our memory products as a result of our decision to shift resources away from the development of our next generation memory product in the third quarter of fiscal year 2006.

        Our net sales by product line in fiscal years 2006 and 2005 consisted of:

		2006		2005
SoC		34	%	35	%
Analog Mixed Signal		29		21
Memory		2		3
Design Characterization Group		8		11
Service		27		30
	Total	100	%	100	%

        For the fiscal year 2006, net sales from our SoC and analog mixed signal net sales increased to $308.9 million representing an increase of 22% from $252.3 million from the same period of fiscal 2005. The increase in net sales was offset by a 33% decrease in net sales of our memory products from $13.1 million in fiscal year 2005 to $8.8 million during fiscal year 2006. Furthermore, our net sales for diagnostics and characterization products for the fiscal year 2006 decreased 14% to $41.1 million from $47.9 million during fiscal year 2005.

        International net sales accounted for approximately 69% of total net sales in both fiscal years 2006 and 2005. Our net sales to the Asia Pacific region accounted for approximately 50% and 46% of total net sales in fiscal years 2006 and 2005, respectively. The demand for automated test and engineering capital equipment in Asian markets historically has been highly volatile, and in some Asian regions there has been geopolitical unrest, both of which have resulted in economic instabilities.

        Gross Margin.    Our gross margin as a percentage of net sales increased to 37% in fiscal year 2006 from 35% for fiscal year 2005. Gross margin for the fiscal year 2006 increased due to improved manufacturing efficiencies resulting from the consolidation of our manufacturing facilities offset by inventory write-downs charges of $36.1 million attributable to decreased demand for our memory and other legacy products as compared to inventory write-downs charges of $29.1 million in fiscal year 2005. In addition, the share-based compensation expense of $0.7 million related to employee stock options and employee stock purchases under SFAS 123(R) was charged to costs of good sold in fiscal year 2006. Our gross margin benefited by approximately $2.2 million or 1% and $6.2 million or 4% from the sale of fully reserved inventory during the fiscal years ended October 31, 2006 and 2005, respectively.

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        Research and Development.    R&D expenses were $91.4 million in fiscal year 2006, compared to $92.5 million in the prior fiscal year, a decrease of 1%. The decrease in R&D expenses in fiscal year 2006 was primarily attributable to a decrease in compensation expense of approximately $3.8 million due to previous headcount reductions, a decrease in travel expenses of $0.3 million and a decrease in share-based compensation of $0.6 million partially offset by accelerated new product development investment costs of approximately $1.4 million. In addition, share-based compensation expense of $1.9 million related to employee stock options and employee stock purchases under SFAS 123(R) was charged to R&D in fiscal year 2006. R&D expenses as a percentage of net sales were 19% and 21% in fiscal years 2006 and 2005, respectively. The decrease in R&D expenses as a percentage of net sales is primarily attributable to lower R&D expenses and higher net sales during fiscal year 2006 as compared to fiscal year 2005.

        Selling, General and Administrative.    SG&A expenses were $117.6 million in fiscal year 2006, compared to $133.2 million in the prior fiscal year, a decrease of 12%. The decrease in SG&A expenses for fiscal year 2006 as compared to fiscal year 2005 was primarily due to a decrease in audit and Sarbanes-Oxley compliance related costs of $2.7 million, integration expense in fiscal year 2005 of $10.3 million with no comparable charges in fiscal year 2006, a decrease in depreciation expenses of $1.6 million, a decrease in rent expense of $2.5 million, a decrease in consigned product amortization expense of $1.7 million, a decrease in bad debt expenses of $3.1 million, a decrease in consulting and outside services of $0.8 million and a decrease in commission expenses of $0.7 million. The decrease in SG&A expenses was offset by an increase in compensation expense of $2.1 million, an increase in maintenance contract expenses of $0.6 million, an increase in postage and other general expenses of $1.0 million and an increase in share-based compensation expense of $3.0 million related to employee stock options and employee stock purchases under SFAS 123(R) charged to SG&A in fiscal 2006. As a percentage of net sales, SG&A expenses were 23% and 30% in fiscal years 2006 and 2005, respectively. The decrease in SG&A expenses as a percentage of net sales is primarily attributable to lower SG&A expenses coupled with higher net sales levels during fiscal year 2006 as compared to fiscal year 2005.

        Amortization of Purchased Intangible Assets and Deferred Compensation.    Amortization of purchased intangible assets and deferred compensation expenses were $17.2 million in fiscal year 2006, compared to $23.5 million in the prior fiscal year, a decrease of 27%. Upon the adoption of SFAS 123(R), we discontinued the amortization of our deferred stock compensation, which was approximately $3.0 million in fiscal year 2005. Of the $23.5 million recorded in fiscal year 2005, amortization of purchased intangibles was $20.5 million. The decrease in amortization of purchased intangible assets in fiscal year 2006 from fiscal year 2005 was due primarily to certain purchased intangible assets including trademark, purchase product backlog, patents and non-compete agreements that became fully amortized during fiscal year 2006.

        Goodwill Impairment.    Effective November 1, 2002, we adopted SFAS 142, which was issued by the FASB in July 2001. Under this standard, we ceased amortizing goodwill effective November 1, 2002.

        It is required that we test goodwill for possible impairment on an annual basis and at any other time if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Circumstances that could trigger an impairment test include but are not limited to: a significant adverse change in the business climate or legal factors; unanticipated competition; loss of key personnel; a significant change in direction with respect to investment in a product or market segment; the likelihood that a significant portion of the business will be sold or disposed of; or the results of testing for recoverability of a significant asset group within a reporting unit determined in accordance with SFAS 142.

        The impairment test for goodwill involves a two-step process: step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to each reporting unit. If the carrying amount is in excess of the fair value, step two requires the comparison of

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the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. Any excess of the carrying value of the reporting unit goodwill over the implied fair value of the reporting unit goodwill will be recorded as an impairment loss.

        The determination as to whether a write-down of goodwill is necessary involves significant judgment based on short-term and long-term projections of our operations. The assumptions supporting the estimated future cash flows of the reporting unit, including profit margins, long-term forecasts of the amounts and timing of overall market growth and our percentage of that market, discount rates and terminal growth rates, reflect our best estimates.

        Based on a combination of factors that came into existence and were identified during the third quarter of fiscal year 2006, particularly: (1) our changed current and projected operating results reflecting lower demand from major customers; and (2) our current market capitalization which was less than our book value for the preceding 10 weeks prior to the end of the third quarter, we concluded there were sufficient indicators to require us to assess whether any portion of our recorded goodwill balance was impaired. We concluded based on our estimates, forecasted discounted cash flows, as well as our market capitalization, that our goodwill was impaired at July 31, 2006. Further analysis indicated that goodwill impairment charges of $423.9 million were necessary in the third quarter of fiscal year 2006. Other long-lived assets were assessed for impairment prior to the performance of the SFAS 142 analysis and were determined not to be impaired.

        We performed the first step of the interim SFAS 142 analysis, consisting of a comparison of the fair value of the reporting unit with our carrying amount, including the goodwill. The fair value was determined based on a combination of the Income Approach, which estimates the fair value based on the future discounted cash flows, and Market Approach, which estimates the fair value based on market prices of comparable companies. Under the Income Approach, we assumed a forecasted cash flow period of 5 years, long-term annual growth rates of 0% to 12%, a discount rate of 20% and terminal value growth rates of 5%. We also considered our total market capitalization as of July 31, 2006, and our average market capitalization for the quarter in order to assess volatility of our market capitalization on that day. Based on the first step of the analysis, we determined that the carrying amount was in excess of its fair value. As such, we were required to perform the second step analysis to determine the amount of the impairment loss. The second step of the analysis consisted of comparing the implied fair value of the goodwill with the carrying amount of the goodwill, with an impairment charge resulting from any excess of the carrying value of the goodwill over the implied fair value of the goodwill based on a hypothetical allocation of the estimated fair value of our tangible and intangible assets (other than goodwill). Based on the second step of the analysis, we concluded that all of our recorded goodwill ($423.9 million) was impaired and as such recorded a noncash charge to continuing operations during the third quarter of fiscal year 2006.

        Restructuring Charges.    In fiscal year 2006, we recorded total restructuring charges of approximately $11.0 million. The restructuring charges were for severance expenses related to headcount reduction, facilities, fixed assets write-off and other liabilities related to the discontinuance of our memory product and overall alignment of our corporate strategy. Of the $11.0 million, approximately $9.7 million was for severance and other related charges which accounted for a headcount reduction of approximately 270 employees. The affected employees were across all business functions throughout the world. The discontinuation of our memory product generated approximately $0.7 million and $0.2 million charges related to contract cancellation and write down of our property and equipment, respectively.

        In fiscal year 2005, we recorded total restructuring charges of approximately $17.6 million. Of the $17.6 million, $5.0 million was for severance and other related charges which accounted for a headcount reduction of 110 employees. Of the $5.0 million, the amount recorded under SFAS 112 at October 31, 2005 was $1.5 million. The affected employees were primarily in research and development

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and selling general and administrative functions throughout the world. Write-off of property and equipment of $1.1 million resulted from our decision to halt additional research and development investment in one of our products that was rendered redundant by the acquisition of NPTest. Operating lease and leasehold restoration charges of $11.5 million, which are net of expected sublease rentals, resulted from vacating the former NPTest headquarters facilities in San Jose. Outsource IT contract cancellation charges amounted to $1.4 million. These charges were offset by deferred rent write-off of $0.7 million and prior accrual adjustment of $0.6 million, primarily related to severance and related charges.

        Interest Income.    We generated interest income of $3.7 million and $2.8 million in fiscal years 2006 and 2005, respectively. The increase in fiscal year 2006 was primarily due to higher interest rates compared to fiscal year 2005, partially offset by lower cash, cash equivalents and short-term investment balances in fiscal year 2006 as compared to fiscal year 2005.

        Interest Expense.    Interest expense was $2.8 million and $3.2 million in fiscal years 2006 and 2005, respectively. Interest expense in fiscal years 2006 and 2005 primarily represents interest on our convertible debt. The decrease in interest expense was primarily due to the repayment of our $5.0 million bank loan as well as no trade accounts receivable factored in fiscal year 2006 partially offset by the interest on the note payable resulted from the lease buyout in fiscal year 2006.

        Other Income and Expenses, Net.    Other income, net was $27,000 and $2.1 million in fiscal years 2006 and 2005, respectively, a decline of $2.1 million. The change to other income in fiscal year 2006 from other net income in fiscal year 2005 was primarily due to the mark up to fair value of an acquired liability in fiscal year 2005 of $1.2 million owed to the former parent of NPTest, an unfavorable change in foreign currency valuation from fiscal year 2005 to fiscal year 2006 of approximately $1.5 million and the write off of impaired equity investment of $0.9 million and higher loss on disposal of fixed assets of approximately $0.9 million during fiscal year 2006 as compared to fiscal year 2005. These were offset by a gain of $2.8 million in the convertible bonds buy-back and a gain on the sale of an equity investment of $0.3 million in fiscal year 2006.

        Income Taxes.    We recorded an income tax provision of $5.9 million and $11.4 million in fiscal years 2006 and 2005, respectively. The income tax expense for the periods consists primarily of foreign tax expense on earnings generated from our foreign operations.

Stock Options and Incentive Plan

        We have a share-based compensation program that provides our Board of Directors broad discretion in creating employee equity incentives. This program includes incentive and non-statutory stock options, restricted stock units and other types of equity granted under various plans, the majority of which are stockholder approved. Stock options are generally time-based, vesting over a four-year period with 12.5% of the granted shares vesting six months after the grant date, and the remaining shares vesting at the rate of 6.25% each quarter thereafter for the following 14 quarters over four years and expire seven to ten years from the grant date. Additionally, we have an Employee Stock Purchase Plan (ESPP) that allows employees to purchase shares of common stock at 85% of the fair market value at the lower of either the date of enrollment or the date of purchase. Shares issued as a result of stock option exercises and our ESPP are generally from our new shares. As of November 3, 2007, we had approximately 2.3 million shares of common stock reserved for future issuance under the stock option plans and ESPP.

        In April, July and August 2007, our Board of Directors approved inducement stock option grants to certain officers which were made outside of any current company plan. We elected to make inducement option grants to induce and attract higher qualified candidates to accept employment with

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us and to fill open officer positions. As of November 3, 2007, there were 780,000 shares issued under these awards.

        At November 3, 2007, there was $13.6 million of unrecognized share-based compensation expense related to non-vested options that is expected to be recognized over a weighted-average period of 2.8 years. At November 3, 2007, there was $0.4 million of unrecognized share-based compensation expense related to outstanding ESPP shares that is expected to be recognized over a four-month period.

        See Note 7 "Share-Based Compensation" of the notes to the consolidated financial statements for further discussion.

Liquidity and Capital Resources

        Net cash provided by operating activities during fiscal year 2007 was $64.8 million. The increase in cash provided by operating activities for fiscal 2007 resulted from net income of $12.5 million, non-cash charges related to depreciation and amortization of $50.0 million, provision for inventory write-downs of $1.4 million, share-based compensation expense related to employee stock options and employee stock purchases under SFAS 123(R) of $5.4 million, the write-off of a long-term intellectual property asset of $0.7 million, and the loss on the sale of the Oregon real property and loss on disposal and impairment of fixed assets of $2.1 million. The increase in operating activities was offset by a decrease in working capital of $3.8 million, a gain on convertible notes exchanged of $3.0 million and a non-cash recovery for allowance for doubtful accounts of $0.4 million.

        Investing activities used net cash of approximately $57.3 million in fiscal year 2007, primarily attributable to cash used of $86.4 million to purchase available-for-sale securities and $5.9 million to purchase property and equipment to support our business. Net cash used in investing activities was partially offset by sales and maturities of available-for-sale securities of $31.1 million, proceeds from the sale of land in Oregon of $3.8 million.

        Financing activities used net cash of $72.9 million in fiscal year 2007. Net cash provided by financing activities primarily reflected $2.0 million received for the issuance of common stock relating to our employee equity plans, $44.1 million of proceeds resulting from the issuance of convertible notes and $30.0 million of proceeds resulting from the sale-leaseback transaction, offset by $3.3 million in payments made on debt and the direct lease financing.

        On February 28, 2007, we completed a sale-leaseback transaction involving our corporate headquarters located in Milpitas, California. The properties were sold to NRFC Milpitas Holdings, LLC (purchaser) for a total price of $30.0 million. Simultaneously, we agreed to lease the properties back from the purchaser for a period of 10 years, along with four, five-year renewal options upon expiration of the initial lease term. The lease was to commence on February 28, 2007 and will expire on February 28, 2017. The annual rent for the first year of the lease is approximately $2.5 million and will increase 2% for each of the following nine years until the expiration of the lease term. As part of the lease agreement, we issued a letter of credit in the amount of $5,090,400, which is used as security on the lease. The letter of credit will expire no sooner than December 31, 2010 unless, including among other conditions, we retire the 1.5% convertible subordinated notes due May 2008 (the Notes) and we do not within six months thereafter issue any new debt or equity. Under the terms of the letter of credit, the purchaser will have the right to draw down the amount of the rental obligations in the event we default on making the monthly payments. The letter of credit is collateralized by restricted cash.

        In August 2006, we implemented a plan to repatriate cash. In the first quarter of fiscal 2007, we repatriated approximately $7.1 million in unremitted foreign earnings.

        On December 20, 2006, we completed the exchange in an aggregate principal amount of $72.5 million of our 1.5% Convertible Subordinated Notes due in May 2008 for a new series of 3.5%

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Convertible Senior Subordinated Notes due in May 2010, as well as the issuance of new 3.5% Convertible Senior Subordinated Notes (the "New Notes") with an aggregate principal amount of $50.0 million. The New Notes contain provisions known as net share settlement which required that, upon conversion of the New Notes, we will pay holders in cash for up to the principal amount of the converted New Notes. Any amount in excess of this cash will be settled in shares of our common stock, or at our option, cash.

        As of November 3, 2007, we had working capital of approximately $206.8 million, including cash, cash equivalents and short-term investments of $242.1 million, and accounts receivable and inventories totaling $126.7 million. We believe that because of the relatively long manufacturing cycles of many of our testers and the new products we presently offer and plan to introduce, investments in inventories will also continue to represent a significant portion of our working capital. The semiconductor industry has historically been highly cyclical and has experienced downturns, which have had a material adverse effect on the semiconductor industry's demand for automatic test equipment, including equipment manufactured and marketed by us. In addition, the automatic test equipment industry is highly competitive and subject to rapid technological change. Events related to these factors may occur in the near term, which would cause a change to our estimate of the net realizable value of receivables, inventories or other assets, and the adequacy of accrued liabilities.

        We believe our current cash and investment positions will be sufficient to meet our anticipated business requirements for the next 12 months.

        We lease many of our facilities and equipment under operating leases that expire through 2017. The approximate future minimum lease payments at November 3, 2007 are as follows (in thousands):

	Net Estimated Future Lease Expense
2008	$	5,267
2009		4,537
2010		3,691
2011		3,339
2012		3,312
Thereafter		12,234
	$	32,380

        The following summarizes our minimum contractual cash obligations and other commitments at November 3, 2007, and the effect of such obligations in future periods (in thousands):

			Total		2008		2009		2010		2011		2012		Thereafter
Contractual Obligations:
	Facilities and equipment operating leases		$	32,380	$	5,267	$	4,537	$	3,691	$	3,339	$	3,312	$	12,234
	Convertible subordinated notes(1)			195,000		72,500		—		122,500		—		—		—
	Interest on convertible subordinated notes			11,479		4,875		4,287		2,317		—		—		—
	Open and non-cancelable purchase order commitments			38,985		36,358		2,390		223		14		—		—
		Total contractual cash and other obligations	$	277,844	$	119,000	$	11,214	$	128,731	$	3,353	$	3,312	$	12,234

(1)

This amount is recorded on the consolidated balance sheets as convertible subordinated notes.

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        Some of the components that we purchase are unique to us and must be purchased in relatively high minimum quantities with long (four and five month) lead times. These purchases can lead us to holding relatively high inventory levels and associated risks. In addition, purchase commitments for unique components are relatively inflexible in terms of deferral or cancellation. At November 3, 2007, we had open and committed non-cancelable purchase orders totaling approximately $39.0 million. The contractual cash obligations and commitments table presented above contains our minimum obligations at November 3, 2007 under these arrangements and others. Actual expenditures will vary based on the volume of transactions and length of contractual service provided. In addition to minimum spending commitments, certain of these arrangements provide for potential cancellation charges.

        As of November 3, 2007, our principal sources of liquidity consisted of approximately $179.3 million of cash and cash equivalents and short-term investments of $62.9 million.

        Off-Balance Sheet Arrangements.    As of November 3, 2007, we did not have any; (i) material off-balance-sheet arrangements; (ii) material commitments for capital expenditures; and (iii) special purpose entities.

Recent Accounting Pronouncements

        In May 2005, the FASB issued Statement of Financial Accounting Standard No. 154, "Accounting Changes and Error Corrections," (SFAS 154) effective with fiscal years beginning after December 15, 2005 and will only impact the consolidated financial statements in periods in which a change in accounting principle is made. This statement replaces APB Opinion No. 20, "Accounting Changes," and Statement of Financial Accounting Standard No. 3, "Reporting Accounting Changes in Interim Financial Statements", and changes the requirements for the accounting for and reporting of a change in accounting principle. Under this pronouncement changes are required to be retrospectively applied to prior financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Retrospective application means the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. This statement addresses restatement of previously issued financial statements to reflect the correction of an error. This statement requires that the retrospective application of a change in accounting principle be limited to the direct effects of the change. This statement also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. The adoption of SFAS 154 did not have a material effect on our consolidated financial position or results of operations.

        In November 2005, the FASB issued FASB Staff Position FAS 115-1 and 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" (FSP 115-1 and 124-1), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 and 124-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP115-1 is effective for reporting periods beginning after December 15, 2005. The adoption of FSP 115-1 and 124-1 did not have a material effect on our consolidated financial position or results of operations.

        In July 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in Income Taxes," which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim

52

periods, disclosure, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of adopting this interpretation.

        In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for the fiscal year beginning November 1, 2008. We are currently evaluating the impact of the provisions of SFAS 157 on our financial position, results of operations and cash flows and do not believe the impact of the adoption will be material.

        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 158). SFAS 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit pension and other postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. SFAS 158 is effective for fiscal years ending after December 15, 2006. The adoption of SFAS 158 had no impact on our financial position, results of operations and cash flows.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115" (SFAS 159). Under SFAS 159, a company may choose, at specified election dates, to measure eligible financial instrument and certain other items at fair value that are not otherwise required to be so measured. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. SFAS 159 is effective as of the beginning of the fiscal year beginning after November 15, 2007. We are currently evaluating the impact of SFAS 159 on our financial position, results of operations and cash flows.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

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

									Future maturities of investments held at November 3, 2007
			Balance October 31, 2006			Balance November 3, 2007
									2008			2009			2010		2011		Thereafter
Cash equivalents
	Amounts		$	95,635		$	179,264		$	179,264		$	—		$	—	$	—	$	—
	Average rate			3.62	%		4.58	%		4.58	%		—			—		—		—
Investments
	Amounts		$	7,177		$	62,869		$	60,418			2,001			—		—		—
	Average rate			5.04	%		5.27	%		5.30	%		5.38	%		—		—		—
		Total investment	$	102,812		$	242,133		$	239,682		$	2,001			—		—		—
		Average rate		3.72	%		4.76	%		4.76	%		5.38	%		—		—		—
Equity instruments			$	—		$	—		$	—			—			—		—		—

53

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

        The sensitivity analysis model used by us for interest rate exposure compares interest income on current investment interest rates versus current investment levels at current interest rates with a 10% increase. Based on this model, a 10% increase or decrease would result in an increase or a decrease in interest income of approximately $10,000. There can be no assurances that the above projected interest rate increase will materialize. Fluctuations of interest rates are beyond our control.

Foreign Exchange

        We generate a significant portion of our sales from customers located outside the United States, principally in Asia and to a lesser extent Europe. International sales are made mostly to foreign distributors and some foreign subsidiaries and are typically denominated in U.S. dollars, but occasionally are denominated in the local currency for European and Japanese customers. The subsidiaries also incur most of their expenses in the local currency. Our SZ product line is developed and manufactured in Germany and, thus, those expenses are Euro based. Accordingly, some of our foreign subsidiaries use the local currency as their functional currency. For the fiscal years ended November 3, 2007, October 31, 2006 and 2005, we recorded foreign currency losses of $1.0 million and $0.6 million and foreign currency gains of $1.6 million, respectively.

        Our international business is subject to risks typical of an international business including, but not limited to: differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other factors. We do not currently use derivatives, but will continue to assess the need for these instruments in the future.

Interest Rate Risk

        Our 1.5% Convertible Subordinated Notes with a maturity date of May 2008 bear interest at a fixed rate of 1.5%, and therefore changes in interest rates do not impact our interest expense on this debt. In addition, our 3.5% Convertible Subordinated Notes with a maturity date of May 2010 bear interest at a fixed rate of 3.5%, and therefore changes in interest rates do not impact our interest expense on this debt. We, from time to time, have outstanding short-term borrowings with variable interest rates. The total average amount of these borrowings outstanding annually has been insignificant. Therefore, we expect that a 10% change in interest rate will not have any material effect on our interest expense.

54

Item 8.    Financial Statements and Supplementary Data

        For the years ended November 3, 2007, October 31, 2006 and 2005.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	56
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting	57
Consolidated Balance Sheets—November 3, 2007 and October 31, 2006	58
Consolidated Statements of Operations—Years Ended November 3, 2007, October 31, 2006 and 2005	59
Consolidated Statements of Stockholders' Equity—Years Ended November 3, 2007, October 31, 2006 and 2005	60
Consolidated Statements of Cash Flows—Years Ended November 3, 2007, October 31, 2006 and 2005	61
Notes to Consolidated Financial Statements	62

55

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of
Credence Systems Corporation

        We have audited the accompanying consolidated balance sheets of Credence Systems Corporation and subsidiaries as of November 3, 2007 and October 31, 2006, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended November 3, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Credence Systems Corporation and subsidiaries at November 3, 2007 and October 31, 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended November 3, 2007, in conformity with U.S. generally accepted accounting principles.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Credence Systems Corporation's internal control over financial reporting as of November 3, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 15, 2008 expressed an unqualified opinion thereon.

        As discussed in Note 7 to the Notes to Consolidated Financial Statements, under the heading Stock-Based Compensation, in fiscal 2006 Credence Systems Corporation changed its method of accounting for stock based compensation.

/s/ ERNST & YOUNG LLP

San Jose, California
January 15, 2008

56

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of
Credence Systems Corporation

        We have audited Credence Systems Corporation 's internal control over financial reporting as of November 3, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Credence Systems Corporation's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.

        In our opinion, Credence Systems Corporation maintained, in all material respects, effective internal control over financial reporting as of November 3, 2007, based on the COSO criteria.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Credence Systems Corporation as of November 3, 2007 and October 31, 2006, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended November 3, 2007 of Credence Systems Corporation and our report dated January 15, 2007 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

San Jose, California
January 15, 2008

57

CREDENCE SYSTEMS CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

			November 3, 2007			October 31, 2006
ASSETS
Current assets:
	Cash and cash equivalents		$	179,264		$	95,635
	Short-term investments			62,869			7,177
	Accounts receivable, net of allowances of $883 and $1,591, respectively			64,174			114,796
	Inventories			62,506			55,200
	Income tax receivable			440			275
	Deferred income taxes			9,902			9,875
	Prepaid expenses and other current assets			16,260			14,511
		Total current assets		395,415			297,469
Property and equipment, net				75,299			87,175
Goodwill				2,606			—
Other intangible assets, net of accumulated amortization of $106,042 and $88,170, respectively				65,966			83,878
Other assets (includes $6,911 and $1,255, respectively in restricted cash)				50,026			49,072
		Total assets	$	589,312		$	517,594
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	20,365		$	32,477
	Accrued expenses and other liabilities			29,500			37,251
	Convertible subordinated notes, current portion			70,700			—
	Accrued payroll and related liabilities			16,715			17,496
	Deferred revenue			27,679			21,935
	Income tax payable			8,563			14,893
	Accrued warranty			12,384			13,514
	Deferred profit			2,703			6,143
		Total current liabilities		188,609			143,709
Convertible subordinated notes, long term portion				119,728			145,000
Long-term deferred income taxes				9,473			9,473
Long-term restructuring liabilities				1,249			2,545
Other liabilities				33,998			4,141
		Total liabilities		353,057			304,868
Commitments and contingencies (Note 5)
Stockholders' equity:
	Preferred stock, $0.001 par value; 41,304 shares authorized, zero shares issued and outstanding as of November 3, 2007 and October 31, 2006			—			—
	Common stock, $0.001 par value; 150,000 shares authorized, 101,660 and 100,610 shares issued and outstanding at November 3, 2007 and October 31, 2006, respectively			102			101
	Additional paid-in capital			1,068,710			1,061,342
Accumulated other comprehensive income				5,825			2,119
Accumulated deficit				(838,382	)		(850,836	)
	Total stockholders' equity			236,255			212,726
	Total liabilities and stockholders' equity		$	589,312		$	517,594

See accompanying notes.

58

CREDENCE SYSTEMS CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

CREDENCE SYSTEMS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

			Year Ended
			November 3, 2007			October 31, 2006			October 31, 2005
Net sales:
	Systems and upgrades		$	357,657		$	358,769		$	313,362
	Service and spare parts			103,482			134,605			133,277
		Total net sales		461,139			493,374			446,639
Cost of goods sold:
	Systems and upgrades			165,946			226,990			208,463
	Service and spare parts			77,096			82,014			81,557
		Total cost of goods sold		243,042			309,004			290,020
Gross margin				218,097			184,370			156,619
Operating expenses:
	Research and development			77,155			91,372			92,538
	Selling, general and administrative			105,478			117,596			133,166
	Amortization of purchased intangible assets & deferred compensation			17,872			17,237			23,470
	Goodwill impairment			—			423,875			—
	Restructuring charges			445			11,002			17,605
		Total operating expenses		200,950			661,082			266,779
Operating income (loss)				17,147			(476,712	)		(110,160	)
Interest income				6,981			3,744			2,777
Interest expense				(8,101	)		(2,760	)		(3,226	)
Other income and (expenses), net				(79	)		27			2,066
Income (loss) before income tax provision				15,948			(475,701	)		(108,543	)
Income tax provision				3,494			5,884			11,389
Net income (loss)			$	12,454		$	(481,585	)	$	(119,932	)
Net income (loss) per share
	Basic		$	0.12		$	(4.82	)	$	(1.28	)
	Diluted		$	0.12		$	(4.82	)	$	(1.28	)
Number of shares used in computing per share amounts
	Basic			101,085			99,981			93,864
	Diluted			101,129			99,981			93,864

See accompanying notes.

59

CREDENCE SYSTEMS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands)

	Preferred Stock					Common Stock						Treasury Stock								Accumulated Other Comprehensive Income
									Additional Paid-in Capital								Deferred Compensation						Retained Earnings (Deficit)			Total Stockholders' Equity
	Shares		Amount			Shares	Amount					Shares		Amount
Balance at October 31, 2004	12,328			12		85,413		86		1,045,665		(129	)		(2,560	)		(8,600	)		2,924			(249,319	)		788,208
Schlumberger Liability Settlement	—			—		615		1		4,999		—			—			—			—			—			5,000
Conversion of preferred stock to common stock	(12,328	)		(12	)	12,328		12		—		—			—			—			—			—			—
Issuance of common stock under employee equity plans	—			—		1,092		1		5,580		129			2,560			—			—			—			8,141
Amortization of deferred compensation	—			—		—		—		—		—			—			3,027			—			—			3,027
Write-off of deferred compensation	—			—		—		—		(1,390	)	—			—			1,390			—			—			—
Net loss	—			—		—		—		—		—			—			—			—			(119,932	)		(119,932	)
Net unrealized loss on securities, net of tax	—			—		—		—		—		—			—			—			(566	)		—			(566	)
Plus: reclassification adjustment for realized gains included in earnings	—			—		—		—		—		—			—			—			283			—			283
Currency translation adjustment, net of tax	—			—		—		—		—		—			—			—			(2,132	)		—			(2,132	)
Total comprehensive loss	—			—		—		—		—		—			—			—			—			—			(122,347	)
Balance at October 31, 2005	—			—		99,448		100		1,054,854		—			—			(4,183	)		509			(369,251	)		682,029
Issuance of common stock under employee equity plans	—			—		1,162		1		4,880		—			—			—			—			—			4,881
Share-based compensation	—			—		—		—		5,791		—			—			—			—			—			5,791
Reclassification of deferred compensation upon adoption of SFAS 123(R)	—			—		—		—		(4,183	)	—			—			4,183			—			—			—
Net loss	—			—		—		—		—		—			—			—			—			(481,585	)		(481,585	)
Net unrealized loss on securities, net of tax	—			—		—		—		—		—			—			—			(401	)		—			(401	)
Plus: reclassification adjustment for realized gains included in earnings	—			—		—		—		—		—			—			—			191			—			191
Currency translation adjustment, net of tax	—			—		—		—		—		—			—			—			1,820			—			1,820
Total comprehensive loss	—			—		—		—		—		—			—			—			—			—			(480,459	)
Balance at October 31, 2006	—			—		100,610		101		1,061,342		—			—			—			2,119			(850,836	)		212,726
Issuance of common stock under employee equity plans	—			—		1,050		1		2,033		—			—			—			—			—			2,034
Share-based compensation	—			—		—		—		5,335		—			—			—			—			—			5,335
Net income	—			—		—		—		—		—			—			—			—			12,454			12,454
Net unrealized loss on securities, net of tax	—			—		—		—		—		—			—			—			(5	)		—			(5	)
Currency translation adjustment, net of tax	—			—		—		—		—		—			—			—			3,711			—			3,711
Total comprehensive income	—			—		—		—		—		—			—			—			—			—			16,160
Balance at November 3, 2007	—		$	—		101,660	$	102	$	1,068,710		—		$	—		$	—		$	5,825		$	(838,382	)	$	236,255

See accompanying notes.

60

CREDENCE SYSTEMS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

				Year Ended
				November 3, 2007			October 31, 2006			October 31, 2005
Cash flows from operating activities:
	Net loss			$	12,454		$	(481,585	)	$	(119,932	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			50,026			52,508			68,825
		Inventory write downs and non-cash charges related to restructuring			1,438			37,944			35,481
		Adjustment (impairment) of goodwill			—			423,875			—
		(Recovery) provision for allowance for doubtful accounts			(438	)		(83	)		2,985
		Share-based compensation(1)			5,353			5,671			3,027
		Loss on disposal and impairment of long-term intellectual property asset			679			—			—
		Loss on disposal of property and equipment			2,107			44			111
		Loss on impaired investment			—			945			—
		Gain repurchases of convertible subordinated notes			(2,955	)		(2,777	)		—
		Realized net loss (gain) from investments			—			(302	)		—
Changes in operating assets and liabilities:
	Accounts receivable, net				52,472			92			4,579
	Inventories				(9,412	)		(13,757	)		14,817
	Income tax receivable and payable				(7,659	)		(4,370	)		6,466
	Prepaid expenses and other assets				(18,138	)		(8,596	)		(13,097	)
	Accounts payable				(12,411	)		(13,794	)		(5,670	)
	Accrued expenses and other current liabilities				(4,708	)		(4,801	)		1,737
	Deferred profit				(3,973	)		1,031			(4,611	)
			Net cash provided by (used in) operating activities		64,835			(7,955	)		(5,282	)
Cash flows from investing activities:
	Purchases of available-for-sale securities				(86,431	)		(31,581	)		(100,775	)
	Sales and maturities of available-for-sale securities				31,132			32,297			162,552
	Acquisition of property and equipment				(5,858	)		(5,756	)		(14,812	)
	Proceeds from sale of property and equipment and leased equipment				3,825			2,515			809
	Acquisition of business, net of cash and cash equivalents acquired				—			(4,643	)		—
			Net cash (used in) provided by investing activities		(57,332	)		(7,168	)		47,774
Cash flows from financing activities:
	Issuance of common & treasury stock				2,034			4,881			8,141
	Proceeds from issuance of convertible notes, net of issuance costs				44,129			—			—
	Proceeds from sale-leaseback				30,000			—			—
	Payments of bank loans and notes payable related to leased products				(3,313	)		(5,000	)		(1,058	)
	Repurchases of convertible subordinated notes				—			(31,850	)		—
			Net cash provided (used in) by financing activities		72,850			(31,969	)		7,083
Effects of exchange rate on cash and cash equivalents					3,276			547			(1,447	)
Net (decrease) increase in cash and cash equivalents					83,629			(46,545	)		48,128
Cash and cash equivalents at beginning of the period					95,635			142,180			94,052
Cash and cash equivalents at end of the period				$	179,264		$	95,635		$	142,180
Supplemental disclosures of cash flow information:
	Interest paid			$	4,736		$	2,913		$	3,007
	Income taxes paid (received)			$	11,347		$	10,822		$	3,992
Noncash investing activities:
	Net transfers of inventory to property and equipment			$	1,990		$	2,905		$	640
	Schlumberger's liability settlement using Credence common stock			$	—		$	—		$	5,000
	Unrealized loss on securities			$	(5	)	$	(210	)	$	(283	)

(1)

During fiscal year 2007 and 2006, the Company recorded a total of approximately $5,335,000 and $5,791,000, respectively in share-based compensation charges of which $102,000 and $120,000 was capitalized as inventory at November 3, 2007 and October 31, 2006 from SFAS No. 123(R) adoption.

See accompanying notes.

61

CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Organization and Summary of Significant Accounting Policies

Organization

        Credence Systems Corporation ("Credence" or the "Company") was incorporated under the laws of the State of California in March 1982 to succeed a sole proprietorship and was reincorporated in Delaware in October 1993. The principal business activity of the Company is the design, development, manufacture, sale and service of integrated test solutions throughout the design, validation and production processes for semiconductors.

        The Company has subsidiaries in Singapore, Taiwan, China and Japan engaged in sales, marketing and service of the Company's products and subsidiaries in Korea, Malaysia, and the Philippines engaged in service of the Company's products. The Company also has European subsidiaries, which principally distribute, service, and support Credence products in Europe and the Middle East. The Company maintains research and development in the U.S., France, Germany, and the UK, and manufacturing in the U.S. and Germany.

Basis of Presentation

        The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain prior year amounts in the consolidated financial statements and related notes have been reclassified to conform to the current year's presentation. Effective in the first quarter of fiscal 2007, the Company reclassified engineering consulting and customized services as net sales instead of as an offset to selling, general, and administrative expenses. The labor and material associated with the delivery of these services which had previously been reported as selling, general, and administrative expenses are classified as cost of goods sold. For the fiscal year ended November 3, 2007, the total amount of engineering consulting and customized services classified as net sales is $14.4 million and the related amount of cost of goods sold is $10.6 million. For comparative purposes, fiscal year ended October 31, 2006, $18.9 million has been reclassified as net sales and the related cost of goods sold of $11.9 million for the fiscal year ended October 31, 2006 has been reclassified to cost of goods sold from selling, general, and administrative expenses. For comparative purposes, for fiscal year ended October 31, 2005, $17.3 million has been reclassified as net sales and the related cost of goods sold of $11.0 million for the fiscal year ended October 31, 2005 has been reclassified to cost of goods sold from selling, general, and administrative expenses. These reclassifications had no effect on the financial position, results of operations, or cash flows for any of the periods presented.

Fiscal Year—Starting with fiscal 2007, the Company changed its fiscal year end from October 31 to a 52 or 53 week year ending on the Saturday closest to October 31. Fiscal year 2007 is a 52 week fiscal year ending on November 3, 2007 in which each fiscal quarter is a 13-week quarter. This change had no impact on the Company's results of operations, financial position, or cash flows.

Use of Estimates

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

        Actual results inevitably will differ from those estimates and such differences may be material to the financial statements. Estimates are used for, but not limited to, the accounting for revenue

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 1—Organization and Summary of Significant Accounting Policies—(Continued)

recognition, allowance for doubtful accounts, inventory valuation, depreciation and amortization, share-based compensation valuation, residual values of leased assets, product maturity and receivable collectability for purposes of revenue recognition, warranty costs, restructuring costs, asset retirement obligations, deferred taxes and contingencies.

        The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability or unwillingness of its customers to make required payments. The Company records its allowances, or bad debt expenses, as selling, general and administrative expenses. Allowances are estimated on outstanding receivable balances based on credit risk assigned to the respective customer. The credit risk categories are determined by a variety of factors including, but not limited to, current financial position and payment history of the customer. The Company will also estimate additional allowances based on percentages on certain aged receivable balances. In addition, when the Company becomes aware that a specific customer is unable to meet its financial obligations to the Company, the Company records a specific allowance to reflect the level of credit risk in the customer's outstanding receivable balance.

        Due to the cyclical nature of the semiconductor equipment industry, the Company monitors its inventory levels in light of changes in the marketplace. In fiscal years 2007 and 2006, the Company recorded inventory write-downs totaling approximately $1.4 million and $36.1 million, respectively.    The fiscal year 2007 write-down was related to the Company's Diagnostics and Characterization product line. The fiscal year 2006 inventory write-down related to decreased demand for the Company's memory and other legacy products.

        Residual values assigned to the Company's products that are leased to customers are based on their remaining useful economic life at the end of the lease terms. The amounts assigned to the residual values are evaluated periodically against technological change and the forecasted business cycle.

Revenue Recognition

        Under Securities and Exchange Commission's Staff Accounting Bulletin No. 104, "Revenue Recognition," (SAB 104), the Company recognizes revenue on the sale of semiconductor manufacturing equipment when title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is fixed or determinable, collectability is reasonably assured and customer acceptance criteria have been successfully demonstrated. Revenue recognition policies are applied consistently among the Company's semiconductor manufacturing equipment product lines. Product revenue is recognized upon shipment only when achieving the customer acceptance criteria can be demonstrated prior to shipment, which generally occurs with mature product. Revenue related to the fair value of the installation obligation is recognized upon completion of the installation. Service revenues are generally recognized upon performance of the activities requested by the customers. Products are classified as mature after several different customers have accepted similar systems. When the customer acceptance criteria cannot be demonstrated prior to shipment, revenue and the related cost of goods sold are deferred until customer acceptance. For some customers in certain countries where collections may be uncertain, the Company may require a letter of credit to be established or cash receipt in advance before revenue can be recognized. Lease revenue is recorded in accordance with Statement of Financial Accounting Standard No. 13, "Accounting for Leases," (SFAS 13), which requires that a lessor account for each lease by either the sales-type or

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CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 1—Organization and Summary of Significant Accounting Policies—(Continued)

operating method. Revenue from sales-type leases is recognized at the net present value of future lease payments. Revenue from operating leases is recognized over the lease period.

        During fiscal years 2007, 2006 and 2005, the Company introduced several new enhancements, systems and products. Certain revenue from sales of these new systems and products during fiscal years 2007, 2006 and 2005 were deferred until the revenue recognition requirements of the Company's revenue recognition policy are satisfied. This practice will continue in the future. In the past, the Company experienced significant delays in the introduction and acceptance of new testers as well as certain enhancements to the Company's existing testers. Delays in introducing a product or delays in the Company's ability to obtain customer acceptance, if they occur in the future, will delay the recognition of revenue and gross profit by the Company.

        With respect to arrangements with multiple deliverables, the Company follows the guidance in Emerging Issue Task Force No. 00-21, "Revenue Arrangements with Multiple Deliverables" (EITF 00-21), to determine whether there is more than one unit of accounting. To the extent that the deliverables are separable into multiple units of accounting, the Company then allocates the total fee on such arrangements to the individual units of accounting using the residual method. The Company then recognizes revenue for each unit of accounting depending on the nature of the deliverable(s) comprising the unit of accounting (principally following SAB 104).

        Sales in the United States are principally made through the Company's direct sales organization consisting of direct sales employees and representatives. Sales outside the United States utilize both direct sales employees and distributors. There are no significant differences in revenue recognition policies based on the sales channel, due to the business practices that have been adopted with the Company's distributor relationships. Because of these business circumstances, the Company does not use "price protection," "stock rotation" or similar programs with its distributors. In general, the Company sells products to the distributor on the basis of a purchase order received from an end customer. The Company evaluates any revenue recognition issues, in such cases, based on the characteristics of the end customer.

        The Company has embedded software in its semiconductor manufacturing equipment. The Company believes this embedded software is incidental to its products and therefore it is excluded from the scope of Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2), since the embedded software in the Company's products is not sold separately, cannot be used on another vendor's products, and the Company cannot fundamentally enhance or expand the capability of the equipment with new or revised embedded software. In addition, the equipment's principal performance characteristics are governed by digital speed and pin count, which are primarily a function of the hardware.

        Deferred revenue includes deferred revenue related to maintenance contracts (and other undelivered services) and to extended warranties where products were sold with more than the standard one-year warranty. Deferred profit is related to equipment that was shipped to certain customers, but for which the revenue and cost of goods sold are not recognized because the customer-specified acceptance criteria has not been met as of the fiscal period end or because the customer is deemed to be a high credit risk and payment has not been received as of the fiscal period end.

        The Company warrants its products to its customers generally for one year from the date of shipment. In addition to the provision of standard warranties, the Company may offer customers paid

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CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 1—Organization and Summary of Significant Accounting Policies—(Continued)

extended warranty services with a fixed fee. The fixed fees are recognized as revenue on a straight-line basis over the applicable term of the contract. Costs related to extended warranty services are recorded as incurred.

        For certain customers, typically those with whom the Company has long-term relationships, the Company may grant extended payment terms. Certain of the Company's receivables have due dates in excess of 90 days and the Company has a history of successfully collecting these extended payment term accounts receivable.

Advertising

        Advertising costs are expensed as incurred and included in selling, general and administrative expenses in the consolidated statements of operations. Advertising expenses were approximately $34,000, $128,000 and $201,000 in fiscal years 2007, 2006 and 2005, respectively.

Derivative Instruments and Hedging Activities

        The Company follows Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133), as amended by SFAS 137 and SFAS 138, which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that an entity recognize derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company does not currently use derivatives, but will continue to assess the need for these instruments in the future.

Foreign Currency Translation

        The Company's international subsidiaries operate primarily using local functional currencies. Accordingly, all assets and liabilities of these subsidiaries are translated using exchange rates in effect at the end of the period, and revenues and costs are translated using average rates for the period. The resulting cumulative translation adjustments are presented as a separate component of stockholders' equity. Realized and unrealized exchange gains or losses from transaction adjustments are reflected in operations and based on past experiences have not been material.

Guarantees

        The Company accounts for guarantees in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34" (FIN 45). Accordingly, the Company evaluates its guarantees to determine whether (a) the guarantee is specifically excluded from the scope of FIN 45, (b) the guarantee is subject to FIN 45 disclosure requirements only, but not subject to the initial recognition and measurement provisions, or (c) the guarantee is required to be recorded in the financial statements at fair value. The Company has evaluated its guarantees and has concluded that they are either not within the scope of FIN 45 or do not require recognition in the financial statements.

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CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 1—Organization and Summary of Significant Accounting Policies—(Continued)

        The Company's corporate by-laws require that the Company indemnify its officers and directors, as well as those who act as directors and officers of other entities at the Company's request, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceedings arising out of their services to the Company. In addition, the Company has entered into separate indemnification agreements with each director and each executive officer of the Company that provide for indemnification of these directors and officers under similar circumstances and under additional circumstances. The indemnification obligations are more fully described in the by-laws and the indemnification agreements. The Company purchases standard directors and officers insurance to cover claims or a portion of the claims made against its directors and officers. Since a maximum obligation is not explicitly stated in the Company's by-laws or in the indemnification agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been required to make payments related to these obligations, and the fair value for these obligations is zero on the consolidated balance sheet as of November 3, 2007.

        As is customary in the Company's industry and as provided for under local law in the United States and other jurisdictions, many of the Company's standard contracts provide remedies to customers and others with whom the Company does business, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of the Company's products. From time to time, the Company indemnifies customers, as well as the Company's suppliers, contractors, lessors under operating lease agreements for environmental matters, lessees, companies that purchase the Company's businesses or assets and others with whom the Company enters into contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale and the use of the Company's products and services such as warranty, the use of their goods and services, the use of facilities and state of the Company's owned facilities, the state of the assets and businesses that the Company sells and other matters covered by such contracts, usually up to a specified maximum amount. Based on past experience, claims made under such indemnifications are rare and the associated estimated fair value of the liability is not material.

Cash, Cash Equivalents, and Short-Term Investments

        For purposes of cash flow reporting, the Company considers all highly liquid investments with minimum yield risks and original maturity dates of three months or less to be cash equivalents. Short-term investments consist primarily of Corporate Debt and obligations of U.S. Government agencies, carried at amortized costs adjusted to fair market value.

        At November 3, 2007 and October 31, 2006, the Company classified all investments as available-for-sale and reported their fair market value. Unrealized gains or losses on available-for-sale securities, if material, are included, net of tax, in equity until disposition.

        Realized gains, losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in interest income. The Company reviews all marketable equity securities for other than temporary declines in fair value. In doing so, the Company evaluates the length of the time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the portfolio company, and its intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. The Company considers circumstances where, as of the end of any quarter, the carrying value of a marketable equity security has been greater than its

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CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 1—Organization and Summary of Significant Accounting Policies—(Continued)

market value for the last six consecutive months, to be de-facto evidence of other than temporary impairment. The Company performs its evaluation of other than temporary impairment on a quarterly basis. Based on the Company's evaluation, if a security is considered to be other than temporarily impaired, an impairment charge is recognized in "Other income and expenses, net" in the consolidated statements of operations. There was no impairment charge recorded in fiscal years 2007, 2006 and 2005. In addition, the cost of securities sold is based on the specific identification method.

        Gross unrealized gains and losses were not significant in fiscal years 2007 and 2006. The realized profits (losses) and interest of $0 million, $0.3 million and $0 million are included in interest income in the consolidated statements of operations for fiscal years 2007, 2006 and 2005, respectively. Unrealized gains and losses are reflected as a separate component of comprehensive income and are included in the consolidated statements of stockholders' equity.

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

	November 3, 2007		October 31, 2006
Money market	$	135,017	$	44,058
Cash		44,247		51,577
Cash and cash equivalents	$	179,264	$	95,635

        Short-term investments mature in one year or less while long-term investments mature in more than one year from the balance sheet date. At November 3, 2007 and October 31, 2006, these investments are classified as available-for-sale and consist of the following (in thousands):

	Amortized Cost		Unrealized Gains in Accumulated Other Comprehensive Income		Unrealized Losses in Accumulated Other Comprehensive Income			Aggregate Fair Value
	(In thousands)
November 3, 2007
Government agency securities	$	10,444	$	4	$	—		$	10,448
Corporate debt		51,952		26		(7	)		51,971
Other		450	$	—	$	—			450
Short-term investments	$	62,846	$	30	$	(7	)	$	62,869
October 31, 2006
Auction rate preferred	$	7,177	$	—	$	—		$	7,177
Short-term investments	$	7,177	$	—	$	—		$	7,177

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CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 1—Organization and Summary of Significant Accounting Policies—(Continued)

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

	For Year Ended
	November 3, 2007		October 31, 2006
Due within 1 year	$	240,133	$	100,816
Due in 2009 and 2008, respectively		2,000		1,996
Cash, cash equivalents and short-term investments	$	242,133	$	102,812

Inventories

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

	For Year Ended
	November 3, 2007		October 31, 2006
Raw materials	$	43,501	$	36,436
Work-in-process		15,837		14,097
Finished goods		3,168		4,667
	$	62,506	$	55,200

        The Company makes inventory commitments and purchase decisions based upon sales forecasts. Each year the Company forecasts an annual operating plan. The Company also has a 12-month rolling forecast that estimates business levels for the next four quarters. These forecasts require the Company to estimate its ability to sell current and future products in the next cyclical period of the industry and compare those estimates with its current inventory levels. It is difficult to predict the timing of the next recovery or recession as well as the strength of that recovery or recession. The Company sells capital equipment with relatively longer technological lives than many of the components that are included in the manufacture of its products. Some of the components that the Company purchases are unique to the Company and must be purchased in relatively high minimum quantities with long (approximately four and five month) lead times. These business circumstances can lead to the Company holding relatively high inventory levels with the associated risks. In addition, purchase commitments for unique components are relatively inflexible in terms of deferral or cancellation. This resulted in the Company entering into a variety of purchase commitments in order to mitigate component supply constraints, capture purchasing efficiencies and obtain supplies of components that are nearing end of life.

        The Company reviews excess and obsolete inventory on an annual basis in light of its three year strategic planning process and then again on a quarterly basis for significant events that might have an impact on inventories. In evaluating the need for inventory write-offs, the Company considers a number of factors including anticipated product life cycles, new product introductions, and expected future use of all raw materials, work-in-process, and finished goods on hand as well as purchase order commitments to purchase inventory. If the forecasts or estimates change, or product roadmaps change, then the Company would need to adjust its assessment of the inventory valuations. The Company

68

CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 1—Organization and Summary of Significant Accounting Policies—(Continued)

reviews inventory on a cyclical basis rather than a seasonal or annual basis because of the nature of its industry, the relatively long lives of its products and the volatility of the business from quarter to quarter. Once the Company has identified excess or obsolete inventory materials, including purchase commitments, it considers alternative future uses for the items in question. In cases where no alternative future uses have been identified, and if the Company concludes that it is probable that the costs associated with the excess or obsolete materials will not be recovered, then an appropriate write-off is recorded. The Company then writes off 100% of the cost of inventory that it specifically identifies. The Company does not as a matter of course scrap all inventory that is identified as excess or obsolete. The Company's products are capital goods with potentially long economic lives and historically the opportunity to sell these products has risen or fallen unexpectedly. The Company has occasionally encountered unexpected demand for old products. The Company monitors the inventories that have been written off or written down but not scrapped, so that if any sales of these items occur and affect the Company's reported gross margins, the effect, if material is disclosed.

        The Company consigns a portion of its finished goods inventory to both external and internal customers on a short-term basis primarily for the purpose of customer demonstration. This inventory is categorized as other assets or other long term assets on the consolidated balance sheet. The Company depreciates all consigned inventories during the period that they are held on consignment over 18 to 36 months. The depreciation expense for consigned inventory is charged to selling, general and administrative expense.

Property and Equipment, Net and Other Intangible Assets

        Machinery and equipment, software and furniture and fixtures are stated at cost and are depreciated using the straight-line method over three years. Personal computer equipment that meets the Company's capitalization threshold is depreciated using the straight-line method over two years. Leasehold improvements are depreciated using the straight-line method over the shorter of seven years or the applicable lease term. Tenant improvements in owned facilities are generally depreciated over seven years. Buildings are depreciated using the straight-line method over the assets' estimated useful lives of thirty years.

        Property and equipment, net consists of the following (in thousands):

	Year Ended
	November 3, 2007			October 31, 2006
Land	$	19,320		$	24,381
Buildings		36,298			35,876
Machinery and equipment		108,839			106,824
Software		34,059			33,731
Leasehold improvements		41,663			40,734
Furniture and fixtures		10,061			10,696
		250,240			252,242
Less accumulated depreciation		(174,941	)		(165,067	)
Net property and equipment	$	75,299		$	87,175

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CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 1—Organization and Summary of Significant Accounting Policies—(Continued)

        Depreciation expense was approximately $14.3 million, $16.0 million and $24.6 million for the years ended November 3, 2007, October 31, 2006 and 2005, respectively.

        In addition, the Company capitalizes a small number of finished systems into the manufacturing function for use in de-bug, quality control, and development as well as the sales function for use in demonstrations and application development. These items are depreciated using the straight-line method over three years.

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

November 3, 2007	Cost		Accumulated Amortization			Net
Purchased technology	$	128,441	$	(74,185	)	$	54,256
Customer relations		21,202		(13,862	)		7,340
Maintenance contracts		13,800		(9,430	)		4,370
Product backlog		4,900		(4,900	)		—
Trademarks		2,053		(2,053	)		—
Patents		862		(862	)		—
Non-compete agreements		750		(750	)		—
Total	$	172,008	$	(106,042	)	$	65,966

October 31, 2006	Cost		Accumulated Amortization			Net
Purchased technology	$	128,481	$	(60,977	)	$	67,504
Customer relations		21,202		(11,958	)		9,244
Maintenance contracts		13,800		(6,670	)		7,130
Product backlog		4,900		(4,900	)		—
Trademarks		2,053		(2,053	)		—
Patents		862		(862	)		—
Non-compete agreements		750		(750	)		—
Total	$	172,048	$	(88,170	)	$	83,878

        The company amortizes other intangibles using the straight-line method. The weighted average amortization period for purchased technology, customer relations and maintenance contracts is nine, seven and five years, respectively. The weighted average amortization period for total other intangible assets is approximately 8.6 years. Amortization expenses for the other intangible assets were $17.9 million, $17.2 million and $20.4 million for fiscal 2007, 2006 and 2005, respectively.

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CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 1—Organization and Summary of Significant Accounting Policies—(Continued)

        The estimated future amortization expense of purchased intangible assets with definite lives for the next five years is as follows (in thousands):

Fiscal Year Ending	Amount
2008	$	15,856
2009		13,503
2010		10,038
2011		8,143
2012		7,135
Thereafter		11,291
Total	$	65,966

Accounting for Asset Retirement Obligations

        In fiscal year 2004, the Company adopted Statement of Financial Accounting Standards No. 143 (SFAS 143) "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The Company has various lease properties which leasehold improvements were completed at various times. As of November 3, 2007, the Company has a balance of $1.4 million recorded in "Accrued expenses and other liabilities" in the consolidated balance sheets, to return the properties at these sites to their original condition upon lease termination.

Equity Investment

        Investments consist of an equity investment in a privately-held company that develops products that are strategic to the Company. During the first quarter of fiscal 2007, the Company entered into an agreement to terminate the equity investment relationship with the privately-held company. As part of the agreement, the Company was entitled to the intellectual property developed which it intended to further develop and incorporate into future products. Based on the expected future use of the technology, the remaining carrying value of the investment of $0.7 million was reclassified to intangible assets, and was being amortized over a five year period using the straight-line method. Subsequently, during the second quarter, the Company completed a review of planned development projects as a part of an expense rationalization process and determined that technology would not be commercialized into a product and consequently had no future use. Therefore, the Company wrote off the remaining intellectual property value in the second quarter of fiscal year 2007.

Post-Employment Benefits

        Post-employment benefits accrued for workforce reductions related to restructuring activities initiated in and after October 2004 are accounted for under Statement of Financial Accounting Standards No. 112, "Employer's Accounting for Post-employment Benefits," (SFAS 112). A liability for

71

CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 1—Organization and Summary of Significant Accounting Policies—(Continued)

post-employment benefits is recorded when payment is probable, the amount is reasonably estimable, and the obligation relates to rights that have vested or accumulated.

Other Balance Sheet Components

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

		November 3, 2007		October 31, 2006
Short-term lease receivables		$	98	$	92
Receivable from contract equipment manufacturers			2,098		2,565
Other prepaid expenses			14,064		11,854
	Total	$	16,260	$	14,511

        Other assets consist of the following (in thousands):

		November 3, 2007		October 31, 2006
Long-term lease receivables		$	193	$	314
Equipment on lease			1		185
Product spares			32,077		33,633
Product consignment			6,179		9,811
Other assets			11,576		5,129
	Total	$	50,026	$	49,072

        Product spare parts that are used in the Company's service business are classified as other assets and are depreciated using the straight-line method over five years. Amortization expense was approximately $11.1 million, $10.9 million, and $9.3 million for fiscal years 2007, 2006, and 2005 respectively.

        Product consignments to internal and external customers are classified as other assets and are depreciated using the straight-line method over 18 to 36 months. Amortization expense was approximately $4.6 million, $7.9 million, and $13.5 million for fiscal years 2007, 2006, and 2005, respectively.

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

	November 3, 2007		October 31, 2006
Accrued distributor commissions	$	2,024	$	2,724
Accrued bonuses		2,517		5,914
Accrued restructuring expenses		2,213		8,305
Accrued value added taxes		3,436		2,602
Accrued interest expense		2,464		993
Other accrued liabilities		16,846		16,713
	$	29,500	$	37,251

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CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 1—Organization and Summary of Significant Accounting Policies—(Continued)

Net Income (loss) Per Share

        Basic and diluted net income (loss) per share is based upon the weighted average number of common shares outstanding during the period. Diluted net income per share would be based upon the weighted average number of common shares and dilutive-potential common shares outstanding during the period.

        The following table sets forth the computation of basic and diluted income (loss) per share for the fiscal years ended November 3, 2007, October 31, 2006 and 2005 (in thousands, except per share amounts):

		2007		2006			2005
Numerator:
	Numerator for basic net income (loss) per share—net income (loss)	$	12,454	$	(481,585	)	$	(119,932	)
	Effect of convertible subordinated notes interest expense and amortization of origination fees		—		—			—
	Numerator for diluted net income (loss) per share—net income (loss)	$	12,454	$	(481,585	)	$	(119,932	)
Denominator:
	Basic average shares outstanding		101,085		99,981			93,864
	Effect of convertible subordinated notes		—		—			—
	Effect of dilutive options		44		—			—
	Denominator for diluted earnings per share		101,129		99,981			93,864
Basic net income (loss) per share		$	0.12	$	(4.82	)	$	(1.28	)
Diluted net income (loss) per share		$	0.12	$	(4.82	)	$	(1.28	)

        During fiscal year 2007, the Company excluded options to purchase 15,266,005 shares of common stock from the diluted income per share calculation, as their effect was anti-dilutive. During fiscal year 2006, the Company excluded options to purchase 17,091,749 shares of common stock from the diluted loss per share calculation, as their effect was anti-dilutive. During fiscal year 2005, the Company excluded options to purchase 18,158,000 shares of common stock from the diluted loss per share calculation, as their effect was anti-dilutive.

        With respect to the convertible subordinated notes issued in June 2003, during fiscal 2007, the Company excluded 6,410,256 shares issuable under the terms of the notes from the diluted income per share calculation, as their effect on an as if converted method was anti-dilutive. During fiscal year 2006, the Company excluded 12,820,513 shares from the diluted loss per share calculation, as their effect was anti-dilutive. During fiscal year 2005, the Company excluded 15,915,119 shares from the diluted loss per share calculation, as their effect was anti-dilutive.

        With respect to the convertible subordinated notes issued in December 2006, in accordance with EITF 90-19 "Convertible Bonds with Issuer Option to Settle for Cash Upon Conversion" and Statement of Financial Accounting Standard No. 128 "Earnings per Share", there were no shares included in the diluted earnings per share calculation for the fiscal year 2007. The principal portion of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 1—Organization and Summary of Significant Accounting Policies—(Continued)

the notes were excluded from the per share calculation as this portion of the obligation can only be settled in cash. There were no incremental shares under the as if converted method as the initial conversion per share price of $8.25 exceeded the Company's share price for the fiscal year ended November 3, 2007.

Recent Accounting Pronouncements

        In May 2005, the FASB issued Statement of Financial Accounting Standard No. 154, "Accounting Changes and Error Corrections," (SFAS 154) effective with fiscal years beginning after December 15, 2005 and will only impact the consolidated financial statements in periods in which a change in accounting principle is made. This statement replaces APB Opinion No. 20, "Accounting Changes," and Statement of Financial Accounting Standard No. 3, "Reporting Accounting Changes in Interim Financial Statements", and changes the requirements for the accounting for and reporting of a change in accounting principle. Under this pronouncement changes are required to be retrospectively applied to prior financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Retrospective application means the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. This statement addresses restatement of previously issued financial statements to reflect the correction of an error. This statement requires that the retrospective application of a change in accounting principle be limited to the direct effects of the change. This statement also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. The adoption of SFAS 154 did not have a material effect on its consolidated financial position or results of operations.

        In November 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position FAS 115-1 and 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" (FSP 115-1 and 124-1), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 and 124-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP115-1 is effective for reporting periods beginning after December 15, 2005. The adoption of FSP 115-1 and 124-1 did not have a material effect on the Company's consolidated financial position or results of operations.

        In July 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in Income Taxes," which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of adopting this interpretation on its financial position, results of operations and cash flows.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 1—Organization and Summary of Significant Accounting Policies—(Continued)

        In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for the fiscal year beginning November 2, 2008.. The FASB has deferred the implementation of SFAS 157 by one year for certain non-financial assets and liabilities such as this will be effective for the fiscal year beginning November 1, 2009. The Company is currently evaluating the impact of the provisions of SFAS 157 on its financial position, results of operations and cash flows and does not believe the impact of the adoption will be material.

        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 158). SFAS 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit pension and other postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. SFAS 158 is effective for fiscal years ending after December 15, 2006. The adoption of SFAS 158 had no impact on the Company's financial position, results of operations and cash flows.

        In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115" (SFAS 159). Under SFAS 159, a company may choose, at specified election dates, to measure eligible financial instrument and certain other items at fair value that are not otherwise required to be so measured. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. SFAS 159 is effective for fiscal year beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS 159 on its financial position, results of operations and cash flows and does not believe the impact of the adoption will be material.

Note 2—Acquisitions

        Hypervision, Inc.:

        In May 2006, the Company acquired Hypervision, Inc. (Hypervision). Hypervision designed, developed and manufactured system solutions, which involved emission emiscope and laser signal injection technology. The Company believes that the acquisition of Hypervision enables the Company to provide customers with various emission microscopy products, supplementing the Company's current diagnostic and characterization products. Under the term of the agreement, the Company agreed to pay Hypervision $4.7 million in cash, of which $3.2 million was paid at closing. In addition, the Company assumed approximately $1.8 million of liabilities, offset by $1.0 million in assets assumed. The Company originally retained the remaining purchase price amount of $1.5 million for possible breach of general representations and warranties and payment of $1.0 million of the retained amount was made in May 2007, and the remaining $0.5 million is due approximately two years after the closing date in the event no such breach of general representations or warranties exists. Of the $4.7 million to be paid, approximately $0.5 million was accounted for as goodwill.

        The acquisition was accounted for as a purchase transaction in accordance with Statement of Financial Accounting Standard No. 141, "Business Combinations," (SFAS 141), and accordingly, the tangible assets acquired and liabilities assumed were recorded at their estimated fair value at the date

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 2—Acquisitions—(Continued)

of the acquisition. The results of operations of Hypervision have been included in the Company's financial statements subsequent to the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition was not material.

        The Company allocated $0.5 million to goodwill, $3.7 million to purchased technology, $1.4 million to customer relations and $0.8 million to liabilities, net of liabilities assumed and assets acquired. During the third fiscal quarter of 2007, the Company recorded goodwill related to pre-acquisition tax contingencies associated with this transaction.

        The purchased technology will be amortized on a straight-line basis over a three-year period. The customer relations will be amortized on a straight-line basis over an eight-year period.

Note 3—Goodwill and Other Intangible Assets

Goodwill Impairment

        Effective November 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets," (SFAS 142), which was issued by the FASB in July 2001. Under this standard, the Company ceased amortizing goodwill effective November 1, 2002.

        SFAS 142 makes use of the concept of reporting units. All acquisitions must be assigned to a reporting unit or units. Reporting units have been defined under the standards to be the same as or one level below an operating segment, as defined in Statement of Financial Accounting Standard No. 131, "Disclosures About Segments of an Enterprise and Related Information", (SFAS 131). A reporting unit would be one level below the operating segment if a component of an operating segment is a business as described under United States Generally Accepted Accounting Principles and (1) is a separable unit that engages in business activities for which discrete financial information is available, (2) has economic characteristics different from other components of the operating segment, and (3) operating results of the component are reviewed regularly by the segment manager. The Company operates in one industry segment, advanced semiconductor test and diagnostic systems. The Company also has a single reporting unit for purposes of SFAS 142, automated test equipment (ATE), primarily because all of the Company's ATE operations are subject to similar economic characteristics. In addition, all the Company's products have common production processes, customers, and product life cycles.

        The Company tests goodwill for possible impairment on an annual basis and at any other time if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Circumstances that could trigger an impairment test include but are not limited to: a significant adverse change in the business climate or legal factors; unanticipated competition; loss of key personnel, a significant change in direction with respect to investment in a product or market segment; the likelihood that a significant portion of the business will be sold or disposed of; or the results of testing for recoverability of a significant asset group within a reporting unit determined in accordance with SFAS 142.

        The impairment test for goodwill involves a two-step process: step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to each reporting unit. If the carrying amount is in excess of the fair value, step two requires the comparison of the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 3—Goodwill and Other Intangible Assets—(Continued)

goodwill. Any excess of the carrying value of the reporting unit goodwill over the implied fair value of the reporting unit goodwill will be recorded as an impairment loss.

        The determination as to whether a write-down of goodwill is necessary involves significant judgment based on short-term and long-term projections of the Company. The assumptions supporting the estimated future cash flows of the reporting unit, including profit margins, long-term forecasts of the amounts and timing of overall market growth and the Company's percentage of that market, discount rates and terminal growth rates, reflect the Company's best estimates.

        As mandated by SFAS 142, the Company completed its annual goodwill impairment test as of July 31, 2005 during the fourth quarter of the 2005 fiscal year. The Company determined that, based on market capitalization and on the test which indicated that the sum of the expected future discounted cash flows from the assets exceeded the carrying value of those assets, the goodwill was not impaired.

        Based on a combination of factors that came into existence and were identified during the third quarter of fiscal 2006, particularly: (1) the Company's changed current and projected operating results reflecting lower demand from major customers; and (2) the Company's current market capitalization which was significantly less than its book value for the preceding 10 weeks prior to the end of the third quarter, the Company concluded there were sufficient indicators to require it to assess whether any portion of its recorded goodwill balance was impaired. The Company determined, based on its estimates of forecasted discounted cash flows and its market capitalization, that its goodwill was impaired at July 31, 2006. Further analysis indicated that the entire balance of goodwill was impaired and an impairment charge of $423.9 million was recorded in the third quarter of fiscal 2006. Other long-lived assets were assessed for impairment prior to the performance of the SFAS 142 analysis and were determined not to be impaired.

        The Company performed the first step of the interim SFAS 142 analysis, consisting of a comparison of the fair value of the reporting unit with its carrying amount, including the goodwill. The fair value was determined based on a combination of the Income Approach, which estimates the fair value based on the future discounted cash flows, and Market Approach, which estimates the fair value based on market prices of comparable companies. Under the Income Approach, the Company assumed a forecasted cash flow period of 5 years, long-term annual growth rates of 0% to 12%, a discount rate of 20% and terminal value growth rates of 5%. The Company also considered its total market capitalization as of July 31, 2006, and its average market capitalization for the quarter in order to assess volatility of its market capitalization on that day. Based on the first step analysis, the Company determined that the carrying amount was in excess of its fair value. As such, the Company was required to perform the second step analysis to determine the amount of the impairment loss. The second step analysis consisted of comparing the implied fair value of the goodwill with the carrying amount of the goodwill, with an impairment charge resulting from any excess of the carrying value of the goodwill over the implied fair value of the goodwill based on a hypothetical allocation of the estimated fair value of the Company to the Company's tangible and intangible assets (other than goodwill). Based on the second step analysis, the Company concluded that all of its recorded goodwill ($423.9 million) was impaired and as such recorded a noncash charge to continuing operations during the third quarter of fiscal year 2006.

        As mandated by SFAS 142, the Company completed its annual goodwill impairment test as of November 3, 2007 during the fourth quarter of the 2007 fiscal year. The company determined that,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 3—Goodwill and Other Intangible Assets—(Continued)

based on market capitalization and on the test which indicated that the sum of the expected discounted cash flows from the assets exceeded the carrying value of the assets, the goodwill was not impaired.

Other Acquisition-Related Intangible Assets Impairment

        As of November 1, 2002, the Company adopted Statements of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," (SFAS 144).

        Prior to assessing goodwill for impairment, the Company evaluates the carrying value of its long-lived assets, consisting primarily of its facilities, purchased intangible assets, and property and equipment, in accordance with SFAS 144, "Accounting for the Impairment or Disposal for Long-Lived Assets," whenever certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Such events or circumstances include, but are not limited to, a prolonged industry downturn, a significant decline in the Company's market value, or significant reductions in projected future cash flows. In assessing the recoverability of the Company's long-lived assets, the Company compares the carrying value to the undiscounted future cash flows the assets are expected to generate. If the total of the undiscounted future cash flows is less than the carrying amount of the assets, such assets are written down based on the excess of the carrying amount over the fair value of the assets. Fair value is generally determined by calculating the discounted future cash flows using a discount rate based upon the Company's weighted average cost of capital. Significant judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows, including profit margins, long-term forecasts of the amounts and timing of overall market growth and the Company's percentage of that market, groupings of assets, discount rates and terminal growth rates. In addition, significant estimates and assumptions are required in the determination of the fair value of the Company's tangible long-lived assets, including replacement cost, economic obsolescence, and the value that could be realized in liquidation. Changes in these estimates could have a material adverse effect on the assessment of the Company's long-lived assets, thereby requiring the Company to write down the assets. The purchased intangibles consist of purchased technology, customer relations, trademarks, patents and non-compete agreements and they typically have estimated useful lives of one to ten years.

        Based on the considerations outlined in the previous discussion on goodwill, in July 2006, the Company also concluded that sufficient indicators existed to require it to perform an analysis to assess whether a portion of its other acquisition-related intangible assets was impaired. This analysis differs from the goodwill analysis in that an impairment is only deemed to have occurred if the sum of the forecasted undiscounted future cash flows related to the asset are less than the carrying value of the intangible asset being tested for impairment. Since the forecasted cash flows exceeded the carrying value, the Company concluded that there was no impairment to its long-lived assets at October 31, 2006.

        The Company updated its analysis as of November 3, 2007 and as the forecasted undiscounted cash flows exceeded the carrying value the Company concluded that there was no impairment to its long-lived assets at November 3, 2007.

Note 4—Restructuring Charges

        During previous years, the Company has recorded restructuring charges as it rationalized operations in light of customer demand declines and economic downturns. The measures, which

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 4—Restructuring Charges—(Continued)

included reducing the workforce, consolidating facilities and changing the strategic focus of a number of sites, was largely intended to align the Company's capacity and infrastructure to anticipated customer demand and transition its operations for higher utilization of facility space. The restructuring charges include employee severance and benefit costs, and costs related to leased facilities vacated, net of estimated sublease income. Severance and benefit costs and other costs associated with restructuring activities were recorded in compliance with Statement of Financial Accounting Standard No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," (SFAS 146). During October 2004, the Company also adopted Statement of Financial Accounting Standard No. 112, "Employer's Accounting for Post Employment Benefits," (SFAS 112), for severance and benefit costs as the Company concluded that (a) the Company has a substantive post employment benefit obligation that is attributed to prior services rendered, (b) rights to those benefits have vested, and (c) payment is probable and the amount can be reasonably estimated. This accounting for restructuring costs requires the Company to record provisions and charges when it has a formal and committed restructuring plan.

        The following tables illustrate the restructuring cost activity for the year ended November 3, 2007 and the estimated timing of future payouts for the major restructuring categories (in thousands):

	Balance at October 31, 2006			Charges		Utilized		Adjustments			Balance at November 3, 2007
Severance	$	(5,029	)	$	—	$	4,479	$	(445	)	$	(995	)
Operating leases		(5,554	)		—		3,137		—			(2,417	)
Total	$	(10,583	)	$	—	$	7,616	$	(445	)	$	(3,412	)
Estimated timing of future payouts:
Fiscal year 2008											$	2,163
Fiscal year 2009												1,249
Total											$	3,412

        During the fiscal year 2007, the Company recorded the following activity related to restructuring charges:

•

The severance and other related charges amounted to $0.4 million, which accounted for adjustments to previous headcount reductions. The affected employees were across all business functions and throughout the world.

        The following table illustrates the restructuring cost activity for the year ended October 31, 2006 for the major restructuring categories (in thousands):

	Balance at October 31, 2005			Charges			Utilized		Adjustments		Balance at October 31, 2006
Severance	$	(2,892	)	$	(10,106	)	$	7,592	$	377	$	(5,029	)
Operating leases		(10,415	)		(628	)		5,258		231		(5,554	)
Other liabilities		(1,369	)		(895	)		2,245		19		—
Total	$	(14,676	)	$	(11,629	)	$	15,095	$	627	$	(10,583	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 4—Restructuring Charges—(Continued)

        During the fiscal year 2006, the Company recorded the following activity related to restructuring charges:

•

The severance and other related charges amounted to $9.7 million, which accounted for headcount reduction of approximately 270 employees. The affected employees were across all business functions and throughout the world.



•

The property and equipment write off, amounting to $0.2 million, resulted from the Company's decision to discontinue its memory product.



•

The operating lease charges of $0.4 million resulted from vacating facilities related to the memory product.



•

Other liabilities of $0.7 million which represents cancellation fees of early termination of certain outsourcing contracts related to the memory product.

        In July 2006, the Company entered into a lease buyout agreement with a landlord for a vacant San Jose building. The agreement terminated the initial lease arrangement and the Company agreed to pay $8.0 million over a three year period. A majority of the operating lease activity in the tables above is associated with this agreement.

Note 5—Commitments and Contingencies

        The Company leases many of its facilities and equipment under operating leases that expire periodically through 2017..

        The future minimum lease payments at November 3, 2007 are as follows (in thousands):

	Net Estimated Future Lease Expense
2008	$	5,267
2009		4,537
2010		3,691
2011		3,339
2012		3,312
Thereafter		12,234
	$	32,380

        Some of the components that the Company purchases are unique to the Company and must be purchased in relatively high minimum quantities with long (four and five month) lead times. These business circumstances can lead to the Company holding relatively high inventory levels and associated risks. In addition, purchase commitments for unique components are relatively inflexible in terms of deferral or cancellation. At November 3, 2007, the Company has open and committed non-cancelable purchase orders totaling approximately $39.0 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 5—Commitments and Contingencies—(Continued)

        The following summarizes the Company's minimum contractual cash obligations and other commitments at November 3, 2007, and the effect of such obligations in future periods (in thousands):

			Total		2008		2009		2010		2011		2012		Thereafter
Contractual Obligations:
	Facilities and equipment operating leases		$	32,380	$	5,267	$	4,537	$	3,691	$	3,339	$	3,312	$	12,234
	Convertible subordinated notes(1)			195,000		72,500		—		122,500		—		—		—
	Interest on convertible subordinated notes			11,479		4,875		4,287		2,317		—		—		—
	Open and non-cancelable purchase order commitments			38,985		36,358		2,390		223		14		—		—
		Total contractual cash and other obligations	$	277,844	$	119,000	$	11,214	$	128,731	$	3,353	$	3,312	$	12,234

(1)

This amount excludes the amount of unamortized discount recorded on the consolidated balance sheets as convertible subordinated notes.

        Rent expense was approximately $3.0 million, $3.3 million and $6.2 million for the years ended November 3, 2007, October 31, 2006 and 2005, respectively.

        The contractual cash obligations and commitments table presented above contains the Company's minimum obligations at November 3, 2007 under these arrangements and others. Actual expenditures will vary based on the volume of transactions and length of contractual service provided. In addition to minimum spending commitments, certain of these arrangements provide for potential cancellation charges.

        There were no material commitments for capital expenditures at November 3, 2007.

        The Company warrants its products to its customers generally for one year from the date of shipment. The Company provides reserves for the estimated costs of product warranties at the time revenue is recognized. The Company estimates the costs of warranty obligations based on historical experience of known product failure rates, use of materials to repair or replace defective products and service delivery costs incurred in correcting product failures.

        The following table represents the activity in the warranty accrual for the fiscal years ended November 3, 2007 and October 31, 2006 (in thousands):

			For the year ended
			November 3, 2007			October 31, 2006
Beginning balance			$	13,514		$	13,419
	Add: Accruals for warranties issued during the period			21,586			19,548
	Less: Adjustments of accrual estimates			2,943			(1,280	)
		Warranty spending		(25,659	)		(18,173	)
Ending balance			$	12,384		$	13,514

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 6—Convertible Subordinated Notes

Convertible Subordinated Notes due 2008

        In June 2003, the Company issued $180 million of 1.5% convertible subordinated notes (the Notes) due May 2008 in a private placement. The Notes are unsecured obligations of the Company and are subordinated to all present and future senior indebtedness of the Company. Interest is payable semiannually on May 15 and November 15. The Notes are convertible into common stock of the Company at an initial conversion price of $11.31 per share, subject to adjustment in certain dilution events. The Notes do not include a beneficial conversion feature or financial covenants. Expenses associated with the offering were capitalized upon issuance and are included in prepaid expense and other current assets and in other assets in the consolidated balance sheets. Such expenses are being amortized to interest expense over the term of the Notes. The Company continues to use the net proceeds of the offering for general corporate purposes.

        In September 2006, the Company purchased $35 million of the Notes for approximately $32 million in cash. This purchase generated a net gain of approximately $2.8 million which was recorded as other income (expenses), net on the consolidated statement of operations.

        On December 20, 2006, the Company completed the exchange of an aggregate principal amount of $72.5 million of its Notes for a new series of 3.5% Convertible Senior Subordinated Notes due in May 2010. See below under Convertible Subordinated Notes due 2010, for further discussion of the exchange.

        Interest expense associated with the Notes was $1.2 million and $2.6 million for the fiscal years ended November 3, 2007 and October 31, 2006.

        Unamortized debt issuance costs associated with the Notes were $0.3 million and $1.5 million at November 3, 2007 and October 31, 2006, respectively. Amortization of debt issuance costs are classified as other income (expense), net on the consolidated statements of operations. Amortization of prepaid loan costs were $0.5 million and $0.5 million for the fiscal years ended November 3, 2007 and October 31, 2006, respectively.

Convertible Subordinated Notes due 2010

        On December 20, 2006, the Company completed the exchange of an aggregate principal amount of $72.5 million of 1.5% Convertible Subordinated Notes due in May 2008 for a new series of 3.5% Convertible Senior Subordinated Notes (the New Notes) due in May 2010, as well as the issuance of additional New Notes with an aggregate principal amount of $50.0 million in a private placement. The New Notes are unsecured obligations of the Company and are subordinated to all present and future senior indebtedness of the Company. Interest is payable semiannually on May 15 and November 15. The New Notes were issued at an implied initial conversion price of $8.25 per share (subject to adjustment) upon occurrence of certain events specified in the indenture. The New Notes contain a provision known as net share settlement which requires that, upon conversion of the New Notes, the Company will pay holders in cash for the principal amount of the New Notes which are converted. Any amount in excess of converted principal will be settled in shares of the Company's common stock, or at its option, in cash. The New Notes do not have financial covenants.

        The New Notes can be converted under certain circumstances, including among others, (a) during any calendar quarter when the volume weighted average price per share of the Company's common stock has been more than 150% of the conversion price for a specified period ending on the last

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 6—Convertible Subordinated Notes—(Continued)

trading day of the preceding calendar quarter, (b) during the five business days when the trading price per $1,000 principal amount of the New Notes for each day within a specified period was less than 98% of the product of the volume weighted average price of the common stock for each day in that period and the applicable conversion rate per $1,000 principal amount of the New Note, (c) if the Company distributes to its stockholders, rights or warrants entitling them to purchase common stock within a specified period at a price less than the closing price of the common stock on the date of issuance, (d) if the Company distributes to its stockholders, assets or securities of the Company, which distribution has a per share value exceeding 7.5% of the volume weighted average price of the common stock on the business day preceding the declaration date for such distribution, (e) in the event a change in control or cessation of trading of the Company's stock occurs or is anticipated to occur or (f) at any time during the 60 day period prior to the maturity date. In addition, the Company has the ability to terminate the conversion feature of the New Notes in the event that the volume weighted average price per share of the Company's common stock has been more than 150% of the conversion price for a specified period. If the Company exercises its right to terminate conversion, the holders of the New Notes may convert their notes within a specified period. The foregoing description of these conversion events is not necessarily complete and reference is made to the Indenture filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on December 21, 2006.

        The Company recorded a discount of $6.1 million related to the New Notes since they were issued at a discount. This amount is being amortized to interest expense over the life of the New Notes, or sooner upon conversion. During the fiscal year ended November 3, 2007, the Company recorded related amortization expense of $1.6 million.

        Interest expense associated with the New Notes was $3.7 million for the fiscal year ended November 3, 2007.

        Expenses of $3.4 million associated with the New Notes offering were capitalized upon issuance and are included in prepaid expenses and other current assets and in other assets in the consolidated balance sheets. Such expenses are being amortized to interest expenses over the term of the New Notes. Unamortized debt issuance costs associated with the New Notes were $2.5 million at November 3, 2007. Amortization of debt issuance costs are classified as other income (expense), net on the consolidated statements of operations. Amortization of debt issuance costs was $0.9 million for the fiscal year ended November 3, 2007.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 6—Convertible Subordinated Notes—(Continued)

        Subordinated Convertible Notes consists of the following (in thousands):

			For the year ended
			November 3, 2007			October 31, 2006
Current convertible subordinated notes
	1.5% convertible subordinated notes due May 2008		$	72,500		$	—
	Discount on 3.5% convertible senior subordinated notes due May 2010, current portion			(1,800	)		—
		Net current convertible subordinated notes		70,700			—
Long term convertible subordinated notes
	1.5% convertible subordinated notes due May 2008		$	—		$	145,000
	3.5% convertible senior subordinated notes due May 2010			122,500			—
	Discount on 3.5% convertible senior subordinated notes due May 2010, long term portion			(2,772	)		—
		Net long term convertible subordinated notes		119,728			—
Net convertible subordinated notes			$	190,428		$	145,000

Note 7—Share-Based Compensation

Stock Option Plans

        The Company has a share-based compensation program that provides its Board of Directors broad discretion in creating employee equity incentives. This program includes incentive and non-statutory stock options, restricted stock units and other types of equity granted under various plans, the majority of which are stockholder approved. Stock options are generally time-based, vesting over a four-year period with 12.5% of the granted shares vesting six months after the grant date, and the remaining shares vesting at the rate of 6.25% each quarter thereafter for the following 14 quarters over four years and expire seven to ten years from the grant date. Additionally, the Company has an Employee Stock Purchase Plan (ESPP) that allows employees to purchase shares of common stock at 85% of the fair market value at the lower of either the date of enrollment or the date of purchase. Shares issued as a result of stock option exercises and the Company's ESPP are generally from the Company's new shares. As of November 3, 2007, the Company had approximately 2.3 million shares of common stock reserved for future issuance under the stock option plans and ESPP.

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

        In fiscal year 2005, the Company's Board of Directors and stockholders approved the 2005 Stock Incentive Plan (the "2005 Plan") which provides for the grant of options to purchase shares of the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 7—Share-Based Compensation—(Continued)

Company's common stock, stock appreciation rights and restricted stock to employees, members of the Board of Directors and consultants. The maximum number of shares available for grant under the 2005 Plan is 5.9 million shares.

        During fiscal year 2005, the 1993 Stock Option Plan (the "1993 Plan"), under which the Company previously granted options to employees and members of the Board of Directors, expired. However, outstanding options granted under the 1993 Plan remains exercisable in accordance with the terms of the original grant agreements.

        In August 2005, the Company's Board of Directors approved the accelerated vesting of certain unvested and "out-of-the-money" non-qualified stock options previously awarded to employees and officers with option exercise prices equal to or greater than $9.15. Options held by non-employee directors are excluded from the vesting acceleration. In addition, in order to prevent executive officers from unintended personal benefits, the Company's executive officers have agreed to the imposition of restrictions on any shares received through the exercise of accelerated options. Those restrictions will prevent the sale of any shares received from the exercise of an accelerated option until the earlier of the original vesting date of the option or the executive officer's termination of employment. The $9.15 price was selected because it was higher than the closing price of the Company's common stock of $8.84 on August 29, 2005, the date of this acceleration. The accelerated options represent approximately 15 percent or approximately 2.8 million shares of the total of all outstanding Credence options on August 29, 2005. The acceleration was intended to reduce the stock option expense the Company would be required to record after the adoption of Statement of Financial Accounting Standard No. 123(R)—"Share-Based Payment" (SFAS 123(R)). This acceleration reduced approximately $10.0 million of stock option expenses under SFAS 123(R) which would have been recognized as an expense through December 2008.

        On November 1, 2005, the Company adopted Statement of SFAS 123(R) for its share-based compensation plans. Under SFAS 123(R), the Company is required to recognize share-based compensation costs based on the estimated fair value at the grant date for its share-based awards. In accordance with this standard, the Company has elected to recognize the compensation cost of all share-based awards that ultimately vest on a straight-line basis over the vesting period of the award.

        On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3 "Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards." The Company has elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects of share-based compensation pursuant to SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool ("APIC pool") related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows of the tax effects of employee share-based compensation awards that are outstanding upon adoption of SFAS 123(R).

        The Company previously accounted for its employee stock option and ESPP under the recognition and measurement principles of Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related Interpretations, and adopted the disclosure-only provisions of Statement of Financial Accounting Standard No. 123, "Accounting for Share-Based Compensation," (SFAS 123), as amended by Statement of Financial Accounting Standard No. 148, "Accounting for Share-Based Compensation—Transition and Disclosures," (SFAS 148). As the ESPP was not compensatory under APB 25, no compensation expense was recorded in earnings for the awards

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 7—Share-Based Compensation—(Continued)

granted under the ESPP. Compensation expense was recorded in earnings for the Company's stock options if they were awarded with an exercise price less than the market price of the Company's stock on the date of grant. The pro forma effects on net loss and net loss per share for stock options and ESPP awards were instead disclosed in a footnote to the consolidated financial statements.

        The Company has elected to use the modified prospective transition method as permitted by SFAS 123(R) and therefore has not restated its financial results for prior periods. Under this transition method, in fiscal year 2006, the compensation cost recognized included the cost for all share-based compensation awards granted prior to, but not yet vested as of November 1, 2005, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123 and the grant date fair value estimated in accordance with the provisions of SFAS 123(R) for awards granted or modified on or after November 1, 2005 whose requisite service period was rendered during fiscal year 2006. The Company determines the fair value of stock options using the single option approach under SFAS 123(R). Prior to the adoption of SFAS 123(R), the Company determined the fair value of stock options using the multiple option approach. In conjunction with the adoption of SFAS 123(R), the Company changed its method of attributing the value of share-based compensation to expense from the accelerated multiple-option approach to the straight-line single option approach for awards granted or modified on or after November 1, 2005. Compensation expense for all share-based payment awards granted prior to November 1, 2005 will continue to be recognized using the accelerated multiple-option approach.

        In calculating the compensation cost, the Company estimates the fair value of each option grant on the date of grant using the Black-Scholes-Merton options pricing model. The Black-Scholes-Merton option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, the Black-Scholes-Merton model requires the input of highly subjective assumptions including the expected stock price volatility and expected term.

        In April, July and August 2007, the Company's Board of Directors approved inducement stock option grants to certain officers of the Company which were made outside of any current Company plan. The Company elected to make inducement option grants to induce and attract higher qualified candidates to accept employment with the Company and to fill open officer positions. These inducement option grants were valued under SFAS 123(R) using the same assumptions and methodology that the Company used for its employee option grants from the Company plan. As of November 3, 2007, there were 780,000 shares issued under these awards.

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CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 7—Share-Based Compensation—(Continued)

        The following table illustrates the share-based compensation expense resulting from stock options and ESPP included in the consolidated statement of operations for the fiscal years ended November 3, 2007 and October 31, 2006 (in thousands):

	For the year ended
	November 3, 2007		October 31, 2006
Cost of goods sold	$	758	$	703
Research and development		1,304		1,932
Selling, general and administrative		3,291		3,036
Share-based compensation expense before income taxes benefit	$	5,353	$	5,671
Income tax benefit		—		—
Share-based compensation expense after income taxes benefit	$	5,353	$	5,671

        At November 3, 2007 and October 31, 2006, the Company capitalized $0.1million and $0.1 million, respectively of share-based compensation expense as inventory; therefore, excluded in the cost of goods sold amount above.

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CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 7—Share-Based Compensation—(Continued)

        The following is a summary of activity under stock option plans at November 3, 2007 (in thousands, except per share and years):

	Options Available for Grant (In thousands)		Number of Options Outstanding (In thousands)		Weighted Average Exercise Price per share		Aggregate Intrinsic Value (In thousands)		Weighted Average Remaining Contractual Life (In years)
Balance at October 31, 2004	1,370		18,745		$	13.56
Increase in authorized shares	8,885		—			—
Options granted	(2,603	)	2,603			8.91
Options canceled	2,153		(2,153	)		15.38
Options forfeited/expired	(3,714	)	(491	)		—
Options exercised	—		(546	)		7.27
Balance at October 31, 2005	6,091		18,158		$	12.87
Options granted	(2,352	)	2,301			6.48
Options canceled	32		(32	)		11.35
Options forfeited/expired	654		(3,028	)		—
Options exercised	—		(307	)		6.63
Balance at October 31, 2006	4,425		17,092		$	12.48
Options granted	(3,673	)	4,250			2.26
Options canceled	1,287		(1,302	)		6.95
Options forfeited/expired	—		(4,718	)		—
Options exercised	—		(56	)		2.02
Balance at November 3, 2007	2,039		15,266		$	11.00	$	22,747	4.72
Vested or expected to vest at November 3, 2007			10,526		$	13.44	$	6,319	4.20
Exercisable at November 3, 2007			10,476		$	13.44	$	6,253	4.20

        Restricted stock units are granted from the pool of shares available for grant. The Company's plan requires that every share of restricted stock unit issued will be counted against the plan limit as 1.4 shares in the above table.

        The weighted-average grant date fair value per options granted during the fiscal year 2007, 2006 and 2005 was $2.26, $3.25 and $5.63, respectively. The total intrinsic value of options exercised during the fiscal year 2007, 2006 and 2005 was $0.02 million, $0.5 million and $1.1 million, respectively. Cash proceeds from the exercise of stock options were $0.04 million, $2.1 million and $4.0 million for the fiscal year 2007, 2006 and 2005, respectively. No income tax benefit was realized from the stock option exercises during the fiscal years 2007, 2006 and 2005. Share-based compensation expense related to stock options recognized under SFAS 123(R) for the fiscal year 2007 and 2006 was $4.0 million and $4.1 million, respectively. The Company generally settles employee stock option exercises with newly issued common shares. At November 3, 2007, there was $13.4 million of unrecognized share-based compensation expense related to non-vested options and is expected to be recognized over a weighted-average period of 2.8 years. At November 3, 2007, there were 15.3 million options outstanding with exercise prices ranging between $0.00 and $67.99.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 7—Share-Based Compensation—(Continued)

        The fair value of option grants was estimated by using the Black-Scholes-Merton model with the following weighted-average assumptions for the fiscal year 2007, 2006 and 2005, respectively:

	2007		2006		2005
Expected volatility	64	%	54	%	73	%
Dividend yield	—		—		—
Risk-free interest rate	3.93	%	4.78	%	3.55	%
Expected term (in years)	4.75		4.0		5.2

        Expected Volatility:    The Company's computation of expected volatility for the fiscal year 2007 is based on a combination of implied volatilities from traded options on the Company's stock and historical volatility. Prior to fiscal year 2006, the Company had used its historical stock price volatility in accordance with SFAS 123 for purposes of its pro forma information. The selection of a combination of the implied and historical volatility approach was based upon the availability of actively traded options on the Company's stock and the Company's assessment that this combination is more representative of future stock price trends than historical volatility alone.

        Dividend Yield:    The dividend yield assumption is based on the Company's history and expectation of dividend payouts.

        Risk-Free Interest Rate:    The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of grant for the expected term of the option.

        Expected Term:    The Company's expected term represents the period that the Company's share-based awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the share-based awards, vesting schedules and expectations of future employee behavior.

        Forfeitures Rate:    Compensation expense recognized in the consolidated statement of operations for the fiscal year 2007 is based on awards ultimately expected to vest and it reflects estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Prior to adoption of SFAS 123(R), the Company accounted for forfeitures as they occurred.

Employee Stock Purchase Plan (ESPP)

        In 1994, the Company adopted the 1994 Employee Stock Purchase Plan (the "1994 Plan"), which provides direct employees, employed with the Company for at least thirty consecutive days as of the entry date into any offering period, with the opportunity to acquire shares of the Company's common stock. Employees may contribute up to 10% of their base salary to the plan. The Company has a one-year rolling plan with two six-month purchases within the offering period. The purchase price is 85% of the fair market value per share of common stock at the beginning of the offering period or the end of the purchase period, whichever is lower. If the fair market value per share is lower on the purchase date than the beginning of the offering period, the current offering period will terminate and a new one-year offering period will commence. The plan restricts the maximum number of shares that an employee can purchase to 1,500 shares each semi-annual period and to $25,000 worth of common

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 7—Share-Based Compensation—(Continued)

stock each year. At November 3, 2007, there were 309,132 shares reserved for issuance under the 1994 Plan.

        The fair value of issuances under the 1994 Plan is estimated on the issuance date by applying the principles of FASB Technical Bulletin 97-1 (FTB 97-1), "Accounting under Statement 123 for Certain Employee Stock Purchase Plan with a Look Back Option" and using the Black-Scholes-Merton options pricing model. During the fiscal years 2007, 2006 and 2005, the Company issued 994,193 shares, 855,396 shares and 676,923 shares, respectively, under the 1994 Plan. Total cash received for the issuance of shares under the employee stock purchase plan was approximately $2.0 million, $2.8 million and $4.1 million during the fiscal years 2007, 2006 and 2005, respectively. Share-based compensation expense related to the 1994 Plan recognized under SFAS 123(R) in fiscal year 2007 and 2006 was $1.2 million and $1.6 million, respectively. At November 3, 2007, there was $0.4 million of unrecognized share-based compensation expense related to outstanding ESPP shares and is expected to be recognized over a four month period.

        The fair value of awards granted under the 1994 Plan share-based compensation was estimated by using the Black-Scholes-Merton model with the following weighted-average assumptions for the fiscal years 2007, 2006 and 2005, respectively:

	2007		2006		2005
Expected volatility	62	%	57	%	57	%
Dividend yield	—		—		—
Risk-free interest rate	3.88	%	4.95	%	2.71	%
Expected term (in years)	0.5		0.5		0.5

        Prior to fiscal year 2006, the Company accounted for its employee stock option and employee stock purchase plans under the intrinsic value recognition and measurement principles of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related Interpretations, and had adopted the disclosure-only provisions of Statement of Financial Accounting Standard No. 123, "Accounting for Share-Based Compensation," (SFAS 123), as amended by Statement of Financial Accounting Standard No. 148, "Accounting for Share-Based Compensation—Transition and Disclosures," (SFAS 148). As the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense was recognized in the Company's financial statements.

        In calculating pro forma compensation, the fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton options pricing model. The Black-Scholes-Merton option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, the Black-Scholes-Merton model requires the input of highly subjective assumptions including the expected stock price volatility. As the Company's share-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of its share-based awards to its employees. Share-based employee compensation expense already included in the reported net loss is a result of amortization of deferred compensation related to acquisitions.

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CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 7—Share-Based Compensation—(Continued)

        Had the Company determined share-based compensation costs based on the estimated fair value at the grant date for its stock options and the estimated fair value at the issuance date for its Employee Stock Purchase Plan, the Company's net loss and net loss per share for the fiscal year ended October 31, 2005 would have been as follows (in thousands, except per share data):

	2005
Net loss as reported	$	(119,932	)
Add: Share-based employee compensation expense included in reported net loss		3,027
Less: Share-based employee compensation expense determined under fair value based methods for all awards		(34,685	)
Pro forma net loss	$	(151,590	)
Basic net loss per share as reported	$	(1.28	)
Basic net loss per share pro forma	$	(1.61	)
Diluted net loss per share as reported	$	(1.28	)
Diluted net loss per share pro forma	$	(1.61	)

Deferred Compensation

        Deferred compensation generally results when the Company, during an acquisition, assumes the obligation of stock option grants made by the acquired company. Deferred compensation is amortized as compensation cost over the weighted average remaining future vesting period of unvested options related to the options assumed. The balance for the deferred compensation is reflected as a contra-equity in the consolidated statements of shareholders' equity.

        During the fiscal year ended October 31, 2005, the Company recognized expense related to the deferred compensation of $3.0 million.

        Upon adopting SFAS 123(R), deferred compensation balance of $4.2 million was charged to additional paid-in capital and amortization ceased.

Note 8—Employee Benefit Plans

        The Company maintains a 401(k) retirement savings plan for its full-time domestic employees, which allows them to contribute up to 20% of their pre-tax wages subject to IRS limits. The Company contributed to this plan during the fiscal years ended November 3, 2007, October 31, 2006 and 2005, $1.5 million, $1.8 million and $1.8 million, respectively.

        Outside of the U.S., the Company also assumed several defined benefit and defined contribution plans that cover substantially all employees. Where applicable, employees are covered by statutory plans. For defined benefit plans, charges to expense are based upon costs computed by independent actuaries. At November 3, 2007 and October 31, 2006, the pension liability was $1.2 million and $1.0 million, respectively. The expenses associated with these plans were not material during fiscal years 2007, 2006 and 2005, respectively.

        The Company has a deferred compensation for certain employees (a "Rabbi Trust" or "trust"). The assets in the Rabbi Trust, consisting of cash equivalents and debt and equity securities, are recorded at current market prices. The trust assets are available to satisfy claims of the Company's

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 8—Employee Benefit Plans—(Continued)

general creditors in the event of its bankruptcy. The trust's assets, included in other assets, and the corresponding deferred compensation liability, included in other liabilities were approximately $1.7 million and $1.9 million at November 3, 2007 and October 31, 2006, respectively.

Note 9—Income Taxes

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

		Year Ended
		November 3, 2007			October 31, 2006			October 31, 2005
Federal:
	Current	$	786		$	—		$	(180	)
	Deferred		—			—			—
			786			—			(180	)
State:
	Current		(2,198	)		391			315
	Deferred		—			—			—
			(2,198	)		391			315
Foreign:
	Current		4,933			5,895			11,254
	Deferred		(27	)		(402	)		—
Income tax provision		$	3,494		$	5,884		$	11,389

        Pre-tax income from foreign operations was approximately $8.7 million, $37.5 million and $44.0 million in fiscal years 2007, 2006 and 2005, respectively.

        In the first quarter of fiscal year 2007, the Company repatriated $7.1 million in foreign earnings that did not result in any additional taxes.

        Cumulative unremitted foreign earnings that are considered to be permanently invested outside the U. S. and on which no U.S. taxes have been provided, are approximately $39.1 million as of November 3, 2007. Due to net operating loss and credit carryforwards, the residual U.S. tax liability, if such amounts were remitted, would be nominal.

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CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 9—Income Taxes—(Continued)

        Reconciliation between the Company's effective tax rate of 21.91% in fiscal year 2007, (1.24%) in fiscal year 2006, and 10.5% in fiscal year 2005 and the U.S. statutory rate of 35% is as follows (in thousands):

	Year Ended
	November 3, 2007			October 31, 2006			October 31, 2005
Tax computed at statutory rate	$	5,582		$	(166,496	)	$	(37,990	)
State income tax		(2,198	)		391			315
U.S. losses not benefited		(2,604	)		15,747			53,380
Foreign rate differential		1,573			(7,630	)		(4,136	)
Goodwill impairment		—			148,356			—
Repatriation		—			14,904			—
Accrued interest		786
Other individually immaterial items		355			612			(180	)
Income tax provision	$	3,494		$	5,884		$	11,389

        The income tax provision in fiscal years 2007, 2006 and 2005 consists primarily of foreign tax on earnings and foreign withholding taxes generated from the Company's operations and interest on tax contingencies offset by a benefit from the release of a contingency resulting from the closing of a statute of limitation.

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

		For the year ended
		November 3, 2007			October 31, 2006
Deferred tax assets:
Inventory reserves not currently deductible		$	41,139		$	46,102
Allowance for doubtful accounts			233			524
Accruals not currently deductible			24,227			25,620
Net operating loss and credit carryforwards			204,199			187,614
Book over tax depreciation			—			3,251
Deferred revenue/profit/commissions			4,783			3,369
Foreign deferred			429			402
	Total deferred tax assets		275,010			266,882
Valuation allowance for deferred tax assets			(224,320	)		(238,698	)
			50,690			28,184
Deferred tax liability:
Tax over book depreciation			(22,927	)		—
Intangibles			(27,087	)		(27,432	)
Prepaid expense			(247	)		(350	)
	Total deferred tax liabilities		(50,261	)		(27,782	)
	Net deferred tax assets	$	429		$	402

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CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 9—Income Taxes—(Continued)

        At November 3, 2007, the Company had unused net operating loss and research tax credit carryforwards for federal income tax purposes of approximately $456.8 million and $10.6 million, respectively, which if not utilized will expire in 2018 through 2027. At November 3, 2007, the Company had unused net operating loss and tax credit carryforwards for state income tax purposes of approximately $103.7 million and $16.3 million, respectively, with varying expiration dates beginning in 2008. At November 3, 2007, the Company also had unused foreign tax credit of $8.3 million primarily related to the prior year Singapore repatriation, which expires in 2016. Utilization of the Company's net operating loss and tax credit carryforwards will be subject to annual limitations due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitations may result in expiration of net operating loss and tax credit carryforwards before full utilization.

        Realization of the net deferred tax assets is dependent on the Company generating sufficient taxable income in future years in appropriate tax jurisdictions to obtain reversals of temporary differences, net operating loss and tax credit carryforwards. Due to uncertainties in the timing and amount of such realization of its deferred tax assets, the Company has provided a valuation allowance equal to its domestic net deferred tax assets at November 3, 2007 and October 31, 2006. The Company had a net decrease in the valuation allowance of $14.4 million in fiscal year 2007 due primarily to the current year change in inventories, net operating loss carryforwards, and fixed assets; increase of $28.6 million in fiscal year 2006 due primarily to the increase in net operating loss and tax credit carryforwards; and an increase of $57.1 million in fiscal year 2005 due to current year change of non-deductible accruals, reserves and increase of net operating loss. Approximately $10.0 million in the valuation allowance for deferred tax assets is related to the acquisition of NPTest during fiscal year 2004, the benefit of which will be credited to goodwill when realized.

Note 10—Sale-Leaseback

        On February 28, 2007, the Company completed a sale-leaseback transaction involving the Company's corporate headquarters located in Milpitas, California. The properties were sold to NRFC Milpitas Holdings, LLC (purchaser), an unrelated third party, for a total price of $30.0 million. Simultaneously, the Company agreed to lease the properties back from the purchaser for a period of 10 years, along with four, five-year renewal options upon expiration of the initial lease term. The initial lease commenced on February 28, 2007, and will expire on February 28, 2017. The annual rent for the first year of the lease is approximately $2.5 million and will increase 2% for each of the following nine years until the expiration of the initial lease term. As part of the lease agreement, the Company issued a letter of credit in the amount of $5.1 million, which is used as security on the lease. The letter of credit will expire no sooner than December 31, 2010 unless, including among other conditions, the Company retires the 1.5% convertible subordinated notes (the Notes) due May 2008 and does not within six months thereafter issue any new debt or equity. Under the terms of the letter of credit, the purchaser will have the right to draw down the amount of the rental obligations in the event the Company defaults on the terms of the lease including making the monthly payments. The letter of credit is collateralized by restricted cash which is reflected in the other assets section of the consolidated balance sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 10—Sale-Leaseback—(Continued)

        Due to the letter of credit being collateralized by restricted cash, the Company is accounting for this transaction as a direct financing under SFAS 98. Accordingly, the Company recorded the proceeds on its books as long-term liabilities, and the Company is expensing periodic lease payments as interest expense. The sale will not be recorded until the letter of credit expires or is otherwise terminated and all of the criteria are met.

Note 11—Legal Matters

        The Company is involved in various claims arising in the ordinary course of business. While management currently believes that the chances these claims against the Company, individually or in aggregate, will have a material adverse impact on its financial position, results of operations or statement of cash flows is remote, these matters are subject to inherent uncertainties and management's view of these matters may change in the future. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on the Company's financial position, results of operations or statement of cash flows.

Note 12—Accumulated Other Comprehensive Income

        The Company's accumulated other comprehensive income consists of the accumulated net unrealized gains or losses on available-for-sale investments and foreign currency translation adjustments. At November 3, 2007 and October 31, 2006, the Company had a balance of net unrealized losses of $23,000 and $18,000, respectively, on available-for-sale investments. Additionally, at November 3, 2007 and October 31, 2006, the Company had a balance of $5.8 million and $2.1 million, respectively, of net foreign currency translation gains.

        Accumulated other comprehensive income and changes thereto consist of (in thousands):

	Year Ended
	November 3, 2007			October 31, 2006			October 31, 2005
Beginning balance, net of tax	$	2,119		$	509		$	2,924
Unrealized loss on available-for-sale securities, net of tax		(5	)		(210	)		(283	)
Currency translation adjustment, net of tax		3,711			1,820			(2,132	)
Ending balance, net of tax	$	5,825		$	2,119		$	509

Note 13—Industry Segments and Concentration of Risks

Credit Risk, Product Line and Segment/Geographic Data

        Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments in cash equivalents, short-term investments and trade receivables. Credit risk evaluations, including Dun & Bradstreet ratings, are performed on all new customers, and subsequent to credit application approval, the Company monitors its customers' financial statements and payment performance. The Company is exposed to credit risks in the event of default by the financial institutions or customers to the extent of the amounts recorded on the consolidated balance sheets. In

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CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 13—Industry Segments and Concentration of Risks—(Continued)

general, the Company does not require collateral on sales except in certain circumstances where a letter of credit is required to be established prior to shipping product.

        Operating segments are business units that have separate financial information and are separately reviewed by the Company's chief decision makers. The Company's chief decision makers are the Chief Executive Officer and Chief Financial Officer. The Company and its subsidiaries currently operate in a single operating segment: the design, development, manufacture, sale and service of advanced semiconductor test and diagnostic systems used in the production of semiconductors. All of the Company's advanced semiconductor test and diagnostic systems operations are subject to similar economic characteristics, have similar production processes, have common customers, and are distributed using the same channels.

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

		Year Ended
		November 3, 2007		October 31, 2006		October 31, 2005
SoC		41	%	34	%	36	%
Analog Mixed Signal		28		29		21
Memory		1		2		3
Design Characterization Group		8		8		10
Service		22		27		30
	Total net sales	100	%	100	%	100	%

        Most of the Company's products are manufactured in the U.S. Export sales from the U.S. are primarily denominated in U.S. dollars but occasionally denominated in Japanese Yen or in the Euro. The Automotive product line is manufactured in Germany and these sales are denominated in U.S. dollars, Japanese Yen and the Euro. All of the Company's products are shipped to the Company's customers throughout North America, Asia Pacific, Europe, and the Middle East. The Company reports revenue net of sales taxes, use taxes and value-added taxes directly imposed by governmental authorities on the Company's revenue producing transactions with its customers. Sales by the Company to customers in different geographic areas, expressed as a percentage of revenue, for the periods ended were:

		Year Ended
		November 3, 2007		October 31, 2006		October 31, 2005
North America		29	%	31	%	31	%
Taiwan		16		11		11
China		5		6		5
Southeast Asia		26		28		19
Rest of Asia Pacific		5		5		11
Europe & Middle East		19		19		23
	Total net sales	100	%	100	%	100	%

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CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 13—Industry Segments and Concentration of Risks—(Continued)

        A distributor in Taiwan, Spirox Corporation, accounted for approximately 16%, 13% and 13% of the Company's net sales in fiscal years 2007, 2006 and 2005, respectively. Spirox Corporation accounted for 29% and 12% of gross accounts receivable at November 3, 2007 and October 31, 2006, respectively.

        In fiscal year 2007, two end-user customers headquartered in the U.S. accounted for 27% and 16% of the Company's net sales, respectively, and 7% and 17% of the Company's gross receivables, respectively.

        In fiscal year 2006, two end-user customers headquartered in the U.S. accounted for 23% and 15% of the Company's net sales, respectively, and 36% and 10% of the Company's gross receivables, respectively.

        In fiscal year 2005, two end-user customers headquartered in the U.S. accounted for 25% and 14% of the Company's net sales, respectively.

        This concentration subjects a significant portion of the Company's receivables and future revenues to the risks associated with doing business in foreign countries, including political and economic instability, currency exchange rate fluctuations and regulatory changes.

        As of November 3, 2007 and October 31, 2006, the majority of the Company's long-lived assets were attributable to its U.S. operations.

Note 14—Related Party Transactions

        Richard Beyer, a director of the Company since September 2003, is President, Chief Executive Officer and a Director of Intersil. For the fiscal years ended November 3, 2007, October 31, 2006 and 2005, the Company sold approximately $8,300, $6,900 and $4,100 of products and services to Intersil, respectively. There were no receivable balances from Intersil at November 3, 2007 and October 31, 2006.

        Dr. William G. Howard Jr., a director of the Company until March 2007, is a director of Xilinx, Inc. (Xilinx). For the fiscal years ended November 3, 2007, October 31, 2006 and 2005, the Company sold approximately $4,000, $0.7 million and $0.6 million, respectively, of products and services to Xilinx. For the years ended November 3, 2007, October 31, 2006 and 2005, the Company purchased goods and services of approximately $0, $3,000 and $0, respectively, from Xilinx. The Company had no amounts owed from or to Xilinx at November 3, 2007 and October 31, 2006.

        Dipanjan Deb, a director of the Company until March 2006, is a Director of AMI Semiconductor (AMIS Holdings, Inc.). For the fiscal years ended October 31, 2006 and 2005, the Company sold approximately $1.4 million and $3.5 million of product and services to AMI Semiconductor, respectively. The amounts of receivables from AMI Semiconductor were approximately $212,000 at October 31, 2006.

Note 15—Subsequent Event

        In January 2008, the Company announced its plans to divest or otherwise reduce its commitment to business and products that are unrelated to its consumer semiconductor market focus, scale down its service infrastructure, and continue with outsourced manufacturing activities. The Company anticipates that these initiatives will result in a net worldwide headcount reduction of 400 people by the end of fiscal 2008. These actions will result in restructuring charges during the first fiscal quarter of 2008.

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CREDENCE SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 15—Subsequent Event—(Continued)

        In January 2008, the Company completed the sale of their facilities in Hillsboro, Oregon. The sales price for the property was $20.0 million. As part of the agreement, the Company entered into an agreement to lease back the property for a two-year period, with renewal options. This sale will result in a charge during the first fiscal quarter of 2008.

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

        Not applicable.

Item 9A.    Controls and Procedures

        Attached as exhibits to this Form 10-K are certifications of Credence's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act). This "Controls and Procedures" section includes information concerning the controls and controls evaluation referred to in the certifications. Part II, Item 8 of this Form 10-K sets forth the report of Ernst & Young LLP, our independent registered public accounting firm, regarding its audit of Credence's internal control over financial reporting and of management's assessment of internal control over financial reporting set forth below in this section. This section should be read in conjunction with the certifications and the Ernst & Young LLP report for a more complete understanding of the topics presented.

        Evaluation of Disclosure Controls and Procedures.    We conducted an evaluation of the effectiveness of the design and operation of our "disclosure controls and procedures" (Disclosure Controls) as of the end of the period covered by this Form 10-K. The controls evaluation was conducted under the supervision and with the participation of management, including our CEO and CFO. Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission's (SEC's) rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our quarterly evaluation of Disclosure Controls includes an evaluation of some components of our internal control over financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis for purposes of providing the management report which is set forth below.

        The evaluation of our Disclosure Controls included a review of the controls' objectives and design, the Company's implementation of the controls and the effect of the controls on the information generated for use in this Form 10-K. In the course of the controls evaluation, we reviewed identified data errors or control problems and sought to confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the Disclosure Controls can be reported in our periodic reports on Form 10-Q and Form 10-K. Many of the components of our Disclosure Controls are also evaluated on an ongoing basis by us. The overall goals of these various evaluation activities are to monitor our Disclosure Controls, and to modify them as necessary. Our intent is to maintain the Disclosure Controls as dynamic systems that change as conditions warrant.

        Based upon the controls evaluation, our CEO and CFO have concluded that, subject to the limitations noted in this Part II, Item 9A, as of the end of the period covered by this Form 10-K, our Disclosure Controls were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information relating to Credence and our consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.

        Management's Report on Internal Control over Financial Reporting.    Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal

99

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.

        Management assessed our internal control over financial reporting as of November 3, 2007, the end of our fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.

        Based on our assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. We reviewed the results of management's assessment with the Audit Committee of our Board of Directors.

        Our independent registered public accounting firm, Ernst & Young LLP, independently assessed the effectiveness of the Company's internal control over financial reporting. Ernst & Young LLP has issued an attestation report which is included in Part II, Item 8 of this Form 10-K.

        Changes in Internal Control over Financial Reporting.    There have been no changes in our internal control over financial reporting during the fourth quarter of fiscal year 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

        Inherent Limitations on Effectiveness of Controls.    The Company's management, including the CEO and CFO, does not expect that our Disclosure Controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on 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. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Item 9B.    Other Information

None

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PART III

Item 10.    Directors, Executive Officers and Corporate Governance

        The information required by this item relating to the Company's directors and nominees and disclosure relating to compliance with Section 16(a) of the Securities Exchange Act of 1934 is included under the captions "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement for the 2008 Annual Meeting of Stockholders and is incorporated herein by reference. The information required by this item relating to the Company's executive officers and key employees is included under the caption "Executive Officers and Key Employees" in Part I of this Form 10-K Annual Report. The information required by this item relating to the committees of the Board of Directors of the Company is included under the caption "Board Committees and Meetings" in the Company's Proxy Statement for the 2008 Annual Meeting of Stockholders and is incorporated herein by reference.

        The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer and controller and a Code of Business Conduct and Ethics within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated there under that applies to all Company employees. A copy of the Code of Ethics or the Code of Business Conduct and Ethics is available at the Company's website: www.credence.com, and without charge upon written request to: Mr. Kevin C. Eichler, the Company's Senior Vice President, Chief Financial Officer and Secretary at the Company's headquarters at 1421 California Circle, Milpitas, California 95035. To the extent required by law, amendments to, and waivers from, any provision of our code of ethics will promptly be disclosed to the public. To the extent permitted by such legal requirements, the Company intends to make such public disclosure by posting such information on the Company's website in accordance with SEC rules.

Item 11.    Executive Compensation

        The information required by this item will be included under the caption "Executive Compensation and Related Information" and the caption "Board Committees and Meetings" in the Company's Proxy Statement for the 2008 Annual Meeting of Stockholders and is incorporated herein by reference.

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

        The information required by this item is included under the caption "Ownership of Securities" in the Company's Proxy Statement for the 2008 Annual Meeting of Stockholders and is incorporated herein by reference.

Equity Compensation Plan Information

        The following table provides information as of November 3, 2007 with respect to the shares of the Company's Common Stock that may be issued under the Company's existing equity compensation plans. The table does not include information with respect to shares subject to outstanding options granted under equity compensation plans assumed by the Company in connection with mergers and acquisitions of the companies that originally granted those options and outstanding options granted under the 1993 Plan. Footnote (5) to the table sets forth the total number of shares of the Company's Common Stock issuable upon the exercise of those assumed options as of November 3, 2007, and the

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weighted average exercise price of those options. No additional options may be granted under those assumed plans.

		A	B		C
Plan Category		Number of Securities to be Issued Upon Exercise of Outstanding Options	Weighted Average Exercise Price of Outstanding Options		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column A)(4)
Equity Compensation Plans Approved by Stockholders(1)(3)		4,014,934	$	6.54	1,278,254
Equity Compensation Plans Not Approved by Stockholders(2)		423,053	$	12.61	982,647
	Total	4,437,987	$	8.62	2,260,091

(1)

Consists of the 2005 Stock Option Plan (the "2005 Plan").

(2)

Consists solely of the Supplemental Stock Option Plan. Options under this Plan are not held by any directors or executive officers of the Company.

(3)

Excludes employee stock purchase rights accruing under the 1994 Employee Stock Purchase Plan. Under the 1994 Plan, each eligible employee may purchase up to 1,500 shares of Common Stock at semi-annual intervals on February 28th and August 31st each year at a purchase price per share equal to 85% of the lower of (i) the closing selling price per share of Common Stock on the employee's entry date into the offering period in which that semi-annual purchase date occurs or (ii) the closing selling price per share on the semi-annual purchase date.

(4)

Consists of shares available for future issuance under the Plans. As of November 3, 2007, an aggregate of 309,132 shares of Common Stock were available for issuance under the 1994 Plan and 1,278,254 shares of Common Stock were available for issuance under the 2005 Plan. However, pursuant to the automatic share increase provisions of the 1994 Plan, the number of shares reserved for each such plan will automatically increase on the first trading day of each fiscal year over the term of the relevant plan by a number of shares equal to one half of one percent (0.5%) of the total number of shares of Common Stock outstanding on the last trading day of the immediately preceding fiscal year. In no event, however, may any such annual increase to the share reserve of the 1994 Plan exceed 500,000 shares, as adjusted from time to time to reflect any subsequent stock dividends or stock splits.

(5)

The table does not include information for equity compensation plans assumed by the Company in connection with mergers and acquisitions of the companies that originally established those plans. As of November 3, 2007, a total of 1,044,173 shares of the Company's Common Stock were issuable upon exercise of outstanding options under those assumed plans. The weighted average exercise price of those outstanding options is $7.76 per share. No additional options may be granted under those assumed plans.

        A Supplemental Stock Option Plan (the "Supplemental Plan") was implemented by the Board on August 9, 2000. The Supplemental Plan is a non-shareholder approved plan under which options may be granted to employees of the Company (or any parent or subsidiary corporation) who are neither officers nor Board members at the time of grant. 1,500,000 shares of Common Stock have been authorized by the Board for issuance under the Supplemental Plan. All option grants will have an exercise price per share equal to the fair market value per share of Common Stock on the grant date. Each option will vest in installments over the optionee's period of service with the Company. The options will vest on an accelerated basis in the event the Company is acquired and those options are not assumed or replaced by the acquiring entity. Each option will have a maximum term (not to exceed 10 years) set by the plan administrator (either the Board or a Board committee) at the time of grant,

102

subject to earlier termination following the optionee's cessation of employment. All options are non-statutory options under the Federal tax law.

        Share issuances under the 2005 Plan will not reduce or otherwise affect the number of shares of Common Stock available for issuance under the Supplemental Plan, and share issuances under Supplemental Plan will not reduce or otherwise affect the number of shares of Common Stock available for issuance under the 2005 Plan.

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

        The information required by this item will be included under the caption "Certain Relationships and Related Transactions" in the Company's Proxy Statement for the 2008 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 14.    Principal Accountant Fees and Services

        The information required by this item will be included under the caption "Principal Independent Registered Public Accounting Firm Fees and Services" in the Company's Proxy Statement for the 2008 Annual Meeting of Stockholders and is incorporated herein by reference.

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PART IV

Item 15.    Exhibits and Financial Statement Schedules

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

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

	Page
Report of Independent Registered Public Accounting Firm	56
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting	57
Consolidated Balance Sheets—November 3, 2007 and October 31, 2006	58
Consolidated Statements of Operations—Years Ended November 3, 2007 and October 31, 2006 and 2005	59
Consolidated Statements of Stockholders' Equity—Years Ended November 3, 2007 and October 31, 2006 and 2005	60
Consolidated Statements of Cash Flows—Years Ended November 3, 2007 and October 31, 2006 and 2005	61
Notes to Consolidated Financial Statements	62

        2.    Financial Statement Schedule.    The following financial statement schedule of Credence Systems Corporation, for the years ended November 3, 2007 and October 31, 2006 and 2005, is filed as part of this Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements of Credence Systems Corporation:

	Page
Schedule II—Valuation and Qualifying Accounts	107

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

        3.    Exhibits.    See Exhibit Index on page 106.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of January 17, 2008.

CREDENCE SYSTEMS CORPORATION (Registrant)
By:	/s/  LAVI A. LEVLavi A. Lev President and Chief Executive Officer
By:	/s/  KEVIN C. EICHLERKevin C. Eichler Chief Financial Officer

POWER OF ATTORNEY

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

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

Signature	Title	Date
/s/  LAVI A. LEVLavi A. Lev	President, Chief Executive Officer (Principal Executive Officer)	January 17, 2008
/s/  KEVIN C. EICHLERKevin C. Eichler	Senior Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)	January 17, 2008
/s/  DAVID L. HOUSEDavid L. House	Director	January 17, 2008

105

/s/  RICHARD M. BEYERRichard M. Beyer	Director	January 17, 2008
/s/  HENK J. EVENHUISHenk J. Evenhuis	Director	January 17, 2008
/s/  LORI HOLLANDLori Holland	Director	January 17, 2008
/s/  IRWIN H. PFISTERIrwin H. Pfister	Director	January 17, 2008
/s/  JON D. TOMPKINSJon D. Tompkins	Director	January 17, 2008
/s/  BRUCE R. WRIGHTBruce R. Wright	Director	January 17, 2008
/s/  PING YANGPing Yang	Director	January 17, 2008

106

Item 15(a)(2).    

Schedule II

CREDENCE SYSTEMS CORPORATION

VALUATION AND QUALIFYING ACCOUNTS

(In thousands)

		Balance at Beginning of Year		Additions			Write-offs		Balance at End of Year
Year ended November 3, 2007
	Allowance for doubtful accounts	$	1,591	$	(438	)	$	270	$	883
Year ended October 31, 2006
	Allowance for doubtful accounts	$	4,325	$	(83	)	$	2,651	$	1,591
Year ended October 31, 2005
	Allowance for doubtful accounts	$	1,607	$	2,985		$	267	$	4,325

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EXHIBIT INDEX

Exhibit Number
3.1(3)	Amended and Restated Certificate of Incorporation of the Company, as currently in effect.
3.2(5)	Amended and Restated Bylaws of the Company, as currently in effect.
4.1(9)	Certificate of Designation for the Non-Voting Convertible Stock of the Registrant.
4.2(2)	Indenture, dated as of June 2, 2003 between the Company and The Bank of New York, as Trustee.
4.3(2)	Form of Global Note (included in Exhibit 4.3).
4.4(17)	Indenture, dated as of December 20, 2006, between the Company and The Bank of New York, as Trustee.
4.5(17)	Form of Global Note (included in Exhibit 4.4).
10.1(14)	Form of Indemnification Agreement between the Company and each of its officers and directors.
10.2(6)	1993 Stock Option Plan, as Amended and Restated through March 19, 2003.
10.3(1)	Form of Notice of Grant to be generally used in connection with the 1993 Stock Option Plan.
10.4(1)	Form of Stock Option Agreement to be generally used in connection with the 1993 Stock Option Plan.
10.5(1)	Addendum to the Stock Option Agreement (Special Tax Elections).
10.6(1)	Addendum to the Stock Option Agreement (Limited Stock Appreciation Rights).
10.7(1)	Addendum to the Stock Option Agreement (Change in Control).
10.8(1)	Addendum to the Stock Option Agreement (Financial Assistance).
10.9(1)	Form of Notice of Grant of Stock Option (Non-Employee Director) to be generally used in connection with the automatic option grant program of the 1993 Stock Option Plan.
10.10(1)	Form of Stock Option Agreement (Non-Employee Director) to be generally used in connection with the automatic option grant program of the 1993 Stock Option Plan.
10.11(18)	Employee Stock Purchase Plan, as Amended and Restated through May 17, 2000.
10.12(1)	Form of Stock Purchase Agreement.
10.13(1)	Form of Enrollment/Change Form.
10.14(4)	Supplemental Stock Option Plan, as amended and restated through November 27, 2000.
10.15(7)	Registration Rights Agreement, dated as of June 2, 2003, by and between Credence Systems Corporation and Citigroup Global Markets, Inc.
10.16(11)	Executive Employment Agreement, dated as of September 9, 2004, and effective May 28, 2004, by and between the Company and Byron Milstead.
10.17(12)	Executive Succession Agreement, dated as of November 5, 2004, and effective January 1, 2005, by and between the Company and Graham J. Siddall.

108

10.18(12)	Amended Executive Employment Agreement, dated as of November 5, 2004, and effective January 1, 2005, by and between the Company and David A. Ranhoff.
10.21(13)	Amended and Restated Executive Employment Agreement, dated as of March 11, 2006, by and between the Company and John Batty.
10.22(13)	Amended and Restated Executive Employment Agreement, dated as of March 11, 2006, by and between the Company and Brett Hooper.
10.23(10)	Settlement Agreement dated May 26, 2005, by and among Schlumberger Technology Corporation, Schlumberger Technologies, Inc., Schlumberger B.V., NPTest Holding Corporation, NPTest Acquisition Corporation and the Company.
10.24(10)	2005 Stock Incentive Plan, as amended.
10.25(15)	Resale Restriction Agreement with respect to certain stock option award agreements issued under the Company's 1993 Stock Option Plan.
10.26(16)	Executive Employment Agreement, dated as of December 9, 2005, by and between the Company and David House.
10.27(8)	Fiscal Year 2006 Incentive Plan.
10.28(8)	Lease and Sublease Termination Agreement between the Registrant and CARR NP Properties LLC.
10.29(17)	Form of Exchange and Purchase Agreement dated as of December 14, 2006 between the Company and Certain Holders of 3.5% Convertible Senior Subordinated Notes due 2010.
10.30(17)	Registration Rights Agreement dated as of December 14, 2006 between the Company and Certain Holders of 3.5% Convertible Senior Subordinated Notes due 2010.
10.31	Purchase and Sale Agreement and Receipt for Earnest Money, dated November 8, 2007, by and between the Company and Carlyle Investment Co.
10.32	First Amendment to Purchase and Sale Agreement, dated December 10, 2007, by and between the Company and Carlyle Investment Co.
10.33	Absolutely Net Office Lease, dated January 7, 2008, by and between the Company and Five Oaks Flex, LLC.
10.34	Absolutely Net Office Lease, dated January 7, 2008, by and between the Company and Five Oaks Office, LLC.
10.35(19)	Executive Employment Agreement, dated January 1, 2008, by and between the Company and Kevin C. Eichler.
21.1	Subsidiaries of the Company.
23.1	Consent of Independent Registered Public Accounting Firm.
24.1	Power of Attorney (reference is made to the signature page of this report).
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

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32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)

Exhibits 10.3 through 10.10 and Exhibits 10.12 and 10.13 are incorporated herein by reference to Exhibits 99.2, 99.3, 99.4, 99.5, 99.6, 99.7, 99.8, 99.9, 99.11 and 99.12, respectively, to the Company's Registration Statement on Form S-8 (File No. 333-27499) declared effective with the Securities and Exchange Commission on May 20, 1997.

(2)

Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-3 (File No. 333-108069) as filed with the Commission on August 19, 2003.

(3)

Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q (Filed No. 000-22366) for the quarterly period ended April 30, 2000.

(4)

Incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (File No. 333-58100), as filed with the Commission on April 2, 2001.

(5)

Incorporated by reference to Exhibit 3.01 to the Company's Current Report on Form 8-K (File No. 000-22366) filed on August 29, 2005.

(6)

Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q (Filed No. 000-22366) for the quarterly period ended April 30, 2003.

(7)

Incorporated herein by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-3 (File No. 333-108069) declared effective with the Securities and Exchange Commission on November 26, 2003.

(8)

Incorporated by reference to Exhibit 10.26 to the Company's Report on Form 10-K (File No. 000-22366) filed on January 17, 2006.

(9)

Incorporated by reference to Exhibit 4.7 to the Company's Registration Statement on Form S-4 (File No. 333-113990) filed on March 29, 2004.

(10)

Exhibits 10.23 and 10.24 are incorporated herein by reference to Exhibits 10.1 and 10.2, respectively, to the Company's Quarterly Report on Form 10-Q (File No. 000-22366) for the quarterly period ended April 30, 2005.

(11)

Exhibits 10.12 is incorporated herein by reference to Exhibit 10.4, to the Company's Report on Form 8-K (File No. 000-22366) filed on September 14, 2004.

(12)

Exhibits 10.17 and 10.18 are incorporated herein by reference to Exhibits 10.1 and 10.2, respectively, to the Company's Report on Form 8-K (File No. 000-22366) filed on November 8, 2004.

(13)

Exhibit 10.21 and 10.22 are incorporated by reference to Exhibit 10.4 and 10.5 to the Company's Quarterly Report on Form 10-Q (File No. 000-22366) filed on March 10, 2006.

(14)

Exhibit 10.1 is incorporated herein by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2003.

(15)

Exhibit 10.25 is incorporated herein by reference to Exhibit 1.01 to the Company's Current Report on Form 8-K (File No. 000-22366) filed on September 1, 2005.

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(16)

Exhibit 10.25 is incorporated herein by reference to Exhibit 1.01 to the Company's Current Report on Form 8-K (File No. 000-22366) filed on December 13, 2005.

(17)

Exhibits 4.5, 4.5, 10.30 and 10.31 are incorporated herein by reference to Exhibit 4.1, 4.2, 10.1 and 10.2 to the Company's Current Report on Form 8-K (File No. 000-22366) filed on December 21, 2006.

(18)

Incorporated by reference to Exhibit 10.11 to the Company's Report on 10-K for the period ended October 31, 2005.

(19)

Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 000-22366) filed on January 8, 2008.

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EX-10.31

Exhibit 10.31

COMMERCIAL ASSOCIATION OF REALTORS® OREGON/SW WASHINGTON
PURCHASE AND SALE AGREEMENT AND RECEIPT FOR EARNEST MONEY
(Oregon Commercial Form)

AGENCY ACKNOWLEDGMENT

Buyer shall execute this Acknowledgment concurrent with the execution of the Agreement below and prior to delivery of that Agreement to Seller. Seller shall execute this Acknowledgment upon receipt of the Agreement by Seller, even if Seller intends to reject the Agreement or make a counter-offer. In no event shall Seller’s execution of this Acknowledgment constitute acceptance of the Agreement or any terms contained therein.

Pursuant to the requirements of Oregon Administrative Rules (OAR 863-015-0215), both Buyer and Seller acknowledge having received the Oregon Real Estate Agency Disclosure Pamphlet, and by execution below acknowledge and consent to the agency relationships in the following real estate purchase and sale transaction as follows:

(a)x (agent name) Steve Marcy of  Integrated Corporate Property Services (firm) (Selling Licensee) is the agent of (check one): o Buyer exclusively; x Seller exclusively; o both Seller and Buyer (“Disclosed Limited Agency”)

(b)x (agent name) Mark Childs of Integrated Corporate Property Services (firm) (Listing Licensee) is the agent of (check one): x Buyer exclusively; o Seller exclusively; o both Seller and Buyer (“Disclosed Limited Agency”).

If the name of the same real estate firm appears in both Paragraphs (a) and (b) above, Buyer and Seller acknowledge that a principal broker of that real estate firm shall become the Disclosed Limited Agent for both Buyer and Seller, as more fully set forth in the Disclosed Limited Agency Agreements that have been reviewed and signed by Buyer, Seller and the named real estate licensee(s).

ACKNOWLEDGED

Buyer:  (print)	Carlyle Invest Co.	(sign)	Date:	11/8/07
Buyer:  (print)		(sign)	Date:
Seller:  (print)		(sign)	Date:
Seller:  (print)		(sign)	Date:

PURCHASE AND SALE AGREEMENT AND RECEIPT FOR EARNEST MONEY

1	Dated:	November 5, 2007
2	BETWEEN:	Credence Systems Corporation, a Delaware Corporation
3	(“Seller”)
4	Address:	1421 California Circle, Milpitas, CA 95035
5	AND:	Carlyle Investment Co, and/or its Assigns	(“Buyer”)
6	Address:	621 SW Alder St, Suite 605, Portland, OR 97205
7	Buyer offers to buy and acquire from Seller (i) the real property and all improvements thereon commonly known as approximately 183,484 square feet comprised of two (2) buildings and
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ALL RIGHTS RESERVED

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1	located at 5800 and 5825 NW Pinefarm Place  in the City of Hillsboro, County of Washington.  Oregon legally described on Exhibit A, attached hereto and incorporated herein by reference (the “Property”) and [check box if applicable o], (B) all of Seller’s right, title and interest in and to certain lease(s) by which the Property is domised as described on attached hereto and incorporated herein by reference (the “Leases”).  If no legal description is attached, Buyer and Seller will attach a legal description upon receipt and reasonable approval by both parties of the Preliminary Commitment or, if applicable, the Survey. As partial consideration for the assignment of the Lease(s) to Buyer, at the Closing (as defined in Section 7 hereof)  Buyer shall assume all of the obligations of the Lessor under the Lease which first accrue on or after the Closing Date (as defined in said Section 7).  The parties shall accomplish such assignment and assumption by executing and delivering to each other through Escrow an Assignment of Lessor’s Interest Under Lease substantially in the form of attached hereto (the “Assignment”).  The occupancy of the Property by the Lessees under such Leases are hereinafter sometimes referred to as the “Tenancles”.
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12	1.             Purchase Price.  The total purchase price is Twenty One Million dollars ($21,000,000) (the “Purchase Price”) payable as follows: all cash at closing.
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16	1.1.          Earnest Money Deposit.  Upon execution of this Agreement, Buyer shall deliver to the Escrow Holder as defined in herein, for the account of Buyer $250,000 as earnest money Deposit to be increased to $500,000 after thirty (30) day due diligence period which commences upon execution of the Agreement (the “Earnest Money”) in the form of o cash or o check or x promissory note (the “Note”) the Earnest Money is in the form of a check being held un-deposited by the o Listing o Selling Firm. It shall be deposited no later than 5 PM Pacific Time three days after execution of the Agreement by Buyer and Seller in the o Listing o Selling Firm’s Clients’ Trust Account o to the Escrow (as hereinafter defined).  If the Earnest Money is in the form of the Note, it shall be due and payable no later than 5 PM Pacific Time one day o after execution of this Agreement by Buyer and Seller or x after satisfaction or waiver by Buyer of the conditions to Buyer’s obligation to purchase the Property set forth in this Agreement or o Other:               .  If the Note is not redeemed and paid in full when due, then (i) the Note shall be delivered and endorsed to Seller (i) not already in Seller’s possession), (ii) Seller may collect the Earnest Money from Buyer, either pursuant to an action on the Note or an action on this Agreement, and (iii) Seller shall have no further obligations under this Agreement.  The purchase and sale of the Property shall be accomplished through an escrow (the “Escrow”) which Seller has established or will establish with Fidelity National Title, 900 SW Fifth Avenue, Portland, OR 97204 (the “Title Company) and the Earnest Money shall be deposited with x Title Company or o Other: The Earnest Money shall be applied to the payment of the purchase price for the Property at Closing.  Any interest earned on the Earnest Money shall be considered to be part of the Earnest Money.  The Earnest Money shall be returned to Buyer in the event any condition to Buyer’s obligation to purchase the Property shall fall to be satisfied or waived through no fault of Buyer. 2.             Conditions to Purchase.  Buyer’s obligation to purchase the Property is conditioned on the following: o none or x Buyer’s approval of the results of (i) the Property inspection described in Section 3 below and (ii) the document review described in Section 4 and (iii) (describe any other condition) Buyer and Seller entering into a mutually acceptable Lease per the terms and conditions outlined in Section 24. If for any reason in Buyer’s sole discretion, Buyer has not given written waiver of these conditions, or stated in writing that these conditions have been satisfied, by written notice given to Seller within 30 days (for
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1	general due diligence). Seller, this Agreement shall be deemed automatically terminated, the Earnest Money shall be promptly returned to Buyer, and thereafter, except as specifically provided to the contrary herein, neither party shall have any further right or remedy hereunder. 3.             Property Inspection. Seller shall permit Buyer and its agents, at Buyer’s sole expense and risk, to enter the Property at reasonable times after reasonable prior notice to Seller and after prior notice to the tenants of the Property as required by the tenants’ leases, if any, to conduct any and all inspections, tests, and surveys concerning the structural condition of the improvements, all mechanical, electrical and plumbing systems, hazardous materials, pest infestation, solls conditions, wetlands, Americans with Disabilities Act compliance, and all other matters affecting the suitability of the Property for Buyer’s intended use and/or otherwise reasonably related to the purchases of the Property including the economic feasibility of such purchase. Buyer shall indemnify, hold harmless, and defend Seller from all liens, costs, and expenses, including reasonable attorneys’ fees and experts’ fees, arising from or relating to Buyer’s entry on and inspection of the Property. This agreement to indemnify, hold harmless, and defend Seller shall survive closing or any termination of this Agreement.
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15	4.             Seller’s Documents. Within 7 days after the Execution Date, Seller shall deliver to Buyer, at Buyer’s address shown below, legible and complete copies of the following documents and other items relating to the ownership, operation, and maintenance of the Property, to the extent now in existence and to the extent such items are within Seller’s possession or control: all documents, reports, and drawings related to The Property.
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20	5.             Title Insurance. Within 10 days after the Execution Date, Seller shall open the Escrow with the Title Company and deliver to Buyer a preliminary title report from the Title Company (the “Preliminary Commitment”), showing the status of Seller’s title to the Property, together with complete and legible copies of all documents shown therein as exceptions to title (“Exceptions”). Buyer shall have 5 days after receipt of a copy of the Preliminary Commitment and Exceptions within which to give notice in writing of Seller of any objection to such title or to any liens or encumbrances affecting the Property. Within 5 days after the date of such notice from Buyer, Seller shall give Buyer written notice of whether it is willing and able to remove the objected-to Exceptions. Within 5 days after the date of such notice from Seller, Buyer shall elect whether to (i) purchase the Property subject to those objected-to Exceptions which Seller is not willing or able to remove or (ii) terminate this Agreement. On or before the Closing Date (defined below), Seller shall remove all Exceptions to which Buyer objects and which Seller agrees Seller is willing and able to remove. All remaining Exceptions set forth in the Preliminary Commitment and agreed to by Buyer shall be deemed “Permitted Exceptions.” The little insurance policy to be delivered by Seller to Buyer at Closing shall contain no Exceptions other than the Permitted Exceptions, any Exceptions caused by Buyer and the usual preprinted Exceptions contained in an owner’s standard ALTA form title insurance policy. 6.             Default; Remedies. Notwithstanding anything to the contrary contained in this Agreement, in the event Buyer fails to deposit the Earnest Money Deposit in Escrow strictly as and when contemplated under Section 1.1 above, Seller shall have the right at any time thereafter to terminate this Agreement and all further rights and obligations hereunder by
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ALL RIGHTS RESERVED

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1	giving written notice thereof to Buyer. If the conditions, if any, to Buyer’s obligation to consummate this transaction are satisfied or waived by Buyer and Buyer nevertheless fails, through no fault of Seller, to close the purchase of the Property, Seller’s sole remedy shall be to retain the Earnest Money paid by Buyer. In the event Seller fails, through no fault of Buyer, to close the sale of the Property, Buyer shall be entitled to pursue any remedies available at law or in equity, including without limitation, the remedy of specific performance. In no event shall Buyer be entitled to punitive or consequential damages. If any, resulting from Seller’s failure to close the sale of the Property. 7.             Closing of Sale  Buyer and Seller agree the sale of the Property shall be closed x on or before December 28, 2007 or o days after the Execution Date (the “Closing Date”) in the Escrow. The sale shall be deemed “closed” when the document(s) conveying title to the Property is recorded and the Purchase Price (increased or decreased, as the case may be, by the net amount of credits and debits in Seller’s account at Closing made by the Escrow Holder pursuant to the terms of this Agreement) is disbursed to Seller. At Closing, Buyer and Seller shall deposit with the Title Company all documents and funds required to close the transaction in accordance with the terms of this Agreement. At Closing, Seller shall deliver a certification in a form approved by Buyer that Seller is not a “foreign person” as such term is defined in the Internal Revenue Code and the Treasury Regulations promulgated under the Internal Revenue Code. If Seller is a foreign person and this transaction is not otherwise exempt from FIRPTA regulations, the Title Company shall be instructed by the parties to withhold and pay the amount required by law to the Internal Revenue Services. At Closing, Seller shall convey fee simple title to the Property to Buyer by x statutory warranty deed or o (the “Deed”)             . If this Agreement provides for the conveyance by Seller of a vendoe’s interest in the Property by a contract of sale, Seller shall deposit with the Title Company (or other mutually acceptable escrow) the executed and acknowledged Deed, together with written instructions to deliver such deed to Buyer upon payment in full of the purchase price. At Closing, Seller shall pay for and deliver to Buyer a standard ALTA form owner’s policy of title insurance (the “Policy”) in the amount of the Purchase Price insuring fee simple title to the Property in Buyer subject only to the Permitted Exceptions and the standard preprinted exceptions contained in the Policy. 8.             Closing Costs; Prorates. Seller shall pay the premium for the Policy. Seller and Buyer shall each pay one-half of the escrow fees charged by the Title Company, any excise tax, and any transfer tax. Real property taxes for the tax year in which the transaction is closed, assessments (if a Permitted Exception), personal property taxes, rents and other Lessee charges arising from existing Tenancies paid for the month of Closing, interest on assumed obligations, and utilities shall be prorated as of the Closing Date. Prepaid rents, security deposits, and other unearned refundable deposits regarding the Tenancies shall be assigned and delivered to Buyer at Closing. x Seller o Buyer o N/A shall be responsible for payment of all taxes. Interest, and penalties, if any, upon removal of the Property from any special assessment or program. 9.             Possession. Buyer shall be entitled to exclusive possession of the Property, subject to the Tenancies existing as of the Closing Date, x on the Closing Date or o            . 10.           Condition of Property. Seller represents that, to the best of Seller’s knowledge without specific inquiry, Seller has received no written notices of violation of any laws, codes.
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38 rules, or regulations applicable to the Property (“Laws”), and Seller is not aware of any such violations or any concealed material defects in the Property which cost more than $N/A to repair or correct. Risk of loss or damage to the Property shall be Seller’s until Closing and Buyer’s at and after Closing. No agent of Buyer or Seller has made any representations regarding the Property. BUYER AND SELLER AGREE THAT THE REAL ESTATE LICENSEES NAMED IN THIS AGREEMENT HAVE MADE NO REPRESENTATIONS TO ANY PARTY REGARDING THE CONDITION OF THE PROPERTY, THE OPERATIONS ON OR INCOME FROM THE PROPERTY, THE TENANCIES, OR WHETHER THE PROPERTY OR THE USE THEREOF COMPLIES WITH LAWS. Except for Seller’s representations set forth in this section 10, Buyer shall acquire the Property “as is” with all faults and buyer shall rely on the results of its own inspection and investigation in Buyer’s acquisition of the Property. It shall be a condition of Buyer’s obligation to close, and of Seller’s right to retain the Earnest Money as of Closing, that all of the Seller’s representations and warranties stated in this Agreement are materially true and correct on the Closing Date. Seller’s representations and warranties stated in this Agreement shall survive Closing for one (1) year. 11.           Personal Property.  This sale includes the following personal property: x N/A or ¨ the personal property located on and used in connection with the Property and owned by Seller which Seller shall itemize in a schedule. Seller shall deliver to Buyer such schedule within        days after the Execution Date. Seller shall convey all personal property owned by Seller on or in the Property to Buyer by executing and delivering to Buyer at Closing through Escrow a Bill of Sale substantially in the form of Exhibit C attached hereto and incorporated herein by reference (the “Bill of Sale”). 12.           Notices.  Unless otherwise specified, any notice required or permitted in, or related to, this Agreement must be in writing and signed by the party to be bound. Any notice will be deemed delivered (i) when personally delivered or delivered by facsimile transmission (with electronic confirmation of delivery), or (ii) on the day following delivery of the notice by reputable overnight courier, or (iii) three (3) days after mailing in the U.S. malls, postage prepaid, by the applicable party in all events, to the address of the other party shown in this Agreement, unless that day is a Saturday, Sunday, or legal holiday, in which event it will be deemed delivered on the next following business day. If the deadline under this Agreement for delivery of a notice or payment is a Saturday, Sunday, or legal holiday such last day will be deemed extended to the next following business day. 13.           Assignment.  Buyer ¨ may not assign ¨ may assign x may assign, only if the assignee is an entity owned and controlled by Buyer (may not assign, if no box is checked) this Agreement or Buyer’s rights under this Agreement without Seller’s prior written consent. If Seller’s consent is required for assignment, such consent may be withheld in Seller’s reasonable discretion. Purchaser is Licensed Real estate broker in Oregon. 14.           Attorneys’ Fees.  In the event a suit, action, arbitration, or other proceeding of any nature whatsoever, including without limitation any proceeding under the U.S. Bankruptcy Code, is instituted, or the services of an attorney are retained, to interpret or enforce any provision of this Agreement or with respect to any dispute relating to this Agreement, the prevailing party shall be entitled to recover from the losing party its attorneys’, paralegals’, accountants’, and other experts’ fees and all other fees, costs, and expenses actually incurred and reasonably necessary in connection therewith (the “Fees”). In the event of suit, action, arbitration, or other proceeding, the amount of Fees shall be determined by the judge or

©1997 Commercial Association of REALTORS® OREGON/SW WASHINGTON (Rev. 1/06)

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ALL RIGHTS RESERVED

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41 arbitrator, shall include all costs and expenses incurred on any appeal or review, and shall be in addition to all other amounts provided by law. 15.           Statutory Land Use Disclaimer and Measure 37 Disclosure.  THE PROPERTY DESCRIBED IN THIS INSTRUMENT MAY NOT BE WITHIN A FIRE PROTECTION DISTRICT PROTECTING STRUCTURES.  THE PROPERTY IS SUBJECT TO LAND USE LAWS AND REGULATIONS, WHICH, IN FARM AND FOREST ZONES, MAY NOT AUTHORIZE CONSTRUCTION OR SITING OF A RESIDENCE AND THAT LIMIT LAWSUITS AGAINST FARMING OR FOREST PRACTICES AS DEFINED IN ORS 30,930 IN ALL ZONES, BEFORE SIGNING OR ACCEPTING THIS INSTRUMENT, THE PERSON TRANSFERRING FEE TITLE SHOULD INQUIRE ABOUT THE PERSON’S RIGHTS, IF ANY, UNDER CHAPTER 1, OREGON LAWS 2005 (BALLOT MEASURE 37 (2004)).  BEFORE SIGNING OR ACCEPTING THIS INSTRUMENT, THE PERSON ACQUIRING FEE TITLE TO THE PROPERTY SHOULD CHECK WITH THE APPROPRIATE CITY OR COUNTY PLANNING DEPARTMENT TO VERIFY APPROVED USES, THE EXISTENCE OF FIRE PROTECTION FOR STRUCTURES AND THE RIGHTS OF NEIGHBORING PROPERTY OWNERS, IF ANY, UNDER CHAPTER 1, OREGON LAWS 2005 (BALLOT MEASURE 37 (2004)). 16.           Cautionary Notice About Liens.  UNDER CERTAIN CIRCUMSTANCES, A PERSON WHO PERFORMS CONSTRUCTION-RELATED ACTIVITIES MAY CLAIM A LIEN UPON REAL PROPERTY AFTER A SALE TO THE PURCHASER FOR A TRANSACTION OR ACTIVITY THAT OCCURRED BEFORE THE SALE.  A VALID CLAIM MAY BE ASSERTED AGAINST THE PROPERTY THAT YOU ARE PURCHASING EVEN IF THE CIRCUMSTANCES THAT GIVE RISE TO THAT CLAIM HAPPENED BEFORE YOUR PURCHASE OF THE PROPERTY.  THIS INCLUDES, BUT IS NOT LIMITED TO, CIRCUMSTANCES WHERE THE OWNER OF THE PROPERTY CONTRACTED WITH A PERSON OR BUSINESS TO PROVIDE LABOR, MATERIAL, EQUIPMENT OR SERVICES TO THE PROPERTY AND HAS NOT PAID THE PERSONS OR BUSINESS IN FULL. 17.           Miscellaneous.  Time is of the essence of this Agreement.  The facsimile transmission of any signed document including this Agreement, in accordance with Paragraph 12, shall be the same as delivery of an original.  At the request of either party, the party delivering a document by facsimile will confirm facsimile transmission by signing and delivering a duplicate original document.  This Agreement may be executed in two or more counterparts, each of which shall constitute an original and all of which together shall constitute one and the same Agreement.  This Agreement contains the entire agreement and understanding of the parties with respect to the subject matter of this Agreement and supersedes all prior and contemporaneous agreements between them with respect thereto.  Without limiting the provisions of Section 13 of this Agreement, this Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. The person signing this Agreement on behalf of Buyer and the person signing this Agreement on behalf of Seller each represents, covenants and warrants that such person has full right and authority to enter into this Agreement and to bind the party for whom such person signs this Agreement to the terms and provisions of this Agreement.  This Agreement shall not be recorded unless the parties otherwise agree. 18.           Addendums; Exhibits.  The following named addendums and exhibits are attached to this Agreement and incorporated within this Agreement:  o none or Exhibit A.

©1997 Commercial Association of REALTORS® OREGON/SW WASHINGTON (Rev. 1/06)

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ALL RIGHTS RESERVED

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39 19.           Time for Acceptance.  Seller has until 5:00 p.m. Pacific Time on Tuesday, November 6, 2007 to accept this offer. Acceptance is not effective until a copy of this Agreement which has been signed and dated by Seller is actually received by Buyer. If this offer is not so accepted, it shall expire and the Earnest Money shall be promptly refunded to Buyer and thereafter, neither party shall have any further right or remedy against the other. 20.           Seller’s Acceptance and Brokerage Agreement.  By execution of this Agreement, Seller agrees to sell the Property on the terms and conditions in this Agreement. Seller further agrees to pay a commission to Integrated Corporate Property Services (“Broker”) in the total amount computed in accordance with (i) the listing agreement or other commission agreement dated October 9, 2006 between Seller and Broker; or (ii) if there is no written commission agreement, Seller hereby agrees to pay a commission of o              percent (           %) of the purchase price or o $             . Seller and Broker agree that the commission is deemed earned as of the earlier of (i) Closing or (ii) the date Buyer waives all conditions precedent to Closing as set forth in this Agreement. Unless otherwise provided in a separate written agreement, Seller shall cause the Escrow Holder to deliver to Broker the real estate commission on the Closing Date or upon Seller’s breach of this Agreement, whichever occurs first. If the Earnest Money is forfeited and retained by Seller in accordance with this Agreement, in addition to any other rights the Broker may have, the Broker shall be entitled to the lesser of (A) fifty percent (50%) of the Earnest Money or (B) the commission agreed to above, and Seller hereby assigns such amount to the Broker. 21.           Execution Date.  The Execution Date is the later of the two dates shown beneath the parties’ signatures below. 22.           Governing Law.  This Agreement is made and executed under, and in all respects shall be governed and construed by the laws of the State of Oregon. 23.           The Buyer and Seller agree to cooperate with the other party in completing an exchange qualifying for nonrecognition of gain under Internal Revenue Code Section 1031. The Buyer and Seller reserve the right to convert this transaction to an exchange at any time before the closing date. The Seller and the Buyer agree, however, that consummation of the transaction contemplated by this agreement is not predicated or conditioned on completion of such on exchange. If either the Buyer or Seller elects to complete an exchange, the other party shall execute all documents, agreements, or instruments reasonably requested by the Exchanging party to complete the exchange. Neither party shall incur additional liabilities, expenses, or costs as a result of or connected with the exchange. 24.           Lease Back, Office:  Seller shall lease back the office building for a period of two (2) years from the date of closing at $1.15/SF NNN. During the term of the lease, Seller shall be limited to a security deposit of one month’s payable base rent. Seller (Tenant) shall have the right to Sublease which the Buyer (Landlord) shall not unreasonably withhold. 25.           Flex:  Seller shall lease back the flex building for a period of two (2) years from the date of closing at $0.85/SF NNN. During the term of the lease, Seller shall be limited to a security deposit of one month’s payable base rent. Seller (Tenant) shall have the right to Sublease which the Buyer (Landlord) shall not unreasonably withhold.

©1997 Commercial Association of REALTORS® OREGON/SW WASHINGTON (Rev. 1/06)

PURCHASE AND SALE AGREEMENT AND RECEIPT FOR EARNEST MONEY (OREGON)

ALL RIGHTS RESERVED

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1  2  3  4  5  6  7  8	26.           CONSULT YOUR ATTORNEY.  THIS DOCUMENT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR REVIEW AND APPROVAL PRIOR TO SIGNING.  NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE COMMERCIAL ASSOCIATION OF REALTORS® OREGON/SW WASHINGTON OR BY THE REAL ESTATE LICENSEES INVOLVED WITH THIS DOCUMENT AS TO THE LEGAL SUFFICIENCY OR TAX CONSEQUENCES OF THIS DOCUMENT. THIS FORM SHOULD NOT BE MODIFIED WITHOUT SHOWING SUCH MODIFICATIONS BY REDLINING, INSERTION MARKS, OR ADDENDA.
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10	Buyer	Carlyle Investments and/or Assigns			Buyer		Credence Systems Corp.
11	By	R. Barry Menashe			By	Joy Leo
12	Title				Title
13	Execution Date			11-8-2007	Execution Date
14	Time of Execution				Time of Execution
15	Home Phone				Home Phone
16	Office Phone				Office Phone
17	Address			621 SW Alder Suite 605	Address			1421 California Circle
18	City		Portland, OR		City			Milpitas, CA
19	Zip		97205		Zip			95035
20	Fax No.				Fax No.
21	E-Mail				E-Mail
22
23	Signature				Signature

CREDENCE LEGAL DEPARTMENT
*******************************
*APPROVED*
Date:	[illegible]
Signature:		[illegible]

©1997 Commercial Association of REALTORS® OREGON/SW WASHINGTON (Rev. 1/06)

PURCHASE AND SALE AGREEMENT AND RECEIPT FOR EARNEST MONEY (OREGON)

ALL RIGHTS RESERVED

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EXHIBIT A

LEGAL DESCRIPTION OF PROPERTY

To Be Provided by Title during Due Diligence

©1997 Commercial Association of REALTORS® OREGON/SW WASHINGTON (Rev. 1/06)

PURCHASE AND SALE AGREEMENT AND RECEIPT FOR EARNEST MONEY (OREGON)

ALL RIGHTS RESERVED

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EX-10.32

Exhibit 10.32

FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT

This FIRST AMENDMENT, signed and entered into as of this 10th day of December, 2007 is by and between CREDENCE SYSTEMS CORPORATION (“Seller”) and CARLYLE INVESTMENT CO. (“Buyer”)

RECITALS

A.Seller and Buyer entered into that certain Purchase and Sale Agreement and Receipt for Earnest Money dated November 5, 2007 (the “Agreement”).

B.Seller and Buyer desire to amend the Agreement as provided for herein.

NOW THEREFORE, for and in consideration of the mutual covenants contained herein and in the Agreement, the parties hereby amend the Agreement as follows:

1.Purchase Price. The Purchase Price is Twenty Million Dollars ($20,000,000).

2.Earnest Money. Upon mutual execution of this First Amendment, Buyer shall (i) convert the Note to cash and deposit the same with the Title Company as Earnest Money, and (ii) also deposit with the Title Company an additional Two Hundred Fifty Thousand Dollars ($250,000) Earnest Money in the form of cash, for a total cash Earnest Money deposit of Five Hundred Thousand Dollars ($500,000).

3.Easements. At Closing, the parties shall grant the following easements:

(a)Seller and Buyer shall each grant to the other permanent, reciprocal easements for purposes of vehicular and pedestrian ingress and egress over and upon the existing drive aisle that straddles the property boundary between Lot 2 of the Property (“Lot 2”) and the abutting Lot 1 that will be retained by Seller (“Lot 1”).

(b)Seller shall grant to Buyer a permanent casement for the use, maintenance, repair, and replacement of an electrical transformer and generator serving the Property, together with the existing lines to and from such equipment and the Property, that are located on Lot 1.

(c)Seller shall grant to Buyer a temporary easement for the use, maintenance, repair, and replacement of the existing parking areas and drive aisles that are located on Lot 1 that serve the building located on Lot 2 (the “Parking Area”). Following Closing, Seller shall complete, at its sole cost and expense, a boundary line adjustment between Lot 1 and Lot 2 to include the Parking Area as part of Lot 2. Buyer shall cooperate with the boundary line adjustment effort, and will execute any and all applications or other documents necessary to accomplish the same. Upon completion of the boundary line adjustment, Seller shall convey the Parking Area to Buyer and the temporary easement therefor shall be terminated. If, despite Seller’s reasonable efforts, Seller is unable to receive all necessary approvals for the boundary line adjustment and the same does not occur, the easement for the Parking Area shall be made permanent.

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The parties shall agree on the form of the above easements prior to Closing, which shall be executed and delivered by the parties at Closing and recorded following the recording of the Deed.

4.Contingency Waiver. Buyer hereby waives all conditions to its obligations under the Agreement, except for Seller and Buyer agreeing on the form or (i) the easements described in Section 3 of this First Amendment and (ii) the lease back of the Property described in Sections 24 and 25 of the Agreement, and the execution and delivery of such documents by the parties at Closing. Seller’s obligations under the Agreement are also contingent upon the same.

5.Right of First Opportunity. At Closing, Seller will grant to Buyer the Right of First Opportunity to purchase Lot 1. By such right, if Seller determines to sell Lot I, Seller will first advise Buyer of the terms and conditions upon which Seller intends to sell Lot 1 and Buyer shall thereafter have fifteen (15) days in which to agree to purchase Lot I on such terms and conditions. If Buyer does not exercise the right to purchase Lot 1, Buyer’s Right of First Opportunity shall be extinguished and Seller shall be free to sell Lot 1 to a third-party.

6.Effect on Agreement. In the event of any inconsistency between the terms of this First Amendment and of the Agreement, the terms hereof shall control. Except as otherwise set forth herein, the terms of the Agreement shall remain as originally stated, and the same shall remain in full force and effect.

7.Defined Terms. To the extent not otherwise defined herein, all capitalized terms used herein shall have the meanings set forth in the Agreement.

8.Counterparts. This First Amendment may be executed in counterparts and by facsimile transmission, each of which shall be deemed to be an original hereof, and all of which together shall constitute one and the same agreement.

IN WITNESS WHEREOF, the parties have executed this First Amendment as of the day and year first above written.

SELLER			BUYER
Credence Systems Corporation			Carlyle Investment Co.
By:			By:
Name:		Dennis Mettagle	Name:		R. Barry Menashe
Its:	Vice President, and CPO		Its:	Owner

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EX-10.33

Exhibit 10.33

ABSOLUTELY NET

BASIC LEASE PROVISIONS

The following lease provisions are hereby incorporated into and made a part of the Absolutely Net Commercial Lease to which this is attached:

A.DATE OF LEASE: January 7, 2008 (the “Effective Date”)

B.NAMES AND ADDRESSES OF PARTIES:

LANDLORD:FIVE OAKS FLEX, LLC
621 SW Alder, Suite 605
Portland, OR 97205

TENANT:CREDENCE SYSTEMS CORPORATION
Attn: General Counsel
5975 NW Pinefarm Place
Hillsboro, OR 97124

C.PREMISES: The land and improvements located at 5975 NW Pinefarm Place, Hillsboro, Washington County, Oregon, the legal description of which is Lot 3, FIVE OAKS WEST, City of Hillsboro, Washington County, Oregon. For the purpose hereof, the term “Building” and “Premises” shall have the same meaning.

D.COMMENCEMENT DATE: January 7, 2008

E.TERM: Commencement Date through January 6, 2010, with an option of Tenant to extend the same to January 6, 2011, upon written notice given to Landlord on or before January 6, 2009, if Tenant is not then in default.

F.MINIMUM MONTHLY RENTAL:  $95,242.50

Rent shall be payable to Landlord at 621 SW Alder, Suite 605, Portland, OR 97205, or such other address as Landlord may designate in writing. On the Commencement Date, Tenant shall pay Landlord Minimum Monthly Rental for the period from the Commencement Date through January 31, 2008.

G.USE: Offices, laboratory, research and development, manufacturing

H.SECURITY DEPOSIT: $95,242.50

I.TENANT’S REQUIRED INSURANCE: Commercial general liability insurance, with limits of liability not less than $2,000,000.00 combined single limit.

BASIC LEASE PROVISIONS

J.EXHIBITS: The following Exhibit is attached hereto and by this reference made a part hereof:  None

K.BROKERS:  None

BASIC LEASE PROVISIONS

ABSOLUTELY NET OFFICE LEASE

1.Parties. This Lease is made between Landlord and Tenant named in the Basic Lease Provisions as of the date set forth therein.

2.Definitions. In addition to other definitions set forth in the Lease, unless the context otherwise specifies or requires, the terms listed below shall have the following meanings:

(a)“Building” shall mean the office building on the Premises.

(b)“CCRs” shall mean that certain Pacific Realty Associates, L.P. Protective Covenants for Five Oaks West Business Park dated February 22,1996, recorded March 1,1996, as Recorder’s No. 96018469; amended September 8, 1997, Recorder’s No. 970835161; October 4, 1999,Recorder’s No. 99113460; August 18, 2000, Recorder’s No. 2000-066732 and September 21, 2000, Recorder’s No. 2000-076736, as well as covenants, conditions and restrictions as shown on Partition Plat 1996-029, and Partition Plat 1997-083, official records of Washington County, Oregon.

(c)“Indemnified Parties” shall mean Landlord, Landlord’s Lender, Landlord’s Landlord, Landlord’s Property Manager, together with their respective affiliates, subsidiaries, successors, assigns, heirs, officers, directors, shareholders, partners, managers, members, employees, agents and contractors.

(d)“Landlord’s Lender” shall mean the holder of any loan that is secured by a lien against the Building.

(e)“Landlord’s Landlord” shall mean the holder of the Landlord’s interests in any lease that is superior to this Lease.

(f)“Landlord’s Property Manager” shall mean any real estate property manager engaged by Landlord from time to time to manage the Building.

3.Possession and Commencement.

(a)Tenant is in possession as of the Commencement Date.

(b)Tenant acknowledges and agrees that Tenant has been in possession of the Premises and that the Premises shall be leased by Landlord to Tenant in its present “AS IS” condition and that Landlord makes absolutely no representations or warranties whatsoever with respect to the Premises or the condition thereof. Tenant acknowledges that Landlord has not investigated and does not warrant or represent to Tenant that the Premises are fit for the purposes intended by Tenant or for any other purpose or purposes whatsoever. Tenant acknowledges that Tenant shall be solely responsible for any and all actions, repairs, permits, approvals and costs required for the rehabilitation, renovation, use, occupancy and operation of the Premises in accordance with applicable governmental requirements, including, without limitation, all governmental charges and fees, if any, which may be due or payable to applicable authorities. Tenant agrees that, by leasing the Premises,

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Tenant warrants and represents that Tenant has examined and approved all things concerning the Premises which Tenant deems material to Tenant’s leasing and use of the Premises. Tenant further acknowledges and agrees that (i) neither Landlord nor any agent of Landlord has made any representation or warranty, express or implied, concerning the Premises or which have induced Tenant to execute this Lease, and (ii) any other representations and warranties are expressly disclaimed by Landlord.

4.Rental.

(a)Beginning upon the Commencement Date and continuing during the entire Term, Tenant shall pay to Landlord the “Minimum Monthly Rental” as described in the Basic Lease Provisions as well as all “Additional Rental” described herein. All references to “Rent” or “Rental” hereinafter set forth in this Lease shall mean the Minimum Monthly Rental and Additional Rental. The Minimum Monthly Rental shall be paid in advance, without offset, notice or demand, on or before the first day of each calendar month during the Term, except for the first calendar month, which shall be prorated based on the Commencement Date.

(b)Tenant recognizes that late payment of Rental or other sum due hereunder will result in additional administrative expense to Landlord, the extent of which additional administrative expense is extremely difficult and economically impractical to ascertain. Tenant therefore agrees that if Rental or any sum is due and payable pursuant to this Lease, and when such amount remains due and unpaid five (5) days after said amount is due, such amount shall be increased by a “Late Charge” in an amount equal to five percent (5%) of the amount due. The amount of the Late Charge to be paid by Tenant shall be reassessed and added to Tenant’s obligation for each successive monthly period until paid. The provisions of this subparagraph in no way relieve Tenant of the obligation to pay Rental or other payments on or before the date on which they are due, nor do the terms of this subparagraph in any way affect Landlord’s remedies pursuant to paragraph 25 of this Lease in the event said Rental or other payment is unpaid after the date due.

5.Security Deposit.If an amount is set forth in the Basic Lease Provisions as the Security Deposit, upon execution of this Lease, Landlord acknowledges receipt of Tenant’s Security Deposit for the full and faithful performance by Tenant of all of the covenants and terms of this Lease required to be performed by Tenant. Such Security Deposit shall be returned to Tenant within thirty (30) days after the expiration of this Lease provided Tenant has fully and faithfully carried out all of Tenant’s obligations hereunder, including the payment of all amounts due to Landlord hereunder and the surrender of the Premises to Landlord in the condition required herein. However, Landlord, at Landlord’s option, may apply such sum on account of the payment of the last month’s Minimum Monthly Rental hereunder. Said sum may be commingled with other funds of Landlord and shall not bear interest. Notwithstanding the above, if Tenant becomes obligated to pay a Late Charge or upon the occurrence of any Event of Default described in paragraph 24 below, at Landlord’s option, the Security Deposit shall become immediately due and payable in full to Landlord, to be applied against any Late Charge, damages or losses suffered by Landlord as a result of Tenant’s failure to timely pay Rental or an Event of Default. In the event of a sale of the Building subject to this Lease, Landlord shall transfer the Security Deposit to the purchaser to be held under the terms of this Lease, and Landlord shall thereupon be released from all liability for the return of the Security Deposit; Tenant agrees to look solely to the new Landlord for the return of the Security Deposit.

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6.Taxes.

(a)Tenant shall be responsible for and pay before delinquent all taxes assessed commencing on the Commencement Date and continuing during the Term against any leasehold or personal property of any kind owned by or placed upon or about the Premises by Tenant.

(b)During the Term, as Additional Rental during the Term, Tenant shall pay before delinquent all real property taxes and assessments levied, assessed or imposed against the land and improvements in the Premises. All real property taxes and assessments payable for a period, part of which shall be beyond the expiration of the Term, shall be prorated between Landlord and Tenant. Tenant shall deliver evidence of payment of all taxes and assessments to Landlord upon payment thereof by Tenant.

(c)If during the Term, the voters or the Legislature of the state in which the Premises are located enact any substitute taxes, in any name or form, which may be adopted to replace or supplement real property taxes, then such substitute taxes shall be considered the equivalent of real property taxes for the purposes of this paragraph. Should there be in effect during the Term any law, statute or ordinance which levies, assesses or imposes any tax (other than any income tax) upon rents, Tenant shall pay such tax as may be attributed to the rents under this Lease or shall reimburse Landlord for any such taxes paid by Landlord within ten (10) days after Landlord bills Tenant for the same.

7.Insurance.

(a)During the Term, Tenant shall maintain in full force a policy or policies of property insurance written on a “special causes of loss” form (otherwise known as “all other perils”) to the extent of at least one hundred percent (100%) percent of the replacement cost of the Building (excluding foundations) which insurance shall also include twelve (12) months business interruption insurance, plate glass insurance, vandalism, malicious mischief, demolition and windstorm coverage for any additional costs resulting from debris removal and coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any portion of the Building required to be demolished, removed or modified by reason of the enforcement of any building, zoning, safety or land use laws as a result of a covered loss. Tenant shall also carry earthquake insurance of not less than $25,000,000.00 covering all of Tenant’s property outside the State of California.

(b)During the Term, Tenant shall maintain in full force a commercial general liability insurance policy of not less than $2,000,000.00, combined single limit, insuring Landlord against liability for bodily injury and property damage occurring in, or about the Building.

(c)Tenant shall at its own expense during the Term also carry in full force and effect:

(i)            Fire and/or casualty insurance with standard extended coverage endorsements to the extent of the full replacement value of Tenant’s trade fixtures, inventory and all other personal property owned or used by Tenant in the operation of Tenant’s business

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with the proceeds thereof being used by Tenant for the replacement of Tenant’s such property in the event of loss. Said insurance shall provide for a deductible no greater than $100,000.00.

(ii)Workmen’s Compensation and Employer’s Liability coverage of not less than statutory limits of the state in which the Premises is located.

(d)All such insurance policy shall be with an insurance company or companies with general policyholders’ rating of not less than “A VIII” as rated in the most current available Best’s Key Rating Guide or “A VIII” as then currently rated by Standard & Poor’s or Moody’s Investors Service and which are qualified to do business in the state in which the Premises are located. Such policies shall provide that the insurance shall not be cancelable or reduced without at least thirty (30) days’ prior written notice to Landlord, and shall be deemed primary and noncontributing with any insurance available to Landlord. Tenant shall furnish Landlord with a certificate or other acceptable evidence that such insurance is in effect. Tenant shall also furnish Landlord with evidence that all premiums have been paid as and when paid by Tenant.

(e)If Tenant shall fail to obtain insurance as required under this paragraph 7, Landlord may, but shall not be obligated to, obtain such insurance for Landlord’s own benefit and not for or on behalf of Tenant, and in such event, Tenant shall pay, as Additional Rent, the premium for such insurance upon demand by Landlord.

(f)Landlord acknowledges that Tenant may maintain the insurance required pursuant to this paragraph 7 under what is commonly known as a “blanket policy”.

8.Intentionally Deleted.

9.Intentionally Deleted.

10.Use of Premises. The Premises shall be used for the Use set forth in the Basic Lease Provisions and for no other purpose without Landlord’s prior written consent. In connection with the Use of the Premises, Tenant shall:

(a)Conform to all applicable laws and regulations of any public authority affecting the Premises and the Use thereof, and correct at Tenant’s own expense any failure of compliance.

(b)Refrain from any activity which would be reasonably offensive to Landlord or to owners or users of adjoining property, or which would tend to create a nuisance or damage the reputation of the Premises. Without limiting the generality of the foregoing, Tenant shall not permit any objectionable noise or odor to escape or be emitted from the Premises.

(c)Refrain from loading the floors beyond their designed capacity and the point considered safe by a competent engineer or architect selected by Landlord.

(d)Refrain from making any marks or attaching any sign, insignia, antenna, aerial or other device (collectively “Signs”) to the exterior or interior walls, windows or roof of the

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Premises without the written consent of the Landlord. Landlord hereby consents to the existing Signs. Notwithstanding Landlord’s consent to any Signs, Tenant may remove all such Signs upon termination of this Lease and, if removed, repair any and all damage to the Premises caused thereby at Tenant’s own cost and expense, including but not limited to, restoring the area under and/or around any such removed sign to the same condition as the remainder of the exterior of the Premises. Landlord hereby approves Tenant’s existing signs.

11.Hazardous Materials.

(a)As used herein, the term “Hazardous Material” means any hazardous or toxic substance, material, or waste which is or becomes regulated by any federal, state, or local governmental authority including, but not limited to, those substances, materials, and wastes listed in the United States Department Transportation Hazardous Materials Table (49 CFR 172.101) or by the United States Environmental Protection Agency as hazardous substances (40 CFR Part 302) and any amendments thereto, any material or substance which is defined as a “hazardous waste” pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 USC § 6903), or defined as a hazardous substance pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 US § 9601 et seq. (42 USC § 9601) together with petroleum products.

(b)Except for Allowable Amounts, Tenant represents and warrants to Landlord that, to the best of Tenant’s knowledge, as of the Commencement Date, there are no Hazardous Material upon the Premises except small quantities for Tenant’s Use normally found in similar properties, which Hazardous Material is maintained in connection with applicable law (“Allowable Amounts”). Except for Allowable Amounts, Tenant shall not generate, store, use, or permit the generation, storage, or usage of any Hazardous Material upon the Premises by Tenant, its agents, employees, contractors, or invitees without the prior written consent of Landlord, which consent may be withheld if Tenant does not demonstrate to Landlord’s reasonable satisfaction that such Hazardous Material is necessary or useful to Tenant’s business and will be used, kept, and stored in a manner that complies with all laws regulating any such Hazardous Material so brought upon or used or kept in or about the Premises.

(c)Tenant shall not cause or permit to be discharged into the plumbing or sewage of the Premises any Hazardous Material.

(d)Without limiting or otherwise qualifying any provision hereof, Tenant shall, at its sole cost and expense, comply with any and all rules, regulations, codes, ordinances, statutes, and other requirements of any lawful governmental authority respecting Hazardous Material, pollution, harmful chemicals, and other materials in connection with Tenant’s activities on or about the Premises and those of its agents, employees, contractors, or invitees. Tenant specifically agrees to comply with such requirements relating to the handling, use, storage, and disposal of Hazardous Material and other materials which are considered by any governmental authority as harmful, dangerous, toxic, flammable, or otherwise deserving special care. In the furtherance of, and not in limitation of, Tenant’s obligations hereunder, throughout the Term, Tenant shall do or cause to be done all things necessary to preserve and keep in full force and effect permits required for the conduct of its business and operations from the time of commencement of this Lease until its expiration or termination.

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(e)Tenant shall pay the full cost of any cleanup, remedial, removal, or restoration work performed on or about the Premises (including posting a performance bond for the estimated cost of cleanup if required by Landlord) as required by any governmental authority in order to remove, neutralize, or otherwise treat Hazardous Material of any type whatsoever directly or indirectly placed by Tenant or its agents, employees, contractors, or invitees on or about the Premises.

(f)Tenant shall be solely responsible for and shall indemnify, defend, and hold Indemnified Parties harmless from any and all claims, judgments, damages, fines, liabilities, demands, causes of action, proceedings, hearings, losses, including without limitation, diminution in value of the Premises, damages for the loss or restriction on use of rentable or usable space or of any amenity of the Premises, damages arising from any adverse impact on marketing of space, and sums paid in settlement of claims, attorney’s fees, consultant fees, and expert fees, which arise during or after the term hereof as a result of contamination by Hazardous Material from Tenant’s Use or activities, or the use or activities of Tenant’s agents or contractors relating to the storage, placement or use of Hazardous Material (hereinafter collectively referred to as “Claims”). This indemnification by Tenant includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal, or restoration work required by any federal, state, or local governmental agency or political subdivision because of Hazardous Material present in the soil or ground water on or under the Premises if caused by Tenant.  Without limiting the foregoing, if the presence of any Hazardous Material on the Premises caused or permitted by Tenant or its agents or contractors results in any contamination of the Premises, Tenant shall promptly take all actions at its sole expense as are necessary to return the Premises to the condition existing prior to the release of any such Hazardous Material to the Premises, provided that Landlord’s approval of such actions shall first be obtained. The foregoing indemnity shall survive the expiration or earlier termination of this Lease. Tenant agrees to defend all such Claims on behalf of Indemnified Parties with counsel reasonably acceptable to Landlord.

(g)In addition to any other right of inspection contained herein, Landlord and its agents shall have the right, following reasonable notice (except in case of emergency), but not the duty, to inspect the Premises at any time to determine whether Tenant is complying with the terms of this Lease. If Tenant is not in compliance with this Lease following notice to Tenant as required pursuant to paragraph 24(b) below, Landlord shall have the right to immediately enter upon the Premises to remedy any contamination caused by Tenant’s failure to comply notwithstanding any other provision of this Lease. Landlord shall use its best efforts to minimize interference with Tenant’s business but shall not be liable for any interference caused thereby.

(h)Any default under this paragraph shall be a material default of this Lease enabling Landlord to exercise any of the remedies set forth in this Lease.

(i)Notwithstanding anything to the contrary provided herein, it shall not be unreasonable for Landlord to withhold its consent to any assignment, encumbrance, sublease, or other transfer of this Lease if a proposed transferee’s anticipated use of the Premises involves the generation, storage, use, treatment, or disposal of any Hazardous Material. No consent to any assignment or subletting shall constitute a further waiver of this provision. Any such assignment or

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subletting without such consent shall be void and shall at Landlord’s option constitute a default hereunder.

12.Intentionally Deleted.

13.Tenant Improvements and Alterations.

(a)Intentionally deleted.

(b)Tenant shall not be required to obtain the consent or approval of Landlord for any decorations, painting, plastering, or carpeting, but Tenant shall be required to give Landlord at least ten (10) days prior written notice thereof.

(c)Tenant shall be required to obtain the prior written approval of Landlord for any alterations or improvements to the Premises which:

(i)are not located wholly within the Premises, the demising walls of the Premises, the entrances to and/or exits from the Premises, or the floor or ceiling of the Premises (unless required to connect the utility systems within the Premises to the utility systems of the Building);

(ii)decrease the value of the Building;

(iii)adversely affect the structural integrity of the Building or the operation of the HVAC, plumbing, electricity, or water and sewer systems of the Building;

(iv)require any roof penetration; or

(v)which are at a cost of $25,000.00 or more.

(d)Any such alterations, additions or improvements shall be made at Tenant’s sole cost and expense. In the event Tenant’s alterations, additions or improvements require roof penetration, Tenant shall use Landlord’s roofing contractor or such other contractor as Landlord reasonably approves. Landlord shall have ten (10) days after receiving Tenant’s written notice of proposed work to respond or provide such written consent. Tenant shall provide Landlord copies of any plans and specifications. Tenant shall deliver to Landlord as-built plans showing all alterations within thirty (30) days following installation of the alteration. Tenant shall provide such construction insurance as may be reasonably required by Landlord.

(e)Landlord shall have the right to require Tenant to furnish adequate security to insure timely payment to the contractors and subcontractors for such work. All work performed by the Tenant shall be done in strict compliance with all applicable building, fire, sanitary and safety codes, and other applicable laws, statutes, regulations and ordinances, and Tenant shall secure all necessary permits for the same. Tenant shall keep the Premises free from all liens in connection with any such work. All work performed by the Tenant shall be carried forward expeditiously, shall not interfere with Landlord’s work or the work to be performed by or for other tenants, and shall be

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completed within a reasonable time. Landlord or Landlord’s agents shall have the right at all reasonable times to inspect the quality and progress of such work.

(f)Tenant shall provide its own trash container(s) for construction debris; promptly remove all construction and related debris from the Premises; and immediately following completion of construction, Tenant shall repair and restore any portions of the Premises harmed as a result of the construction activities to the condition existing immediately prior to construction. Landlord’s review and/or approval of any request for alterations, additions or improvements in or to the Premises, and/or the plans and specifications with respect thereto, shall not create responsibility or liability on the part of Landlord, nor shall such review or approval evidence or constitute a representation or warranty by Landlord with respect to the action or undertaking approved or the completeness, accuracy, design sufficiency, or compliance of such plans or specifications with laws, ordinances, rules, and /or regulations of any governmental agency or authority. Landlord and Tenant acknowledge that such items shall be Tenant’s exclusive responsibility.

(g)All improvements, alterations and other work performed on the Premises by either Landlord or Tenant shall be the property of Landlord when installed, except for Tenant’s trade fixtures, and may not be removed at the expiration of this Lease unless the applicable Landlord’s consent specifically provides otherwise.

14.Repairs and Maintenance.

(a)During the Term, Tenant shall continue all of Tenant’s existing maintenance programs and service contracts (either those in existence or replacements thereof). Tenant shall maintain, replace and repair the Premises (including but not limited to landscaping and parking lots) as well as all the structural and exterior components of the Building including the roof during the Term. Tenant shall repair and replace the component parts of the heating and air conditioning, water, sewer, gas and electrical systems as necessary to maintain said systems in the same condition as existed on the Effective Date, reasonable wear and tear excepted. Tenant shall provide all ordinary maintenance and repairs to the Premises, including, without limitation, replacement of broken glass, replacement of worn or damaged flooring, repair of lighting fixtures, and repairs and maintenance of interior walls and ceilings. On the expiration of the Term or other termination of this Lease, Tenant shall deliver up the Premises with all required repairs and replacements completed and with all improvements located thereon, in good repair and condition, broom clean, reasonable wear and tear and the provisions of paragraph 21 excepted.

(b)Tenant agrees that Landlord shall have no obligation under this Lease to make any repairs or replacements to the Premises or improvements thereon, or any alteration, addition, change, or improvement thereof or thereto, whether structural or otherwise. The intention of this Lease is that the rent received by Landlord shall be “ABSOLUTELY NET”, free and clear of any expenses to Landlord under this Lease for the taxes, insurance, and/or construction, care, maintenance (including common area maintenance charges and charges accruing under easements, assessments and/or charges pursuant to the CCRs or other agreements relating to the Premises), operation, repair, replacement, alteration, addition, change, and improvement of or to the Premises. Upon the expiration or earlier termination of this Lease, Tenant shall remain responsible for, and shall pay to Landlord, any cost, charge or expense for which Tenant is otherwise responsible for hereunder

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attributable to any period (prorated on a daily basis) prior to the expiration or earlier termination of this Lease.

(c)Tenant shall not enter into any maintenance agreements that will extend beyond the Term without Landlord’s prior written consent.

(d)Upon expiration of the Term, Tenant shall assign to Landlord any warranties relating to the Premises and deliver to Landlord all manuals, plans, specifications, records and other documents maintained by Tenant in connection with the maintenance of the Building.

15.Liens. Tenant shall keep the Premises and Tenant’s leasehold interest free from all liens, including construction, mechanic’s and materialmen’s liens, arising from any act or omission of Tenant or those claiming under Tenant. Notwithstanding the foregoing, in the event of a lien, Tenant shall remove said lien by applicable statutory bond procedure or otherwise discharge such lien within ten (10) days of written notice from Landlord. Landlord shall have the right to post and maintain on the Premises such notices of nonresponsibility as are provided for under the lien laws of the state in which the Premises are located.

16.Utilities. Tenant shall be solely responsible and promptly pay for all water and sewer facilities, gas and electrical services, including heat and light, garbage collection, and all other facilities and utility services used by Tenant in the Premises during the Term. Tenant shall pay for all light bulbs, tubes and ballasts in the Premises. Tenant agrees at all times to cooperate fully with Landlord and to abide by all the regulations and requirements which Landlord may prescribe for the proper functioning and protection of said systems. Except for Landlord’s willful misconduct, Landlord shall not be liable for, and Tenant shall not be entitled to, any abatement or reduction of Rental nor shall Tenant be excused from compliance with all terms and provisions of this Lease by reason of Landlord’s failure to furnish any of the foregoing.

17.Light and Air. This Lease does not grant any rights of access to light or air over any part of the Premises.

18.Indemnity.

(a)The Indemnified Parties shall not be liable to Tenant, or to Tenant’s employees, agents, invitees, licensees, contractors, or visitors, or to any other person, for any injury to person or damage to property or for consequential damages of any nature on or about the Premises caused by any act or omission of Tenant, its agents, servants, or employees, or of any other persons entering upon the Premises under express or implied invitation by Tenant; provided, however, subject to the provisions of paragraph 19 below, which provisions shall control the terms of this paragraph 18, an Indemnified Party shall be liable for actual damages resulting from its negligence or willful misconduct.

(b)Tenant agrees to indemnify, defend, and hold harmless Indemnified Parties of and from any and all claims, demands, causes of action, losses, liabilities, judgments, attorney’s fees, expenses, or damages (i) arising from any accident, incident, injury, damage, howsoever and by whomsoever caused, to any person or property occurring in or about the Premises, except to the

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extent such accident, incident, injury or damage is caused by the negligence or willful misconduct of an Indemnified Party, (ii) arising out of any and all defaults by Tenant or its agents, employees, or contractors under this Lease, or (iii) arising out of the negligence or willful misconduct of Tenant or its agents, employees, or contractors. Tenant shall, at its own cost and expense, defend any and all suits which may be brought against Indemnified Parties either alone or in connection with others upon any such above-mentioned cause or claim, and shall satisfy, pay and discharge any and all judgments that may be recovered against Indemnified Parties in any such action or actions in which Indemnified Parties may be a party defendant.

(c)The provisions of this paragraph shall survive expiration or earlier termination of this Lease with respect to claims or liability occurring prior to such termination.

19.Waiver of Subrogation. Notwithstanding anything to the contrary contained in this Lease, but without limiting any other waiver set forth herein, Landlord and Tenant hereby mutually agree that in the event either Landlord or Tenant sustains a loss by reason of fire or any other event or casualty and such party is then covered (or is required by the terms of this Lease to be covered) in whole or in part by insurance with respect to such loss, then the party sustaining the loss agrees that, to the extent (but only to the extent) such party is compensated for such loss by its insurance (or to the extent the insurance required to be carried under this Lease by such party would have compensated the party for such loss), the party sustaining the loss shall have no right to recovery against the other party, its partners, officers, agents, contractors or employees, and waives any right of subrogation which might otherwise exist in or accrue to any third party. Landlord and Tenant agree that all policies of insurance obtained by them pursuant to the terms of this Lease shall contain provisions or endorsements thereto waiving the insurer’s rights of subrogation with respect to claims against the other and, unless the policies permit waiver of subrogation without notice to the insurer, each shall notify its insurance companies of the existence of the waiver and indemnity provisions set forth in this Lease. In all events, but subject to any other waiver set forth herein, the party sustaining any loss which is required to be covered by insurance pursuant to the other provisions of this Lease may recover from the other party (assuming such other party otherwise has liability for the loss suffered) the amount of any deductible or excess loss under any applicable policy of insurance, to the extent of the deductible under such policy and/or such excess loss.

20.Damage to Tenant’s Property. Except for Landlord’s willful misconduct, Landlord shall not be liable and Tenant hereby waives all claims against Landlord for any damage to the goods, stock, merchandise or other property of Tenant or to any person in or about the Premises resulting from any cause whatsoever, including, but not limited to, damage by rain, water, gas, steam, electricity or theft.

21.Damage or Destruction.

(a)If the Premises shall be partially damaged by fire or other cause and subparagraph (b) below does not apply, the damage to the Premises shall be repaired by Tenant, at Tenant’s sole cost and expense and there shall be no abatement of Rent. The repairs shall be made at the expense of Tenant, whether or not insurance proceeds are available and shall be accomplished with all reasonable dispatch. Tenant, at Tenant’s expense shall repair and/or replace all of Tenant’s property necessary for the operation of Tenant’s business.

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(b)If, during the last year of the Term, the Premises are damaged by a fire or other cause to the extent of fifty percent (50%) or more of the replacement cost thereof, either party may elect to terminate this Lease as of the date of damage or destruction by notice given to the other party in writing not more than sixty (60) days following the date of damage provided, however, if Landlord has elected to terminate this Lease, Tenant may cancel Landlord’s such election by agreeing to make all necessary repairs. If such notice is given, all rights and obligations of the parties shall cease as of the date of termination and Minimum Monthly Rental and Additional Rent shall be prorated as of said date and Tenant shall pay to Landlord one hundred percent (100%) of the replacement cost for damage to the Building (excluding foundations and without deduction for depreciation) without deductible. Tenant’s said obligation is not contingent on Tenant having received insurance proceeds. Any insurance which may be carried by Landlord or Tenant shall be for the sole benefit of the party carrying such insurance.

(c)In the absence of an election to terminate as described in subparagraph (b) above, Tenant shall proceed to restore the Building pursuant to the provisions of subparagraph (a) above to substantially the same form as prior to the damage or destruction and there shall be no abatement of Rent.

22.Condemnation.

(a)If the entire Premises shall be acquired or condemned by any governmental authority under its power of eminent domain for any public or quasi-public use or purpose, this Lease shall terminate as of the date of vesting or acquisition of title in the condemning authority and the Rental shall be abated on that date. If less than the whole should be so acquired or condemned, Tenant shall have the option to terminate this Lease by notice given to Landlord within thirty (30) days of such taking. In the event that such a notice of termination is given, this Lease shall terminate as of the date of vesting or acquisition of title in the condemning authority and the Minimum Monthly Rental and Additional Rent shall be prorated as of such date.

(b)If this Lease has not been terminated as hereinabove set forth, this Lease shall continue in force and effect, but from and after the date of the vesting of title in the condemning authority, the Minimum Monthly Rental payable hereunder during the unexpired portion of the Term shall be reduced proportionately and any Additional Rent payable pursuant to the terms to reflect the diminution of the Premises.

(c)In connection with any taking of the Premises, Landlord shall be entitled to receive the entire amount of any award which may be made or given in such taking or condemnation, without deduction or apportionment for any estate or interest of Tenant, it being expressly understood and agreed by Tenant that no portion of any such award shall be allowed or paid to Tenant for any so-called bonus or excess value of this Lease, and such bonus or excess value shall be the sole property of Landlord. Tenant shall not assert any claim against Landlord or the taking authority for any compensation because of such taking (including any claim for bonus or excess value of this Lease); provided, however, if any portion of the Premises is taken, Tenant shall have the right, if permitted pursuant to applicable law, to recover from the condemning authority (but not from Landlord) any compensation as may be separately awarded or recoverable by Tenant for the taking of Tenant’s furniture, fixtures, equipment and other personal property

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within the Premises, for Tenant’s relocation expenses, and for any loss of goodwill or other damage to Tenant’s business by reason of such taking.

23.Bankruptcy. Subject to paragraph 28, this Lease shall not be assigned or transferred voluntarily or involuntarily by operation of law. It may, at the option of Landlord, be terminated if Tenant be adjudged bankrupt or insolvent, or makes an assignment for the benefit of creditors, or files or is a party to the filing of a petition in bankruptcy, or commits an act of bankruptcy, or in the case a receiver or a trustee is appointed to take charge of any of the assets of Tenant or subtenants and assigns in or about the Premises, and such receiver or trustee is not removed within thirty (30) days after the date of his appointment, or in the event of judicial sale of the personal property in or on the Premises upon judgment against Tenant or any subtenant or assignee, unless such property or reasonable replacement thereof be installed on the Premises. To the extent permitted by law, this Lease or any sublease hereunder shall not be considered as an asset of a debtor-in-possession, or an asset in bankruptcy, insolvency, receivership, or other judicial proceedings.

24.Tenant’s Default. The following shall be “Events of Default” by Tenant:

(a)Failure of Tenant to pay any Rental when due or failure of Tenant to pay any other charge required hereunder within five (5) days of written notice from Landlord to Tenant. Notwithstanding anything to the contrary provided herein, if Landlord has given one such notice to Tenant in a calendar year, Tenant shall be in default if rental is not paid within five (5) days of the date due without the need for any further notice from Landlord to Tenant.

(b)Failure of Tenant to comply with any term or condition or fulfill any obligation of this Lease (other than the payment of Rental or other charges), within twenty (20) days after written notice by Landlord specifying the nature of the default with reasonable particularity. If the default is of such a nature that it cannot be completely remedied within the twenty (20) day period, this subparagraph shall be complied with if Tenant begins correcting the default within the twenty (20) day period and thereafter proceeds with reasonable diligence and in good faith to effect the remedy as soon as practicable (but in no event longer than ninety (90) days).

(c)Intentionally deleted.

(d)The bankruptcy or insolvency of Tenant or the occurrence of other acts specified in paragraph 23 of this Lease which give Landlord the option to terminate.

(e)A default pursuant to that certain Absolute Net Office Lease of even date between Five Oaks Office, LLC as landlord and Tenant shall be deemed an Event of Default hereunder.

25.Remedies on Tenant’s Default. If an Event of Default occurs, Landlord may, at Landlord’s option, exercise any one or more of the rights and remedies available to a landlord in the state in which the Premises is located to redress such default, consecutively or concurrently, including the following:

(a)Landlord may elect to terminate Tenant’s right to possession of the Premises or

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any portion thereof by written notice to Tenant. Following such notice, Landlord may re-enter, take possession of the Premises and remove any persons or property by legal action or self-help with the use of reasonable force. To the extent permitted by law, Landlord shall have the right to restrain the personal property belonging to Tenant which is on the Premises at the time of re-entry, or the right to such other security interest therein as the law may permit, to secure all sums due or which become due to Landlord under this Lease. Perfection of such security interest shall occur by taking possession of such personal property or otherwise provided by law.

(b)Following re-entry by Landlord, Landlord may relet the Premises for a term longer or shorter than the Term and upon any reasonable terms including the granting of rent concessions to the new tenant. Landlord may alter, refurbish or otherwise change the character or use of the Premises in connection with such reletting. Landlord shall not be required to relet for any use or purpose which Landlord may reasonably consider injurious to its property or to any tenant which Landlord may reasonably consider objectionable. No such reletting by Landlord following a default by Tenant shall be construed as an acceptance of the surrender of the Premises. If rent received upon such reletting exceeds the rent received under this Lease, Tenant shall have no claim to the excess.

(c)Following re-entry, Landlord shall have the right to recover from Tenant the following damages:

(i)The Worth at the Time of the Award (as hereinafter defined) of all unpaid Rental for the period prior to re-entry; plus

(ii)The Worth at the Time of the Award (as hereinafter defined) of the amount equal to the Rental lost during any period during which the Premises are not relet prior to the date of the award, if Landlord uses reasonable efforts to relet the Premises; plus

(iii)The Worth at the Time of the Award (as hereafter defined) of the amount by which the unpaid Rental for the balance of the term after the time of the award exceeds the amount Tenant proves could be avoided; plus

(iv)Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant’s failure to perform Tenant’s obligation under this Lease or which in the ordinary course of things would be likely to result therefrom, including, without limitation, the cost of clean up and repair in preparation for a new tenant, renovations, remodeling, the cost of correcting any defaults or restoring any unauthorized alterations, the amount of any real estate commissions or advertising expenses and attorney’s fees; plus

(v)At Landlord’s election, any other amount in addition to or in lieu of the foregoing, as may be permitted from time to time by applicable law; plus

(vi)Reasonable attorney’s fees and expert witness fees incurred in connection with the default, whether or not any litigation is commenced; plus

(d)If Landlord lists the Premises with a real estate broker experienced in leasing

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commercial property in the metropolitan area in which the Premises are located, such listing shall be conclusively presumed to be the taking of reasonable efforts to relet the Premises; plus

(e)As used in subparagraphs (c)(i) and (c)(ii) above, the “Worth at the Time of Award” is computed by allowing interest at a rate equal to the published prime interest rate of the Bank of America, N.A., San Francisco, California plus four (4%) percent, unless such rate exceeds lawful limits permitted by the laws of the state in which the Premises are located, in which case interest shall accrue at the highest rate permitted in such state (hereinafter referred to as the “Default Interest Rate”). As used in subparagraph (c)(iii) above, the “Worth at the Time of Award” is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award, plus one (1%) percent.

(f)In the event that Tenant remains in possession following default and Landlord does not elect to re-enter, Landlord may recover all delinquent Rental and shall have the right to cure any nonmonetary default and recover the cost of such cure from Tenant, plus interest from the date of the expenditure at the Default Interest Rate. In addition, Landlord shall be entitled to recover attorney’s fees reasonably incurred in connection with the default, whether or not litigation is commenced. Landlord may sue to recover such amounts as they accrue, and no one action for accrued damages shall bar a later action for damages subsequently accruing.

(g)The foregoing remedies shall not be exclusive but shall be in addition to all other remedies and rights provided under applicable law, and no election to pursue one right shall preclude resort to another consistent remedy.

26.Surrender at Expiration.

(a)Upon expiration of the Term or earlier termination on account of default, Tenant shall deliver all keys to Landlord and peaceably surrender the Premises broom clean and in the same condition as exists on the Effective Date, reasonable wear and tear excepted. Depreciation and wear from ordinary use for the purpose for which the Premises were let need not be restored, but all repairs and replacements for which Tenant is responsible shall be completed pursuant to paragraph 14 above. Tenant’s obligations under this paragraph shall be subject to the provisions of paragraph 21 relating to damage or destruction.

(b)All improvements and alterations placed on the Premises during the Lease term, other than Tenant’s trade fixtures, shall, at Landlord’s option exercised at the time of granting of its consent, become the property of Landlord. Movable furniture, decorations, floor covering other than hard surface bonded or adhesively fixed flooring, curtains, drapes, blinds, furnishings and trade fixtures shall remain the property of Tenant if placed on the Premises by Tenant. Anything to the contrary contained herein notwithstanding, in no event shall Tenant be required to remove any improvements, alterations, or fixtures (but not trade fixtures) that exist on the Premises as of the Commencement Date.

(c)If Landlord so elects at the time of granting its consent, Tenant shall remove any or all fixtures installed on the Premises during the Lease term which would otherwise remain the property of Landlord, and shall repair any physical damage resulting from the removal. If Tenant fails

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to remove such fixtures, Landlord may do so and charge the cost to Tenant with interest from the date of expenditure at the Default Interest Rate. Tenant shall remove all furnishings, furniture and trade fixtures which remain the property of Tenant. If Tenant fails to do so, this shall be an abandonment of the property, and Landlord may retain the property and all rights of Tenant with respect to it shall cease or, by notice in writing given to Tenant within twenty (20) days after removal was required, Landlord may elect to hold Tenant to its obligation of removal. If Landlord elects to require Tenant to remove, Landlord may effect a removal and place the property in public or private storage for Tenant’s account. Tenant shall be liable to Landlord for the cost of removal, transportation to storage, and storage, with interest on all such expenses from the date of expenditure by Landlord at the Default Interest Rate.

(d)The time for removal of any property or fixtures which Tenant is required to remove from the Premises upon termination shall be as follows:

(i)On or before the date this Lease terminates because of expiration of the term or because of a default under paragraphs 22 and 23.

(ii)Within thirty (30) days after notice from Landlord requiring such removal where the property to be removed is a fixture which Tenant is not required to remove except after such notice by Landlord, and such date would fall after the date on which Tenant would be required to remove other property.

27.Holdover.

(a)If Tenant does not vacate the Premises at the time required, Landlord shall treat Tenant as a tenant from month-to-month, subject to all the provisions of this Lease except the Term, except that the Rental shall be one hundred fifty (150%) percent of the Minimum Monthly Rental due for the full calendar month immediately preceding the expiration of the Term together with all damages (but specifically excluding consequential damages) sustained by Landlord by said failure to vacate. Failure of Tenant to remove fixtures, furniture, furnishings or trade fixtures which Tenant is required to remove under this Lease shall constitute a failure to vacate to which this paragraph shall apply if the property not removed will substantially interfere with the occupancy of the Premises by another tenant or with occupancy by Landlord for any purpose including preparation for a new tenant.

(b)If a month-to-month tenancy results from a holdover by Tenant under this paragraph, the tenancy shall be terminable at the end of any monthly rental period on written notice by either party given not less than ten (10) days prior to the termination date which shall be specified in the notice. Tenant waives any notice which would otherwise be provided by law with respect to a month-to-month tenancy.

28.Assignment and Subletting.

(a)Tenant shall not assign or pledge this Lease, sublet all or any part of the

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Premises whether voluntarily, involuntarily or by operation of law, or permit the use or occupancy of the Premises by anyone other than Tenant, or assign this Lease for security purposes, without the written consent of Landlord. In the event that Landlord shall consent to an assignment or sublease hereunder, Tenant shall pay Landlord’s reasonable attorneys’ fees and costs, incurred in connection with the processing of documents necessary to the giving of such consent.

(b)In the event Tenant desires to sublet the Premises, or any portion thereof, or assign this Lease, Tenant shall give written notice thereof to Landlord at least fifteen (15) but not more than one hundred twenty (120) days prior to the proposed commencement date of such subletting or assignment, which notice shall set forth the name of the proposed subtenant or assignee, the relevant terms of any such sublease and copies of relevant financial information concerning the proposed subtenant or assignee. Landlord shall respond to the request within fourteen (14) days of Tenant’s notice. Tenant shall remain primarily liable, after any assignment or sublease, for the payment of Rental and other charges hereunder and the performance of all of Tenant’s obligations under this Lease, notwithstanding such assignment or subletting by Tenant.

(c)In addition to Landlord’s right to approve any subtenant or assignee Landlord shall have the option, in Landlord’s sole discretion, to terminate this Lease or in the case of a proposed sublease of less than all of the Premises to recapture the portion of the Premises to be sublet as of the date the subletting or assignment is to be effective. Landlord shall exercise Landlord’s option within thirty (30) days from the date of receipt of Tenant’s written notice. If Landlord exercises Landlord’s option to terminate this Lease or recapture a portion of the Premises, Tenant shall be released of all further liability hereunder from and after the effective date of such termination or recapture as to the Premises as a whole in connection in the case of termination or as to portion of the Premises recaptured. If Landlord exercises Landlord’s option to recapture a portion of the Premises, Tenant shall be released proportionately based on the Rental as of the date immediately prior to such recapture.

(d)Consent by Landlord to one (1) assignment or sublease shall not constitute a consent to other transfers or a waiver of Landlord’s rights pursuant to this paragraph.

(e)Notwithstanding anything contained in this paragraph 28 to the contrary, Tenant shall have the right to assign this Lease or to sublet the Premises to any corporation or entity into which Tenant may merge or to any corporation or entity arising out of a consolidation of Tenant with another corporation or to a corporation or other entity acquiring all or substantially all of the assets or stock of Tenant. Such right to assign the Lease or to sublet the Premises shall be expressly conditioned upon Tenant delivering to Landlord an executed copy of the assignment wherein the corporation or entity into which Tenant may merge or the corporation or entity arising out of a consolidation of Tenant with another corporation or entity or such acquiring corporation or entity, as the case may be, assumes for the benefit of Landlord all of the terms, conditions and covenants set forth in this Lease to be observed and performed by Tenant existing on and after the effective date of the assignment and agrees to be bound by the terms, conditions and covenants of this Lease. Any such assignment or subletting shall not relieve Tenant from liability for the payment of Rental or other sums herein provided or from the obligation to keep and be bound by the terms, conditions and covenants of this Lease.

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(f)No sublease shall extend beyond the Term.

29.Authority. If a party is a corporation, each of the individuals executing this Lease on behalf of such party does hereby covenant and warrant that the party is a duly authorized and existing corporation, that such party has and is qualified to do business in the state in which the Building is located, that the corporation has full right and authority to enter into this Lease and that each and all of the individuals signing on behalf of the corporation are authorized to do so. Upon Landlord’s request, Tenant shall provide Landlord with evidence reasonably satisfactory to Landlord confirming the foregoing covenants and warranties.

30.Subordination. Tenant agrees that this Lease shall be subject and subordinate to any mortgage, trust deed or like encumbrance heretofore or hereafter placed by Landlord or its successors in interest upon its interest in the Premises to secure the payment of monies loaned, interest thereon and other obligations. Landlord agrees to provide Tenant a Non-Disturbance Agreement from the holder of any future mortgage, trust deed or like encumbrance. The terms of any Non-Disturbance Agreement provided by Landlord shall also contain such covenants, conditions, restrictions, limitations, exceptions and the like as are reasonably necessary and customary for the protection and balancing of the competing interests of the Tenant, the Landlord’s Lender and Landlord. Such Non-Disturbance Agreement shall also provide that no assignment or transfer of Landlord’s rights hereunder to a lending institution as collateral security in connection with such encumbrance and no foreclosure sale or transfer in lieu of foreclosure shall affect Tenant’s right to possession, use and occupancy of the Premises so long as Tenant is not in default hereunder. The failure by Landlord to obtain such Non-Disturbance Agreement shall not affect the subordination of this Lease to any such encumbrance. Tenant agrees to execute and deliver, within ten (10) days of such request by Landlord, any and all instruments desired by Landlord subordinating in the manner requested by Landlord to such mortgage, trust deed or like encumbrance. Tenant further appoints Landlord as its attorney-in-fact for the Term to execute, on behalf of Tenant, any such instruments subordinating this Lease to such mortgage, trust deed or like encumbrance. In the event of the sale of the real property of which the Premises are a part upon foreclosure or upon the exercise of a power of sale, Tenant will, upon written request of the purchaser, attorn to the purchaser and recognize the purchaser as Landlord under this Lease.

31.Estoppel Certificate.

(a)Tenant shall from time to time, upon not less than ten (10) days’ prior notice, submit to Landlord, or to any person designated by Landlord, in a form presented by Landlord, a statement in writing certifying: (i) that this Lease is unmodified and in full force and effect (or if there have been modifications, identifying the same by the date thereof and specifying the nature thereof); (ii) that to the knowledge of Tenant no uncured default exists hereunder (or if such uncured default does exist, specifying the same); (iii) the dates to which Rental and other charges payable hereunder have been paid; (iv) that Tenant has no claims against Landlord and no defenses or offsets to Rental except for the continuing obligations under this Lease (or if Tenant has any such claims, defenses or offsets, specifying the same); and (v) such other matters as may be requested by Landlord.

(b)If Tenant shall fail to respond within ten (10) days of receipt by Tenant of a written request by Landlord as herein provided, Tenant shall be deemed to have given such certificate

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as above provided, without modification, and shall be deemed to have admitted the accuracy of any information supplied by Landlord to a prospective purchaser or mortgagee and that this Lease is in full force and effect, that there are not uncured defaults in Landlord’s performance, that the Security Deposit is as stated in the Basic Lease Provisions and that not more than one (1) month’s Minimum Monthly Rental has been paid in advance.

(c)Any such certificate may be relied upon by any prospective purchaser or lender.

32.Force Majeure. Except for Tenant’s obligation to pay Rental and other charges, neither party shall be deemed in default for the nonperformance or for any interruption or delay in performance of any of the terms, covenants and conditions of this Lease if the same shall be due to any labor dispute, strike, lock-out, civil commotion or like operation, invasion, rebellion, hostilities, war, terrorism, bio-terrorism, military or usurped power, sabotage, governmental regulations or controls, inability to obtain labor, services or materials, or through act of God or causes beyond the reasonable control of such party, provided such cause is not due to such party’s willful act or neglect.

33.Landlord’s Right of Entry. Landlord and/or its authorized representatives may enter the Premises at all reasonable times (but at any time in the event of emergency). Any such entry shall be in compliance with Tenant’s reasonable access rules, including easements and restrictions dealing with secured and/or restricted areas.

34.Landlord’s Right to Cure Default. If Tenant shall fail to perform any of the covenants or obligations to be performed by Tenant, Landlord, in addition to all other remedies provided herein, shall have the option to cure such default after ten (10) days’ written notice to Tenant. All of Landlord’s expenditures incurred to correct the default shall be reimbursed by Tenant upon demand with interest from the date of expenditure by Landlord at the Default Interest Rate. Landlord’s right to cure defaults is for the full protection of Landlord and the existence of this right shall not release Tenant from the obligation to perform all of the covenants herein provided to be performed by Tenant, or deprive Landlord of any other right which Landlord may have by reason of such default by Tenant.

35.Intentionally deleted.

36.Landlord’s Signs and Showings. Landlord may place on the Premises (but not on the Building) signs notifying the public that the Premises are “for sale” or “for rent” or “for lease”.  During the Term, Landlord may also show the Premises to potential tenants, buyers and/or lenders at all reasonable times during normal business hours and subject to the terms of paragraph 33 hereof.

37.Brokers. If Tenant has dealt with any other person or real estate broker in respect to leasing the Building, Tenant shall be solely responsible for the payment of any such fee due said person or firm and Tenant shall hold Landlord free and harmless against any liability in respect thereto.

38.Intentionally deleted.

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39.General Provisions.

(a)Complete Agreement. There are no oral agreements between Landlord and Tenant affecting this Lease, and this Lease may not be modified, except by written instrument by the parties or their successors in interest. This Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and other statements, if any, between Landlord and Tenant or displayed by Landlord to Tenant with respect to the subject matter of this Lease or the Building. There are no representations between Landlord and Tenant, other than those contained in this Lease, and all reliance with respect to this Lease is fully upon such representation. Submission of this instrument by Landlord for examination or signature by Tenant does not constitute a reservation of or option for the Lease, and this instrument is not effective as a Lease or otherwise until execution and delivery by both Landlord and Tenant.

(b)Exhibits and Addenda. Exhibits and Addenda attached hereto shall be initialed by Landlord and Tenant and are incorporated herein and made a part of this Lease.

(c)Recordation. Neither Landlord nor Tenant shall record this Lease or a memorandum hereof without the prior consent of the other party.

(d)Waiver. If either Landlord or Tenant waives the performance of any term, covenant or condition contained in this Lease, such waiver shall not be deemed a waiver of any subsequent breach of the same or any other term, covenant or condition contained in this Lease. Acceptance of Rental (in whole or part) by Landlord shall not constitute a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, regardless of Landlord’s knowledge of such preceding breach at the time of Landlord’s acceptance of such Rental. Failure by Landlord or Tenant to enforce any of the terms, covenants or conditions of this Lease for any length of time shall not be deemed a waiver or to decrease the right of Landlord or Tenant to insist thereafter upon the strict performance by the party violating any of the terms, covenants or conditions of this Lease. Waiver by Landlord or Tenant of any term, covenant or condition contained in this Lease may only be made by an original written document signed by the waiving party.

(e)Time. Time is of the essence of this Lease.

(f) Severability. If any term or provision of this Lease, the deletion of which would not adversely affect the receipt of any material benefit by either party hereunder, shall be held to be invalid or unenforceable to any extent, the remainder of this Lease shall not be affected thereby and each term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law.

(g)Notices. All notices, demands, consents, approvals and other communications which are required or desired to be given by either party to the other hereunder shall be in writing and shall be: hand delivered; transmitted by facsimile (with a duplicate copy sent by first class mail, postage prepaid); sent by certified or registered mail, postage prepaid, return receipt requested; or sent by reputable overnight courier service for delivery on the next business day, delivery charges prepaid. Notices delivered by hand or by overnight courier shall be deemed given when actually received or when refused by their intended recipient.  Facsimile notices shall be deemed delivered

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when a legible copy has been received (provided receipt has been verified by telephone confirmation or one of the other permitted means of giving notice pursuant to this paragraph. Mail notices shall be deemed received two (2) days following mailing. Notices shall be sent to Landlord and Tenant at the addresses set forth in the Basic Lease Provisions. A party may change its address for notice by giving at least ten (10) days prior notice of such change to the other party.

(h)Joint and Several Liability. If there be more than one Tenant, the obligations hereunder imposed upon Tenant shall be joint and several.

(i)Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive, but shall, whenever possible, be cumulative with all other remedies at law or in equity.

(j)Successors and Assigns. Subject to the provisions of paragraph 28 above, the terms, covenants and conditions contained herein shall be binding upon and inure to the benefit of the heirs, successors, executors, administrators and assigns of the parties.

(k)Costs of Suit. In the event that any party to this Lease institutes a suit, action, arbitration, or other legal proceeding of any nature whatsoever, relating to this Lease or to the rights or obligations of the parties with respect thereto, including, without limitation, any proceeding seeking a declaration of rights, for rescission or under the U.S. Bankruptcy Code and involving issues peculiar to federal bankruptcy law, the prevailing party shall be entitled to recover from the losing party its reasonable attorney, paralegal, accountant, expert witness (whether or not called to testify at trial or other proceeding) and other professional fees and all other fees, costs, and expenses actually incurred and reasonably necessary in connection therewith, including but not limited to deposition transcript and court reporter costs, as determined by the judge or arbitrator at trial or other proceeding, and including such fees, costs and expenses incurred in any appellate or review proceeding, or in collecting any judgment or award, or in enforcing any decree rendered with respect thereto, in addition to all other amounts provided for by law.

(l)Sale. In the event that the original Landlord or any successor in interest of Landlord in the Premises shall sell or convey the Premises, all liabilities and obligations on the part of the original Landlord or such successor under this Lease occurring thereafter shall terminate and thereupon all such liabilities and obligations shall be binding upon the new owner.

(m)Construction. The paragraph headings of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any parts of this Lease. If the context so requires, the singular pronoun shall be taken to mean and include the plural and that generally all grammatical changes shall be made, assumed and implied to make the provisions hereof apply equally to corporations, partnerships and individuals.

(n)Law Governing. This Lease shall be governed by the laws of the state in which the Premises are located.

(o)Consents. Any consent or approval required under this Lease shall be valid only if granted in writing and, unless otherwise specifically provided herein, shall not be unreasonably withheld or conditioned by either party.   The consenting party shall have the right to impose

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reasonable conditions as part of any consent including reimbursement of reasonable attorney and other professional fees and costs incurred in determining how to respond to the request for consent or approval. In no event shall either party have the right to terminate this Lease, and in no event shall either party be liable for monetary damages to the other, based upon a claim arising from the withholding or conditioning of consent or approval; the sole remedy of the party for any withholding or conditioning of consent or approval which is proven to be contrary to this Lease or its Exhibits shall be a court or arbitrator order requiring the party to grant the requested consent or approval on terms ordered by the court or arbitrator.

(p)Waiver of Jury Trial. LANDLORD AND TENANT EACH WAIVE ALL RIGHTS TO TRIAL BY JURY OF ANY SUITS, CLAIMS, COUNTERCLAIMS, ACTIONS OR OTHER PROCEEDINGS OF ANY KIND ARISING UNDER OR RELATING TO THIS LEASE (INCLUDING, WITHOUT LIMITATION ANY PRESENT OR FUTURE MODIFICATION HEREOF) OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO DEALINGS OF THE PARTIES HERETO OR THE PREMISES, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. LANDLORD AND TENANT EACH ACKNOWLEDGES THAT THIS IS A WAIVER OF A LEGAL RIGHT AND REPRESENTS TO THE OTHER THAT THIS WAIVER IS MADE KNOWINGLY AND VOLUNTARILY. LANDLORD AND TENANT EACH AGREES THAT ALL SUCH SUITS, CLAIMS, COUNTERCLAIMS, ACTIONS OR OTHER PROCEEDINGS SHALL BE TRIED BEFORE A JUDGE OF A COURT OF COMPETENT JURISDICTION, WITHOUT A JURY. LANDLORD AND TENANT EACH AGREES THAT THIS PARAGRAPH CONSTITUTES WRITTEN CONSENT THAT TRIAL BY JURY SHALL BE WAIVED IN ANY SUCH SUIT, CLAIM, COUNTERCLAIM, ACTION OR OTHER PROCEEDING AND AGREE THAT LANDLORD AND TENANT SHALL EACH HAVE THE RIGHT AT ANY TIME TO FILE THIS LEASE WITH A CLERK OR JUDGE OF ANY COURT IN WHICH ANY SUCH SUIT, CLAIM, COUNTERCLAIM, ACTION OR OTHER PROCEEDING MAY BE PENDING AS STATUTORY WAIVER OF TRIAL BY JURY.

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IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease in duplicate the day and year first herein written, any corporate signature being by authority of the Board of Directors.

Five Oaks Flex, LLC		Credence Systems Corporation
an Oregon limited liability company		a Delaware corporation
By:		By:
	R. Barry Menashe, Manager		Byron Milstead,
			Sr. Vice President and General Counsel
LANDLORD		TENANT

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EX-10.34

Exhibit 10.34

ABSOLUTELY NET

BASIC LEASE PROVISIONS

The following lease provisions are hereby incorporated into and made a part of the Absolutely Net Commercial Lease to which this is attached:

A.DATE OF LEASE: January 7, 2008 (the “Effective Date”)

B.NAMES AND ADDRESSES OF PARTIES:

LANDLORD:FIVE OAKS OFFICE, LLC
621 SW Alder, Suite 605
Portland, OR 97205

TENANT:CREDENCE SYSTEMS CORPORATION
Attn: General Counsel
5975 NW Pinefarm Place
Hillsboro, OR 97124

C.PREMISES: The land and improvements located at 5800 NW Pinefarm Place, Hillsboro, Washington County, Oregon, the legal description of which is Lot 2, FIVE OAKS WEST, City of Hillsboro, Washington County, Oregon. For the purpose hereof, the term “Building” and “Premises” shall have the same meaning.

D.COMMENCEMENT DATE: January 7, 2008

E.TERM: Commencement Date through January 6, 2010, with an option of Tenant to extend the same to January 6, 2011, upon written notice given to Landlord on or before January 6, 2009, if Tenant is not then in default.

F.MINIMUM MONTHLY RENTAL:    $82,149.10

Rent shall be payable to Landlord at 621 SW Alder, Suite 605, Portland, OR 97205, or such other address as Landlord may designate in writing. On the Commencement Date, Tenant shall pay Landlord Minimum Monthly Rental for the period from the Commencement Date through January 31, 2008.

G.USE: Offices, laboratory, research and development

H.SECURITY DEPOSIT: $82,149.10

I.TENANT’S REQUIRED INSURANCE: Commercial general liability insurance,

with limits of liability not less than $2,000,000.00 combined single limit.

BASIC LEASE PROVISIONS

ABSOLUTELY NET

BASIC LEASE PROVISIONS

The following lease provisions are hereby incorporated into and made a part of the Absolutely Net Commercial Lease to which this is attached:

A.DATE OF LEASE: January 7, 2008 (the “Effective Date”)

B.NAMES AND ADDRESSES OF PARTIES:

LANDLORD:FIVE OAKS OFFICE, LLC
621 SW Alder, Suite 605
Portland, OR 97205

TENANT:CREDENCE SYSTEMS CORPORATION
Attn: General Counsel
5975 NW Pinefarm Place
Hillsboro, OR 97124

C.PREMISES: The land and improvements located at 5800 NW Pinefarm Place, Hillsboro, Washington County, Oregon, the legal description of which is Lot 2, FIVE OAKS WEST, City of Hillsboro, Washington County, Oregon. For the purpose hereof, the term “Building” and “Premises” shall have the same meaning.

D.COMMENCEMENT DATE: January 7, 2008

E.TERM: Commencement Date through December 31, 2009, with an option of Tenant to extend the same to December 31, 2010, upon written notice given to Landlord on or before December 31, 2008, if Tenant is not then in default.

F.MINIMUM MONTHLY RENTAL:    $82,149.10

Rent shall be payable to Landlord at 621 SW Alder, Suite 605, Portland, OR 97205, or such other address as Landlord may designate in writing. On the Commencement Date, Tenant shall pay Landlord Minimum Monthly Rental for the period from the Commencement Date through January 31,2008.

G.USE: Offices, laboratory, research and development

H.SECURITY DEPOSIT: $82,149.10

I.TENANT’S REQUIRED INSURANCE: Commercial general liability insurance, with limits of liability not less than $2,000,000.00 combined single limit.

BASIC LEASE PROVISIONS

J.EXHIBITS: The following Exhibit is attached hereto and by this reference made a part hereof: None

K.BROKERS: None

BASIC LEASE PROVISIONS

ABSOLUTELY NET OFFICE LEASE

1.Parties. This Lease is made between Landlord and Tenant named in the Basic Lease

Provisions as of the date set forth therein.

2.Definitions. In addition to other definitions set forth in the Lease, unless the context otherwise specifies or requires, the terms listed below shall have the following meanings:

(a)“Building” shall mean the office building on the Premises.

(b)“CCRs” shall mean that certain Pacific Realty Associates, L.P. Protective Covenants for Five Oaks West Business Park dated February 22, 1996, recorded March 1, 1996, as Recorder’s No. 96018469; amended September 8, 1997, Recorder’s No. 970835161; October 4, 1999, Recorder’s No. 99113460; August 18, 2000, Recorder’s No. 2000-066732 and September 21, 2000, Recorder’s No. 2000-076736, as well as covenants, conditions and restrictions as shown on Partition Plat 1996-029, and Partition Plat 1997-083, official records of Washington County, Oregon.

(c)“Indemnified Parties” shall mean Landlord, Landlord’s Lender, Landlord’s Landlord, Landlord’s Property Manager, together with their respective affiliates, subsidiaries, successors, assigns, heirs, officers, directors, shareholders, partners, managers, members, employees, agents and contractors.

(d)“Landlord’s Lender” shall mean the holder of any loan that is secured by a lien against the Building.

(e)“Landlord’s Landlord” shall mean the holder of the Landlord’s interests in any lease that is superior to this Lease.

(f)“Landlord’s Property Manager” shall mean any real estate property manager engaged by Landlord from time to time to manage the Building.

3.Possession and Commencement.

(a)Tenant is in possession as of the Commencement Date.

(b)Tenant acknowledges and agrees that Tenant has been in possession of the Premises and that the Premises shall be leased by Landlord to Tenant in its present “AS IS” condition and that Landlord makes absolutely no representations or warranties whatsoever with respect to the Premises or the condition thereof. Tenant acknowledges that Landlord has not investigated and does not warrant or represent to Tenant that the Premises are fit for the purposes intended by Tenant or for any other purpose or purposes whatsoever. Tenant acknowledges that Tenant shall be solely responsible for any and all actions, repairs, permits, approvals and costs required for the rehabilitation, renovation, use, occupancy and operation of the Premises in accordance with applicable governmental requirements, including, without limitation, all governmental charges and fees, if any, which may be due or payable to applicable authorities. Tenant agrees that, by leasing the Premises,

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Tenant warrants and represents that Tenant has examined and approved all things concerning the Premises which Tenant deems material to Tenant’s leasing and use of the Premises. Tenant further acknowledges and agrees that (i) neither Landlord nor any agent of Landlord has made any representation or warranty, express or implied, concerning the Premises or which have induced Tenant to execute this Lease, and (ii) any other representations and warranties are expressly disclaimed by Landlord.

4.Rental.

(a)Beginning upon the Commencement Date and continuing during the entire Term, Tenant shall pay to Landlord the “Minimum Monthly Rental” as described in the Basic Lease Provisions as well as all “Additional Rental” described herein. All references to “Rent” or “Rental” hereinafter set forth in this Lease shall mean the Minimum Monthly Rental and Additional Rental. The Minimum Monthly Rental shall be paid in advance, without offset, notice or demand, on or before the first day of each calendar month during the Term, except for the first calendar month, which shall be prorated based on the Commencement Date.

(b)Tenant recognizes that late payment of Rental or other sum due hereunder will result in additional administrative expense to Landlord, the extent of which additional administrative expense is extremely difficult and economically impractical to ascertain. Tenant therefore agrees that if Rental or any sum is due and payable pursuant to this Lease, and when such amount remains due and unpaid five (5) days after said amount is due, such amount shall be increased by a “Late Charge” in an amount equal to five percent (5%) of the amount due. The amount of the Late Charge to be paid by Tenant shall be reassessed and added to Tenant’s obligation for each successive monthly period until paid. The provisions of this subparagraph in no way relieve Tenant of the obligation to pay Rental or other payments on or before the date on which they are due, nor do the terms of this subparagraph in any way affect Landlord’s remedies pursuant to paragraph 25 of this Lease in the event said Rental or other payment is unpaid after the date due.

5.Security Deposit.If an amount is set forth in the Basic Lease Provisions as the Security Deposit, upon execution of this Lease, Landlord acknowledges receipt of Tenant’s Security Deposit for the full and faithful performance by Tenant of all of the covenants and terms of this Lease required to be performed by Tenant. Such Security Deposit shall be returned to Tenant within thirty (30) days after the expiration of this Lease provided Tenant has fully and faithfully carried out all of Tenant’s obligations hereunder, including the payment of all amounts due to Landlord hereunder and the surrender of the Premises to Landlord in the condition required herein. However, Landlord, at Landlord’s option, may apply such sum on account of the payment of the last month’s Minimum Monthly Rental hereunder. Said sum may be commingled with other funds of Landlord and shall not bear interest. Notwithstanding the above, if Tenant becomes obligated to pay a Late Charge or upon the occurrence of any Event of Default described in paragraph 24 below, at Landlord’s option, the Security Deposit shall become immediately due and payable in full to Landlord, to be applied against any Late Charge, damages or losses suffered by Landlord as a result of Tenant’s failure to timely pay Rental or an Event of Default. In the event of a sale of the Building subject to this Lease, Landlord shall transfer the Security Deposit to the purchaser to be held under the terms of this Lease, and Landlord shall thereupon be released from all liability for the return of the Security Deposit; Tenant agrees to look solely to the new Landlord for the return of the Security Deposit.

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6.Taxes.

(a)Tenant shall be responsible for and pay before delinquent all taxes assessed commencing on the Commencement Date and continuing during the Term against any leasehold or personal property of any kind owned by or placed upon or about the Premises by Tenant.

(b)During the Term, as Additional Rental during the Term, Tenant shall pay before delinquent all real property taxes and assessments levied, assessed or imposed against the land and improvements in the Premises. All real property taxes and assessments payable for a period, part of which shall be beyond the expiration of the Term, shall be prorated between Landlord and Tenant. Tenant shall deliver evidence of payment of all taxes and assessments to Landlord upon payment thereof by Tenant.

(c)If during the Term, the voters or the Legislature of the state in which the Premises are located enact any substitute taxes, in any name or form, which may be adopted to replace or supplement real property taxes, then such substitute taxes shall be considered the equivalent of real property taxes for the purposes of this paragraph. Should there be in effect during the Term any law, statute or ordinance which levies, assesses or imposes any tax (other than any income tax) upon rents, Tenant shall pay such tax as may be attributed to the rents under this Lease or shall reimburse Landlord for any such taxes paid by Landlord within ten (10) days after Landlord bills Tenant for the same.

7.Insurance.

(a)During the Term, Tenant shall maintain in full force a policy or policies of property insurance written on a “special causes of loss” form (otherwise known as “all other perils”) to the extent of at least one hundred percent (100%) percent of the replacement cost of the Building (excluding foundations) which insurance shall also include twelve (12) months business interruption insurance, plate glass insurance, vandalism, malicious mischief, demolition and windstorm coverage for any additional costs resulting from debris removal and coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any portion of the Building required to be demolished, removed or modified by reason of the enforcement of any building, zoning, safety or land use laws as a result of a covered loss. Tenant shall also carry earthquake insurance in amounts of not less than $25,000,000.00 covering all of Tenant’s property outside the State of California.

(b)During the Term, Tenant shall maintain in full force a commercial general liability insurance policy of not less than $2,000,000.00, combined single limit, insuring Landlord against liability for bodily injury and property damage occurring in, or about the Building.

(c)Tenant shall at its own expense during the Term also carry in full force and effect:

(i)Fire and/or casualty insurance with standard extended coverage endorsements to the extent of the full replacement value of Tenant’s trade fixtures, inventory

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and all other personal property owned or used by Tenant in the operation of Tenant’s business with the proceeds thereof being used by Tenant for the replacement of Tenant’s such property in the event of loss. Said insurance shall provide for a deductible no greater than$100,000.00.

(ii)Workmen’s Compensation and Employer’s Liability coverage of not less than statutory limits of the state in which the Premises is located.

(d)All such insurance policy shall be with an insurance company or companies with general policyholders’ rating of not less than “A VIII” as rated in the most current available Best’s Key Rating Guide or “A VIII” as then currently rated by Standard & Poor’s or Moody’s Investors Service and which are qualified to do business in the state in which the Premises are located. Such policies shall provide that the insurance shall not be cancelable or reduced without at least thirty (30) days’ prior written notice to Landlord, and shall be deemed primary and noncontributing with any insurance available to Landlord. Tenant shall furnish Landlord with a certificate or other acceptable evidence that such insurance is in effect. Tenant shall also furnish Landlord with evidence that all premiums have been paid as and when paid by Tenant.

(e)If Tenant shall fail to obtain insurance as required under this paragraph 7, Landlord may, but shall not be obligated to, obtain such insurance for Landlord’s own benefit and not for or on behalf of Tenant, and in such event, Tenant shall pay, as Additional Rent, the premium for such insurance upon demand by Landlord.

(f)Landlord acknowledges that Tenant may maintain the insurance required pursuant to this paragraph 7 under what is commonly known as a “blanket policy”.

8.Intentionally Deleted.

9.Intentionally Deleted.

10.Use of Premises. The Premises shall be used for the Use set forth in the Basic Lease Provisions and for no other purpose without Landlord’s prior written consent. In connection with the Use of the Premises, Tenant shall:

(a)Conform to all applicable laws and regulations of any public authority affecting the Premises and the Use thereof, and correct at Tenant’s own expense any failure of compliance.

(b)Refrain from any activity which would be reasonably offensive to Landlord or to owners or users of adjoining property, or which would tend to create a nuisance or damage the reputation of the Premises. Without limiting the generality of the foregoing, Tenant shall not permit any objectionable noise or odor to escape or be emitted from the Premises.

(c)Refrain from loading the floors beyond their designed capacity and the point considered safe by a competent engineer or architect selected by Landlord.

(d)Refrain from making any marks or attaching any sign, insignia, antenna, aerial

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or other device (collectively “Signs”) to the exterior or interior walls, windows or roof of the Premises without the written consent of the Landlord. Landlord hereby consents to the existing Signs. Notwithstanding Landlord’s consent to any Signs, Tenant may remove all such Signs upon termination of this Lease and, if removed, repair any and all damage to the Premises caused thereby at Tenant’s own cost and expense, including but not limited to, restoring the area under and/or around any such removed sign to the same condition as the remainder of the exterior of the Premises. Landlord hereby approves Tenant’s existing signs.

11.Hazardous Materials.

(a)As used herein, the term “Hazardous Material” means any hazardous or toxic substance, material, or waste which is or becomes regulated by any federal, state, or local governmental authority including, but not limited to, those substances, materials, and wastes listed in the United States Department Transportation Hazardous Materials Table (49 CFR 172.101) or by the United States Environmental Protection Agency as hazardous substances (40 CFR Part 302) and any amendments thereto, any material or substance which is defined as a “hazardous waste” pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 USC § 6903), or defined as a hazardous substance pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 US § 9601 et seq. (42 USC § 9601) together with petroleum products.

(b)Except for Allowable Amounts, Tenant represents and warrants to Landlord that, to the best of Tenant’s knowledge, as of the Commencement Date, there are no Hazardous Material upon the Premises except small quantities for Tenant’s Use normally found in similar properties, which Hazardous Material is maintained in connection with applicable law (“Allowable Amounts”). Except for Allowable Amounts, Tenant shall not generate, store, use, or permit the generation, storage, or usage of any Hazardous Material upon the Premises by Tenant, its agents, employees, contractors, or invitees without the prior written consent of Landlord, which consent may be withheld if Tenant does not demonstrate to Landlord’s reasonable satisfaction that such Hazardous Material is necessary or useful to Tenant’s business and will be used, kept, and stored in a manner that complies with all laws regulating any such Hazardous Material so brought upon or used or kept in or about the Premises.

(c)Tenant shall not cause or permit to be discharged into the plumbing or sewage of the Premises any Hazardous Material.

(d)Without limiting or otherwise qualifying any provision hereof, Tenant shall, at its sole cost and expense, comply with any and all rules, regulations, codes, ordinances, statutes, and other requirements of any lawful governmental authority respecting Hazardous Material, pollution, harmful chemicals, and other materials in connection with Tenant’s activities on or about the Premises and those of its agents, employees, contractors, or invitees. Tenant specifically agrees to comply with such requirements relating to the handling, use, storage, and disposal of Hazardous Material and other materials which are considered by any governmental authority as harmful, dangerous, toxic, flammable, or otherwise deserving special care. In the furtherance of, and not in limitation of, Tenant’s obligations hereunder, throughout the Term, Tenant shall do or cause to be done all things necessary to preserve and keep in full force and effect permits required for the conduct of its business

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and operations from the time of commencement of this Lease until its expiration or termination.

(e)Tenant shall pay the full cost of any cleanup, remedial, removal, or restoration work performed on or about the Premises (including posting a performance bond for the estimated cost of cleanup if required by Landlord) as required by any governmental authority in order to remove, neutralize, or otherwise treat Hazardous Material of any type whatsoever directly or indirectly placed by Tenant or its agents, employees, contractors, or invitees on or about the Premises.

(f)Tenant shall be solely responsible for and shall indemnify, defend, and hold Indemnified Parties harmless from any and all claims, judgments, damages, fines, liabilities, demands, causes of action, proceedings, hearings, losses, including without limitation, diminution in value of the Premises, damages for the loss or restriction on use of rentable or usable space or of any amenity of the Premises, damages arising from any adverse impact on marketing of space, and sums paid in settlement of claims, attorney’s fees, consultant fees, and expert fees, which arise during or after the term hereof as a result of contamination by Hazardous Material from Tenant’s Use or activities, or the use or activities of Tenant’s agents or contractors relating to the storage, placement or use of Hazardous Material (hereinafter collectively referred to as “Claims”).  This indemnification by Tenant includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal, or restoration work required by any federal, state, or local governmental agency or political subdivision because of Hazardous Material present in the soil or ground water on or under the Premises if caused by Tenant. Without limiting the foregoing, if the presence of any Hazardous Material on the Premises caused or permitted by Tenant or its agents or contractors results in any contamination of the Premises, Tenant shall promptly take all actions at its sole expense as are necessary to return the Premises to the condition existing prior to the release of any such Hazardous Material to the Premises, provided that Landlord’s approval of such actions shall first be obtained. The foregoing indemnity shall survive the expiration or earlier termination of this Lease. Tenant agrees to defend all such Claims on behalf of Indemnified Parties with counsel reasonably acceptable to Landlord.

(g)In addition to any other right of inspection contained herein, Landlord and its agents shall have the right, following reasonable notice (except in case of emergency), but not the duty, to inspect the Premises at any time to determine whether Tenant is complying with the terms of this Lease. If Tenant is not in compliance with this Lease following notice to Tenant as required pursuant to paragraph 24(b) below, Landlord shall have the right to immediately enter upon the Premises to remedy any contamination caused by Tenant’s failure to comply notwithstanding any other provision of this Lease. Landlord shall use its best efforts to minimize interference with Tenant’s business but shall not be liable for any interference caused thereby.

(h)Any default under this paragraph shall be a material default of this Lease enabling Landlord to exercise any of the remedies set forth in this Lease.

(i)Notwithstanding anything to the contrary provided herein, it shall not be unreasonable for Landlord to withhold its consent to any assignment, encumbrance, sublease, or other transfer of this Lease if a proposed transferee’s anticipated use of the Premises involves the generation, storage, use, treatment, or disposal of any Hazardous Material.  No consent to any

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assignment or subletting shall constitute a further waiver of this provision. Any such assignment or subletting without such consent shall be void and shall at Landlord’s option constitute a default hereunder.

12.Intentionally Deleted.

13.Tenant Improvements and Alterations.

(a)Intentionally deleted.

(b)Tenant shall not be required to obtain the consent or approval of Landlord for any decorations, painting, plastering, or carpeting, but Tenant shall be required to give Landlord at least ten (10) days prior written notice thereof.

(c)Tenant shall be required to obtain the prior written approval of Landlord for any alterations or improvements to the Premises which:

(i)are not located wholly within the Premises, the demising walls of the Premises, the entrances to and/or exits from the Premises, or the floor or ceiling of the Premises (unless required to connect the utility systems within the Premises to the utility systems of the Building);

(ii)decrease the value of the Building;

(iii)adversely affect the structural integrity of the Building or the operation of the HVAC, plumbing, electricity, or water and sewer systems of the Building;

(iv)require any roof penetration; or

(v)which are at a cost of $25,000.00 or more.

(d)Any such alterations, additions or improvements shall be made at Tenant’s sole cost and expense. In the event Tenant’s alterations, additions or improvements require roof penetration, Tenant shall use Landlord’s roofing contractor or such other contractor as Landlord reasonably approves. Landlord shall have ten (10) days after receiving Tenant’s written notice of proposed work to respond or provide such written consent. Tenant shall provide Landlord copies of any plans and specifications. Tenant shall deliver to Landlord as-built plans showing all alterations within thirty (30) days following installation of the alteration. Tenant shall provide such construction insurance as may be reasonably required by Landlord.

(e)Landlord shall have the right to require Tenant to furnish adequate security to insure timely payment to the contractors and subcontractors for such work. All work performed by the Tenant shall be done in strict compliance with all applicable building, fire, sanitary and safety codes, and other applicable laws, statutes, regulations and ordinances, and Tenant shall secure all necessary permits for the same. Tenant shall keep the Premises free from all liens in connection with any such work. All work performed by the Tenant shall be carried forward expeditiously, shall not

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interfere with Landlord’s work or the work to be performed by or for other tenants, and shall be completed within a reasonable time. Landlord or Landlord’s agents shall have the right at all reasonable times to inspect the quality and progress of such work.

(f)Tenant shall provide its own trash container(s) for construction debris; promptly remove all construction and related debris from the Premises; and immediately following completion of construction, Tenant shall repair and restore any portions of the Premises harmed as a result of the construction activities to the condition existing immediately prior to construction. Landlord’s review and/or approval of any request for alterations, additions or improvements in or to the Premises, and/or the plans and specifications with respect thereto, shall not create responsibility or liability on the part of Landlord, nor shall such review or approval evidence or constitute a representation or warranty by Landlord with respect to the action or undertaking approved or the completeness, accuracy, design sufficiency, or compliance of such plans or specifications with laws, ordinances, rules, and /or regulations of any governmental agency or authority. Landlord and Tenant acknowledge that such items shall be Tenant’s exclusive responsibility.

(g)All improvements, alterations and other work performed on the Premises by either Landlord or Tenant shall be the property of Landlord when installed, except for Tenant’s trade fixtures, and may not be removed at the expiration of this Lease unless the applicable Landlord’s consent specifically provides otherwise.

14.Repairs and Maintenance.

(a)During the Term, Tenant shall continue all of Tenant’s existing maintenance programs and service contracts (either those in existence or replacements thereof). Tenant shall maintain, replace and repair the Premises (including but not limited to landscaping and parking lots) as well as all the structural and exterior components of the Building including the roof during the Term. Tenant shall repair and replace the component parts of the heating and air conditioning, water, sewer, gas and electrical systems as necessary to maintain said systems in the same condition as existed on the Effective Date, reasonable wear and tear excepted. Tenant shall provide all ordinary maintenance and repairs to the Premises, including, without limitation, replacement of broken glass, replacement of worn or damaged flooring, repair of lighting fixtures, and repairs and maintenance of interior walls and ceilings. On the expiration of the Term or other termination of this Lease, Tenant shall deliver up the Premises with all required repairs and replacements completed and with all improvements located thereon, in good repair and condition, broom clean, reasonable wear and tear and the provisions of paragraph 21 excepted.

(b)Tenant agrees that Landlord shall have no obligation under this Lease to make any repairs or replacements to the Premises or improvements thereon, or any alteration, addition, change, or improvement thereof or thereto, whether structural or otherwise. The intention of this Lease is that the rent received by Landlord shall be “ABSOLUTELY NET”, free and clear of any expenses to Landlord under this Lease for the taxes, insurance, and/or construction, care, maintenance (including common area maintenance charges and charges accruing under easements, assessments and/or charges pursuant to the CCRs or other agreements relating to the Premises), operation, repair, replacement, alteration, addition, change, and improvement of or to the Premises. Upon the expiration or earlier termination of this Lease, Tenant shall remain responsible for, and shall

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pay to Landlord, any cost, charge or expense for which Tenant is otherwise responsible for hereunder attributable to any period (prorated on a daily basis) prior to the expiration or earlier termination of this Lease.

(c)Tenant shall not enter into any maintenance agreements that will extend beyond the Term without Landlord’s prior written consent.

(d)Upon expiration of the Term, Tenant shall assign to Landlord any warranties relating to the Premises and deliver to Landlord all manuals, plans, specifications, records and other documents maintained by Tenant in connection with the maintenance of the Building.

15.Liens. Tenant shall keep the Premises and Tenant’s leasehold interest free from all liens, including construction, mechanic’s and materialmen’s liens, arising from any act or omission of Tenant or those claiming under Tenant. Notwithstanding the foregoing, in the event of a lien, Tenant shall remove said lien by applicable statutory bond procedure or otherwise discharge such lien within ten (10) days of written notice from Landlord. Landlord shall have the right to post and maintain on the Premises such notices of nonresponsibility as are provided for under the lien laws of the state in which the Premises are located.

16.Utilities. Tenant shall be solely responsible and promptly pay for all water and sewer facilities, gas and electrical services, including heat and light, garbage collection, and all other facilities and utility services used by Tenant in the Premises during the Term. Tenant shall pay for all light bulbs, tubes and ballasts in the Premises. Tenant agrees at all times to cooperate fully with Landlord and to abide by all the regulations and requirements which Landlord may prescribe for the proper functioning and protection of said systems. Except for Landlord’s willful misconduct, Landlord shall not be liable for, and Tenant shall not be entitled to, any abatement or reduction of Rental nor shall Tenant be excused from compliance with all terms and provisions of this Lease by reason of Landlord’s failure to furnish any of the foregoing.

17.Light and Air. This Lease does not grant any rights of access to light or air over any part of the Premises.

18.Indemnity.

(a)The Indemnified Parties shall not be liable to Tenant, or to Tenant’s employees, agents, invitees, licensees, contractors, or visitors, or to any other person, for any injury to person or damage to property or for consequential damages of any nature on or about the Premises caused by any act or omission of Tenant, its agents, servants, or employees, or of any other persons entering upon the Premises under express or implied invitation by Tenant; provided, however, subject to the provisions of paragraph 19 below, which provisions shall control the terms of this paragraph 18, an Indemnified Party shall be liable for actual damages resulting from its negligence or willful misconduct.

(b)Tenant agrees to indemnify, defend, and hold harmless Indemnified Parties of and from any and all claims, demands, causes of action, losses, liabilities, judgments, attorney’s fees, expenses, or damages (i) arising from any accident, incident, injury, damage, howsoever and by

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whomsoever caused, to any person or property occurring in or about the Premises, except to the extent such accident, incident, injury or damage is caused by the negligence or willful misconduct of an Indemnified Party, (ii) arising out of any and all defaults by Tenant or its agents, employees, or contractors under this Lease, or (iii) arising out of the negligence or willful misconduct of Tenant or its agents, employees, or contractors. Tenant shall, at its own cost and expense, defend any and all suits which may be brought against Indemnified Parties either alone or in connection with others upon any such above-mentioned cause or claim, and shall satisfy, pay and discharge any and all judgments that may be recovered against Indemnified Parties in any such action or actions in which Indemnified Parties may be a party defendant.

(c)The provisions of this paragraph shall survive expiration or earlier termination of this Lease with respect to claims or liability occurring prior to such termination.

19.Waiver of Subrogation. Notwithstanding anything to the contrary contained in this Lease, but without limiting any other waiver set forth herein, Landlord and Tenant hereby mutually agree that in the event either Landlord or Tenant sustains a loss by reason of fire or any other event or casualty and such party is then covered (or is required by the terms of this Lease to be covered) in whole or in part by insurance with respect to such loss, then the party sustaining the loss agrees that, to the extent (but only to the extent) such party is compensated for such loss by its insurance (or to the extent the insurance required to be carried under this Lease by such party would have compensated the party for such loss), the party sustaining the loss shall have no right to recovery against the other party, its partners, officers, agents, contractors or employees, and waives any right of subrogation which might otherwise exist in or accrue to any third party. Landlord and Tenant agree that all policies of insurance obtained by them pursuant to the terms of this Lease shall contain provisions or endorsements thereto waiving the insurer’s rights of subrogation with respect to claims against the other and, unless the policies permit waiver of subrogation without notice to the insurer, each shall notify its insurance companies of the existence of the waiver and indemnity provisions set forth in this Lease. In all events, but subject to any other waiver set forth herein, the party sustaining any loss which is required to be covered by insurance pursuant to the other provisions of this Lease may recover from the other party (assuming such other party otherwise has liability for the loss suffered) the amount of any deductible or excess loss under any applicable policy of insurance, to the extent of the deductible under such policy and/or such excess loss.

20.Damage to Tenant’s Property. Except for Landlord’s willful misconduct, Landlord shall not be liable and Tenant hereby waives all claims against Landlord for any damage to the goods, stock, merchandise or other property of Tenant or to any person in or about the Premises resulting from any cause whatsoever, including, but not limited to, damage by rain, water, gas, steam, electricity or theft.

21.Damage or Destruction.

(a)If the Premises shall be partially damaged by fire or other cause and subparagraph (b) below does not apply, the damage to the Premises shall be repaired by Tenant, at Tenant’s sole cost and expense and there shall be no abatement of Rent. The repairs shall be made at the expense of Tenant, whether or not insurance proceeds are available and shall be accomplished with all reasonable dispatch. Tenant, at Tenant’s expense shall repair and/or replace all of Tenant’s

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property necessary for the operation of Tenant’s business.

(b)If, during the last year of the Term, the Premises are damaged by a fire or other cause to the extent of fifty percent (50%) or more of the replacement cost thereof, either party may elect to terminate this Lease as of the date of damage or destruction by notice given to the other party in writing not more than sixty (60) days following the date of damage provided, however, if Landlord has elected to terminate this Lease, Tenant may cancel Landlord’s such election by agreeing to make all necessary repairs. If such notice is given, all rights and obligations of the parties shall cease as of the date of termination and Minimum Monthly Rental and Additional Rent shall be prorated as of said date and Tenant shall pay to Landlord one hundred percent (100%) of the replacement cost for damage to the Building (excluding foundations and without deduction for depreciation) without deductible. Tenant’s said obligation is not contingent on Tenant having received insurance proceeds. Any insurance which may be carried by Landlord or Tenant shall be for the sole benefit of the party carrying such insurance.

(c)In the absence of an election to terminate as described in subparagraph (b) above, Tenant shall proceed to restore the Building pursuant to the provisions of subparagraph (a) above to substantially the same form as prior to the damage or destruction and there shall be no abatement of Rent.

22.Condemnation.

(a)If the entire Premises shall be acquired or condemned by any governmental authority under its power of eminent domain for any public or quasi-public use or purpose, this Lease shall terminate as of the date of vesting or acquisition of title in the condemning authority and the Rental shall be abated on that date. If less than the whole should be so acquired or condemned, Tenant shall have the option to terminate this Lease by notice given to Landlord within thirty (30) days of such taking. In the event that such a notice of termination is given, this Lease shall terminate as of the date of vesting or acquisition of title in the condemning authority and the Minimum Monthly Rental and Additional Rent shall be prorated as of such date.

(b)If this Lease has not been terminated as hereinabove set forth, this Lease shall continue in force and effect, but from and after the date of the vesting of title in the condemning authority, the Minimum Monthly Rental payable hereunder during the unexpired portion of the Term shall be reduced proportionately and any Additional Rent payable pursuant to the terms to reflect the diminution of the Premises.

(c)In connection with any taking of the Premises, Landlord shall be entitled to receive the entire amount of any award which may be made or given in such taking or condemnation, without deduction or apportionment for any estate or interest of Tenant, it being expressly understood and agreed by Tenant that no portion of any such award shall be allowed or paid to Tenant for any so-called bonus or excess value of this Lease, and such bonus or excess value shall be the sole property of Landlord. Tenant shall not assert any claim against Landlord or the taking authority for any compensation because of such taking (including any claim for bonus or excess value of this Lease);  provided, however, if any portion of the Premises is taken, Tenant shall have the right, if permitted pursuant to applicable law, to recover from the condemning authority (but not from Landlord) any compensation as may be separately awarded or

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recoverable by Tenant for the taking of Tenant’s furniture, fixtures, equipment and other personal property within the Premises, for Tenant’s relocation expenses, and for any loss of goodwill or other damage to Tenant’s business by reason of such taking.

23.Bankruptcy. Subject to paragraph 28, this Lease shall not be assigned or transferred voluntarily or involuntarily by operation of law. It may, at the option of Landlord, be terminated if Tenant be adjudged bankrupt or insolvent, or makes an assignment for the benefit of creditors, or files or is a party to the filing of a petition in bankruptcy, or commits an act of bankruptcy, or in the case a receiver or a trustee is appointed to take charge of any of the assets of Tenant or subtenants and assigns in or about the Premises, and such receiver or trustee is not removed within thirty (30) days after the date of his appointment, or in the event of judicial sale of the personal property in or on the Premises upon judgment against Tenant or any subtenant or assignee, unless such property or reasonable replacement thereof be installed on the Premises. To the extent permitted by law, this Lease or any sublease hereunder shall not be considered as an asset of a debtor-in-possession, or an asset in bankruptcy, insolvency, receivership, or other judicial proceedings.

24.Tenant’s Default. The following shall be “Events of Default” by Tenant:

(a)Failure of Tenant to pay any Rental when due or failure of Tenant to pay any other charge required hereunder within five (5) days of written notice from Landlord to Tenant. Notwithstanding anything to the contrary provided herein, if Landlord has given one such notice to Tenant in a calendar year, Tenant shall be in default if rental is not paid within five (5) days of the date due without the need for any further notice from Landlord to Tenant.

(b)Failure of Tenant to comply with any term or condition or fulfill any obligation of this Lease (other than the payment of Rental or other charges), within twenty (20) days after written notice by Landlord specifying the nature of the default with reasonable particularity. If the default is of such a nature that it cannot be completely remedied within the twenty (20) day period, this subparagraph shall be complied with if Tenant begins correcting the default within the twenty (20) day period and thereafter proceeds with reasonable diligence and in good faith to effect the remedy as soon as practicable (but in no event longer than ninety (90) days).

(c)Intentionally deleted.

(d)The bankruptcy or insolvency of Tenant or the occurrence of other acts specified in paragraph 23 of this Lease which give Landlord the option to terminate.

(e)A default pursuant to that certain Absolute Net Office Lease of even date between Five Oaks Flex, LLC as landlord and Tenant shall be deemed an Event of Default hereunder.

25.Remedies on Tenant’s Default. If an Event of Default occurs, Landlord may, at
Landlord’s option, exercise any one or more of the rights and remedies available to a landlord in the
state in which the Premises is located to redress such default, consecutively or concurrently, including
the following:

(a)Landlord may elect to terminate Tenant’s right to possession of the Premises or

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any portion thereof by written notice to Tenant. Following such notice, Landlord may re-enter, take possession of the Premises and remove any persons or property by legal action or self-help with the use of reasonable force. To the extent permitted by law, Landlord shall have the right to restrain the personal property belonging to Tenant which is on the Premises at the time of re-entry, or the right to such other security interest therein as the law may permit, to secure all sums due or which become due to Landlord under this Lease. Perfection of such security interest shall occur by taking possession of such personal property or otherwise provided by law.

(b)Following re-entry by Landlord, Landlord may relet the Premises for a term longer or shorter than the Term and upon any reasonable terms including the granting of rent concessions to the new tenant. Landlord may alter, refurbish or otherwise change the character or use of the Premises in connection with such reletting. Landlord shall not be required to relet for any use or purpose which Landlord may reasonably consider injurious to its property or to any tenant which Landlord may reasonably consider objectionable. No such reletting by Landlord following a default by Tenant shall be construed as an acceptance of the surrender of the Premises. If rent received upon such reletting exceeds the rent received under this Lease, Tenant shall have no claim to the excess.

(c)Following re-entry, Landlord shall have the right to recover from Tenant the following damages:

(i)The Worth at the Time of the Award (as hereinafter defined) of all unpaid Rental for the period prior to re-entry; plus

(ii)The Worth at the Time of the Award (as hereinafter defined) of the amount equal to the Rental lost during any period during which the Premises are not relet prior to the date of the award, if Landlord uses reasonable efforts to relet the Premises; plus

(iii)The Worth at the Time of the Award (as hereafter defined) of the amount by which the unpaid Rental for the balance of the term after the time of the award exceeds the amount Tenant proves could be avoided; plus

(iv)Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant’s failure to perform Tenant’s obligation under this Lease or which in the ordinary course of things would be likely to result therefrom, including, without limitation, the cost of clean up and repair in preparation for a new tenant, renovations, remodeling, the cost of correcting any defaults or restoring any unauthorized alterations, the amount of any real estate commissions or advertising expenses and attorney’s fees; plus

(v)At Landlord’s election, any other amount in addition to or in lieu of the foregoing, as may be permitted from time to time by applicable law; plus

(vi)Reasonable attorney’s fees and expert witness fees incurred in connection with the default, whether or not any litigation is commenced; plus

(d)If Landlord lists the Premises with a real estate broker experienced in leasing

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commercial property in the metropolitan area in which the Premises are located, such listing shall be conclusively presumed to be the taking of reasonable efforts to relet the Premises; plus

(e)As used in subparagraphs (c)(i) and (c)(ii) above, the “Worth at the Time of Award” is computed by allowing interest at a rate equal to the published prime interest rate of the Bank of America, N.A., San Francisco, California plus four (4%) percent, unless such rate exceeds lawful limits permitted by the laws of the state in which the Premises are located, in which case interest shall accrue at the highest rate permitted in such state (hereinafter referred to as the “Default Interest Rate”). As used in subparagraph (c)(iii) above, the “Worth at the Time of Award” is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award, plus one (1%) percent.

(f)In the event that Tenant remains in possession following default and Landlord does not elect to re-enter, Landlord may recover all delinquent Rental and shall have the right to cure any nonmonetary default and recover the cost of such cure from Tenant, plus interest from the date of the expenditure at the Default Interest Rate. In addition, Landlord shall be entitled to recover attorney’s fees reasonably incurred in connection with the default, whether or not litigation is commenced. Landlord may sue to recover such amounts as they accrue, and no one action for accrued damages shall bar a later action for damages subsequently accruing.

(g)The foregoing remedies shall not be exclusive but shall be in addition to all other remedies and rights provided under applicable law, and no election to pursue one right shall preclude resort to another consistent remedy.

26.Surrender at Expiration.

(a)Upon expiration of the Term or earlier termination on account of default, Tenant shall deliver all keys to Landlord and peaceably surrender the Premises broom clean and in the same condition as exists on the Effective Date, reasonable wear and tear excepted. Depreciation and wear from ordinary use for the purpose for which the Premises were let need not be restored, but all repairs and replacements for which Tenant is responsible shall be completed pursuant to paragraph 14 above. Tenant’s obligations under this paragraph shall be subject to the provisions of paragraph 21 relating to damage or destruction.

(b)All improvements and alterations placed on the Premises during the Lease term, other than Tenant’s trade fixtures, shall, at Landlord’s option exercised at the time of granting of its consent, become the property of Landlord. Movable furniture, decorations, floor covering other than hard surface bonded or adhesively fixed flooring, curtains, drapes, blinds, furnishings and trade fixtures shall remain the property of Tenant if placed on the Premises by Tenant. Anything to the contrary contained herein notwithstanding, in no event shall Tenant be required to remove any improvements, alterations, or fixtures (but not trade fixtures) that exist on the Premises as of the Commencement Date.

(c)If Landlord so elects at the time of granting its consent, Tenant shall remove any or all fixtures installed on the Premises during the Lease term which would otherwise remain the property of Landlord, and shall repair any physical damage resulting from the removal. If Tenant fails

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to remove such fixtures, Landlord may do so and charge the cost to Tenant with interest from the date of expenditure at the Default Interest Rate. Tenant shall remove all furnishings, furniture and trade fixtures which remain the property of Tenant. If Tenant fails to do so, this shall be an abandonment of the property, and Landlord may retain the property and all rights of Tenant with respect to it shall cease or, by notice in writing given to Tenant within twenty (20) days after removal was required, Landlord may elect to hold Tenant to its obligation of removal. If Landlord elects to require Tenant to remove, Landlord may effect a removal and place the property in public or private storage for Tenant’s account. Tenant shall be liable to Landlord for the cost of removal, transportation to storage, and storage, with interest on all such expenses from the date of expenditure by Landlord at the Default Interest Rate.

(d)The time for removal of any property or fixtures which Tenant is required to remove from the Premises upon termination shall be as follows:

(i)On or before the date this Lease terminates because of expiration of the term or because of a default under paragraphs 22 and 23.

(ii)Within thirty (30) days after notice from Landlord requiring such removal where the property to be removed is a fixture which Tenant is not required to remove except after such notice by Landlord, and such date would fall after the date on which Tenant would be required to remove other property.

27.Holdover.

(a)If Tenant does not vacate the Premises at the time required, Landlord shall treat Tenant as a tenant from month-to-month, subject to all the provisions of this Lease except the Term, except that the Rental shall be one hundred fifty (150%) percent of the Minimum Monthly Rental due for the full calendar month immediately preceding the expiration of the Term together with all damages (but specifically excluding consequential damages) sustained by Landlord by said failure to vacate. Failure of Tenant to remove fixtures, furniture, furnishings or trade fixtures which Tenant is required to remove under this Lease shall constitute a failure to vacate to which this paragraph shall apply if the property not removed will substantially interfere with the occupancy of the Premises by another tenant or with occupancy by Landlord for any purpose including preparation for a new tenant.

(b)If a month-to-month tenancy results from a holdover by Tenant under this paragraph, the tenancy shall be terminable at the end of any monthly rental period on written notice by either party given not less than ten (10) days prior to the termination date which shall be specified in the notice. Tenant waives any notice which would otherwise be provided by law with respect to a month-to-month tenancy.

28.Assignment and Subletting.

(a)Tenant shall not assign or pledge this Lease, sublet all or any part of the Premises whether voluntarily, involuntarily or by operation of law, or permit the use or occupancy of

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the Premises by anyone other than Tenant, or assign this Lease for security purposes, without the written consent of Landlord. In the event that Landlord shall consent to an assignment or sublease hereunder, Tenant shall pay Landlord’s reasonable attorneys’ fees and costs, incurred in connection with the processing of documents necessary to the giving of such consent.

(b)In the event Tenant desires to sublet the Premises, or any portion thereof, or assign this Lease, Tenant shall give written notice thereof to Landlord at least fifteen (15) but not more than one hundred twenty (120) days prior to the proposed commencement date of such subletting or assignment, which notice shall set forth the name of the proposed subtenant or assignee, the relevant terms of any such sublease and copies of relevant financial information concerning the proposed subtenant or assignee. Landlord shall respond to the request within fourteen (14) days of Tenant’s notice. Tenant shall remain primarily liable, after any assignment or sublease, for the payment of Rental and other charges hereunder and the performance of all of Tenant’s obligations under this Lease, notwithstanding such assignment or subletting by Tenant.

(c)In addition to Landlord’s right to approve any subtenant or assignee Landlord shall have the option, in Landlord’s sole discretion, to terminate this Lease or in the case of a proposed sublease of less than all of the Premises to recapture the portion of the Premises to be sublet as of the date the subletting or assignment is to be effective. Landlord shall exercise Landlord’s option within thirty (30) days from the date of receipt of Tenant’s written notice. If Landlord exercises Landlord’s option to terminate this Lease or recapture a portion of the Premises, Tenant shall be released of all further liability hereunder from and after the effective date of such termination or recapture as to the Premises as a whole in connection in the case of termination or as to portion of the Premises recaptured. If Landlord exercises Landlord’s option to recapture a portion of the Premises, Tenant shall be released proportionately based on the Rental as of the date immediately prior to such recapture.

(d)Consent by Landlord to one (1) assignment or sublease shall not constitute a consent to other transfers or a waiver of Landlord’s rights pursuant to this paragraph.

(e)Notwithstanding anything contained in this paragraph 28 to the contrary, Tenant shall have the right to assign this Lease or to sublet the Premises to any corporation or entity into which Tenant may merge or to any corporation or entity arising out of a consolidation of Tenant with another corporation or to a corporation or other entity acquiring all or substantially all of the assets or stock of Tenant. Such right to assign the Lease or to sublet the Premises shall be expressly conditioned upon Tenant delivering to Landlord an executed copy of the assignment wherein the corporation or entity into which Tenant may merge or the corporation or entity arising out of a consolidation of Tenant with another corporation or entity or such acquiring corporation or entity, as the case may be, assumes for the benefit of Landlord all of the terms, conditions and covenants set forth in this Lease to be observed and performed by Tenant existing on and after the effective date of the assignment and agrees to be bound by the terms, conditions and covenants of this Lease. Any such assignment or subletting shall not relieve Tenant from liability for the payment of Rental or other sums herein provided or from the obligation to keep and be bound by the terms, conditions and covenants of this Lease.

(f)No sublease shall extend beyond the Term.

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29.Authority. If a party is a corporation, each of the individuals executing this Lease on behalf of such party does hereby covenant and warrant that the party is a duly authorized and existing corporation, that such party has and is qualified to do business in the state in which the Building is located, that the corporation has full right and authority to enter into this Lease and that each and all of the individuals signing on behalf of the corporation are authorized to do so. Upon Landlord’s request, Tenant shall provide Landlord with evidence reasonably satisfactory to Landlord confirming the foregoing covenants and warranties.

30.Subordination. Tenant agrees that this Lease shall be subject and subordinate to any mortgage, trust deed or like encumbrance heretofore or hereafter placed by Landlord or its successors in interest upon its interest in the Premises to secure the payment of monies loaned, interest thereon and other obligations. Landlord agrees to provide Tenant a Non-Disturbance Agreement from the holder of any future mortgage, trust deed or like encumbrance. The terms of any Non-Disturbance Agreement provided by Landlord shall also contain such covenants, conditions, restrictions, limitations, exceptions and the like as are reasonably necessary and customary for the protection and balancing of the competing interests of the Tenant, the Landlord’s Lender and Landlord. Such Non-Disturbance Agreement shall also provide that no assignment or transfer of Landlord’s rights hereunder to a lending institution as collateral security in connection with such encumbrance and no foreclosure sale or transfer in lieu of foreclosure shall affect Tenant’s right to possession, use and occupancy of the Premises so long as Tenant is not in default hereunder. The failure by Landlord to obtain such Non-Disturbance Agreement shall not affect the subordination of this Lease to any such encumbrance. Tenant agrees to execute and deliver, within ten (10) days of such request by Landlord, any and all instruments desired by Landlord subordinating in the manner requested by Landlord to such mortgage, trust deed or like encumbrance. Tenant further appoints Landlord as its attorney-in-fact for the Term to execute, on behalf of Tenant, any such instruments subordinating this Lease to such mortgage, trust deed or like encumbrance. In the event of the sale of the real property of which the Premises are a part upon foreclosure or upon the exercise of a power of sale, Tenant will, upon written request of the purchaser, attorn to the purchaser and recognize the purchaser as Landlord under this Lease.

31.Estoppel Certificate.

(a)Tenant shall from time to time, upon not less than ten (10) days’ prior notice, submit to Landlord, or to any person designated by Landlord, in a form presented by Landlord, a statement in writing certifying: (i) that this Lease is unmodified and in full force and effect (or if there have been modifications, identifying the same by the date thereof and specifying the nature thereof); (ii) that to the knowledge of Tenant no uncured default exists hereunder (or if such uncured default does exist, specifying the same); (iii) the dates to which Rental and other charges payable hereunder have been paid; (iv) that Tenant has no claims against Landlord and no defenses or offsets to Rental except for the continuing obligations under this Lease (or if Tenant has any such claims, defenses or offsets, specifying the same); and (v) such other matters as may be requested by Landlord.

(b)If Tenant shall fail to respond within ten (10) days of receipt by Tenant of a written request by Landlord as herein provided, Tenant shall be deemed to have given such certificate as above provided, without modification, and shall be deemed to have admitted the accuracy of any

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information supplied by Landlord to a prospective purchaser or mortgagee and that this Lease is in full force and effect, that there are not uncured defaults in Landlord’s performance, that the Security Deposit is as stated in the Basic Lease Provisions and that not more than one (1) month’s Minimum Monthly Rental has been paid in advance.

(c)Any such certificate may be relied upon by any prospective purchaser or lender.

32.Force Majeure. Except for Tenant’s obligation to pay Rental and other charges, neither party shall be deemed in default for the nonperformance or for any interruption or delay in performance of any of the terms, covenants and conditions of this Lease if the same shall be due to any labor dispute, strike, lock-out, civil commotion or like operation, invasion, rebellion, hostilities, war, terrorism, bio-terrorism, military or usurped power, sabotage, governmental regulations or controls, inability to obtain labor, services or materials, or through act of God or causes beyond the reasonable control of such party, provided such cause is not due to such party’s willful act or neglect.

33.Landlord’s Right of Entry. Landlord and/or its authorized representatives may enter the Premises at all reasonable times (but at any time in the event of emergency). Any such entry shall be in compliance with Tenant’s reasonable access rules, including easements and restrictions dealing with secured and/or restricted areas.

34.Landlord’s Right to Cure Default. If Tenant shall fail to perform any of the covenants or obligations to be performed by Tenant, Landlord, in addition to all other remedies provided herein, shall have the option to cure such default after ten (10) days’ written notice to Tenant. All of Landlord’s expenditures incurred to correct the default shall be reimbursed by Tenant upon demand with interest from the date of expenditure by Landlord at the Default Interest Rate. Landlord’s right to cure defaults is for the full protection of Landlord and the existence of this right shall not release Tenant from the obligation to perform all of the covenants herein provided to be performed by Tenant, or deprive Landlord of any other right which Landlord may have by reason of such default by Tenant.

35.Intentionally deleted.

36.Landlord’s Signs and Showings. Landlord may place on the Premises (but not on the Building) signs notifying the public that the Premises are “for sale” or “for rent” or “for lease”. During the Term, Landlord may also show the Premises to potential tenants, buyers and/or lenders at all reasonable times during normal business hours and subject to the terms of paragraph 33 hereof.

37.Brokers. If Tenant has dealt with any other person or real estate broker in respect to leasing the Building, Tenant shall be solely responsible for the payment of any such fee due said person or firm and Tenant shall hold Landlord free and harmless against any liability in respect thereto.

38.Intentionally deleted.

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9044.051 Five Oaks Office Lease to Credence Lot 2 v2

39.General Provisions.

(a)Complete Agreement. There are no oral agreements between Landlord and Tenant affecting this Lease, and this Lease may not be modified, except by written instrument by the parties or their successors in interest. This Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and other statements, if any, between Landlord and Tenant or displayed by Landlord to Tenant with respect to the subject matter of this Lease or the Building. There are no representations between Landlord and Tenant, other than those contained in this Lease, and all reliance with respect to this Lease is fully upon such representation. Submission of this instrument by Landlord for examination or signature by Tenant does not constitute a reservation of or option for the Lease, and this instrument is not effective as a Lease or otherwise until execution and delivery by both Landlord and Tenant.

(b)Exhibits and Addenda. Exhibits and Addenda attached hereto shall be initialed by Landlord and Tenant and are incorporated herein and made a part of this Lease.

(c)Recordation. Neither Landlord nor Tenant shall record this Lease or a memorandum hereof without the prior consent of the other party.

(d)Waiver. If either Landlord or Tenant waives the performance of any term, covenant or condition contained in this Lease, such waiver shall not be deemed a waiver of any subsequent breach of the same or any other term, covenant or condition contained in this Lease. Acceptance of Rental (in whole or part) by Landlord shall not constitute a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, regardless of Landlord’s knowledge of such preceding breach at the time of Landlord’s acceptance of such Rental. Failure by Landlord or Tenant to enforce any of the terms, covenants or conditions of this Lease for any length of time shall not be deemed a waiver or to decrease the right of Landlord or Tenant to insist thereafter upon the strict performance by the party violating any of the terms, covenants or conditions of this Lease. Waiver by Landlord or Tenant of any term, covenant or condition contained in this Lease may only be made by an original written document signed by the waiving party.

(e)Time. Time is of the essence of this Lease.

(f)Severability. If any term or provision of this Lease, the deletion of which would not adversely affect the receipt of any material benefit by either party hereunder, shall be held to be invalid or unenforceable to any extent, the remainder of this Lease shall not be affected thereby and each term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law.

(g)Notices. All notices, demands, consents, approvals and other communications which are required or desired to be given by either party to the other hereunder shall be in writing and shall be: hand delivered; transmitted by facsimile (with a duplicate copy sent by first class mail, postage prepaid); sent by certified or registered mail, postage prepaid, return receipt requested; or sent by reputable overnight courier service for delivery on the next business day, delivery charges prepaid. Notices delivered by hand or by overnight courier shall be deemed given when actually received or when refused by their intended recipient. Facsimile notices shall be deemed delivered when a legible copy has been received (provided receipt has been verified by telephone confirmation

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9044.051 Five Oaks Office Lease to Credence Lot 2 v2

or one of the other permitted means of giving notice pursuant to this paragraph. Mail notices shall be deemed received two (2) days following mailing. Notices shall be sent to Landlord and Tenant at the addresses set forth in the Basic Lease Provisions. A party may change its address for notice by giving at least ten (10) days prior notice of such change to the other party.

(h)Joint and Several Liability. If there be more than one Tenant, the obligations hereunder imposed upon Tenant shall be joint and several.

(i)Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive, but shall, whenever possible, be cumulative with all other remedies at law or in equity.

(j)Successors and Assigns. Subject to the provisions of paragraph 28 above, the terms, covenants and conditions contained herein shall be binding upon and inure to the benefit of the heirs, successors, executors, administrators and assigns of the parties.

(k)Costs of Suit. In the event that any party to this Lease institutes a suit, action, arbitration, or other legal proceeding of any nature whatsoever, relating to this Lease or to the rights or obligations of the parties with respect thereto, including, without limitation, any proceeding seeking a declaration of rights, for rescission or under the U.S. Bankruptcy Code and involving issues peculiar to federal bankruptcy law, the prevailing party shall be entitled to recover from the losing party its reasonable attorney, paralegal, accountant, expert witness (whether or not called to testify at trial or other proceeding) and other professional fees and all other fees, costs, and expenses actually incurred and reasonably necessary in connection therewith, including but not limited to deposition transcript and court reporter costs, as determined by the judge or arbitrator at trial or other proceeding, and including such fees, costs and expenses incurred in any appellate or review proceeding, or in collecting any judgment or award, or in enforcing any decree rendered with respect thereto, in addition to all other amounts provided for by law.

(l)Sale. In the event that the original Landlord or any successor in interest of Landlord in the Premises shall sell or convey the Premises, all liabilities and obligations on the part of the original Landlord or such successor under this Lease occurring thereafter shall terminate and thereupon all such liabilities and obligations shall be binding upon the new owner.

(m)Construction. The paragraph headings of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any parts of this Lease. If the context so requires, the singular pronoun shall be taken to mean and include the plural and that generally all grammatical changes shall be made, assumed and implied to make the provisions hereof apply equally to corporations, partnerships and individuals.

(n)Law Governing. This Lease shall be governed by the laws of the state in which the Premises are located.

(o)Consents. Any consent or approval required under this Lease shall be valid only if granted in writing and, unless otherwise specifically provided herein, shall not be unreasonably withheld or conditioned by either party. The consenting party shall have the right to impose reasonable conditions as part of any consent including reimbursement of reasonable attorney and

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9044.051 Five Oaks Office Lease to Credence Lot 2 v2

other professional fees and costs incurred in determining how to respond to the request for consent or approval. In no event shall either party have the right to terminate this Lease, and in no event shall either party be liable for monetary damages to the other, based upon a claim arising from the withholding or conditioning of consent or approval; the sole remedy of the party for any withholding or conditioning of consent or approval which is proven to be contrary to this Lease or its Exhibits shall be a court or arbitrator order requiring the party to grant the requested consent or approval on terms ordered by the court or arbitrator.

(p)Waiver of Jury Trial. LANDLORD AND TENANT EACH WAIVE ALL RIGHTS TO TRIAL BY JURY OF ANY SUITS, CLAIMS, COUNTERCLAIMS, ACTIONS OR OTHER PROCEEDINGS OF ANY KIND ARISING UNDER OR RELATING TO THIS LEASE (INCLUDING, WITHOUT LIMITATION ANY PRESENT OR FUTURE MODIFICATION HEREOF) OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO DEALINGS OF THE PARTIES HERETO OR THE PREMISES, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. LANDLORD AND TENANT EACH ACKNOWLEDGES THAT THIS IS A WAIVER OF A LEGAL RIGHT AND REPRESENTS TO THE OTHER THAT THIS WAIVER IS MADE KNOWINGLY AND VOLUNTARILY. LANDLORD AND TENANT EACH AGREES THAT ALL SUCH SUITS, CLAIMS, COUNTERCLAIMS, ACTIONS OR OTHER PROCEEDINGS SHALL BE TRIED BEFORE A JUDGE OF A COURT OF COMPETENT JURISDICTION, WITHOUT A JURY. LANDLORD AND TENANT EACH AGREES THAT THIS PARAGRAPH CONSTITUTES WRITTEN CONSENT THAT TRIAL BY JURY SHALL BE WAIVED IN ANY SUCH SUIT, CLAIM, COUNTERCLAIM, ACTION OR OTHER PROCEEDING AND AGREE THAT LANDLORD AND TENANT SHALL EACH HAVE THE RIGHT AT ANY TIME TO FILE THIS LEASE WITH A CLERK OR JUDGE OF ANY COURT IN WHICH ANY SUCH SUIT, CLAIM, COUNTERCLAIM, ACTION OR OTHER PROCEEDING MAY BE PENDING AS STATUTORY WAIVER OF TRIAL BY JURY.

[Remainder of this page left intentionally blank]

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9044.051 Five Oaks Office Lease to Credence Lot 2 v2

IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease in duplicate the day and year first herein written, any corporate signature being by authority of the Board of Directors.

Five Oaks Office, LLC		Credence Systems Corporation
an Oregon limited liability company		a Delaware corporation
By:		By:
	R. Barry Menashe, Manager		Byron Milstead,
			Sr. Vice President and General Counsel
LANDLORD		TENANT

Page 22. OFFICE LEASE

9044.051 Five Oaks Office Lease to Credence Lot 2 v2

EX-21.1

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EXHIBIT 21.1

CREDENCE SYSTEMS CORPORATION
SUBSIDIARIES OF THE COMPANY

        The following are certain wholly-owned or majority-owned direct or indirect subsidiaries of Credence Systems Corporation as of December 31, 2007:

Credence Capital Corporation, a California corporation

Credence International Limited, Inc., a Delaware corporation
    Wholly-owned subsidiary:
        Credence Korea Ltd., a South Korea company

Credence International Ltd., a British Virgin Islands limited company
    Wholly-owned subsidiaries:
        Credence Systems Pte Ltd., a Singapore limited company
        NPTest (Philippines) Inc., a Philippines corporation
        NPTest UK Ltd., a United Kingdom limited company
            Wholly-owned subsidiary:
                Credence France SAS, a limited liability company in France

Credence Systems KK, a Japanese company

Credence Systems (M) Sdn BhD, a Malaysian limited company

Credence Systems (P), Inc., a Philippines corporation

Credence Europa Ltd, a private limited company in the United Kingdom
    Wholly-owned subsidiaries:
        Credence Systems GmbH, a German corporation
        Credence Systems (UK) Limited, a privately limited company in the United Kingdom

Credence Italia Srl, an Italian company

Credence Systems Armenia L.L.C., a limited liability company in the Republic of Armenia

Hypervision, Inc., a California corporation;

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EXHIBIT 21.1

EX-23.1

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Exhibit 23.1

CONSENT OF IDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements:

(1)

Registration Statement (Form S-8 No. 333-126094) pertaining to Credence Systems Corporation Amended and Restated 1993 Stock Option Plan, Amended and Restated Employee Stock Purchase Plan and Amended and Restated 2005 Stock Incentive Plan,



(2)

Registration Statement (Form S-8 No. 333-116047) pertaining to the NPTest Holdings Corporation 2003 Stock Incentive Plan (assumed by Credence Systems Corporation),



(3)

Registration Statement (Form S-8 No. 114768) pertaining to Credence Systems Corporation Amended and Restated 1993 Stock Option Plan and Amended and Restated Employee Stock Purchase Plan,



(4)

Registration Statement (Form S-8 No. 333-27499) pertaining to Credence Systems Corporation 1993 Stock Option Plan and Employee Stock Purchase Plan,



(5)

Registration Statements (Form S-8 Nos. 333-32834 and 333-59051) pertaining to Credence Systems Corporation 1993 Stock Option Plan,



(6)

Registration Statement (Form S-8 No. 333-38428) pertaining to the 1996 Stock Option Plan of TMT, Inc. (assumed by Credence Systems Corporation),



(7)

Registration Statement (Form S-8 No. 333-50432) pertaining to Credence Systems Corporation Supplemental Stock Option Plan, 1993 Stock Option Plan and Employee Stock Purchase Plan,



(8)

Registration Statement (Form S-8 No. 333-58100) pertaining to Credence Systems Corporation Supplemental Stock Option Plan,



(9)

Registration Statement (Form S-8 No. 333-69584) pertaining to the 1995 Stock Incentive Plan, 1995 Stock Option Plan for Non-Employee Directors, 1995 Employee Stock Purchase Plan, and the 2000 Nonqualified Stock Option Plan of Integrated Measurement Systems, Inc. (each assumed by Credence Systems Corporation),



(10)

Registration Statement (Form S-8 No. 333-74346) pertaining to the Fluence Technology, Inc. 1997 Stock Option Plan (assumed by Credence Systems Corporation), Opmaxx, Inc. 1997 Stock Option/Stock Issuance Plan (assumed by Credence Systems Corporation), Credence Systems Corporation 1993 Stock Option Plan and Credence Systems Corporation Supplemental Stock Option Plan,



(11)

Registration Statement (Form S-8 No. 333-77007) pertaining to Credence Systems Corporation 1993 Stock Option Plan and 1994 Employee Stock Purchase Plan,



(12)

Registration Statement (Form S-8 No. 333-102916) pertaining to Credence System Corporation 1993 Stock Option Plan, Employee Stock Purchase Plan, and the Optonics, Inc. 2001 Stock Option and Incentive Plan (assumed by Credence Systems Corporation),



(13)

Registration Statement (Form S-3 No. 333-125722) pertaining to the registration of 615,157 shares of common stock,



(14)

Registration Statement (Form S-3 No. 333-108069) pertaining to the Credence $180 million, 1.50% convertible subordinated notes and 15,915,119 shares of common stock,



(15)

Registration Statement (Form S-4 No. 333-113990) pertaining to the registration of 33,201,258 shares of common stock and 203,036 non-voting convertible stock in connection with the acquisition of NPTest;



(16)

Registration Statement (Form S-3 No. 333-108069) pertaining to the Credence 3.5% convertible senior subordinated notes due 2010 face value is $122.5 million

(17)

Registration Statement (Form S-8 No. 333-140120) pertaining to Inducement Stock Option Grant to Joy Leo (Grant Date of April 16, 2007) and Inducement Stock Option Grant to Pat Brady (Grant Date of April 16, 2007)

of our reports dated January 15, 2008, with respect to the consolidated financial statements and schedule of Credence Systems Corporation and effectiveness of internal control over financial reporting of Credence Systems Corporation included in this Annual Report (Form 10-K) for the year ended November 3, 2007.

	/s/ Ernst & Young LLP
San Jose, California January 15, 2008

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Exhibit 23.1

CONSENT OF IDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

EX-31.1

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Exhibit 31.1

CERTIFICATION

I, Lavi A. Lev, certify that:

        1.     I have reviewed this annual report on Form 10-K of Credence Systems Corporation;

        2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

        3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

        4.     The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

        a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

        b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

        c)     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

        d)    Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

        5.     The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

        a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

        b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

	/s/  LAVI A. LEVLavi A. Lev President and Chief Executive Officer
Date:	January 17, 2008

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Exhibit 31.1

EX-31.2

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Exhibit 31.2

CERTIFICATION

I, Kevin C. Eichler, certify that:

        1.     I have reviewed this annual report on Form 10-K of Credence Systems Corporation;

        2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

        3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

        4.     The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

        a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

        e)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

        f)     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

        g)     Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

        5.     The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

        a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

        b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

	/s/  KEVIN C. EICHLERKevin C. Eichler Chief Financial Officer
Date:	January 17, 2008

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Exhibit 31.2

EX-32.1

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Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
UNDER 18 U.S.C. 1350
PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the annual report of Credence Systems Corporation (the "Company") on Form 10-K for the fiscal year ended November 3, 2007 as filed with the Securities and Exchange Commission (the "Report"), I, Lavi A. Lev, President and Chief Executive Officer of the Company, hereby certify, pursuant to and for the purposes of 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that to the best of my knowledge:

        (1)   the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

        (2)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	January 17, 2008
	/s/  LAVI A. LEVLavi A. Lev President and Chief Executive Officer

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Exhibit 32.1

EX-32.2

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Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
UNDER 18 U.S.C. 1350
PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the annual report of Credence Systems Corporation (the "Company") on Form 10-K for the fiscal year ended November 3, 2007 as filed with the Securities and Exchange Commission (the "Report"), I, Kevin C. Eichler, Chief Financial Officer of the Company, hereby certify, pursuant to and for the purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

        (1)   the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

        (2)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	January 17, 2008
	/s/  KEVIN C. EICHLERKevin C. Eichler Chief Financial Officer

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Exhibit 32.2