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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2004

OR

For the transition period from              to             

Commission file number 000-50503

NPTEST HOLDING CORPORATION

(Exact name of registrant as specified in its charter)

150 Baytech Drive, San Jose, California

95134

(Address of principal executive offices)

(Zip Code)

(408) 586-8200

(Registrant’s telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report.

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At April 30, 2004, there were 39,986,572 shares of the Registrant’s common stock, $0.001 par value per share, outstanding.

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NPTEST HOLDING CORPORATION

INDEX

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of NPTest Holding Corporation and its consolidated subsidiaries (“NPTest”) to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Examples of forward-looking statements include statements regarding NPTest’s future financial results, operating results, business strategies, projected costs, products, competitive positions and plans and objectives of management for future operations. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section entitled “Risk Factors” in Item 2. Other risks and uncertainties are disclosed in NPTest’s prior SEC filings, including its Annual Report on Form 10-K for the fiscal year ended December 31, 2003. These and many other factors could affect NPTest’s future financial operating results, and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by NPTest or on its behalf. NPTest assumes no obligation to update the information in this Quarterly Report on Form 10-Q.

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PART I - FINANCIAL INFORMATION

Item 1. - FINANCIAL STATEMENTS

NPTEST HOLDING CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

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

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NPTEST HOLDING CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

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

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NPTEST HOLDING CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

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

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NPTEST HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

NPTest Holding Corporation had no operations prior to its acquisition of NPTest, Inc. from Schlumberger on July 29, 2003, and the Company’s historical financial statements for the periods prior to July 29, 2003 are not meaningful. The condensed statement of operations and statement of cash flows for March 31, 2003, referred to as “Predecessor Company”, have been derived from the consolidated financial statements of Schlumberger. Although NPTest, Inc. was not a separate company, the accompanying condensed statement of operations and statement of cash flows are presented as if NPTest, Inc. had existed as an entity separate from Schlumberger and its subsidiaries. These statements include the historical assets, liabilities, revenues and expenses that were directly related to the NPTest, Inc. business of Schlumberger during the periods presented and have been derived from Schlumberger’s historical bases in the assets and liabilities and the historical results of operations of NPTest, Inc. Financial data for NPTest, Inc. is presented for informational purposes only, however, these amounts are not necessarily comparable as a result of the purchase accounting adjustments recorded as part of the acquisition of NPTest, Inc. from Schlumberger.

In the opinion of management, the unaudited-interim condensed consolidated financial statements of NPTest Holding Corporation and its subsidiaries (“NPTest”) included in this quarterly report on Form 10-Q have been prepared on a basis consistent with the December 31, 2003 audited financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2003. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of future operating results.

The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. The Company’s significant accounting policies have not materially changed during the three months ended March 31, 2004.

The Company recognizes revenue in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition.” Generally, acceptance of products with published specifications is received at the factory floor prior to shipment, therefore revenue, less fair value of installation, is recognized upon shipment when legal title passes. In those limited instances where there are customer-specific acceptance conditions, revenue is only recognized upon final customer-site acceptance. The Company’s shipping terms are primarily freight-on-board (“FOB”) shipping point. However, a portion of revenue associated with certain installation-related tasks, based upon fair value of that service, is recognized when the tasks are completed. When several elements are bundled into one contract, revenue is not recognized unless the fair value of the undelivered element(s) is objective and reliable and the delivered element has standalone value to the customer. The total contract revenue is allocated to the individual elements based upon the relative fair value of each element. For multiple element arrangements, management having the relevant authority establishes fair value based upon vendor-specific objective evidence. The fair value of the undelivered element is either the price charged when the element is sold separately or, for an element not yet being sold separately, the price established by management. When a price is established by management, it must be probable that the price will not change before the element is actually sold separately. For products that have not been demonstrated to meet product specifications prior to shipment, revenue is recognized on receipt of customer technical acceptance. In any event, no revenue is recognized before legal title passes to the customer. A provision for the estimated cost of warranty is recorded when revenue is recognized. Revenue related to spare parts is generally recognized upon shipment. Services revenue is generally recognized ratably over the period of the related contract. Deferred income includes amounts that have been billed per the contractual terms but have not been recognized as revenue. For product revenue, this typically includes the amount of deferred revenue less all warranty costs.

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In accordance with Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” the Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees.”

The Company’s policy is to grant options with an exercise price equal to the fair value of the Company’s stock on the date of the grant. Accordingly, no compensation cost has been recognized in the Company’s Statement of Operations. The Company provides additional pro forma disclosures as required under Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation, Transition and Disclosure.”

The following table illustrates the effect on Net Loss and Net Loss Per Share if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended, to options granted under the stock option plan. For purposes of this disclosure, the value of the options is estimated using the Black-Scholes option-pricing model and amortized ratably to expense over the options’ vesting period using the following assumptions:

Options vest over four years, with the first year cliff vesting, and the following three years vesting ratably 1/36 per month. The estimated weighted average fair value of options granted during the three months ended March 31, 2004 was $7.01 per share.

Because the estimated value is determined as of the date of grant, the actual value ultimately realized by the employee may be significantly different from the original estimate.

Inventories are stated on a first-in, first-out basis at the lower of standard cost or market. Cost includes material, labor, allocated overhead and contract manufacturing costs. Inventories consist of the following:

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In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company is required to perform an annual impairment test for goodwill. The standard also requires that goodwill be allocated to a company’s reporting units for purposes of impairment testing. The Company has one reporting unit. The identification and measurement of goodwill impairment involves the estimation of the fair value of the Company. The estimates of fair value of the Company are based on the best information available as of the date of the assessment, which primarily includes the Company’s market capitalization and incorporates management assumptions about expected future cash flows. Although no goodwill impairment has been recorded to date, there can be no assurances that future goodwill impairment will not occur.

The company has acquired certain intangible assets through the acquisition of NPTest, Inc. The original costs and accumulated amortization of these assets at March 31, 2004 are as follows:

The estimated amortization expense for the years ending December 31, 2004, 2005, 2006, 2007 and 2008 is $4,813, $2,229, $2,229, $2,229 and $2,229, respectively, and $2,435 for periods thereafter.

Basic and diluted net loss per share is computed by dividing net loss to common shareholders by the weighted average number of common shares outstanding for the period.

A reconciliation of the numerator and denominator of basic and diluted net loss per share is as follows:

At March 31, 2004, 420 options outstanding were excluded from the computation of diluted net loss per share because they were anti-dilutive.

Components of accrued liabilities are as follows:

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NPTest Acquisition

On July 29, 2003, the Company purchased NPTest, Inc. from Schlumberger for cash of approximately $220,290 plus acquisition costs of $2,189. In connection with the acquisition, the Company agreed that Schlumberger would have a right to participate, to a limited extent, in a portion of any future increases in the value of the business.

In particular, under the agreement, the Company will be required to make payments to Schlumberger under the following scenarios:

If Schlumberger makes a Value Increase Election or an Acquisition Election, the Company may choose to make the payment in any combination of cash or stock. If the Company makes the payment in stock, the Company has agreed to use the Company’s reasonable efforts to give Schlumberger customary registration rights.

Any future consideration paid to Schlumberger, as a result of the contingencies noted above, would be recorded as an adjustment to goodwill.

Legal Proceedings

The Company is party to various legal proceedings and claims that arise in the ordinary course of business. As of March 31, 2004, there are no such matters pending that the Company expects to have a material effect on its financial condition, results of operations or cash flows.

Warranty

The Company accrues for warranty costs based on historical trends of product failure rates and the expected material and labor costs to provide warranties. The majority of products are generally covered by a warranty ranging from 90 days to two years. The following table summarizes the activity related to the product warranty reserve during the period ended March 31, 2004:

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Indemnifications

The Company indemnifies certain customers, distributors, suppliers, and subcontractors for attorney fees and damages and costs awarded against parties in certain circumstances in which its products are alleged to infringe third-party intellectual property rights, including patents, registered trademarks, or copyrights. The terms of indemnification obligations are generally perpetual from the effective date of the agreement. In certain cases, there are limits on and exceptions to the potential liability for indemnification relating to intellectual property infringement claims. The Company cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these agreements. To date, the Company has not paid any claim or been required to defend any claim related to its indemnification obligations, and accordingly, the Company has not accrued any amounts for indemnification obligations. However, there can be no assurance that the Company will not have any future financial exposure under these indemnification obligations.

Merger with Credence

The Company entered into a merger agreement with Credence Systems Corporation (“Credence”) in February 2004. Under the agreement, the Company would pay Credence a fee of $20,000 if the Company’s board of directors determines, in the exercise of its fiduciary duties and subject to the terms and conditions of the merger agreement, to change its recommendation of the merger after receipt of a superior proposal from a third party before the consummation of the transaction.

Commitments

At March 31, 2004, non-cancelable commitments under inventory-related purchase agreements amount to $29,000. In addition, minimum rental commitments under non-cancelable operating leases, primarily real estate and office facilities in effect at March 31, 2004 are as follows:

Operating lease rental expense was $1,200 for the three months ended March 31, 2004.

Components of comprehensive income/(loss), on an after-tax basis where applicable, are as follows:

The components of accumulated other comprehensive loss are as follows:

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ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We were formed on June 20, 2003 for the purpose of acquiring NPTest, Inc. from Schlumberger. Accordingly, we had no operations prior to our acquisition of NPTest, Inc. on July 29, 2003, and our historical financial statements for the periods prior to July 29, 2003 are not meaningful. For purposes of the following discussion, our financial statements, unless otherwise indicated, also refer to historical financial statements of NPTest, Inc. (our predecessor) included herein although the financial results are not directly comparable. The following discussion should be read in conjunction with the financial statements and notes thereto. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to certain factors, including those factors discussed in the section entitled “Risk Factors” below and elsewhere in this report. (See “Special Note Regarding Forward-Looking Statements”)

OVERVIEW

General

We design, develop and manufacture advanced semiconductor test and diagnostic systems and provide related services for the semiconductor industry. Our customers include integrated device manufacturers, or IDMs, fabless design companies, foundries and assembly and test subcontractors worldwide. Our products and services enable our customers to bring their increasingly complex integrated circuits, or ICs, to market faster, at lower cost and without compromising IC quality. We offer products that enable our customers to debug, characterize and test a wide range of ICs, including the fastest multi-Gigahertz microprocessors and the most highly integrated, high-speed system-on-a-chip, or SOC, devices. In addition, we provide test engineering services, including debug, repair and characterization. As of March 31, 2004, we had 900 employees worldwide.

Our business dates back to 1965 when Fairchild Semiconductor established an automated test equipment division. Schlumberger Limited, a global oilfield and information services company with major activity in the energy industry, acquired Fairchild Semiconductor in 1979. The business we now operate, which we refer to as NPTest, Inc., was a part of the business Schlumberger acquired. On July 29, 2003, NPTest Holding, LLC, which is principally owned by Francisco Partners (95.7%) and Shah Management (3.6%), acquired NPTest, Inc. from Schlumberger. On December 16, 2003, we issued 14,600,000 shares in an initial public offering of our common stock. Thereafter, NPTest Holding, LLC owned approximately 63.4% of the Company.

Credence Systems Corporation

We have entered into an Agreement and Plan of Reorganization dated as of February 22, 2004 among Credence Systems Corporation, a Delaware corporation (“Credence”), Cataline Corporation, a Delaware corporation and a wholly owned subsidiary of Credence (the “Merger Sub”) and us, providing for our merger with and into Merger Sub, with the Merger Sub continuing as the surviving corporation. Our board of directors and the board of directors of Credence have unanimously approved the merger and the merger agreement.

Pursuant to the merger, each share of our common stock issued and outstanding immediately before the effective time (other than dissenting shares and shares held by us, Credence, or any direct or indirect wholly owned subsidiary of us or Credence) will be converted at the effective time of the merger into the right to receive, directly or indirectly, 0.8 shares of Credence common stock (plus cash in lieu of fractional shares) and cash equal to $5.75 per share.

Pursuant to the merger agreement, our stock option plan and all NPTest options then outstanding under our stock option plan, whether vested or unvested, will be assumed by Credence at the effective time and converted into options to purchase shares of Credence common stock in the amounts and at the price that are described in the merger agreement.

The merger is subject to customary conditions to closing, including (i) approval of holders of our common stock, (ii) approval of the holders of Credence’s common stock, (iii) expiration or termination of the applicable Hart-Scott-Rodino waiting period and certain other regulatory approvals, (iv) the accuracy of representations and warranties and the absence of any material adverse effect with respect to each party’s business (in each case, subject to certain exceptions) and (v) the delivery of customary opinions from counsel to each party that the merger will qualify as tax-free reorganization for federal income tax purposes.

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We have cleared key regulatory steps required to close this transaction including expiration of the Hart-Scott-Rodino waiting period. We have set the date for the Credence and NPTest stockholder meetings for May 27, 2004 and we expect the transaction to close on or about May 28, 2004.

We have agreed to pay Credence a fee of $20 million if our board of directors determines, in the exercise of its fiduciary duties and subject to the terms and conditions of the merger agreement, to change its recommendation of the merger after receipt of a superior proposal from a third party before the consummation of the transaction (or if our stockholders fail to approve the merger after such a proposal is publicly announced and that transaction is thereafter consummated within 6 months of the termination of the merger agreement).

NPTest Holding, LLC, who beneficially owns 25,379,550 shares of our common stock, has entered into a stockholder voting agreement with Credence pursuant to which they have agreed to vote no less than 50.1% of their shares in favor of the merger. NPTest Holding, LLC may vote its other shares on the merger in its discretion.

NPTest Holding, LLC has also entered into a stockholder lock-up agreement with Credence pursuant to which NPTest Holding, LLC must abide by certain restrictions with respect to the sale, transfer or other disposition of shares of Credence stock owned by it after the closing of the merger. In addition, NPTest Holding, LLC has entered into a registration rights agreement with Credence pursuant to which Credence has agreed to file one or more registration statements with the Securities and Exchange Commission on behalf of NPTest Holding, LLC in certain circumstances and subject to certain terms and conditions.

Although the proposed acquisition in itself would not trigger any payments to Schlumberger, the Company would remain contingently liable to Schlumberger under the terms of the NPTest, Inc. acquisition agreement as outlined in note 3 in the footnotes to the financial statements.

Basis of Presentation

Our condensed consolidated statement of operations and statement of cash flows for March 31, 2003 have been derived from the consolidated financial statements of Schlumberger. Although NPTest, Inc. was not a separate company, the accompanying condensed consolidated statement of operations and statement of cash flows for March 31, 2003 are presented as if NPTest, Inc. had existed as an entity separate from Schlumberger and its subsidiaries. These condensed consolidated financial statements include the historical assets, liabilities, revenues and expenses that were directly related to the NPTest, Inc. business of Schlumberger during the periods presented and have been derived from Schlumberger’s historical bases in the assets and liabilities and the historical results of operations of NPTest, Inc. Following the acquisition of the business from Schlumberger on July 29, 2003, we began accumulating retained earnings/deficits.

Certain amounts of Schlumberger’s corporate expenses, including legal, accounting, employee benefits, real estate, insurance services, information technology services, treasury and other corporate and infrastructure costs, although not directly attributable to NPTest, Inc.’s operations, have been allocated to NPTest, Inc. on a basis that Schlumberger and NPTest, Inc. considered to be a reasonable reflection of the utilization of services provided or the benefit received by NPTest, Inc.

The financial information presented in this Form 10-Q is not indicative of our financial position, results of operations and cash flows in the future nor is it necessarily indicative of what our financial position, results of operations and cash flows would have been had we been a separate, stand-alone entity for the periods presented.

Cyclical Business

Our business and operating results depend in significant part upon capital expenditures of manufacturers of semiconductors, which in turn depend upon the current and anticipated market demand for those products. Historically, the semiconductor industry has been highly cyclical with recurring periods of over-supply, which often have had a severe negative effect on demand for test equipment, including systems manufactured and marketed by us. Services revenue depends largely upon the size of the installed base of our products and is not as directly affected by industry cyclicality as is our net product revenue.

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Our product revenue decreased $1.9 million from $42.3 million for the period March 31, 2003 to $40.4 million compared to the three month period ended March 31, 2004. Our service revenue increased $1.7 million from $16.6 million for the three month period ended March 31, 2003 to $18.3 million for the three month period ended March 31, 2004.

Foreign Currencies

We sell our products and services primarily in two major currencies. Sales in North America, Europe and Asia Pacific are primarily denominated in U.S. Dollars, and sales in Japan are primarily denominated in Yen. We incur expenses primarily in four major currencies, the U.S. Dollar, the Euro, the Yen and the British Pound. A weakening U.S. Dollar will generally result in higher operating costs for us principally in Europe and, to a lesser extent, in Japan. Our historical financial statements do not reflect any foreign currency hedging arrangements as we have not hedged our foreign currency exposure to date. However, we may seek to hedge our exposure to foreign currency rate fluctuations in the future.

Introduction of Sapphire NP

We are currently devoting and intend to continue to devote significant resources to the development, production and commercialization of our new Sapphire NP platform. We launched our new Sapphire NP tester in the third quarter of 2003 and shipped five systems to our customers in the fourth quarter of 2003 and thirteen systems in the first quarter of 2004. Of the total 18 Sapphire systems shipped to date, one was recognized to revenue in the fourth quarter of 2003 and 11 were recognized in the first quarter of 2004. At introduction, the Sapphire NP testers are available in less complex configurations targeted at markets that require cost effective test solutions. Our future operating results will depend in large part upon our ability to successfully commercialize a range of Sapphire NP products. We cannot be sure that the Sapphire NP product will achieve market acceptance or generate substantial revenue. We believe that the acceptance, volume production, timely delivery and customer satisfaction of our Sapphire NP tester is of critical importance to our future financial results.

Concentration of Customers

Intel accounted for 48% and 41% for the first quarter of 2004 and 2003, respectively. STMicroelectronics accounted for 10% and 12% for the first quarter of 2004 and 2003, respectively. Sun Microsystems accounted for 12% of our revenues for the first quarter of 2003. Our customers are generally not obligated by long-term contracts to purchase our systems. A small number of IDMs and assembly and test subcontractors account for a substantial portion of the purchases of test equipment generally. Consequently, our business and operating results would be materially adversely affected by the loss of, or any significant reduction in orders by, any of our significant customers.

Income Taxes

We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax assets will not be realized. We have determined that our future taxable income will be sufficient to recover all of our deferred tax assets. However, should there be a change in our ability to recover our deferred tax assets, we could be required to record a valuation allowance against our deferred tax assets. This would result in an increase to our tax provision in the period in which we determined that it is more likely than not that the deferred tax assets would not be recovered.

Acquisition of NPTest, Inc.

On July 29, 2003 we acquired NPTest, Inc. from Schlumberger. We accounted for the acquisition as a purchase in accordance with Statement of Financial Accounting Standards, or SFAS, No. 141 “Business Combinations.” All acquired tangible assets, identifiable intangible assets as well as assumed liabilities were valued based on their relative fair values. Accordingly, we adjusted the value of our inventory to fair value based on the stage of completion less cost to dispose. The resulting $11.4 million increase in the value of our inventory will result in increased cost of product revenue and reduced operating margins.

Goodwill and Intangible Assets

In connection with our acquisition of NPTest, Inc. from Schlumberger, we recorded goodwill of approximately $8.6 million and intangible assets of approximately $25.3 million. Intangible assets include customer contracts and relationships of $1.5

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million, developed technologies of $14.1 million and backlog of $9.7 million with estimated useful lives for amortization of seven years, seven years and less than two years, respectively. At March 31, 2004, total net intangibles amounted to $16.2 million.

Critical Accounting Policies

For a description of what we believe to be the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2003. There have been no changes in our critical accounting policies since December 31, 2003.

The following discussion of our financial condition and results of operations should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and the related notes included in Item 1 of this Quarterly Report on Form 10-Q. This discussion contains forward looking statements, which involve risk and uncertainties. Our actual results could differ materially from those anticipated in the forward looking statements as a result of certain factors, including but not limited to those discussed in “Risk Factors” and elsewhere in this report. (See “Special Note Regarding Forward-Looking Statements.”)

RESULTS OF OPERATIONS

NPTest received new orders of $91.4 million for the first quarter of 2004 compared to $80.8 million in the first quarter of 2003. The increase was primarily a result of growth in product orders driven by Sapphire and a change in the timing of annual orders received in the first quarter of 2004.

Net Product Revenue

Total net sales for the three month periods ended March 31, 2004 and 2003 were $58.6 million and $58.9 million, respectively. Net product sales for the three month periods ended March 31, 2004 and 2003 were $40.4 million and $42.3 million, respectively. The decrease related to the reduction in revenue from our older product lines largely offset by the increase in revenue from our newly introduced Sapphire product. Service revenues for the three month periods ended March 31, 2004 and 2003 were $18.3 million and $16.6 million, respectively. Customer service maintenance revenues increased by $1.2 million and Saber increased by $0.4 million as a result of our higher installed base.

Cost of Net Revenue

Total net cost of revenue for the three month period ended March 31, 2004 and 2003 were $37.1 million and $34.4 million, respectively. Product cost of sales for the three month period ended March 31, 2004 and 2003 were $26.1 million and $23.5 million, respectively. The increase in product cost of sales in 2004 was primarily due to charges related to amortization of intangible assets of $1,079,000, and tangible assets written up to fair value of $949,000 as a result of our acquisition of NPTest, Inc. in the third quarter of 2003. Cost of service revenue for the three month periods ended March 31, 2004 and 2003 were $11.0 million and $10.9 million, respectively.

Research and Development Expenses

Research and development expenses for the three month period ended March 31, 2004 and 2003 were $11.0 million and $11.3 million, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three month period ended March 31, 2004 and 2003 were $12.4 million and $10.4 million, respectively. The increase in selling, general and administrative expenses was primarily due to accounting, legal and other expenses of approximately $1.2 million incurred in connection with our initial public offering and our proposed acquisition by Credence and amortization of fixed assets and other costs associated with our acquisition of NPTest, Inc. totaling approximately $200,000.

Interest Income

Interest income in the three month period ended March 31, 2004 related to interest income received from our short term investments from the proceeds from our initial public offering in the fourth quarter of 2003.

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Foreign currency transaction gain and loss

Foreign currency transaction gain was $11,000 in the three month period ended March 31, 2004 and foreign currency transaction loss was $388,000 in the three month period ended March 31, 2003. The gain in 2004 relates to the dollar strengthening against the Euro compared to the weakening of the dollar against the Euro in the first three months of 2003.

Income Taxes

We recorded an income tax benefit of $478,000 and an income tax provision of $214,000 in the three month period ended March 31, 2004 and March 31, 2003, respectively. The effective tax rate for income tax benefit recorded in the first quarter of 2004 was 29% and for income tax expense recorded in the first quarter of 2003 was 9%. The change from an income tax provision for the first quarter of 2003 to an income tax benefit for the first quarter of 2004 is due to operating income generated in first quarter of 2003 and operating losses incurred in first quarter of 2004. The income and losses generated in the foreign jurisdictions were taxed at the rate applicable in such jurisdictions.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities for the three month period ended March 31, 2004 was $3.0 million, which reflects a net loss of approximately $1.2 million and depreciation and amortization of approximately $2.9 million. Key movements within working capital and other include favorable movements in inventory of $3.4 million and prepaid expenses and other assets of $2.5 million. These were offset by unfavorable movements in other accrued liabilities of $3.6 million, deferred income of $1.6 million and income taxes payable of $1.3 million. Net cash used by operating activities for the three month period ended March 31, 2003 was $1.6 million, which reflects net income of $2.2 million and depreciation and amortization of approximately $2.0 million. Key movements within working capital and other include unfavorable movements in account receivable of $9.7 million, prepaid expenses and other assets of $2.0 million, and other accrued liabilities of $2.8 million. These were offset by favorable movements in inventory of $4.5 million and accounts payable of $4.5 million.

Cash used in investing activities were $1.5 million and $1.0 million in the three month period ended March 31, 2004 and 2003, respectively, as a result of capital expenditures for both periods.

Cash used in financing activities for the three month period ended March 31, 2004 was $2.2 million due to issuance cost on common stock of $0.3 million and book overdrafts (unpresented checks) of $1.9 million. Cash provided by financing activities for the three month period ended March 31, 2003 was $7.1 million, primarily due to stockholders’ investment of $7.0 million.

We expect that our capital expenditures for 2004 will be approximately $5.0 million. These anticipated expenditures primarily relate to the purchase of capital equipment for the general support of our business.

At March 31, 2004, non-cancelable commitments under inventory-related purchase agreements amount to $29 million. In addition, minimum rental commitments under non-cancelable operating leases, primarily real estate and office facilities in effect at March 31, 2004 are as follows (in thousands):

Operating lease rental expense was $1.2 million for the three months ended March 31, 2004.

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RISK FACTORS

Factors Affecting Results, Including Risks and Uncertainties

Risks Related to our Proposed Merger with Credence Systems Corporation

Our proposed transaction with Credence Systems Corporation may not be consummated and may adversely affect our business.

We recently announced that we have entered into an agreement and plan of reorganization with Credence Systems Corporation. This announcement, and the uncertainty surrounding the proposed merger, may have a negative effect on our ability to sell our products and retain our key employees. The transaction is subject to various closing conditions, including, among other conditions, approval by Credence stockholders and our stockholders. If the merger agreement is terminated under certain specified circumstances, we may be required to pay termination fees of up to $20.0 million.

In addition, if the merger is not completed, we may be subject to the following material risks, among others:

Further, if the merger is terminated and our board of directors determines to seek another merger or business combination, it is not certain that we will be able to find a merger partner or that the new merger partner would be willing to pay an equivalent, higher or more attractive price than that which would be paid by Credence in the merger.

We now have cleared the key regulatory steps required to close this transaction including expiration of the Hart Scott Rodino waiting period. We have set the date for the Credence and NPTest stockholder meetings for May 27, 2004 and we expect the transaction to close on or about May 28, 2004.

Risks Related to Our Business

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

Our business and operating results depend in significant part upon capital expenditures of manufacturers of semiconductors, which in turn depend upon the current and anticipated market demand for these products. Historically, the semiconductor industry has been highly cyclical with recurring periods of over-supply, which often have had a severe negative effect on demand for test equipment, including systems manufactured and marketed by us. During these periods, we experienced significant reductions in customer orders. In the most recent downward cycle, our net product revenue decreased from approximately $216.4 million in 2000 to approximately $149.5 million in 2001. It then increased to approximately $180.0 million in 2002 and decreased to approximately $163.1 million in 2003. During industry downturns when our products are used less frequently, our services may also be adversely affected. The current industry slowdown has had, and future slowdowns may have, a material adverse effect on our operating results. The downturn in the semiconductor industry has affected the test equipment market more significantly than the overall capital equipment sector. The impact of this slowdown is magnified due to the high proportion of fixed costs in our industry, including significant research and development, manufacturing and sales costs. The uncertainty regarding the growth rate of economies throughout the world has caused companies to reduce capital investment and may cause further reduction of such investments. These reductions have been particularly severe in the semiconductor equipment industry. If the worldwide economies rebound in the near future, we do not know if our business will experience similar effects. If the worldwide economies do not rebound in the near future, we expect that the growth we have recently experienced may not be sustainable and that our business may be harmed.

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

In the past we have experienced, and in the future we expect to continue to experience, fluctuations in revenue and operating results from quarter to quarter for a variety of reasons, including:

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Each of the risks indicated in the foregoing list applies to us without regard to geographic or other boundaries as a result of the global nature of the semiconductor industry. As a result of these risks, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be meaningful, and that these comparisons may not be an accurate indicator of our future performance. Also, sales of a relatively limited number of our systems account for a substantial portion of our net revenue in any particular quarter. Thus, changes in the timing or terms of a small number of transactions could disproportionately affect our operating results in any particular quarter. Moreover, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors. If this occurs, we would expect to experience an immediate and significant decline in the trading price of our stock.

Variations in the amount of time it takes for us to sell our systems may cause fluctuations in our operating results.

Variations in the length of our sales cycles could cause our net sales, and therefore our business, financial condition, operating results and cash flows, to fluctuate widely from period to period. These variations often are based upon factors partially or completely outside our control. The factors that affect the length of time it takes for us to complete a sale depend upon many elements including:

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As a result of these and a number of other factors influencing our sales cycles with particular customers, the period between our initial contact with a potential customer and the time when we recognize revenue from that customer, if ever, varies widely. Our product sales cycle typically can range from six to 24 months. Sometimes our sales cycle can be much longer, particularly when the sales cycle involves developing new applications for our systems and technology or the introduction of new products. During these cycles, we commit substantial resources to our sales efforts before receiving any revenue, and we may never receive any revenue from a customer despite these sales efforts.

We rely on a small number of customers for a significant portion of our revenues, and the termination of any of these relationships would adversely affect our business.

Intel Corporation accounted for 37% in 2001, 52% in 2002, 41% in the combined twelve months ended December 31, 2003, and 48% and 41% for the first quarter of 2004 and 2003, respectively, of our net revenue, and STMicroelectronics accounted for 18% in 2001, 10% in 2002, 11% in the combined twelve months ended December 31, 2003, and 10% and 12% for the first quarter of 2004 and 2003, respectively, of our net revenue. The combined twelve months ended December 31, 2003 information represents the sum of the financial data for the January 1, 2003 to July 29, 2003 period for NPTest, Inc. and the financial data for the period from inception to December 31, 2003 for NPTest Holding Corporation. Our customers are generally not obligated by long-term contracts to purchase our systems and frequently evaluate competitive products prior to placing new orders. Furthermore, one of our competitors is working with our largest customer in the development and promotion of their open architecture initiative. If that initiative is successful, it could lead to that competitor gaining a larger percentage of that customer’s business for test equipment. The semiconductor industry is highly concentrated, and a small number of integrated circuit device manufacturers and assembly and test subcontractors account for a substantial portion of the purchases of integrated circuit test equipment generally, including our diagnostic and test equipment. Consequently, our business and operating results would be materially adversely affected by the loss of, or any reduction in orders by, any of our significant customers, particularly if we were not able to replace that lost revenue with additional orders from new or existing customers.

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

Our ability to increase our sales will depend in part upon our ability to obtain orders from new customers. Obtaining orders from new customers is difficult because integrated circuit device manufacturers typically select one vendor’s systems for testing an entire generation of integrated circuits and make substantial investments to develop related test program software and interfaces. Once a manufacturer has selected a test system vendor for a generation of integrated circuits, that manufacturer is more likely to continue to purchase test systems from that vendor for that generation of integrated circuits, as well as subsequent generations of integrated circuits. If we are unable to obtain new customers that adopt and implement our products and technology, our business will be harmed. New customer acquisition can be a costly process. The development of new customer relationships can require substantial investment in research, development and manufacturing without any assurance from prospective customers that they will place significant orders. In addition, the length of time required to complete a sale varies widely, with some sales taking up to two years.

If we do not continue to introduce new products and services that reflect advances in integrated circuit technology in a timely manner, our products and services will become obsolete, we will not achieve broad market penetration and our operating results will suffer.

The integrated circuit design and manufacturing industry into which we sell our products is characterized by rapid technological changes, frequent new product and service introductions and evolving industry standards. The success of our new product and service offerings will depend on several factors, including our ability to:

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Many of our products are used by our customers to develop, test and manufacture their new products. We therefore must anticipate industry trends and develop products in advance of the commercialization of our customers’ products. Development of new products generally requires a substantial investment before we can determine the commercial viability of these innovations. The future success of our new technologies, products and services depends on broad acceptance among our customers. In addition, new methods of testing integrated circuits such as self-testing integrated circuits may be developed which render our products uncompetitive or obsolete. If we fail to adequately predict our customers’ needs and technological advances, we may invest heavily in research and development of products and services that do not lead to significant revenue, or we may fail to invest in technology necessary to meet changing customer demands. Without the timely introduction of new products, services and enhancements that reflect these changes, our products and services will likely become technologically obsolete and our revenue and operating results would suffer.

If we are not able to successfully market and sell our new Sapphire NP platform, our revenue and financial condition will be adversely affected.

Our success will depend in large part upon broad adoption of our new Sapphire NP platform. We are currently devoting and intend to continue to devote significant resources to the development, production and commercialization of the Sapphire NP products. The sale of new products, such as the Sapphire NP tester, is subject to acceptance criteria, which could delay the recognition of revenue. Typically, these acceptance criteria will consist of testing to ensure the tester conforms to published specifications and will not include any customer-specific acceptance criteria. Only a small number of products in the integrated circuit test equipment market have achieved broad market acceptance. Accordingly, we cannot be sure that the Sapphire NP platform will achieve market acceptance or generate substantial revenue. Furthermore, existing and prospective customers may not order any of our current products as they assess the Sapphire NP platform and the degree to which it is accepted in the market. The success of Sapphire NP depends upon a number of factors, including:

Delays in introducing Sapphire NP or in our ability to obtain customer acceptance would delay the recognition of revenue by us. If the Sapphire NP platform has actual or perceived reliability, quality or other problems, we may suffer reduced orders, higher manufacturing costs, delays in collecting accounts receivable and higher service, support and warranty expenses, and/or inventory write-offs, among other effects. In addition, Sapphire NP runs on software that we developed internally, as well as Microsoft Windows-based operating software. If viruses or other problems develop in this software the operation of our Sapphire NP tester could be adversely affected. We believe that the acceptance, volume production, timely delivery and customer satisfaction of our Sapphire NP platform is of critical importance to our future financial results. As a result, our inability to correct any technical, reliability, parts shortages or other difficulties or to manufacture and ship the Sapphire NP testers on a timely basis to meet customer requirements could damage our relationships with current and prospective customers and would materially adversely affect our business, financial condition and results of operations.

If we discover problems in the design or development of our new Sapphire NP platform, our business would be harmed.

Our new Sapphire NP platform is continuing to undergo further development, modification and enhancement. Successful development of Sapphire NP is dependent on a number of factors, including:

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We began to ship our Sapphire NP tester in the fourth quarter of 2003. As this is a new product, these shipments are likely to continue to be subject to acceptance criteria that could delay the recognition of revenue from these sales. Typically, these acceptance criteria will consist of testing to ensure the tester conforms to published specifications and will not include any customer-specific acceptance criteria. At introduction, Sapphire NP has been made available in less complex configurations targeted at markets that require cost effective test solutions. Our future operating results will depend in large part upon our ability to successfully introduce and commercialize a range of Sapphire NP products, many of which are not yet available and are under development. We experienced delays from time to time in the development of the Sapphire NP platform. More complex configurations of the Sapphire NP, which we plan to introduce in the future, will require additional software and hardware development and the development of new integrated circuits. Unanticipated difficulties or delays in further design and development of the Sapphire NP platform could lead to increased production costs and could adversely impact our ability to take customer orders, ship products and fulfill contractual obligations in a timely manner. As a result, our relationship with our customers could be harmed and our business, financial condition and results of operations could be materially adversely affected.

Existing customers may be unwilling to bear expenses associated with transitioning to a new product.

The expense to our customers of transitioning to a new product can be significant. Certain customers may be unwilling, or unable, to bear the increased costs of migrating to a new testing platform, particularly during the current industry downturn. This may make it difficult to market and sell new products, such as the Sapphire NP tester, to customers, including our existing customers, at least in the short-term. In addition, as we introduce new products, such as Sapphire NP testers, we cannot predict with certainty if and when our customers will transition to those products.

If we fail to plan the production of products accurately, we could incur inventory losses.

Given the nature of the markets in which we participate, we cannot reliably predict future revenue or profitability. Accordingly, we must order components and build some inventory in advance of the receipt of actual purchase orders. Furthermore, purchase orders may be cancelled or postponed, generally without penalty to the customer. If we do not obtain orders as we anticipate, we could have excess inventory for a specific product that we would not be able to sell to any other customer, likely resulting in inventory write-offs, which could have a material adverse effect on our business, financial condition and results of operations.

Failure in our ability to effectively design custom integrated circuits or to develop the software and hardware used for our products would harm our business.

We customize integrated circuits and develop software and hardware as part of the production of many of our products. Design defects in the custom integrated circuits or in the software used for our products could cause delays in the manufacturing and shipment of our products. Such delays may adversely affect customer relationships, as well as our business, financial condition and results of operations.

Products that do not meet customer specifications or contain defects that harm our customers could damage our reputation and cause us to lose customers and revenue.

The complexity and ongoing development of our products could lead to design or manufacturing problems. Our test equipment may fail to meet our customers’ technical requirements and may harm our customers’ business. If any of our products fail to meet specifications or have reliability or quality problems, our reputation could be damaged significantly and customers might be reluctant to buy our products, which could result in a decline in revenues, an increase in product returns and the loss of existing customers or the failure to attract new customers.

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We may not be able to fund our future capital requirements from our operations, and financing from other sources may not be available on favorable terms or at all.

We made capital expenditures of $4.0 million in 2001, $5.3 million in 2002, and $5.6 million in the combined twelve months ended December 31, 2003. The combined twelve months ended December 31, 2003 information represents the sum of the financial data for the January 1, 2003 to July 29, 2003 period for NPTest, Inc. and the financial data for the period from inception to December 31, 2003 for NPTest Holding Corporation. During the periods in which Schlumberger owned us, it provided funds to finance our working capital or other cash requirements. However, since our acquisition by Francisco Partners, Schlumberger no longer provides these funds. Our future capital requirements will depend on many factors, including the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancement to existing products, the cost to ensure access to adequate manufacturing capacity, and the market acceptance of our products. To the extent that existing cash and cash equivalents, together with any cash from operations, are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Future equity financings could be dilutive to the existing holders of our common stock. Future debt financings could involve restrictive covenants. We will likely not be able to obtain financing with interest rates as favorable as those that we have enjoyed in the past. 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 opportunities, grow our business or respond to competitive pressures or unanticipated requirements, which could materially adversely affect our business, financial condition and results of operations.

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

We face substantial competition throughout the world in each of our product areas. Our competitors include Advantest, Agilent Technologies, Credence Systems, FEI Company, Hamamatsu, LTX Corporation and Teradyne. As noted previously, on February 23, 2004, we announced that we have entered into a definitive agreement pursuant to which Credence Systems Corporation, a leading provider of design-to-test solutions for the worldwide semiconductor industry, will acquire us. Some of our competitors have substantially greater financial resources and more extensive engineering, manufacturing, marketing and customer support capabilities than we do. We expect our competitors to continue to improve the performance of their current products and to introduce new products, new technologies or services that could adversely affect sales of our current and future products and services. We may not be able to compete effectively with these competitors.

Our competitors may also elect to reduce the price of their products leading to a reduction in average selling prices throughout our industry. The overall demand for test equipment is not likely to increase as prices are reduced. Accordingly, price reductions may limit our opportunities for growth as the overall size of the test equipment market may be reduced and could result in reduced sales.

Economic, political and other risks associated with international sales and operations, particularly in Asia, could adversely affect our sales.

Since we sell our products and services worldwide, our business is subject to risks associated with doing business internationally. Our revenue originating outside the United States, including export sales from our United States manufacturing facilities to foreign customers and sales by our foreign subsidiaries and branches, as a percentage of our total net revenue, was 60.7% in 2001, 47.6% in 2002, and 50.1% in the combined twelve months ended December 31, 2003. The combined twelve months ended December 31, 2003 information represents the sum of the financial data for the January 1, 2003 to July 29, 2003 period for NPTest, Inc. and the financial data for the period from inception to December 31, 2003 for NPTest Holding Corporation. In particular, the economies of Asia have been highly volatile and recessionary in the past, resulting in significant fluctuations in local currencies and other instabilities. Many countries in Asia have recently been affected by the occurrence of severe acute respiratory syndrome, or SARS. These instabilities continue and may occur again in the future. Our exposure to the business risks presented by the economies of Asia will increase to the extent that we continue to expand our operations in that region. An outbreak of SARS could result in delay in customer acceptance of our products or prevent us from installing or servicing our products sold in the affected region. International turmoil, exacerbated by the war in Iraq, and the escalating tensions in North Korea have contributed to an uncertain political and economic climate, both in the United States and globally, which may affect our ability to generate revenue on a predictable basis. In addition, terrorist attacks and the threat of future terrorist attacks both domestically and internationally have negatively impacted an already weakened worldwide economy. As we sell products both in the United States and internationally, the threat of future terrorist attacks may adversely affect our business. These conditions make it difficult for us and for our customers to accurately forecast and plan future business activities and could have a material adverse effect on our business, financial condition and results of operations.

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We are subject to risks associated with currency fluctuations.

We sell our products and services and incur a variety of costs outside of the United States. Therefore we are exposed to foreign currency exchange movements, particularly in the Euro, the Japanese Yen and, to a lesser extent, the British Pound. With respect to revenue, our primary exposure exists during the period between execution of a purchase order denominated in a foreign currency and collection of the related receivable. During this period, changes in the exchange rates of the foreign currency to the U.S. Dollar will affect our revenue, cost of revenue and operating margins and could result in exchange losses. While a significant portion of our purchase orders to date have been denominated in U.S. Dollars, competitive conditions may require us to enter into an increasing number of purchase orders denominated in foreign currencies. We incur a variety of costs in foreign currencies, including some of our labor and manufacturing costs, components and sales costs. While we have not entered into foreign currency hedging arrangements in the past, we may do so in the future. We cannot assure you that any hedging transactions we may enter into will be effective or will not result in foreign exchange hedging losses.

The technology labor market is very competitive, and our business will suffer if we are not able to hire and retain key personnel.

Our future success depends in part on the continued service of our key executive officers, as well as our research, engineering, sales, marketing, manufacturing and administrative personnel, most of whom are not subject to employment or non-competition agreements. In addition, competition for qualified personnel in the technology area is intense, and we operate in several geographic locations where labor markets are particularly competitive, including the Silicon Valley region of Northern California where our headquarters and central research and development laboratories are located. Our business is particularly dependent on expertise, which only a very limited number of engineers possess. The loss of any of our key employees, or a broader loss of any of our employees who are highly skilled in our specialized sector of integrated circuit technology, would materially adversely affect our business, financial condition and results of operations.

Our dependence on subcontractors and sole source suppliers may prevent us from delivering an acceptable product on a timely basis.

We rely on subcontractors to manufacture certain subassemblies for our products, and we rely on both single source and sole source suppliers, some of whom are relatively small in size, for many of the components we use in our products. As custom integrated circuits are found in virtually every product that we sell, virtually all of our products contain some components from sole source suppliers. Our reliance on subcontractors gives us less control over the manufacturing process and exposes us to significant risks, especially inadequate capacity, late delivery, substandard quality and high costs. Additionally, our subcontractors and suppliers are generally under no obligation to provide us with material for as long as our requirements may exist. As a result, the loss or failure to perform by any of these providers could adversely affect our business and operating results. In addition, the manufacturing of certain components and subassemblies is an extremely complex process. Therefore, if a supplier became unable to provide the volume of parts required on a timely basis, or at an acceptable price, we would have to identify and qualify acceptable replacements from alternative sources of supply, or manufacture such components internally. The process of qualifying new subcontractors and new suppliers, or initiating manufacturing internally for these complex components is a lengthy process and could also materially adversely affect our business, financial condition and results of operations.

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

Third parties may claim that we are infringing their intellectual property rights and we may be unaware of intellectual property rights of others that may cover some of our technology, products and services. Any litigation regarding patents or other intellectual property could be costly and time-consuming, and divert our management and key personnel from our business operations. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements. However, we may not be able to obtain royalty or license agreements on terms acceptable to us, or at all. We also may be subject to significant damages or injunctions against development and sale of certain of our products and services.

We often rely on licenses of intellectual property useful for our business. These licenses may not be available in the future on favorable terms, or at all. In addition, our position with respect to the negotiation of licenses may change as a result of our acquisition from Schlumberger or as a result of Credence’s proposed acquisition of us. The loss of any of these licenses could harm our business, financial condition and results of operations.

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

Our success depends in large part on our proprietary technology. We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our proprietary rights. If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our operating results.

Our pending patent and trademark registration applications may not be allowed or competitors may challenge the validity or scope of these patent applications or trademark registrations. In addition, our patents may not provide us with a significant competitive advantage.

We may be required to spend significant resources to monitor and protect our intellectual property rights. We may not be able to detect infringement and may lose competitive position in the market before we do so. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture market share in those countries.

In the event that environmental contamination was to occur as a result of our ongoing operations, we could be subject to substantial liabilities in the future.

Our manufacturing processes involve the use of substances regulated under various international, federal, state and local laws governing the environment. The failure or inability to comply with existing or future laws could result in significant remediation liabilities, the imposition of fines or the suspension or termination of production. Schlumberger has agreed to indemnify us for up to three years from the acquisition date for environmental liabilities resulting from operations conducted prior to our acquisition of the NPTest business. However, we are responsible for any liabilities resulting from our operation of the business after the acquisition and also for future costs of compliance with these laws. In addition, we may not be aware of all conditions that could subject us to liability.

If our facilities were to experience catastrophic loss due to natural disasters, our operations would be seriously harmed.

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

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

We may make acquisitions of, or significant investments in, complementary companies, products or technologies, although no acquisition or investments are currently pending. Any future acquisitions would be accompanied by risks such as:

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We cannot guarantee that we will be able to successfully integrate any business, products, technologies or personnel that we might acquire in the future, and our failure to do so could harm our business.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, and other relevant market rate or price changes. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying assets are traded.

Foreign Exchange Rates

We are exposed to foreign currency exchange movements, primarily in the euro, and the Japanese yen, and to a lesser extent, the British pound, as we enter into various contracts, which change in value as foreign currency exchange rates change. The primary exposure exists during the period between when a contract price is fixed in foreign currency and when the related receivable is collected. To mitigate this risk we only fix contracts in the above referenced foreign currencies, and normally fix prices for long-term contracts using U.S. dollar prices. The length of time between when a short-term contract price is contractually fixed and when the equipment is delivered typically ranges between two to four months, unless the equipment can be taken from finished goods inventory. Our standard terms of sale are 80% due 30 days after delivery, and 20% due 30 days after customer site acceptance, which is required within 30 days of delivery. In the future, we may seek to hedge our exposure to foreign currency rate fluctuations with forward contracts. We cannot assure you that any hedging transactions we may enter into will be effective or will not result in foreign exchange hedging losses. Our historical financial statements do not reflect any foreign currency arrangements.

Interest Rates

We have virtually no debt, and therefore our exposure to market risk related to interest rates is limited. If and when we enter into future borrowing arrangements, we may seek to manage the exposure to interest rate changes by using a mix of debt maturities and variable-and fixed-rate debt together with interest rate swaps, where appropriate, to fix or lower borrowing costs.

Item 4. Controls and Procedures

(a) The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that the Company’s disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

(b) There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

None.

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits

(b) Reports on Form 8-K

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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