Verigy Ltd. - Quarterly Report (10-Q)

Share Name	Share Symbol	Market	Type
Verigy Ltd. (MM)	NASDAQ:VRGY	NASDAQ	Common Stock

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

		For the quarterly period ended July 31, 2008

		OR

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

		For the transition period from to

COMMISSION FILE NUMBER: 000-52038

Verigy Ltd.

(Exact Name of Registrant as Specified in Its Charter)

SINGAPORE		N/A
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

NO. 1 YISHUN AVE 7 SINGAPORE 768923		N/A
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code (+65) 6755-2033

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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

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

As of September 3, 2008, there were 58,938,009 outstanding ordinary shares, no par value.

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VERIGY LTD.

TABLE OF CONTENTS

		Page Number
Part I. Financial Information

Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Financial Statements	3
	Condensed Consolidated Statements of Operations for the three and nine months ended July 31, 2008 and 2007	3
	Condensed Consolidated Balance Sheets at July 31, 2008 and October 31, 2007	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended July 31, 2008 and 2007	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36

Part II. Other Information

Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Submission of Matters to a Vote of Security Holders	49
Item 5.	Other Information	49
Item 6.	Exhibits	50
Signature		51
Exhibit Index		52

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VERIGY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(Unaudited)

	Three Months Ended July 31,				Nine Months Ended July 31,
	2008		2007		2008		2007
Net revenue:
Products	$	138	$	168	$	423	$	443
Services	41		36		118		109
Total net revenue	179		204		541		552
Costs of sales:
Cost of products	67		85		202		233
Cost of services	29		26		86		76
Total costs of sales	96		111		288		309
Operating expenses:
Research and development	27		23		78		68
Selling, general and administrative	40		38		116		107
Restructuring charges	1		—		1		—
Separation costs	—		1		—		4
Total operating expenses	68		62		195		179

Income from operations	15		31		58		64
Other income, net	6		3		15		10

Income before taxes	21		34		73		74
Provision for income taxes	3		4		9		9
Net income	$	18	$	30	$	64	$	65

Net income per share – basic:	$	0.30	$	0.50	$	1.06	$	1.10

Net income per share – diluted:	$	0.29	$	0.50	$	1.05	$	1.09

Weighted average shares (in thousands) used in computing net income per share:
Basic:	60,003		59,428		59,962		59,068
Diluted:	60,853		60,418		60,760		59,708

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

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VERIGY LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	July 31, 2008			October 31, 2007
	(in millions, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	218		$	146
Short-term marketable securities	167			229
Trade accounts receivable, net	87			107
Inventory	86			68
Other current assets	49			54
Total current assets	607			604
Property, plant and equipment, net	42			42
Long-term marketable securities	82			48
Goodwill and other intangibles, net	18			18
Other long-term assets	82			59
Total assets	$	831		$	771

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	76		$	76
Payables to Agilent	—			1
Employee compensation and benefits	46			53
Deferred revenue, current	63			65
Income taxes and other taxes payable	5			12
Other current liabilities	22			19
Total current liabilities	212			226
Long-term liabilities:
Income taxes payable	10			—
Other long-term liabilities	48			47
Total liabilities	270			273

Commitments and contingencies (Note 19)

Shareholders’ equity
Ordinary shares, no par value; 59,814,433 and 59,704,629 issued and outstanding at July 31, 2008 and October 31, 2007, respectively	—			—
Additional paid in capital	402			381
Retained earnings	179			131
Accumulated other comprehensive loss	(20		)	(14		)
Total shareholders’ equity	561			498
Total liabilities and shareholders’ equity	$	831		$	771

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

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VERIGY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended July 31,
	2008			2007
	(in millions)
Cash flows from operating activities:
Net income	$	64		$	65
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	11			9
Excess and obsolete inventory-related charges	8			8
Loss on disposal of property, plant and equipment	1			1
Share-based compensation	12			10
Excess tax benefits from share-based compensation	(1		)	(2		)
Impairment of cost-based investments	—			2
Impairment loss on marketable securities	2			—
Changes in assets and liabilities, net of effect of acquisitions:
Trade accounts receivable, net	22			30
Receivables from Agilent	—			8
Inventory	(23		)	3
Accounts payable	—			2
Payables to Agilent	(1		)	(26		)
Employee compensation and benefits	(7		)	(3		)
Deferred revenue, current	(1		)	(3		)
Income taxes and other taxes payable	(8		)	(11		)
Other current assets and accrued liabilities	4			(1		)
Other long term assets and long term liabilities	10			(6		)
Net cash provided by operating activities	93			86

Cash flows from investing activities:
Acquisitions and investment, net of cash acquired	(28		)	—
Investments in property, plant and equipment	(8		)	(9		)
Purchases of available for sale marketable securities	(256		)	(458		)
Proceeds from sales and maturities of available for sale marketable securities	275			197
Net cash used in investing activities	(17		)	(270		)

Cash flows from financing activities:
Issuance of ordinary shares under employee stock plans	8			12
Repurchase of ordinary shares	(13		)	—
Excess tax benefits from share-based compensation	1			2
Net cash (used in) provided by financing activities	(4		)	14

Net increase (decrease) in cash and cash equivalents	72			(170		)
Cash and cash equivalents at beginning of period	146			300
Cash and cash equivalents at end of period	$	218		$	130

Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	10		$	9

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

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VERIGY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. OVERVIEW

Overview

Verigy Ltd. (“we,” “us” or the “Company”) designs, develops and manufactures semiconductor test equipment and provides test system solutions that are used in the manufacture, validation, characterization, and production test of System-on-a-Chip (SOC), System-in-a-Package (SIP), high-speed memory and memory devices. In addition to test equipment, our solutions include advanced analysis tools as well as consulting, service and support offerings such as start-up assistance, application services and system calibration and repair.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments which are of a normal and recurring nature and necessary to fairly state the statements of financial position, results of operations and cash flows for the dates and periods presented.

Reclassifications. Certain amounts disclosed in the notes to the condensed consolidated financial statements for the three and nine months ended July 31, 2007, were reclassified to conform to the presentation used for the three and nine months ended July 31, 2008.

Principles of consolidation . The condensed consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.

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

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Derivative instruments. We have implemented a hedging strategy that is intended to mitigate our foreign currency exposure by entering into foreign currency forward contracts that have maturities in excess of one month. These contracts are used to reduce our risk associated with exchange rate movement, as gains and losses on these contracts are intended to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged. These derivative financial instruments are recorded at fair value based upon quoted market prices for comparable instruments. For derivative instruments designated and qualifying as cash flow hedges of anticipated foreign currency denominated transactions, the effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity, and is reclassified into the statement of operations when the hedged transaction affects earnings. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, the gain or loss on the associated financial instrument is recorded promptly in earnings. For derivative instruments used to hedge existing foreign currency denominated assets or liabilities, the gain or loss on these hedges is recorded promptly in earnings to offset the changes in the fair value of the assets or liabilities being hedged. Verigy does not use derivative financial instruments for trading or speculative purposes.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). The purpose of SFAS No. 157 is to define fair value, establish a framework for measuring fair value and enhance disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position (FSP) 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP 157-1”) and FSP 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”).
FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of fiscal year 2010. The measurement and disclosure requirements related to financial assets and financial liabilities are effective for us beginning in the first quarter of fiscal year 2009. We are currently evaluating whether SFAS No. 157 will result in a change to our fair value measurements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No.159 will be effective for us beginning in the first quarter of fiscal year 2009. We are currently evaluating the impact of adopting SFAS No. 159 on our financial position, cash flows and results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS
No. 141(R) amends SFAS No. 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed and any noncontrolling interest in an acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of a business combination. It is effective for fiscal years beginning on or after December 15, 2008 and will be applied prospectively. We are currently assessing the impact that SFAS No. 141(R) may have on our consolidated financial statements upon adoption in fiscal year 2010.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 requires that ownership interests in subsidiaries held by parties other than the parent, and the amount of consolidated net income, be clearly identified, labeled, and presented in the consolidated financial statements. It also requires, once a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. Sufficient disclosures are required to clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. It is effective for fiscal years beginning on or after December 15, 2008 and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements shall be applied prospectively. We are currently assessing the impact that SFAS No. 160 may have on our consolidated financial statements upon adoption in fiscal year 2010.

In March 2008, the FASB issued SFAS No. 161, “ Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133 ” (“SFAS No. 161”). SFAS No. 161 expands the current disclosure requirements of SFAS No. 133, “ Accounting for Derivative Instruments and Hedging Activities ,” and requires that companies must now provide enhanced disclosures on a quarterly basis regarding how and why the entity uses derivatives, how derivatives and related hedged items are accounted for under SFAS No. 133 and how derivatives and related hedged items affect the company’s financial position, performance and cash flow. SFAS No. 161 is effective prospectively for periods beginning on or after November 15, 2008. We are currently assessing the impact that SFAS No. 161 may have on our consolidated financial statements upon our adoption in fiscal year 2009.

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4. TRANSACTIONS WITH AGILENT

During the three and nine months ended July 31, 2008 and 2007, we had no revenue from sale of products to Agilent or any outstanding receivables. For the three months ended July 31, 2008 and 2007, we purchased $0.6 million and $3.8 million of materials from Agilent, respectively. For the nine months ended July 31, 2008 and 2007, we purchased $3.7 million and $7.5 million of materials from Agilent, respectively.

As of July 31, 2008, we had no payables to Agilent for transition-related services, compared to $1 million of payables to Agilent at October 31, 2007, which primarily related to transition-related services provided to us by Agilent during the second half of fiscal year 2007. We have completed all of our transition service agreements with Agilent.

5. NET INCOME PER SHARE

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

	Three Months Ended July 31,				Nine Months Ended July 31,
	2008		2007		2008		2007
Basic Net Income Per Share:
Net income (in millions)	$	18	$	30	$	64	$	65
Weighted average number of ordinary shares (1)	60,003		59,428		59,962		59,068
Basic net income per share	$	0.30	$	0.50	$	1.06	$	1.10
Diluted Net Income Per Share:
Net income (in millions)	$	18	$	30	$	64	$	65
Weighted average number of ordinary shares (1)	60,003		59,428		59,962		59,068
Potentially dilutive ordinary share equivalents — stock options, restricted share units and other employee stock plans (1)	850		990		798		640
Total shares for purpose of calculating diluted net income per share (1)	60,853		60,418		60,760		59,708
Diluted net income per share	$	0.29	$	0.50	$	1.05	$	1.09

(1) Weighted average shares are presented in thousands.

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

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

	Three Months Ended July 31,		Nine Months Ended July 31,
	2008	2007	2008	2007
Non-qualified Share Options:
Number of options to purchase ordinary shares (in thousands)	667	208	812	1,140

Restricted Share Units:
Number of restricted share units (in thousands)	96	—	12	—

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6. PROVISION FOR INCOME TAXES

For the three months ended July 31, 2008 and 2007, we recorded income tax expense of approximately $3 million and $4 million, respectively. During the nine months ended July 31, 2008 and 2007, we recorded income tax expense of approximately $9 million for both periods presented.

On November 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position, as well as provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provision of FIN 48 is effective for fiscal years beginning after December 15, 2006, and applies to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. As a result of the adoption of FIN 48, we increased our reserves for unrecognized tax benefits by $0.2 million and increased our reserves for penalties by $0.2 million, for a total increase of $0.4 million, which was accounted for as a cumulative adjustment to the beginning balance of retained earnings. Additionally, we reclassified $10.4 million from current income taxes and other taxes payable to long-term taxes payable. At the adoption date of November 1, 2007, we had $9.8 million of unrecognized tax benefits which would reduce our income tax expense if recognized. As of July 31, 2008, we had $11.6 million of unrecognized tax benefits, of which $10.4 million is recorded as long- term liabilities, and $1.2 million is recorded as income taxes payable. As of July 31, 2008, we had an additional $2.5 million of unrecognizable tax benefits, which is recorded as a reduction in long term deferred tax assets.

Our continuing practice is to recognize interest and penalties related to income tax matters as a component of income tax expense. We had approximately $0.6 million of accrued interest and penalties at the adoption date of November 1, 2007, and approximately $1.1 million of accrued interest and penalties as of July 31, 2008.

Although we file Singapore, U.S. federal, U.S. state and foreign income tax returns, our three major tax jurisdictions are Singapore, the U.S. and Germany. Our 2006 and 2007 tax years remain subject to examination by the tax authorities in our major tax jurisdictions. We are not currently under audit for any tax years.

7. SHARE-BASED COMPENSATION

2006 Equity Incentive Plan

On June 7, 2006, our board of directors adopted the Verigy Ltd. 2006 Equity Incentive Plan (the “2006 EIP”). A total of 10,300,000 ordinary shares were authorized for issuance under the plan. The 2006 EIP provides for grants of incentive stock options, nonqualified stock options, stock appreciation rights and restricted share units. At July 31, 2008, there were approximately 4.4 million ordinary shares available for issuance under the 2006 EIP.

Except for replacement options granted in connection with Verigy’s separation from Agilent, employee nonqualified stock options have an exercise price of no less than 100% of the fair market value of an ordinary share on the date of grant and, generally, vest at a rate of 25% per year over 4 years. The maximum allowable term is 10 years. Restricted share units awarded to employees pay out in an equal number of ordinary shares and, generally, vest at a rate of 25% per year over 4 years. Options and restricted share units cease to vest upon termination of employment. If an employee terminates employment due to death, disability or retirement at or after age 65 with at least 15 years of service, then the vested portion of the employee’s option and restricted share unit award is determined by adding 12 months to the length of his or her actual service, and the option is exercisable as to the vested shares for one year after the date of termination, or, if earlier, the expiration of the term of the option.

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Stock options granted to outside directors have a maximum term of 5 years. Options granted prior to the second quarter of fiscal year 2008 become vested on the first anniversary of the grant date, and options granted beginning in the second quarter of fiscal year 2008 become vested in four equal quarterly installments from the grant date. Restricted share units granted prior to the second quarter of fiscal year 2008 become vested on the first anniversary of the grant date, and units granted beginning in the second quarter of fiscal year 2008 become vested in four equal quarterly installments from the grant date. Restricted share units granted to outside directors are paid out on the third anniversary of the grant date. All awards granted to an outside director become fully vested upon the director’s termination of services if due to of death, disability, retirement at or after age 65, or if in connection with a change in control.

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

2006 Employee Shares Purchase Plan

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

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

As of July 31, 2008, a total of 668,416 ordinary shares had been issued as a result of purchases made by participants in our Purchase Plan. On the purchase dates of May 31, 2008, November 30, 2007, May 31, 2007 and November 30, 2006, we issued 171,905, 155,030, 197,000 and 144,481 ordinary shares, respectively, to participants in our Purchase Plan.

Share-Based Compensation for Verigy Options and Purchase Plan

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

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

Share-Based Compensation for Agilent Options Held by Verigy Employees

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

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Share-Based Payment Award Activity

The following table summarizes stock option activity during the nine months ended July 31, 2008:

	Options
	Shares		Weighted Average Exercise Price
	(in thousands)
Outstanding as of October 31, 2007	3,280		$	15.38
Granted	361		$	23.55
Exercised (1)	(227	)	$	13.54
Cancelled / Expired	(68	)	$	15.13
Outstanding as of July 31, 2008	3,346		$	16.40

(1) The total pretax intrinsic value of stock options exercised during the nine months ended July 31, 2008 was $2.4 million.

The following table summarizes restricted share unit activity during the nine months ended July 31, 2008:

	Restricted Share Units
	Shares		Weighted Average Grant Date Share Price
	(in thousands)
Outstanding as of October 31, 2007	870		$	18.49
Granted	730		$	22.05
Vested and paid out	(212	)	$	19.15
Forfeited	(49	)	$	19.83
Outstanding as of July 31, 2008 (2) (3) (4)	1,339		$	20.28

The following table summarizes information about all outstanding stock options to purchase ordinary shares of Verigy at July 31, 2008:

	Options Outstanding
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Aggregate Intrinsic Value
	(in thousands)				(in thousands)
$7.48 — 15.00	1,512	5.29 years	$	13.10	$	13,812
$15.01 — 20.00	1,314	6.42 years	$	16.44	7,600
$20.01 — 25.00	115	5.82 years	$	23.87	—
$25.01 — 30.00	405	5.62 years	$	26.43	—
	3,346	5.79 years	$	16.40	$	21,412

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing stock price of our ordinary shares of $22.23 at July 31, 2008, which would have been received by award holders had all award holders exercised their awards that were in-the-money as of that date. As of July 31, 2008, approximately 1,456,000 outstanding options were vested and exercisable and the weighted average exercise price was $15.05. Among the 1,456,000 outstanding options that were vested and exercisable, the total number of exercisable stock options that were in-the-money was 1,341,000 and the weighted average exercise price was $14.12.

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The following table summarizes information about all outstanding restricted share unit awards of Verigy ordinary shares at July 31, 2008:

	Restricted Share Units Outstanding
Range of Grant Date Share Prices	Number Outstanding	Weighted Average Grant Date Share Price
	(in thousands)
$14.75 — 15.00 (2)	74	$	14.97
$15.01 — 20.00 (3)	570	$	18.32
$20.01 — 25.00	494	$	20.80
$25.01 — 30.00 (4)	201	$	26.52
	1,339	$	20.28

(2) The outstanding restricted share units as of July 31, 2008 include 22,000 fully vested units held by outside directors.

(3) The outstanding restricted share units as of July 31, 2008 include 13,000 fully vested units held by outside directors.

(4) The outstanding restricted share units as of July 31, 2008 include 11,000 fully vested units held by outside directors.

As of July 31, 2008, the total grant date fair value of our outstanding restricted share units was approximately $27.2 million and the aggregate market value of the ordinary shares underlying the outstanding restricted share units was $29.8 million.

Share-based Compensation

The impact on our results for share-based compensation for the three and nine months ended July 31, 2008 and 2007, respectively, was as follows:

	Three Months Ended July 31,				Nine Months Ended July 31,
	2008		2007		2008		2007
	(in millions)
Cost of products and services	$	0.8	$	0.6	$	2.3	$	1.8
Research and development	0.5		0.4		1.5		1.3
Selling, general and administrative	3.0		2.4		8.6		7.2
Total share-based compensation expense	$	4.3	$	3.4	$	12.4	$	10.3

For the three and nine months ended July 31, 2008 and 2007, share-based compensation capitalized within inventory was insignificant.

The weighted average grant date fair value of awards related to Verigy options granted during the three and nine months ended July 31, 2008, was $10.45 and $9.93 per share, respectively, and was determined using the Black-Scholes option pricing model. The tax benefit realized from exercised stock options and similar awards for the three and nine months ended July 31, 2008 was $0.4 million and $0.6 million, respectively, compared to $1.4 million and $1.8 million for the three and nine months ended July 31, 2007, respectively.

As of July 31, 2008 and 2007, the total compensation cost related to share-based awards not yet recognized, net of expected forfeitures, was approximately $34.0 million and $28.1 million, respectively. We expect to recognize the cost of these share-based awards over a weighted average of 2.44 years.

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Valuation Assumptions for Verigy Options

The fair value of Verigy options granted during the three and nine months ended July 31, 2008 and 2007 was estimated at grant date using a Black-Scholes options-pricing model with the following weighted average assumptions:

	Three Months Ended July 31,				Nine Months Ended July 31,
	2008		2007		2008		2007
Risk-free interest rate for options	3.37	%	4.82	%	3.14	%	4.60	%
Dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Volatility for options	44.5	%	39.3	%	47.0	%	40.3	%
Expected option life	4.50 years		4.45 years		4.42 years		4.36 years

Valuation Assumptions for the Purchase Plan

	Three Months Ended July 31,				Nine Months Ended July 31,
	2008		2007		2008		2007
Risk-free interest rate for Purchase Plan	2.05	%	5.25	%	2.05	%	5.25	%
Dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Volatility for Purchase Plan	44.1	%	39.1	%	44.1	%	39.1	%
Expected option life for Purchase Plan	6 months		6 months		6 months		6 months

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

8. SHARE REPURCHASE PROGRAM

On November 27, 2007, our board of directors approved the use of up to $150 million to repurchase up to 10 percent of Verigy’s outstanding ordinary shares, or approximately 6 million ordinary shares. On April 15, 2008, during our annual general meeting of shareholders, our shareholders approved the share repurchase program.

The following repurchases under the above program were completed in the period presented below:

Three Months Ended	Number of Ordinary Shares Repurchased	Weighted Average Price Per Share		Amount of Ordinary Shares Repurchased
	(in thousands)			(in thousands)
July 31, 2008	637	$	22.97	$	14,630
Program to date as of July 31, 2008	637	$	22.97	$	14,630

All such shares repurchased are immediately retired and will not be available for future resale. The remaining amount that is authorized under the stock repurchase program is approximately 5.4 million shares and $135 million.

9. INOVYS ACQUISITION

During the three months ended January 31, 2008, we acquired Inovys, a privately held company. Inovys provides innovative solutions for design debug, failure analysis and yield acceleration for complex semiconductor devices and processes. From the acquisition date, the results of operations of Inovys’ business are included in our condensed consolidated statements of operations and were not material to revenues or net income for the period following the acquisition. The purchase price was allocated to the acquired net assets based on estimates of fair values. Pro forma results of operations for the acquisition have not been presented as the effect has not been significant for the periods presented.

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10. COMPREHENSIVE INCOME

The components of comprehensive income, net of tax, are as follows:

	Three Months Ended July 31,					Nine Months Ended July 31,
	2008			2007		2008			2007
	(in millions)
Net income	$	18		$	30	$	64		$	65
Other comprehensive income:
Foreign currency translation adjustments, net of tax	—			—		—			—
Change in unrealized losses on marketable securities and investments in other long-term assets, net of tax	(2		)	—		(7		)	—
Change in unrealized losses on derivative instruments qualifying as cash flow hedges, net of tax	(1		)	—		—			—
Total comprehensive income	$	15		$	30	$	57		$	65

Verigy’s derivative financial instruments consist of currency forward exchange contracts and are recorded at fair value on the condensed consolidated balance sheets. Changes in the fair value of derivatives that do not qualify for hedge accounting treatment, as well as the ineffective portion of hedges, if any, are recognized in the consolidated statement of operations. The effective portion of the foreign exchange gain (loss) is reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity and is reclassified into the statement of operations when the hedged transaction affects earnings. All amounts included in accumulated other comprehensive loss as of July 31, 2008 will generally be reclassified into earnings within 12 months. Changes in the fair value of currency forward exchange due to changes in time value are excluded from the assessment of effectiveness and are recognized in earnings. The change in forward time value was not material for all periods presented. If the transaction being hedged fails to occur, or if a portion of any derivative is deemed to be ineffective, we will recognize the gain (loss) on the associated financial instrument in other income, net in the statement of operations. We did not have any ineffective hedges during the periods presented.

11. INVENTORY

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

	July 31,		October 31,
	2008		2007
	(in millions)
Raw materials	$	35	$	25
Work in progress	9		6
Finished goods	42		37
Total inventory	$	86	$	68

There is approximately $16 million of demonstration products included in finished goods inventory as of July 31, 2008 and $17 million as of October 31, 2007.

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12. PROPERTY, PLANT AND EQUIPMENT, NET

	July 31,			October 31,
	2008			2007
	(in millions)
Leasehold improvements	$	16		$	13
Software	21			21
Machinery and equipment	46			40
Total property, plant and equipment	83			74
Accumulated depreciation and amortization	(41		)	(32		)
Total property, plant and equipment, net	$	42		$	42

We recorded approximately $4 million and $3 million of depreciation and amortization expense during the three months ended July 31, 2008 and 2007, respectively. We recorded approximately $11 million and $9 million of depreciation and amortization expense during the nine months ended July 31, 2008 and 2007, respectively.

13. MARKETABLE SECURITIES

We account for our short-term marketable securities in accordance with SFAS No. 115, “ Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). We classify our marketable securities as available for sale at the time of purchase and re-evaluate such designation as of each consolidated balance sheet date. We amortize premiums and discounts against interest income over the life of the investment. Our marketable securities are classified as cash equivalents if the original maturity, from the date of purchase, is ninety days or less. Our marketable securities are classified as short-term investments if the original maturity, from the date of purchase, is in excess of ninety days since we intend to convert them into cash as necessary to meet our liquidity requirements.

Our marketable securities include commercial paper, corporate bonds, government securities and auction rate securities. Auction rate securities are securities that are structured with interest rate reset periods of generally less than ninety days but with contractual maturities that can be well in excess of ten years. At the end of each interest rate reset period, which occur every seven to thirty-five days, investors can buy, sell, or continue to hold the securities at par. Our auction rate securities experienced failed auctions due to sell orders exceeding buy orders which occurred as a result of liquidity concerns derived primarily from the mortgage and debt markets. We continue to see liquidity issues in the market for auction rate securities. Our auction rate securities primarily consist of investments that are backed by pools of student loans guaranteed by the U.S. Department of Education and other asset-backed securities. We evaluate our investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and insurance guarantor, and our ability and intent to hold the investment for a period of time sufficient for anticipated recovery of market value. Based on an analysis of other-than-temporary impairment factors, at July 31, 2008, we have recorded a temporary impairment within accumulated other comprehensive loss for the nine months ended July 31, 2008 of approximately $6 million (net of tax of $1 million) related to these auction rate securities. We estimate the fair value using market price or a discounted cash flow model incorporating assumptions that market participants would use in their estimates of fair value. Some of these assumptions include estimates for interest rates, timing and amount of cash flows and expected holding periods of the auction rate securities. Our marketable securities portfolio as of July 31, 2008 has a carrying value of $249 million, of which approximately $82 million represented auction rate securities. The interest rate reset auctions for our portfolio have all failed as of July 31, 2008. These securities have been in a loss position for less than 12 months. The funds associated with failed auctions will not be accessible to us until a successful auction occurs, a buyer is found outside of the auction process, or the underlying securities have matured or are called by the issuer. Given the recent disruptions in the credit markets and the fact that the liquidity for these types of securities remains uncertain, we have classified all of our auction rate securities as long-term assets in our condensed consolidated balance sheet as our ability to liquidate such securities in the next 12 months is uncertain.

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The following table summarizes our marketable security investments as of July 31, 2008:

	Cost		Gross Unrealized Gains (Losses)		Estimated Fair Market Value
	(in millions)
Short-term marketable securities:
Money market funds	$	186	$	—	$	186
U.S. treasury securities and government agency securities	71		—		71
Corporate debt securities	96		—		96
Total short-term available for sale investments	$	353	$	—	$	353

	Cost		Gross Unrealized Gains (Losses)			Estimated Fair Market Value
	(in millions)
Long-term marketable securities:
Auction rate securities	$	89	$	(7	)	$	82
Total long-term available for sale investments	$	89	$	(7	)	$	82

As Reported:
Cash equivalents	$	186
Short-term marketable securities	167
Long-term marketable securities	82
Total at July 31, 2008	$	435

The amortized cost and estimated fair value of cash equivalents and marketable securities classified as available-for sale at July 31, 2008 are shown in the table below based on their contractual maturity dates:

	Cost		Gross Unrealized Gains (Losses)			Estimated Fair Market Value
	(in millions)
Less than 1 year	$	326	$	—		$	326
Due in 1 to 2 years	27		—			27
Due after 2 years	89		(7		)	82
Total at July 31, 2008	$	442	$	(7	)	$	435

14. GUARANTEES

Standard Warranty

A summary of our standard warranty accrual activity during the nine months ended July 31, 2008 and 2007 is shown in the table below: (Also see Note 18 “Other Current Liabilities and Other Long-Term Liabilities”)

	Nine Months Ended July 31,
	2008			2007
	(in millions)
Beginning balance at November 1,	$	9		$	6
Accruals for warranties issued during the period	8			9
Accruals related to pre-existing warranties (including changes in estimates)	—			5
Settlements made during the period	(10		)	(12		)
Ending balance at July 31,	$	7		$	8

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

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Extended Warranty

A summary of our extended warranty deferred revenue activity for the nine months ended July 31, 2008 and 2007 is shown in the table below:

	Nine Months Ended July 31,
	2008			2007
	(in millions)
Beginning balance at November 1,	$	21		$	20
Revenue recognized during the period	(8		)	(7		)
Deferral of revenue for new contracts	5			8
Ending balance at July 31,	$	18		$	21

In our condensed consolidated balance sheets, current deferred revenue is presented separately and long-term deferred revenue is included in other long-term liabilities.

Indemnifications

As is customary in our industry and as is provided for in local law in the U.S. and other jurisdictions, many of our standard contracts provide remedies to our customers and others with whom we enter into contracts, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of our products. From time to time, we indemnify customers, as well as our suppliers, contractors, lessors, lessees and others with whom we enter into contracts, against combinations of loss, expense or liability arising from various triggering events related to the sale and the use of our products, the use of their goods and services, the use of facilities and state of our owned facilities and other matters covered by such contracts, usually up to a specified maximum amount. In addition, from time to time we also provide protection to these parties against claims related to undiscovered liabilities, additional product liability or environmental obligations.

Under agreements we entered into with Agilent at the time of the separation, we will indemnify Agilent in connection with our activities conducted prior to and following our separation from Agilent in connection with our business and the liabilities that we specifically assumed under the agreements. These indemnifications cover a variety of aspects of our business, including, but not limited to, employee, tax, intellectual property and environmental matters.

15. RESTRUCTURING

During the three months ended July 31, 2008, we offered an early retirement plan to a number of eligible employees. The total charges incurred during this period for this early retirement plan were $2.1 million, $1.2 million of which was recorded within cost of sales and the remainder of which was recorded within operating expenses.

In connection with the transfer of our manufacturing activities to Flextronics in fiscal year 2006, we transferred a number of employees to Flextronics. As part of this arrangement, we had a potential obligation in the future of approximately $2 million associated with the termination of these transferred employees from the manufacturing facilities in Flextronics in Germany. We had deferred these costs and recognized them ratably over the employees’ period of service through the employees’ expected termination from Flextronics. During the second quarter of fiscal year 2008, we determined that we were no longer liable to pay this obligation as we had decided to maintain a specialized portion of our manufacturing activities in Germany. As a result, at the end of the second quarter of fiscal year 2008, we recorded a $1.2 million benefit relating to restructuring charges.

As of July 31, 2008, we had approximately $2.4 million in accrued restructuring liability relating to reductions that will occur during the second half of fiscal year 2008.

16. SEPARATION COSTS

In connection with our separation from Agilent in June 2006, we incurred one-time internal and external separation costs, such as information technology set-up costs and consulting and legal and other professional fees. These expenses totaled $1.0 million and $4.5 million in the three and nine months ended July 31, 2007, respectively, and were not significant during the three and nine months ended July 31, 2008.

17. RETIREMENT AND POST-RETIREMENT PENSION PLANS

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

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

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

For the three and nine months ended July 31, 2008, our matching expenses for our U.S. employees under the Verigy 401(k) and the Verigy profit sharing plans were $0.9 million and $2.5 million, respectively, compared to $0.9 million and $2.6 million in the comparable periods in fiscal year 2007.

Effective June 1, 2006, Verigy made available certain retiree benefits to U.S. employees meeting certain age and service requirements upon termination of employment through Verigy’s Retiree Medical Account (RMA) Plan. At the date of separation, the present value of our responsibility for the retiree medical benefit obligation was approximately $2.3 million. We are ratably recognizing this obligation over a period of 6.4 years, the shorter of the estimated average working lifetime or retirement eligibility of these employees. For the three and nine months ended July 31, 2008, the amount of expenses recognized under the RMA plan was approximately $0.2 million and $0.5 million, respectively. There are no plan assets related to these obligations, and we currently do not have any plans to make any contributions.

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

Change in Plans. Upon our separation from Agilent, the defined benefit plans for our employees in Germany, Korea, Taiwan, France and Italy were transferred to us. With the exception of Italy and France, which involve relatively insignificant amounts, Agilent completed the funding of these transferred plans, based on 100% of the accumulated benefit obligation level as of the separation date, by contributing approximately $3.3 million into our pension trust accounts during the three months ended January 31, 2007.

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Costs for All U.S. and Non-U.S. Plans. The following tables summarize the principal components of total costs associated with the retirement-related benefit plans of Verigy for the three and nine months ended July 31, 2008 and 2007:

	U.S. Plans				Non-U.S. Plans				Total
	Three Months Ended July 31,
	2008		2007		2008		2007		2008		2007
	(in millions)
Defined benefit pension plan costs	$	—	$	—	$	1.8	$	1.5	$	1.8	$	1.5
Defined contribution pension plan costs	0.9		0.9		0.3		0.3		1.2		1.2
Non-pension post-retirement benefit costs	0.2		0.2		—		—		0.2		0.2
Total retirement-related plans costs	$	1.1	$	1.1	$	2.1	$	1.8	$	3.2	$	2.9

	U.S. Plans				Non-U.S. Plans				Total
	Nine Months Ended July 31,
	2008		2007		2008		2007		2008		2007
	(in millions)
Defined benefit pension plan costs	$	—	$	—	$	5.3	$	4.4	$	5.3	$	4.4
Defined contribution pension plan costs	2.5		2.6		0.9		0.5		3.4		3.1
Non-pension post-retirement benefit costs	0.5		0.5		—		—		0.5		0.5
Total retirement-related plans costs	$	3.0	$	3.1	$	6.2	$	4.9	$	9.2	$	8.0

Non-U.S. Defined Benefit. For the three and nine months ended July 31, 2008 and 2007, the net pension costs related to our employees participating in our non-U.S. defined benefit plans were comprised of:

	Three Months						Nine Months
	Ended						Ended
	July 31,						July 31,
	2008			2007			2008			2007
	(in millions)
Service cost — benefits earned during the year	$	1.2		$	1.0		$	3.9		$	3.0
Interest cost on benefit obligation	1.0			0.7			2.9			2.0
Expected return on plan assets	(0.7		)	(0.5		)	(2.4		)	(1.5		)
Amortization and deferrals of recognized amounts:
Actuarial loss	0.3			0.3			0.9			0.9
Total net plan costs	$	1.8		$	1.5		$	5.3		$	4.4

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

18. OTHER CURRENT LIABILITIES AND OTHER LONG-TERM LIABILITIES

Other current accrued liabilities at July 31, 2008 and October 31, 2007, were as follows:

	July 31, 2008		October 31, 2007
	(in millions)
Supplier liabilities	$	7	$	5
Accrued warranty costs	7		9
Other	8		5
Total other current liabilities	$	22	$	19

Supplier liabilities reflect the amount by which our firmly committed inventory purchases from our suppliers exceed our current forecasted production and service and support needs. (Also see Note 14, “Guarantees” for additional information regarding warranty accruals).

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Other long-term liabilities at July 31, 2008 and October 31, 2007, were as follows:

	July 31, 2008		October 31, 2007
	(in millions)
Long-term extended warranty and deferred revenue	$	8	$	12
Retirement plan accruals	39		32
Other	1		3
Total other long-term liabilities	$	48	$	47

(Also see Note 17, “Retirement and Post-Retirement Pension Plans” for additional information regarding retirement plan accruals).

19. COMMITMENTS AND CONTINGENCIES

As of July 31, 2008, there was no material change in our capital lease obligations, operating lease obligations, purchase obligations or any other long-term liabilities reflected on our condensed consolidated balance sheets as compared to such obligations and liabilities as of October 31, 2007.

As a result of adopting FIN 48, we had $9.8 million of unrecognized tax benefits which were recorded as long term liabilities upon adoption on November 1, 2007. As of July 31, 2008, we had $11.6 million of unrecognized tax benefits, of which $10.4 million is recorded as long- term liabilities, $1.2 million is recorded as income taxes payable within current liabilities, and an additional $2.5 million which is recorded as a reduction in long term deferred tax assets.

Rent expense was $1.5 million and $4.7 million for the three and nine months ended July 31, 2008, respectively, compared to $1.4 million and $4.2 million in the comparable periods in fiscal year 2007.

From time to time, we are involved in lawsuits, claims, investigations and proceedings, including patent, commercial and environmental matters, which arise in the ordinary course of business.

20. SEGMENT & GEOGRAPHIC INFORMATION

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

	Three Months				Nine Months
	Ended				Ended
	July 31,				July 31,
	2008		2007		2008		2007
	(in millions)
Net revenue from products:
SOC / SIP / High-Speed Memory	$	129	$	92	$	366	$	210
Memory	9		76		57		233
Net revenue from products	138		168		423		443
Net revenue from services	41		36		118		109
Total net revenue	$	179	$	204	$	541	$	552

Major customers

For the three months ended July 31, 2008, three of our customers accounted for 44% of our total net revenue, with each one of them accounting for 19.6%, 13.7%, and 10.7%, respectively. For the three months ended July 31, 2007, one of our customers accounted for 30.9% of our total net revenue.

For the nine months ended July 31, 2008, one of our customers accounted for 11.3% of our total net revenue. For the nine months ended July 31, 2007, two of our customers accounted for 35.7% of our total net revenue, with one customer accounting for 24.2% and the other customer accounting for 11.5% of our total net revenue.

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Geographic Net Revenue Information:

	Three Months				Nine Months
	Ended				Ended
	July 31,				July 31,
	2008		2007		2008		2007
	(in millions)
United States	$	25	$	29	$	83	$	171
Singapore	125		148		363		296
Japan	14		12		48		38
Rest of the World	15		15		47		47
Total net revenue	$	179	$	204	$	541	$	552

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

Geographic Property, Plant and Equipment Information:

	July 31,		October 31,
	2008		2007
	(in millions)
United States	$	14	$	13
Singapore	14		17
Germany	6		4
China	3		3
Rest of the World	5		5
Total geographic property, plant and equipment	$	42	$	42

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This report contains forward-looking statements including, without limitation, statements regarding manufacturing operations, increase in sales and growth of business in Asia, research and development activities and expenses, variations in quarterly revenues and operating results, trends, cyclicality, seasonality and growth in the markets we sell into, our strategic direction, expenditure in research and development, anticipated benefits from our operating model, our future effective tax rate, new product introductions, growth in service revenue, our liquidity position, our ability to generate cash from continuing operations, our expected growth, the potential impact of adopting new accounting pronouncements, our potential future financial results, the quality of our marketable securities, our purchase commitments, our obligation and assumptions about our retirement and post-retirement benefit plans, the impact of our variable cost structure, and our lease payment obligations that involve risks and uncertainties. Additional forward-looking statements can be identified by words such as “anticipated,” “expect,” “believes,” “plan,” “predicts,” and similar terms. Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including those discussed under “Part II, Item 1A., Risk Factors” and elsewhere in this report.

Overview

Prior to our initial public offering, we were a wholly-owned subsidiary of Agilent Technologies, Inc (“Agilent”). We became an independent company on June 1, 2006, when we separated from Agilent. On June 13, 2006, we completed our initial public offering and became a separate stand-alone publicly-traded company incorporated in Singapore focused on technology and innovation in semiconductor testing. We design, develop, manufacture and sell advanced test systems and solutions for the semiconductor industry. We offer a single platform for each of the two general categories of devices being tested: our 93000 Series platform, designed to test System-on-a-Chip (SOC), System-in-a-Package (SIP) and high-speed memory devices, and our V5000 Series platform, designed to test memory devices, including flash memory and multi-chip packages. Our test solutions are both scalable and flexible. Our test platforms are scalable across different frequency ranges, different pin counts and different numbers of devices under simultaneous test. Our test platforms’ flexibility allows for a single test system to test a wide range of applications for semiconductor devices. Our scalable platform architecture provides us with internal operating model efficiencies such as relatively lower research and development costs, engineering headcount, support requirements and inventory risk. The scalability and flexibility of our test solutions also provides economic benefits to our customers by allowing them to get their complex, feature-rich semiconductor devices to market quickly and to reduce their overall costs. In addition to our test equipment, our solutions include advanced analysis tools as well as consulting, service and support offerings such as start-up assistance, application services and system calibration and repair.

We have a broad customer base, with almost 1,900 93000 Series systems and more than 2,550 V5000 Series systems installed worldwide as of July 31, 2008. Our customers include integrated device manufacturers (“IDMs’), test subcontractors, also referred to as subcontractors, which includes specialty assembly, package and test companies as well as wafer foundries, and fabless design companies.

Basis of Presentation and Separation from Agilent

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

Amounts included in the accompanying condensed consolidated financial statements are expressed in U.S. dollars. The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain amounts in the condensed consolidated financial statements for the three and nine months ended July 31, 2007 were reclassified to conform to the presentation used for the three and nine months ended July 31, 2008. In the third quarter of fiscal year 2008, we recorded a $2.6 million adjustment in other income, net, related to foreign currency remeasurement gains. These gains relate to a failure to remeasure certain foreign currency assets and liabilities, primarily value added tax receivables, arising in fiscal years 2006, 2007 and the first two quarters of fiscal year 2008. Management has assessed the impact of this adjustment and does not believe the amounts are material, either individually or in the aggregate, to any of the prior years’ financial statements, and the impact of correcting these errors in the current year is not expected to be material to the full fiscal year 2008 financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States have been condensed or omitted pursuant to such rules and regulations. The following discussion should be read in conjunction with our 2007 Annual Report on Form 10-K.

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Overview of Results

Our total net revenue for the three months ended July 31, 2008, was $179 million, down $25 million, or 12.3%, from the comparable period in fiscal year 2007, but up 10.5% sequentially. This decrease was due to lower revenue from sales of our memory test systems in the third quarter of fiscal year 2008. The decline in our memory test revenues resulted from substantial declines in the capital spending patterns of our memory device manufacturer customers and of their subcontractor test partners to which we also sell systems. The overall decline in the memory market capital spending reflects continued excess supply and price erosion for memory products, which has resulted in lower manufacturing output and excess test capacity. These factors have caused our customers to delay test system orders and delay delivery of systems ordered.

Notwithstanding the cyclical weakness in the memory test industry, our SOC business showed continued strength. We experienced increased demand for our 93000 platform for SOC applications, in particular our Port Scale RF products, driven primarily by strong demand for our customers’ devices targeted at wireless, PC and consumer mixed-signal device markets. For the three months ended July 31, 2008, three of our SOC customers each accounted for more than 10% of our total net revenue. In contrast, for the three months ended July 31, 2007, one of our memory customers accounted for more than 10% of our total net revenue.

Our gross margin for the three months ended July 31, 2008, was 46.4%, an increase of 0.8 percentage points from the comparable period in fiscal year 2007. Gross margin improvement was primarily attributable to the stronger mix of SOC systems, which generally have a higher gross margin than our memory systems, sold during the quarter. Excluding the impact of $1.2 million of restructuring charges in cost of sales relating to an early retirement program recently initiated, gross margin would have been essentially flat compared to the second quarter of fiscal year 2008.

Our total operating expenses, including separation and restructuring charges, were $68 million in the three months ended July 31, 2008, up $6 million, or 9.7%, from the comparable period in fiscal year 2007, and up by $5 million sequentially. This increase in operating expenses from the comparable quarter of fiscal year 2007 was primarily due to increased spending on research and development initiatives for memory products that are planned for introduction by the end of the calendar year and SOC products planned for release during the next 9 to 12 months, higher share-based compensation and increases in field selling and governance costs.

Net income for the three and nine months ended July 31, 2008 was $18 million and $64 million, a decrease of 40.0% and 1.5% from the $30 and $65 million achieved in the comparable periods in fiscal year 2007. This decrease was primarily due to the overall decline in the memory market capital spending, partially offset by our revenue growth in SOC testers and increased revenue generated from our Port Scale RF product. For the nine months ended July 31, 2008, we generated operating cash flows of $93 million and our cash and cash equivalents balance as of July 31, 2008 was $218 million.

We derive a significant percentage of our net revenue from outside of North America. Net revenue from customers located outside of North America represented 86.0% and 85.8% of total net revenue in the three months ended July 31, 2008 and 2007, respectively. Net revenue in North America was lower by 13.8% during the three months ended July 31, 2008, compared to the same period of fiscal year 2007, due to the continuing outsourcing by our North American customers to contract manufacturers in Asia. Net revenue in Asia (including Japan) was higher by 11.4% in the three months ended July 31, 2008, compared to the same period of fiscal year 2007. We expect this trend of increasing sales in Asia (including Japan) to continue as semiconductor manufacturing activities continue to concentrate in that region.

The sales of our products and services are dependent, to a large degree, on customers who are subject to cyclical trends in the demand for their products. These cyclical periods have had and will have a significant effect on our business since our customers often delay or accelerate purchases in reaction to changes in their businesses and to demand fluctuations in the semiconductor industry. Historically, these demand fluctuations have resulted in significant variations in our results of operations. This was particularly relevant during the second and third quarters of fiscal year 2008 where we saw a significant decrease in revenue from our memory platform and experienced some order postponements. Due to our product diversification, however, we were able to partially offset the effect of this downturn in demand for flash memory systems with increased demand for our SOC products fueled by the wireless, PC and consumer mixed-signal device markets. The sharp swings in the semiconductor industry in recent years have generally affected the semiconductor test equipment and services industry more significantly than the overall capital equipment sector.

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Furthermore, we sell to a variety of customers, including subcontractors. Because we sell to subcontractors, which during market troughs tend to decrease or postpone orders for new test systems and test services more quickly and dramatically than other customers, any downturn may cause a quicker and more significant adverse effect on our business than on the broader semiconductor industry. In addition, although a decline in orders for semiconductor capital equipment may accompany or precede the timing of a decline in the semiconductor market as a whole, recovery in semiconductor capital equipment spending may lag the recovery by the semiconductor industry.

Although our visibility into the memory market remains poor, we continue to invest in our memory products in anticipation of a cyclical recovery in the market and are working on initiatives to expand our memory customer base. In addition, we will place stronger emphasis on our SOC business focusing our attention and resources on high growth segments of the markets we address such as highly-integrated RF, consumer mixed-signal, high-speed memory and yield improvement.

Critical Accounting Policies and Estimates

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

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. There have been no significant changes during the three and nine months ended July 31, 2008 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended October 31, 2007, filed with the Securities and Exchange Commission on December 21, 2007.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). The purpose of SFAS No. 157 is to define fair value, establish a framework for measuring fair value and enhance disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position (FSP) 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP 157-1”) and FSP 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of fiscal year 2010. The measurement and disclosure requirements related to financial assets and financial liabilities are effective for us beginning in the first quarter of fiscal year 2009. We are currently evaluating whether SFAS No. 157 will result in a change to our fair value measurements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) amends SFAS No. 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed and any noncontrolling interest in an acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of a business combination. It is effective for fiscal years beginning on or after December 15, 2008 and will be applied prospectively. We are currently assessing the impact that SFAS No. 141(R) may have on our consolidated financial statements upon adoption in fiscal year 2010.

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In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 requires that ownership interests in subsidiaries held by parties other than the parent, and the amount of consolidated net income, be clearly identified, labeled, and presented in the consolidated financial statements. It also requires, once a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. Sufficient disclosures are required to clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. It is effective for fiscal years beginning on or after December 15, 2008, and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements shall be applied prospectively. We are currently assessing the impact that SFAS No. 160 may have on our consolidated financial statements upon adoption in fiscal year 2010.

Quarterly Results of Operations

Our quarterly results of operations have varied in the past and are likely to continue to vary in the future primarily due to the cyclical nature of the semiconductor industry. The semiconductor industry has been highly cyclical with recurring periods of diminished product demand. During these periods, semiconductor designers and manufacturers, facing reduced demand for their products, have significantly reduced their capital and other expenditures, including expenditures for semiconductor test equipment and services such as those we offer. We have experienced just such a cyclical downturn in our memory business during fiscal year 2008. Historically, our third and fourth fiscal quarters have tended to be our strongest quarters for new orders, while our first fiscal quarter tends to be our weakest quarter for orders. During the third quarter of 2008 we continued to see weakness in the memory market which negatively impacted our orders during the period. We believe that the most significant factor driving these seasonal patterns is the holiday buying season for consumer electronics products. The seasonality of our business is often masked to a significant extent by the high degree of cyclicality of the semiconductor industry. As such, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of future performance. In future periods, the market price of our ordinary shares could decline if our revenues and results of operations are below the expectations of analysts and investors. Factors that may cause our revenue and results of operations to vary include those discussed in the “Risk Factors” in Item 1A of Part II of, and else where in, this report.

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

	Three Months July 31,				Nine Months Ended July 31,
	2008		2007		2008		2007
Net revenue:
Products	77.1	%	82.4	%	78.2	%	80.3	%
Services	22.9		17.6		21.8		19.7
Total net revenue	100.0		100.0		100.0		100.0
Cost of sales:
Cost of products	37.4		41.7		37.3		42.2
Cost of services	16.2		12.7		15.9		13.8
Total cost of sales	53.6		54.4		53.2		56.0
Gross margin (1)	46.4		45.6		46.8		44.0
Operating expenses:
Research and development	15.1		11.3		14.4		12.3
Selling, general and administrative	22.3		18.6		21.4		19.4
Restructuring charges	0.6		—		0.2		—
Separation costs	—		0.5		—		0.7
Total operating expenses	38.0		30.4		36.0		32.4
Income from operations	8.4		15.2		10.8		11.6
Other income, net	3.4		1.5		2.7		1.8
Income before income taxes	11.8		16.7		13.5		13.4
Provision for income taxes	1.7		2.0		1.7		1.6
Net income	10.1	%	14.7	%	11.8	%	11.8	%

(1) Gross margin represents the ratio of gross profit to total net revenue

Net Revenue

	Three Months Ended July 31,				2008 over 2007		Nine Months Ended July 31,				2008 over 2007
	2008		2007		Change		2008		2007		Change
	($ in millions)						($ in millions)
Net revenue from products:
SOC/SIP/High-Speed Memory	$	129	$	92	40.2	%	$	366	$	210	74.3	%
Memory	9		76		(88.2	)%	57		233		(75.5	)%
Net revenue from products	138		168		(17.9	)%	423		443		(4.5	)%

Net revenue from services	41		36		13.9	%	118		109		8.3	%
Total net revenue	$	179	$	204	(12.3	)%	$	541	$	552	(2.0	)%

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Our revenue by geographic region for the three and nine months ended July 31, 2008 and 2007 is as follows:

	Three Months Ended July 31,						2008 over 2007		Nine Months Ended July 31,						2008 over 2007
	2008			2007			Change		2008			2007			Change
	($ in millions)								($ in millions)
North America	$	25		$	29		(13.8	)%	$	83		$	173		(52.0	)%
As a percent of total net revenue	14.0		%	14.2		%			15.3		%	31.3		%

Europe	$	7		$	9		(22.2	)%	$	26		$	24		8.3	%
As a percent of total net revenue	3.9		%	4.4		%			4.8		%	4.4		%

Asia-Pacific, excluding Japan	$	133		$	154		(13.6	)%	$	384		$	317		21.1	%
As a percent of total net revenue	74.3		%	75.5		%			71.0		%	57.4		%

Japan	$	14		$	12		16.7	%	$	48		$	38		26.3	%
As a percent of total net revenue	7.8		%	5.9		%			8.9		%	6.9		%

Total net revenue	$	179		$	204		(12.3	)%	$	541		$	552		(2.0	)%

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

Net revenue in the three months ended July 31, 2008 was $179 million, a decrease of $25 million, or 12.3%, from the $204 million in the three months ended July 31, 2007. Net product revenue in the three months ended July 31, 2008 was $138 million, a decrease of $30 million, or 17.9%, from the $168 million in the three months ended July 31, 2007. These decreases were due to lower revenue from sales of our memory test systems, partially offset by increases in SOC and services revenue. As noted in the “Overview” above, our memory customers continue to delay memory tester purchases and have significantly cut their capital budgets due to excess supply and lower capacity utilization. Despite the cyclical weakness in the memory test industry, our SOC business showed continued strength in the third fiscal quarter of fiscal year 2008. During this period, we experienced increased demand for our 93000 platform in SOC testers, in particular our Port Scale RF products driven by wireless, PC and consumer mixed-signal device markets.

Net revenue in the nine months ended July 31, 2008 was $541 million, a decrease of $11 million, or 2.0%, from the $552 million in the corresponding prior year period. Net product revenue in the nine months ended July 31, 2008 was $423 million, a decrease of $20 million, or 4.5%, from the $443 million in the prior year period. These decreases were primarily due to lower revenue from sales of our memory test systems, partially offset by higher revenue from sales of our SOC and high-speed memory test systems and our Port Scale RF products.

Net revenue in North America was lower by 13.8% in the three months ended July 31, 2008, compared to the three months ended July 31, 2007, primarily due to decreased sales to customers for memory test systems in the U.S. Net revenue from customers located in Asia represented 82.1% of total net revenue for the three months ended July 31, 2008, compared to 81.4% in the three months ended July 31, 2007. We expect the trend of increasing sales in the Asia region to continue as semiconductor manufacturing activities continue to concentrate in that region.

Service revenue for the three months ended July 31, 2008 accounted for $41 million, or 22.9% of net revenue, compared to $36 million, or 17.6% of net revenue for the three months ended July 31, 2007. Our service revenue is expected to grow in absolute amount as we provide services to a growing installed base of systems. Unlike product revenue, service revenue tends not to experience significant cyclical fluctuations due to the fact that service contracts generally extend for one to two years and revenue is recognized over the contractual period or as services are rendered.

Service revenue for the nine months ended July 31, 2008 accounted for $118 million, or 21.8% of net revenue, compared to $109 million, or 19.7% of net revenue for the nine months ended July 31, 2007.

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Cost of Sales

Cost of Products

	Three Months Ended July 31,						2008 over 2007		Nine Months Ended July 31,						2008 over 2007
	2008			2007			Change		2008			2007			Change
	($ in millions)								($ in millions)
Cost of products	$	67		$	85		(21.2	)%	$	202		$	233		(13.3	)%
As a percent of product revenue	48.6		%	50.6		%			47.8		%	52.6		%

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

The decrease in cost of products of approximately $18 million in the three months ended July 31, 2008, compared to the three months ended July 31, 2007, was primarily due to the decrease in memory product shipments as well as a decrease of separation costs, partially offset by an increase of restructuring charges compared to the three months ended July 31, 2007. Also, our cost of products included $0.6 million of SFAS No. 123(R) share-based compensation expense in the three months ended July 31, 2008, compared to $0.4 million of such charges in the three months ended July 31, 2007.

Cost of products as a percent of net product revenue decreased by 2.0 percentage points in the three months ended July 31, 2008, compared to the three months ended July 31, 2007, primarily due to the shift in product mix toward higher gross margin SOC products as well as decreases of separation costs in the current year period.

Excess and obsolete inventory-related charges in the three months ended July 31, 2008 and 2007 were $3 million and $3 million, respectively. We also sold previously written down inventory for $0.4 million and $1 million in the three months ended July 31, 2008 and 2007, respectively. The sales of previously written down inventory improved our cost of products gross margins by approximately 0.3 percentage points for the three months ended July 31, 2008 and 0.3 percentage points in three months ended July 31, 2007.

The decrease in cost of products of approximately $31 million in the nine months ended July 31, 2008, compared to the nine months ended July 31, 2007, was primarily due to a decrease in product shipments primarily of our memory products, coupled with a favorable shift in product mix and lower restructuring and separation costs compared to the comparable period in fiscal year 2007. Our cost of products also included $1.6 million of SFAS No. 123(R) share-based compensation expense in the nine months ended July 31, 2008, compared to $1.2 million of such charges in the nine months ended July 31, 2007.

Cost of products as a percent of net product revenue decreased by 4.8 percentage points in the nine months ended July 31, 2008, compared to the nine months ended July 31, 2007, primarily due to the favorable product mix as well as lower restructuring and separation costs and lower performance-based compensation expenses in the current year period.

Excess and obsolete inventory-related charges in the nine months ended July 31, 2008 and 2007 were $8 million and $8 million, respectively. We sold previously written down inventory for $2.2 million and $3 million in the nine months ended July 31, 2008 and 2007, respectively. The sales of previously written down inventory increased gross margin by approximately 0.5 percentage points and 0.4 percentage points for the nine months ended July 31, 2008 and 2007, respectively.

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Cost of Services

	Three Months Ended July 31,						2008 over 2007		Nine Months Ended July 31,						2008 over 2007
	2008			2007			Change		2008			2007			Change
	($ in millions)								($ in millions)
Cost of services	$	29		$	26		11.5	%	$	86		$	76		13.2	%
As a percent of service revenue	70.7		%	72.2		%			72.9		%	69.7		%

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

Cost of services in the three months ended July 31, 2008 was higher compared to the three months ended July 31, 2007. Cost of services as a percent of service revenue decreased by 1.5 percentage points, from 72.2% in the three months ended July 31, 2007 to 70.7% in the three months ended July 31, 2008. This margin improvement is primarily due to lower material consumption and people related costs needed to support our installed base. Our cost of services included $0.2 million of SFAS No. 123(R) share-based compensation expense in both the three months ended July 31, 2008 and 2007.

Cost of services in the nine months ended July 31, 2008 was higher in both absolute amount and as a percent of the related revenue than the nine months ended July 31, 2007. The increase in cost of services in absolute amount reflected increased costs associated with supporting a larger installed base. Cost of services as a percent of service revenue increased by 3.2 percentage points, from 69.7% in the nine months ended July 31, 2007 to 72.9% in the nine months ended July 31, 2008. This margin deterioration is primarily due to the fact that we are putting more service capability in place for our upcoming product introductions. In addition, we had higher material, freight and duty costs needed to support our installed base, we experienced higher material consumption, and had an unfavorable currency impact during the period. Our cost of services also included $0.7 million and $0.6 million of SFAS No. 123(R) share-based compensation expense in the nine months ended July 31, 2008 and 2007, respectively.

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

Operating Expenses

Research and Development Expenses

	Three Months Ended July 31,						2008 over 2007		Nine Months Ended July 31,						2008 over 2007
	2008			2007			Change		2008			2007			Change
	($ in millions)
Research and development	$	27		$	23		17.4	%	$	78		$	68		14.7	%
As a percent of net revenue	15.1		%	11.3		%			14.4		%	12.3		%

Research and Development. Research and development expense includes costs related to salaries and related compensation expenses for research and development and engineering personnel; materials used in research and development activities; outside contractor expenses; depreciation of equipment used in research and development activities; facilities and other overhead and support costs for the above; and share-based compensation. Research and development costs have generally been expensed as incurred.

Research and development expense increased by $4 million in absolute dollars in the three months ended July 31, 2008, compared to the prior year period. This increase was primarily due to higher expenses to support product development activities for memory products planned for release by the end of the calendar year and SOC products planned for release during the next 9 to 12 months. Research and development expense also included $0.5 million and $0.4 million of SFAS No. 123(R) share-based compensation expense for the three months ended July 31, 2008 and 2007, respectively. Research and development costs as a percentage of revenue increased by 3.8 percentage points from 11.3% in the three months ended July 31, 2007, to 15.1% in the three months ended July 31, 2008. The increase in research and development expense as a percent of revenue reflected the higher level of absolute spending combined with the lower revenue in the current year period.

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Research and development expense in the nine months ended July 31, 2008 increased in absolute dollars by $10 million compared to the same time last year, primarily due to higher expenses to support new memory product introductions planned for release by the end of the calendar year and new SOC products planned for release during the next 9 to 12 months, partially offset by lower performance based compensation. Research and development as a percentage of revenue increased by 2.1 percentage points from 12.3% in the nine months ended July 31, 2007 to 14.4% in the nine months ended July 31, 2008. This increase was primarily due to decreased product shipments in the three months ended July 31, 2008. Research and development expense also included $1.5 million and $1.3 million of SFAS No. 123(R) share-based compensation expense for the nine months ended July 31, 2008 and 2007, respectively.

We believe that we need to maintain a significant level of research and development spending in order to remain competitive and, as a result, we expect our research and development expenses to only vary modestly in dollar amount from period to period, and to fluctuate as a percentage of revenue based on revenue levels.

Selling, General and Administrative Expenses

	Three Months Ended July 31,						2008 over 2007		Nine Months Ended July 31,						2008 over 2007
	2008			2007			Change		2008			2007			Change
	($ in millions)
Selling, general and administrative	$	40		$	38		5.3	%	$	116		$	107		8.4	%
As a percent of net revenue	22.3		%	18.6		%			21.4		%	19.4		%

Selling, General and Administrative. Selling, general and administrative expense includes costs related to salaries and related expenses for sales, marketing and applications engineering personnel; sales commissions paid to sales representatives and distributors; outside contractor expenses; other sales and marketing program expenses; travel and professional service expenses; salaries and related expenses for administrative, finance, human resources, legal and executive personnel; facility and other overhead and support costs for the above; and share-based compensation.

Selling, general and administrative expense increased by $2 million in absolute dollars in the three months ended July 31, 2008 compared to the prior year period primarily due to higher field selling costs and higher share-based compensation expenses and increased governance costs. Selling, general and administrative expense included approximately $3.0 million of share-based compensation expenses in the three months ended July 31, 2008, compared to $2.4 million of such expenses for the three months ended July 31, 2007.

Selling, general and administrative expenses increased 8.4% to $116 million for the nine months ended July 31, 2008, compared to the nine months ended July 31, 2007. This increase was primarily due to higher field selling costs and higher share-based compensation expenses offset slightly by lower performance based compensation. Selling, general and administrative expenses included approximately $8.6 million of share-based compensation expenses in the nine months ended July 31, 2008, compared to $7.2 million of such charges in the nine months ended July 31, 2007.

Restructuring Charges

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As of July 31, 2008, we had approximately $2.4 million in accrued restructuring liability. We anticipate that this program will be substantially complete by the end of fiscal year 2008.

Separation Costs

Other Income, net

Interest and other income consists primarily of interest earned on cash, cash equivalents and investments, gains and losses from foreign exchange transactions, offset, as applicable, by realized losses and other-than-temporary impairments recorded with respect to our marketable securities, if any.

In the third quarter of fiscal year 2008, we recorded a $2.6 million adjustment in other income, net, related to foreign currency remeasurement gains. These gains relate to a failure to remeasure certain foreign currency assets and liabilities, primarily value added tax receivables, arising in fiscal years 2006, 2007 and the first two quarters of fiscal year 2008. Interest and other income was $6 million for the three months ended July 31, 2008, compared to $3 million in the prior year period. For the nine months ended July 31, 2008, interest and other income was $15 million, compared to $10 million in the comparable period in fiscal year 2007. Other income for the nine months ended July 31, 2008 was favorably impacted by the foreign currency remeasurement gains discussed above, as well as higher income generated due to our higher cash, cash equivalents and investment balances in the current year, partially offset by a $1.5 million other-than-temporary impairment charge taken on our auction rate securities. (Also see Note 2, “Summary of Significant Accounting Policies” for additional information regarding the $2.6 million adjustment).

Provision for Income Taxes

For the three months ended July 31, 2008 and 2007, we recorded income tax expense of approximately $3 and $4 million, respectively. During the nine months ended July 31, 2008 and 2007, we recorded income tax expense of approximately $9 million for both periods presented.

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

On November 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position as well as provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provision of FIN 48 is effective for fiscal years beginning after December 15, 2006, and applies to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. As a result of the adoption of FIN 48, we increased our reserves for unrecognized tax benefits by $0.2 million and increased our reserves for penalties by $0.2 million, for a total increase of $0.4 million, which was accounted for as a cumulative adjustment to the beginning balance of retained earnings. Additionally, we reclassified $10.4 million from current income taxes and other taxes payable to long-term taxes payable. At the adoption date of November 1, 2007, we had $9.8 million of unrecognized tax benefits which would reduce our income tax expense if recognized. As of July 31, 2008, we had $11.6 million of unrecognized tax benefits, of which $10.4 million is recorded as long-term liabilities, and $1.2 million is recorded as income taxes payable. As of July 31, 2008, we had an additional $2.5 million of unrecognizable tax benefits, which is recorded as a reduction in long term deferred tax assets. We estimate that there will be no material changes in our unrecognized tax benefits in the next 12 months.

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Financial Condition

Liquidity and Capital Resources

As of July 31, 2008, we had $218 million in cash and cash equivalents, compared to $146 million as of October 31, 2007. This increase was primarily due to cash generated from our operations and cash proceeds from the sale of available for sale securities, partially offset by investments in other private companies made during the nine months ended July 31, 2008 including the acquisition of Inovys.

Net Cash Provided by Operating Activities

In the nine months ended July 31, 2008, we generated $93 million in cash from operating activities, compared to cash provided by operating activities of $86 million in the nine months ended July 31, 2007. The $93 million cash generation during the nine months ended July 31, 2008 was a result of $64 million of net income, $22 million reduction in receivables, and a $14 million net increase in net assets. Also, during the nine months ended July 31, 2008, we had non-cash charges of $11 million from depreciation and amortization expense, $8 million from inventory write-offs, $11 million of net share-based compensation costs, a $2 million impairment loss on marketable securities and a $1 million loss on disposal of property, plant and equipment. These impacts were partially offset by an increase of $23 million in inventory, and decreases of $8 million in income and other taxes payable, $7 million in employee compensation and benefits, $1 million in payables, and $1 million in deferred revenue.

In the nine months ended July 31, 2007, we generated $86 million in cash from operating activities. The $86 million cash generation during the nine months ended July 31, 2007, was the result of $65 million of net income, $38 million reduction in receivables and a $3 million decrease in inventory. These impacts were partially offset by decreases of $24 million in trade payables, $11 million in income and other taxes payable and $13 million net increase in net assets. Also, in the nine months ended July 31, 2007, we had non-cash charges of $9 million in depreciation and amortization expense, $8 million from inventory write-offs, $8 million of net SFAS No. 123(R) share-based compensation costs, $2 million in impairment of cost-based investments as well as $1 million in loss on disposal of fixed assets.

Net Cash Used in Investing Activities

Net cash used in investing activities in the nine months ended July 31, 2008 was $17 million, compared to $270 million used in the nine months ended July 31, 2007. The net cash used was primarily related to the cash paid for the acquisition of Inovys and other investments of $28 million, net of cash acquired as well as the investments made in our property, plant and equipment of $8 million. This was partially offset by the net proceeds from the purchase and sales of available for sale marketable securities of $19 million. Our marketable securities include commercial paper, corporate bonds, government securities and auction rate securities. Auction rate securities are securities that are structured with interest rate reset periods of generally less than ninety days but with contractual maturities that can be well in excess of ten years. At the end of each interest rate reset period, which occur every seven to thirty-five days, investors can buy, sell, or continue to hold the securities at par. Our auction rate securities experienced failed auctions due to sell orders exceeding buy orders which occurred as a result of liquidity concerns derived primarily from the mortgage and debt markets. We continue to see liquidity issues in the market for auction rate securities. Our auction rate securities primarily consist of investments that are backed by pools of student loans guaranteed by the U.S. Department of Education and other asset-backed securities. We believe that the credit quality of these securities remains high based on both the ratings of the underlying securities and on the government and insurance provider guarantees. We evaluate our investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and insurance guarantor, and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value. Based on an analysis of other-than-temporary impairment factors, at July 31, 2008, we have recorded a temporary impairment within accumulated other comprehensive loss for the nine months ended July 31, 2008 of approximately $6 million (net of tax of $1 million) related to these auction rate securities. We

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estimate the fair value using market price or a discounted cash flow model incorporating assumptions that market participants would use in their estimates of fair value. Some of these assumptions include estimates for interest rates, timing and amount of cash flows and expected holding periods of the auction rate securities. Our marketable securities portfolio as of July 31, 2008 has a carrying value of $249 million, of which approximately $82 million represented auction rate securities. The interest rate reset auctions for our portfolio have all failed as of July 31, 2008. These securities have been in a loss position for less than 12 months. The funds associated with failed auctions will not be accessible to us until a successful auction occurs, a buyer is found outside of the auction process, or the underlying securities have matured or are called by the issuer. Given the recent disruptions in the credit markets and the fact that the liquidity for these types of securities remains uncertain, we have classified all of our auction rate securities as long-term assets in our condensed consolidated balance sheet as our ability to liquidate such securities in the next 12 months is uncertain. Based on our expected cash flows and other sources of cash, we do not believe that any reduction in liquidity of our auction rate securities will have a material impact on our overall ability to meet our liquidity needs.

Net cash used in investing activities in the nine months ended July 31, 2007, was $270 million. The $270 million of net investment in the nine months ended July 31, 2007, was primarily related to $458 million invested in available-for-sale marketable securities and $9 million cash payments for site set-ups and leasehold improvements, partially offset by $197 million of proceeds from sales and maturities of available-for-sale marketable securities. Our marketable securities include commercial paper, corporate bonds, government securities and auction rate securities, and are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of shareholders’ equity, net of tax.

Net Cash Used in (Provided by) Financing Activities

Net cash used in financing activities in the nine months ended July 31, 2008 was $4 million, compared to $14 million provided in the nine months ended July 31, 2007. In the second quarter of fiscal year 2008, our shareholders approved the share repurchase program, which provides our directors authority to acquire up to 10 percent, or approximately 6 million shares, of Verigy’s outstanding ordinary shares. The $4 million net cash used in the nine months ended July 31, 2008 was comprised of approximately $13 million of repurchase of ordinary shares, $1 million of excess tax benefits from share-based compensation, $1 million from the exercise of employee stock options, and approximately $7 million from contributions by participants of our Purchase Plan, for which 155,030 shares and 171,905 shares were issued in the first and third quarter of fiscal year 2008, respectively.

Net cash provided by financing activities in the nine months ended July 31, 2007, was $14 million. The $14 million net cash proceeds in the nine months ended July 31, 2007 was comprised of approximately $7 million from the exercise of employee stock options, $5 million from contributions by participants of our Purchase Plan, and approximately $2 million for excess tax benefits associated with the exercise of stock options and the vesting of restricted share units.

Other

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

We believe that existing cash, cash equivalents and short-term marketable securities of approximately $385 million, together with cash generated from operations, will be sufficient to satisfy our working capital, capital expenditure and other liquidity needs at least through the next twelve months. We may require or choose to obtain debt or equity financing in the future. We cannot assure you that additional financing, if needed, will be available on favorable terms or at all.

Contractual Obligations and Commitments

Contractual Obligations

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

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The following table summarizes our contractual obligations at July 31, 2008:

			Less than		One to three		Three to five		More than
(in millions)	Total		one year		years		years		five years
Operating leases	$	57	$	11	$	16	$	12	$	18
Commitments to contract manufacturers and suppliers	101		101		—		—		—
Other purchase commitments	51		51		—		—		—
Long-term liabilities	47		—		8		39		—
Total	$	256	$	163	$	24	$	51	$	18

The table above excludes approximately $10 million of unrecognized tax benefits as we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority.

Operating leases. Commitments under operating leases relate primarily to leasehold property. We have long-term lease arrangements for our corporate headquarters in Singapore, our U.S. headquarters in Cupertino, California, and our Boeblingen, Germany facility, currently the research and development site for our V93000 Series. We also have long-term lease arrangements for our ASIC development office in Colorado, as well as other sales and support facilities around the world.

Commitments to contract manufacturers and suppliers. We purchase components from a variety of suppliers and historically we have used several contract manufacturers to provide manufacturing services for our products. During the normal course of business, we issue purchase orders with estimates of our requirements several months ahead of the delivery dates. However, our agreements with these suppliers usually allow us the option to cancel, reschedule, or adjust our requirements based on our business needs prior to firm orders being placed. Typically, purchase orders outstanding with delivery dates within 30 days are non-cancelable. Therefore, only approximately 29% of our purchase commitments arising from these agreements are firm, non-cancelable and unconditional commitments. We expect to fulfill the purchase commitments for inventory within one year.

In addition, we record a liability for firm, non-cancelable and unconditional purchase commitments for quantities in excess of our future demand forecasts. Such liabilities were $7 million as of July 31, 2008, and $5 million as of October 31, 2007. These amounts are included in other current liabilities in our condensed consolidated balance sheets at July 31, 2008 and October 31, 2007.

Other purchase commitments. Other purchase commitments relate primarily to contracts with professional services suppliers, which include third-party consultants for legal, finance, engineering and other administrative services. With the exception of our IT service providers, our purchase commitments with professional service providers are typically cancelable with a notice of 90 days or less without significant penalties. The agreement with our primary IT service provider requires a notification period of 120 days and includes a termination charge of up to approximately $1 million in order to cancel our long-term contract.

Long-term liabilities. Long-term liabilities relate primarily to $39 million of defined benefit and defined contribution retirement obligations, $8 million of extended warranty and deferred revenue obligations, $10 in income taxes payable and approximately $1 million of other long-term liabilities. Upon our separation from Agilent, the defined benefit plans for our employees in Germany, Korea, Taiwan, France and Italy were transferred to us. With the exception of Italy and France, which involve relatively insignificant amounts, Agilent completed the funding of these transferred plans based on 100% of the accumulated benefit obligation level as of the separation date. Verigy made approximately $2 million of contributions to the retirement plans during fiscal year 2007. We expect expenses of approximately $7 million in fiscal year 2008 for the retirement plans and we plan on making a contribution of approximately $2 million in fiscal year 2008.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of July 31, 2008.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Foreign Currency Risk

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

We have implemented a hedging strategy that is intended to mitigate our currency exposures by entering into foreign currency forward contracts that have maturities of in excess of one month. These contracts are used to reduce our risk associated with exchange rate movements, as gains and losses on these contracts are intended to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The effective portion of the foreign exchange gain (loss) is reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity and is reclassified into the statement of operations when the hedged transaction affects earnings. If the transaction being hedged fails to occur, or if a portion of any derivative is deemed to be ineffective, we will recognize the gain (loss) on the associated financial instrument in other income, net in the statement of operations. During the three months ended July 31, 2008, we recorded approximately $0.5 million in unrealized gains in accumulated other comprehensive loss relating to cash flow hedges.

We do not hedge all of our foreign currency exposures, and there can be no assurances that our efforts will adequately protect us against the risks associated with foreign currency fluctuations. We do not use derivative financial instruments for speculative or trading purposes.

We performed a sensitivity analysis assuming a hypothetical 10 percent adverse movement in foreign exchange rates to the hedging contracts and the underlying exposures described above. As of July 31, 2008 and October 31, 2007, the analysis indicated that these hypothetical market movements would not have a material effect on our condensed consolidated financial position, results of operations or cash flows.

Investment and Interest Rate Risk

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

Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate interest securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in the market value due to changes in interest rates. However, because we classify our debt securities as “available for sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary. Should interest rates fluctuate by 10 percent, the value of our marketable securities would not have a significant impact as of July 31, 2008, and our interest income would have changed by approximately $1.3 million for the nine months ended July 31, 2008.

Auction rate securities are securities that are structured with interest rate reset periods of generally less than ninety days but with contractual maturities that can be well in excess of ten years. At the end of each interest rate reset period, which occur every seven to thirty-five days, investors can buy, sell, or continue to hold the securities at par. Our auction rate securities experienced failed auctions due to sell orders exceeding buy orders which occurred as a result of liquidity concerns derived primarily from the mortgage and debt markets. We continue to see liquidity issues in the market for auction rate securities. Our auction rate securities primarily consist of investments that are backed by pools of student loans guaranteed by the U.S. Department of Education and other asset-backed securities. We believe that the credit quality of these securities remains high based on both the ratings of the underlying securities and on the government and insurance provider guarantees. We evaluate our investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and insurance guarantor, and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market

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value. Based on an analysis of other-than-temporary impairment factors, at July 31, 2008, we have recorded a temporary impairment within accumulated other comprehensive loss for the nine months ended July 31, 2008 of approximately $6 million (net of tax of $1 million) related to these auction rate securities. We estimate the fair value using market price or a discounted cash flow model incorporating assumptions that market participants would use in their estimates of fair value. Some of these assumptions include estimates for interest rates, timing and amount of cash flows and expected holding periods of the auction rate securities. Our marketable securities portfolio as of July 31, 2008 has a carrying value of $249 million, of which approximately $82 million represented auction rate securities. The interest rate reset auctions for our portfolio have all failed as of July 31, 2008. These securities have been in a loss position for less than 12 months. The funds associated with failed auctions will not be accessible to us until a successful auction occurs, a buyer is found outside of the auction process, or the underlying securities have matured or are called by the issuer. Given the recent disruptions in the credit markets and the fact that the liquidity for these types of securities remains uncertain, we have classified all of our auction rate securities as long-term assets in our condensed consolidated balance sheet as our ability to liquidate such securities in the next 12 months is uncertain. Based on our expected cash flows and other sources of cash, we do not believe that any reduction in liquidity of our auction rate securities will have a material impact on our overall ability to meet our liquidity needs.

Our marketable securities are reported at fair value with the related unrealized gains and losses (net of tax) included in accumulated other comprehensive income (loss), a component of shareholders’ equity. Realized gains or losses on the sale of marketable securities are determined using the specific-identification method and were immaterial for the three and nine months ended July 31, 2008. We record an impairment charge to the extent that the carrying value of our available for sale securities exceeds the estimated fair market value of the securities and the decline in value is determined to be other-than-temporary. We recorded an other-than-temporary impairment within the statement of operations of $1.5 million during the nine months ended July 31, 2008.

We record our equity investments within other long-term assets and account for these investment on a cost basis. We are required under generally accepted accounting principles to review our equity interests for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We may be required to record a charge, which may be significant, to earnings in our consolidated financial statements during the period in which impairment of our investments in equity interests is determined. This could adversely impact our results of operations.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of July 31, 2008, pursuant to and as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of July 31, 2008, the company’s disclosure controls and procedures, as defined by Rule 13a-15(b) under the Exchange Act, were effective and designed to ensure that (i) information required to be disclosed in the company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Based on their evaluation, Verigy’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of the end July 31, 2008.

Inherent Limitations on Effectiveness of Controls

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

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended July 31, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time we are subject to legal proceedings, claims and litigation arising in the ordinary course of business.

ITEM 1A. RISK FACTORS

Set forth below and elsewhere in this report on Form 10-Q and in other documents we file with the SEC, are risks and uncertainties that could cause actual results to differ materially from the results expressed or implied by the forward-looking statements contained in this Quarterly Report. You should carefully consider the risks described below and the other information in this report before investing in our ordinary shares. Our business could be seriously harmed by any of these risks. The trading price of our ordinary shares could decline due to any of these risks, and you may lose all or part of your investment. The following risk factors, “Our dependence on contract manufacturers may prevent us from delivering our products on a timely basis,” “Our business and operating results could be harmed by the highly cyclical nature of the semiconductor industry,” “The loss of, or significant reduction in the number of sales to, our significant customers could materially harm our business,” “ We face substantial competition which, among other things, may lead to price pressure and adversely affect our sales and revenue,” “Our effective tax rate may vary significantly from period to period, and we could owe significant taxes even during periods when we experience low operating profit or operating losses,” “We sell our products and services worldwide, and our business is subject to risks inherent in conducting business activities in geographies outside of the United States” and “Funds associated with certain of our auction rate securities may not be accessible for in excess of 12 months and our auction rate securities may experience an other-than-temporary decline in value, which would adversely affect our income” have been updated from the version of these risk factors set forth in our Annual Report on Form 10-K for the year ended October 31, 2007. We have also included an additional risk factor “We may be required to record a significant charge to earnings if our investments in equity interests become impaired” in this report.

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

Risks Relating to Our Business

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

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

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

We rely entirely on contract manufacturers, which gives us less control over the manufacturing process and exposes us to significant risks, especially inadequate capacity, late delivery, substandard quality and high costs. Moreover, because our products are very complex to manufacture, transitioning manufacturing activities from one location to another, or from one manufacturing partner to another, is complicated. Flextronics commenced production of our V5000 series products in China in July 2006 and assumed our manufacturing activities for the 93000 Series products in Germany in June 2006. We expect to complete the transition of our volume manufacturing activities related to our 93000 Series platform to Flextronics in China by the end of fiscal year 2008. We cannot be certain that existing or future contract manufacturers will be able to manufacture our products on a timely and cost-effective basis, or to our quality and performance specifications. If our contract manufacturers are unable to meet our manufacturing requirements in a timely manner, whether as a result of transitional issues or otherwise, our ability to ship products and to realize the related revenues when anticipated could be materially affected.

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

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

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

Our business and operating results depend in significant part upon capital expenditures of semiconductor designers and manufacturers, which in turn depend upon the current and anticipated market demand for products incorporating semiconductors from these designers and manufacturers. Historically, the semiconductor industry has been highly cyclical with recurring periods of diminished product demand. During these periods, semiconductor designers and manufacturers, facing reduced demand for their products, have significantly reduced their capital and other expenditures, including expenditures for semiconductor test equipment and services such as those we offer. These periods of reduced product and services demand have been characterized by excessive inventory levels, cancellation of customer orders and erosion of selling prices, as well as excessive semiconductor test capacity. As a consequence, during these periods, we have experienced significant reductions in customer orders for new test equipment, fewer upgrades to existing test equipment and less demand for our test services. We have also experienced order cancellations, delays in commitments and delays in collecting accounts receivable. Furthermore, because we have a high proportion of customers that are subcontractors, which during market downturns tend to reduce or cancel orders for new test systems and test services more quickly and dramatically than other customers, any downturn may cause a quicker and more significant adverse impact on our business than on the broader semiconductor industry. In addition, although a decline in orders for semiconductor capital equipment, including test equipment, may accompany or precede the timing of a decline in the semiconductor market as a whole, any recovery in spending for semiconductor capital equipment, including test equipment, may lag any recovery by the semiconductor industry. We have experienced just such a cyclical downturn in our memory business during fiscal year 2008, with revenue for our memory test products declining to $9 million in the three months ended July 31, 2008, a 88% decrease from the $76 million recorded in the prior year period. These factors have caused our customers to delay test system orders and to delay delivery of systems ordered. While this steep decline was partially offset by strength in our SOC business, we nonetheless remain subject to substantial cyclical fluctuations in revenues and orders.

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

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

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

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

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

For the three months ended July 31, 2008, revenue from our top ten customers accounted for approximately 71.5% of our total net revenue, with three customers accounting for more than 10% of our total net revenue. In comparison, for the three months ended July 31, 2007, revenue from our top ten customers accounted for approximately 71.6% of our total net revenue, with one of our customers accounting for more than 10% of our total net revenue. For the nine months ended July 31, 2008, revenue from our top ten customers accounted for approximately 61.3% of our total net revenue, with one customer accounting for more than 10% of our total net revenue. In comparison, for the nine months ended July 31, 2007, revenue from our top ten customers accounted for approximately 65.2% of our total net revenue, with two customers accounting for more than 10% of our total net revenue.

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

·		a decision by our customers to purchase test equipment and services from our competitors;

·		a decision by our customers to pursue the development and implementation of self-testing integrated circuits or other strategies that reduce their need for our new or enhanced test equipment;

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

·		the shift by our IDM customers to fab-lite or fabless semiconductor models;

·		our ability to keep pace with changes in semiconductor technology;

·		our ability to maintain quality levels of our equipment and services that meet customer expectations;

·		our ability to produce and deliver sufficient quantities of our test equipment in a timely manner; and

·		our ability to provide quality customer service and support.

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

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

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

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

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

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

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

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

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

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

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

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

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

·	properly identify customer needs and anticipate technological advances and industry trends, such as the disaggregation of the traditional IDM semiconductor supply chain into fabless design companies, foundries and packaging, assembly and test providers;

·	develop and commercialize new and enhanced technologies and applications that meet our customers’ evolving performance requirements in a timely manner;

·	develop and deliver enhancements and related services for our current test equipment that are capable of satisfying our customers’ specific test requirements; and

·	introduce and promote market acceptance of new test equipment platforms, such as our V5500 Series system for memory testing.

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

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

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

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

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

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

·	the internal technical capabilities and sophistication of our customers, which impacts their need for our test services; and

·	the capital expenditures of our customers.

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

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

Our test equipment is highly complex and employs advanced technologies. The use of complex technology in our test equipment increases the likelihood that we could experience design, performance or manufacturing problems. If any of our products have defects or reliability or quality problems, we may, in some circumstances, be exposed to liability, our reputation could be damaged significantly and customers might be reluctant to buy our products, which could result in a decline in revenues, an increase in product returns and the loss of existing customers and the failure to attract new customers.

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

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

We may face competition from Agilent in the future.

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

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

·	automated semiconductor test development systems (including hardware and software) that are intended to enable development of test programs and protocols for use in high-volume functional test of ICs or SIPs, whether or not such development test systems themselves are capable of performing such high-volume functional test; and

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

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

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

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

After October 31, 2009, Agilent will be free to compete with any portion or all of our business without restriction, and in doing so will be free to use the retained underlying technologies. Agilent will not be permitted to use the intellectual property rights transferred to us, and licensed from us back to Agilent, to compete with us with respect to our core business of developing, manufacturing, selling and supporting automated semiconductor test systems for high-volume functional test of ICs or SIPs. Agilent will, however, be able to use such intellectual property rights to develop and sell components for such systems, including systems developed and sold by us as well as those developed and sold by our competitors. While selling components has not represented a material portion of our business in the past and is not expected to be an area of focus for the near future, our business could be adversely affected if systems offered by our competitors become more competitive as a result of Agilent supplying components for our competitors’ systems or if, by buying components from Agilent, our customers are able to delay or bypass altogether purchasing newer systems from us.

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

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

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

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

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

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

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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 protect our intellectual property rights, our competitive position could suffer, which could harm our operating results. Our pending patent and trademark registration applications may not be allowed or competitors may challenge the validity or scope of these patent applications or trademark registrations. In addition, our patents may not provide us with a significant competitive advantage.

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

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

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

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

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

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

·	difficulties in assimilating the operations and personnel of acquired companies;

·	diversion of our management’s attention from ongoing business concerns;

·	our potential inability to maximize our financial and strategic position through the successful incorporation of acquired technology and rights into our products and services;

·	additional expense associated with amortization of acquired assets;

·	difficulty in maintaining uniform standards, controls, procedures and policies;

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

·	dilution to our shareholders in the event we issue shares as consideration to finance an acquisition;

·	difficulty integrating and implementing the accounting controls necessary to comply with regulatory requirements such as Section 404 of the Sarbanes-Oxley Act; and

·	increased leverage, if we incur debt to finance an acquisition.

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

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

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

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

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

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

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

Our headquarters are in Singapore, our manufacturing is outsourced largely to Flextronics, and we sell our products and services worldwide. As a result, our business is subject to risks associated with doing business internationally. Revenue from customers in Japan accounted for approximately 7.8% and 5.9% of total net revenue for the three months ended July 31, 2008 and 2007, respectively. Revenue from customers in Asia-Pacific, excluding Japan, accounted for approximately 74.3% and 75.5% for the three months ended July 31, 2008 and 2007, respectively. Revenue from customers in Japan accounted for approximately 8.9% and 6.9% of total net revenue for the nine months ended July 31, 2008 and 2007, respectively. Revenue from customers in Asia-Pacific, excluding Japan, accounted for approximately 71.0% and 57.4% for the nine months ended July 31, 2008 and 2007, respectively. The economies of Asia have been highly volatile and recessionary in the past, resulting in significant fluctuations in local currencies. Our exposure to the business risks presented by the economies of Asia will increase to the extent that we continue to expand our operations in that region, including continuing to transition our volume contract manufacturing processes to Flextronics in China.

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

·	difficulties in managing geographically disparate operations;

·	potential greater difficulty and longer time in collecting accounts receivable from customers located abroad;

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

·	unexpected changes in regulatory requirements that may limit our ability to export our software or sell into particular jurisdictions or impose multiple conflicting tax laws and regulations;

·	political and economic instability, civil unrest or war;

·	terrorist activities and health risks such as “bird flu’ and SARS that impact international commerce and travel;

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

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

·	nationalization of foreign owned assets, including intellectual property.

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

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

Our auction rate securities experienced failed auctions due to sell orders exceeding buy orders which occurred as a result of liquidity concerns derived primarily from the mortgage and debt markets. We continue to see liquidity issues in the market for auction rate securities. Our auction rate securities primarily consist of investments that are backed by pools of student loans guaranteed by the U.S. Department of Education and other asset-backed securities. We believe that the credit quality of these securities remains high based on both the ratings of the underlying securities and on the government and insurance provider guarantees. We evaluate our investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and insurance guarantor, and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value. Based on an analysis of other-than-temporary impairment factors, at July 31, 2008, we have recorded a temporary impairment within accumulated other comprehensive loss for the nine months ended July 31, 2008 of approximately $6 million (net of tax of $1 million) related to these auction rate securities. We estimate the fair value using market price or a discounted cash flow model incorporating assumptions that market participants would use in their estimates of fair value. Some of these assumptions include estimates for interest rates, timing and amount of cash flows and expected holding periods of the auction rate securities. Our marketable securities portfolio as of July 31, 2008 has a carrying value of $249 million, of which approximately $82 million represented auction rate securities. The interest rate reset auctions for our portfolio have all failed as of July 31, 2008. These securities have been in a loss position for less than 12 months. The funds associated with failed auctions will not be accessible to us until a successful auction occurs, a buyer is found outside of the auction process, or the underlying securities have matured or are called by the issuer. Given the recent disruptions in the credit markets and the fact that the liquidity for these types of securities remains uncertain, we have classified all of our auction rate securities as long-term assets in our condensed consolidated balance sheet as our ability to liquidate such securities in the next 12 months is uncertain. Based on our expected cash flows and other sources of cash, we do not believe that any reduction in liquidity of our auction rate securities will have a material impact on our overall ability to meet our liquidity needs.

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We may be required to record a significant charge to earnings if our investments in equity interests become impaired.

We are required under generally accepted accounting principles to review our equity interests for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of an investment in equity interest may not be recoverable include a decline in the operating performance of an equity investee if a private company. In the past we have made, and in the future may make, significant or minority equity investments in complementary businesses, products or technologies. If the operating performance of the companies in which we make equity investments declines, we may be required to record a charge, which may be significant, to earnings in our consolidated financial statements during the period in which impairment of our investments in equity interests is determined. This could adversely impact our results of operations.

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

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

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

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

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

·	changes in expectations as to our future financial performance, including financial estimates or publication of research reports by securities analysts;

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

·	announcements of new products or technical innovations by us or our competitors;

·	actions by institutional shareholders; and

·	speculation in the press or investment community.

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

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

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

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

Singapore corporate law may impede a takeover of our company by a third party, which could adversely affect the value of our ordinary shares.

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

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

Under Singapore law, new shares may be issued only with the prior approval of our shareholders in a general meeting. At our 2008 annual general meeting of shareholders, our shareholders provided our directors general authority to issue new shares until the earlier to occur of the conclusion of our 2009 annual general meeting or the expiration of the period within which the next annual general meeting is required to be held. Subject to the shareholders’ approval, the provisions of the Singapore Companies Act and our amended and restated memorandum and articles of association, our board of directors may allot and issue new shares on terms and conditions and with the rights and restrictions as they may think fit to impose. Any additional issuances of new shares by our directors may adversely impact the market price of our ordinary shares.

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

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

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On November 27, 2007, we announced that our Board authorized a share purchase program. The program authorizes our directors the use of up to $150 million to repurchase up to 10 percent of Verigy’s outstanding ordinary shares, or approximately 6 million shares. This share purchase program, unless varied or revoked by our shareholders at a general meeting, will continue in effect until the earlier of the date of our 2009 annual general meeting of shareholders or the date by which our 2009 annual general meeting of shareholders is required to be held. All of these shares were repurchased on the open market and were funded with existing cash. All ordinary shares that were repurchased as of July 31, 2008 have been cancelled. The following table summarizes repurchases of our ordinary stock during the three months ended July 31, 2008 ( in thousands, except the per share amounts) :

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
May 1, 2008 – May 31, 2008 (1)	—	—		—	$	150,000
June 1, 2008 – June 30, 2008	390	$	23.76	390	$	140,742
July 1, 2008 – July 31, 2008	247	$	21.73	247	$	135,370
Total	637	$	22.97	637

(1) Share repurchases did not begin until June of 2008.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

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ITEM 6. EXHIBITS

(a) Exhibits:

Exhibit

Incorporated By Reference

Number

Exhibit Description

Form

File Number

Exhibit

Date

Filed Herewith

3.1

Amended and Restated Memorandum and Articles of Association of Verigy Ltd.

S-1/A

333-132291

3.2

6/5/2006

4.1

Form of Specimen Share Certificate for Verigy Ltd.’s Ordinary Shares

S-1/A

333-132291

4.1

6/1/2006

10.12**

Employment Offer Letter, by and between Verigy and Jorge Titinger, effective June 9, 2008

8-K

000-52038

99.2

6/5/2008

31.1

Certification of Principal Executive Officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

** Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.

Table of Contents

SIGNATURE

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.

Dated: September 5, 2008	By:	/s/ Robert J. Nikl
		ROBERT J. NIKL
		Vice President and Chief Financial Officer

Table of Contents

VERIGY LTD.

EXHIBIT INDEX

Exhibit

Incorporated By Reference

Number

Exhibit Description

Form

File Number

Exhibit

Date

Filed Herewith

3.1

Amended and Restated Memorandum and Articles of Association of Verigy Ltd.

S-1/A

333-132291

3.2

6/5/2006

4.1

Form of Specimen Share Certificate for Verigy Ltd.’s Ordinary Shares

S-1/A

333-132291

4.1

6/1/2006

10.12**

Employment Offer Letter, by and between Verigy and Jorge Titinger, effective June 9, 2008

8-K

000-52038

99.2

6/5/2008

31.1

Certification of Principal Executive Officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

** Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.

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