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CREDENCE SYSTEMS CORPORATION Credence Systems Corporation 2002 2001 2000 1999 1998 for Fiscal Year Ending October 31 (In Thousands, Except Per Share Amounts)

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CREDENCE SYSTEMS CORPORATION Credence Systems Corporation 2002 2001 2000 1999 1998 for Fiscal Year Ending October 31 (In Thousands, Except Per Share Amounts) ANNUAL REPORT 2002 ENSURING THE FUTURE CREDENCE SYSTEMS CORPORATION Credence Systems Corporation 2002 2001 2000 1999 1998 For Fiscal Year Ending October 31 (In Thousands, Except Per Share Amounts) Net Sales ..................................................... 164,209 301,718 757,351 253,253 253,500 Operating Income (Loss) ................................. (173,194) (172,942) 225,550 3,361 (47,159) Net Income (Loss) .......................................... (170,481) (98,676) 120,510 4,772 (29,613) Net Income Per Diluted Share (Loss) .................... (2.81) (1.65) 2.00 0.10 (0.59) Number of Shares Used in Computing Per Share Amount .............................. 60,570 59,818 61,892 50,168 49,812 Working Capital .............................................. 234,050 323,946 426,515 188,954 220,014 Total Assets ................................................... 582,249 757,419 983,437 428,799 369,603 Shareholders' Equity ....................................... 519,237 680,940 767,875 243,228 203,559 Credence intends to provide the most cost-effective products and services to move our customers' devices from concept through production. Recognized as the number one North American ATE supplier for customer satisfaction in 2002. TO OUR SHAREHOLDERS STATE OF THE INDUSTRY We are currently experiencing the most prolonged downturn in the history of the semiconductor industry. Electronic sales – the driver of semiconductor consumption – are forecasted to drop yet again in 2002 following a contraction of 14 percent in 2001. This is unprecedented in an industry that has grown every year prior to 2001. In early calendar 2002, the semiconductor capital equipment industry in general, and the automatic test equipment (ATE) industry in particular, began to see an improvement in business conditions and book-to-bill ratios climbed above one for the first time in 18 months. Unfortunately, this long awaited "recovery" proved to be short-lived and conditions turned down again in the second half of the calendar year. It now appears that the increased orders were not driven by a general improvement in business fundamentals, but only reflected pockets of market strength driven by specific technologies, inventory level corrections, isolated growth niche markets and early moves toward 300 mm wafer size. Looking forward, we expect fiscal year 2003 to be another challenging year and we will continue to view our business from a complete cycle perspective and rationalize our operations accordingly. In the face of declining orders, particularly from our outsourcing test house customers in Asia, fiscal year 2002 was particularly difficult for Credence. Similar to many of our peers in the semiconductor equipment industry, we evaluated our business and took aggressive measures to adjust our capacity and cost structure downward. We reduced excess capacity resulting from continued order softness, consolidated our facilities and accelerated the integration of IMS, which was acquired in August 2001. Additionally, we implemented headcount reductions, pay cuts, reduced work-weeks and forced time off. Fortunately these actions, combined with our strong balance sheet, enabled us to maintain the necessary investment in critical R&D programs and customer service initiatives throughout fiscal year 2002. As a result, we were recognized as the number one North American ATE supplier and number four Test & Material Handling Equipment Supplier worldwide by VLSI Research Inc 2002 Customer Satisfaction Survey. Additionally, we brought more new products to market than in any other year in the Company's history. These products included the Octet configurable SoC platform, ASL 3000RF, ASL 3000, IMS Gemini MS, TestDeveloper, and Personal Kalos XZ. RESTRUCTURING TO IMPROVE EFFICIENCY Over the course of fiscal year 2002, we made widespread changes in the organization to create a leaner, stronger and more competitive Company. We consolidated major functional groups to increase overall productivity and efficiency and, earlier in the year, we combined the IMS and Credence customer service organizations into a single group. As we progressed through the fiscal year, we consolidated the sales organizations including sales offices throughout the United States, Asia and Europe. On the product side, we created two groups: the Mobile Products Group consisting of our Mixed-Signal/Wireless and Memory divisions in California, and the SoC Products Group consisting of the SoC, IMS and DaTS divisions in Oregon. As a result, we now have a unified and focused organization that can compete more effectively in this current economic environment. Our newly formed product groups will focus on two critical market segments. The SoC Products Group will primarily focus on developing compelling, cost-effective solutions that will meet next-generation SoC device requirements both in the engineering and production test phases. Our Mobile Products Group will focus on delivering compelling test solutions for the rapidly growing mobile and communications markets where compact size, low power consumption and reduced cost are key. Both groups contribute to our objective to provide the best integrated design-to-production test portfolio in the industry. INVESTING IN A DOWNTURN Despite the current cyclical industry downturn, we believe in investing in critical programs, regions and markets that most benefit the Company. Domestically, we took advantage of our strong debt-free balance sheet and the depressed commercial real estate market in the Bay Area to purchase a facility that will allow us to consolidate our Silicon Valley employees into a single location in Milpitas, California. In Asia, we opened a direct sales office in China and we increased our marketing presence in Taiwan. With the added resources in these regions, we believe Credence can deliver a stronger and more cohesive product and services portfolio that spans across the design-to-production test flow. Focused on delivering the most comprehensive and compelling design-to-production test solutions. NEW PRODUCTS AND NEW CUSTOMERS With over 400 design wins and 35 patents filed this fiscal year alone, we believe our new product and technology portfolio will better position Credence as an innovative and competitive player. In fiscal year 2002, we observed an increasing demand for a test strategy that would help semiconductor manufacturers lower test costs and decrease time-to-volume, while solving complex SoC test challenges in computer, communications and consumer electronics applications. Our new Octet platform is competitively priced and addresses these customer requirements through its configurable platform and powerful software tools. The challenges of next-generation wireless devices and applications IMS GEMINI MS drove the development of our new ASL 3000RF system, which features Credence's patented modulated vector network analysis (MVNA) technology, the first major technology breakthrough development in S-parameter measurements in 30 years. The need for semi- conductor manufacturers to move integrated circuit (IC) designs rapidly into production resulted in the development of our IMS Gemini MS engineering validation test system for device debug, characterization and failure analysis of complex SoC devices. These products, along with our entire design-to-production test portfolio, will enable Credence to grow its business in the SoC and RF production test areas while maintaining our leadership position in the IC validation test space. ASL 3000RF Despite the decline in revenues, new customers represented 29 percent of our orders in fiscal 2002. We strongly believe that our new products and broader addressable market gave us the opportunity to sell to these new customers. This is the highest percentage of new customers for Credence since 1998 when it reached the 31 percent level. Capturing new customers in the trough of a cycle is an encouraging indicator of future growth of the Company as repeat orders drive business opportunity in an upturn. OCTET Dr. Graham J. Siddall David A. Ranhoff John R. Detwiler Chairman and President and Senior Vice President, Finance Chief Executive Officer Chief Operating Officer and Chief Financial Officer INDUSTRY RECOVERY History has shown that long and deep downturns in the semiconductor industry are invariably followed by strong upturns. We believe the eventual recovery of the industry will be based on three major factors: an increase in consumer confidence and end-user demand, corporate/institutional return to IT spending and compelling mobile solutions in converging wireless applications and services. While we wait for the industry to recover, meeting our financial objectives will be our top priority and we are prepared to take additional steps, as necessary, to further reduce our operating expenses. We will continue to remain focused on our product development roadmap, quality programs and customer service initiatives so that Credence will be better prepared to take advantage of the market when it rebounds. In addition, we also plan to actively seek strategic acquisition opportunities that will improve our design-to- production test portfolio and lead to increased shareholder value. Finally, we would like to thank our shareholders for their patience and loyalty and our employees for their hard work, support and dedication. We are committed to taking the necessary steps to return Credence to profitability and to secure the best long-term future for the Company and its shareholders. Sincerely, Dr. Graham J.
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