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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

Document Description		10-K Part
Portions of the registrant's Proxy Statement for its 2008 Annual General Meeting of Shareholders, which will be filed pursuant to Regulation 14A within 120 days after registrant's fiscal year ended October 31, 2007, are incorporated by reference into Part III, Items 10 - 14 of this Annual Report on Form 10-K. Except as expressly incorporated by reference, the registrant's Proxy statement shall not be deemed to be a part of this Annual Report on Form 10-K.

TABLE OF CONTENTS

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

Forward-Looking Statements

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

PART I

Item 1.    Business

Overview

        Verigy designs, develops, manufactures, sells and supports advanced test systems and solutions for the semiconductor industry. We offer a single platform for each of the two general categories of devices being tested: our 93000 Series platform, designed to test System-on-a-Chip (SOC), System-in-a-Package (SIP) and high-speed memory devices, and our Versatest V5000 Series platform, designed to test memory devices, including flash memory and multi-chip packages containing a mix of memory devices. Our test solutions are both scalable and flexible. Our test platforms are scalable across different frequency ranges, different pin counts and different numbers of devices. Our test platforms' flexibility allows for a single test system to test a wide range of applications for semiconductor devices. Our scalable platform architecture provides us with internal operating model efficiencies such as reduced research and development costs, engineering headcount, support requirements and inventory risk. The scalability and flexibility of our test solutions also provide economic benefits to our customers by allowing them to get their complex, feature-rich semiconductor devices to market quickly and to reduce their overall costs. We also provide test and application expertise, service and support through our worldwide service organization.

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

The Semiconductor Test Equipment Industry

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

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

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

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

        Due to the different architectures and functionalities of semiconductors, semiconductor test equipment and services are generally categorized by the type of semiconductors tested. The two general categories are equipment used to test memory semiconductors, referred to as memory testing, and equipment used to test non-memory semiconductors, which includes testers for testing less complex, discrete semiconductors, and testers designed to test very complex, highly integrated semiconductors commonly referred to as System-on-a-Chip, or SOC, or System-in-a-Package, or SIP, testing.

        SOCs and SIPs are semiconductors that integrate the functionality of multiple individual ICs onto a single IC or package of ICs, and often contain both digital and analog functionalities, including radio frequency (RF) capabilities, communication interfaces and embedded memory. By combining multiple technologies onto a single, more complex chip or package, these devices provide the benefits of lower cost, smaller size, higher performance and lower power consumption and facilitate faster time-to-market that is critical, particularly for products targeted to the consumer electronics market.

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

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

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

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

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

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

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

Semiconductor Test Market Challenges

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

Increased pressure to reduce overall cost of test

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

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Increased pressure to improve time-to-market

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

Increased complexity and performance requirements of test

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

Meeting the needs of test subcontractors

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

Our Solution

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

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

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

Scalable platform across a broad range of performance levels

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

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

Flexible platforms across a breadth of applications

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

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

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

Advanced, innovative test technology

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

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

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

Global delivery of expert application knowledge

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

Lowered overall cost of test for customers

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

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

Shortened time-to-market

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

Our Strategy

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

Maintaining the rapid pace of product innovation on scalable platforms

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

Continuing to focus on emerging opportunities for profitable growth

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

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

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

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

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

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

Optimizing our operating model to generate sustainable profitability

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

Our Products and Services

        We offer a single platform for each of the two general categories of devices being tested: our 93000 Series platform, designed to test SOCs, SIPs and high-speed memory devices, and our Versatest V5000 Series platform, designed to test memory devices, including flash memory and multi-chip packages. Each of these platforms is highly scalable and flexible and contains advanced, innovative test technology. We also provide high levels of test application expertise, services and support for our customers who use these platforms.

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

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

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

        Scalability.    Our 93000 Series platform, with its "tester-per-pin" architecture, is highly scalable in a number of ways, including with respect to the frequency range of the applied test signals, the number of pins to accommodate ICs with different pin counts and the number of devices that can be tested in parallel. The 93000 Series platform with our latest generation Pin Scale digital cards is scalable in frequency performance from 400 Mbits/second to 12 Gbits/second, addressing the test needs for a wide range of today's high-speed interfaces, including PCI Express, HyperTransport, Serial ATA and ultra-high-speed I/O buses required for wired communications. With up to 32 channels per digital card and the ability to use from 4 to 64 cards per system, the 93000 Series platform can scale in the number of pins that it tests simultaneously, from 128 to 2,048 pins, enabling it to test large numbers of devices in parallel. Our 93000 Series platform's scalability allows a customer to initially buy a 93000 Series platform with just a few test pins and moderate frequency performance capabilities today and then upgrade to more pins and greater frequency performance capabilities as test requirements change.

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

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

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

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

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

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

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

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

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

•

Our Versatest V5500 Series system is a highly scalable high-volume production test system configured for final test of packaged devices, and optimized for final test of MCPs. When equipped with our optional Programmable Interface Matrix, it can be scaled to test up to 512 devices and up to 24,576 pins in parallel. Like our other Versatest V5000 Series platforms, the Versatest V5500 Series system performance can test up to 200 Megahertz data rates.

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•

Our Versatest V5400 Series system is a highly scalable high-volume production test system configured and optimized for wafer test. It can be scaled to test up to 288 devices and up to 4608 pins in parallel while the devices being tested are still in silicon wafer form. A V5400 system can be upgraded to a V5500 system at a customer's site, thereby maintaining scalability across the product family.



•

Our Versatest V5000e Series system is a full function but less expensive and lower volume memory test system designed for use in the research and development environment. It provides engineers a relatively inexpensive test tool for testing small numbers of devices in prototype development that provides all of the functionality of an expensive production test system and can be used to avoid the expense and inefficiency of taking a more expensive, high-volume test system out of production. Programs developed for the Versatest V5000 Series system can be quickly transferred to our Versatest V5400 and V5500 Series systems for high volume production, helping shorten customers' time to market. In fiscal year 2007, we added the Versatest 5000ep Series system to provide an additional option which allows customers to perform quality assurance, characterization and small lot production at wafer-sort and final test on new memory devices.

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

        Flexibility.    There are fewer pure NOR and NAND flash manufacturers, and the test mix for most manufacturers now includes several different types of memory such as Flash, DRAM and SRAM. In addition, device densities are increasing and use of new test methodologies, such as RPC, DFT and BIST, is increasing. The V5000 Series platform has the ability to test Flash, DRAM, SRAM and stacked memory devices on a single platform, and can provide a wide variety of test methodologies, including RPC, DFT and BIST. This flexibility enables our customers to cost-effectively test a wide range of parts without having to change test platforms.

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

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

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

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

Test and Application Expertise, Services and Support

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

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

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Introduction of New Platform Families

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

Research and Development

        Our scalable platform architectures provide for operating model efficiencies such as streamlined research and development and more efficient engineering team. Our research and development strategy focuses on designing test solutions that lower the overall cost of test for semiconductor designers and manufacturers. We strive to design high performance, low overall cost per test semiconductor test equipment that has high throughput, scalability and flexibility and is efficient to manufacture, easy to use and simple to support.

        From our history as part of Agilent, which was part of HP until its spin-off in 1999, we have a legacy of introducing new and innovative designs to market. We have a highly structured approach to maximize research and development efficiency. A group of internal advisors formulates a long-term technology plan with clear objectives. Through our direct engagement with customers, high-priority projects are identified and appropriate resources are allocated. Engineering resources are organized by area of competence to effectively develop expertise and to share technologies across product lines.

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

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

Sales and Support

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

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

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

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

Customers

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

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

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

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Manufacturing

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

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

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

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

Competition

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

        The competitive factors affecting the market for our products include:

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product performance, features and functionality;



•

price;



•

scalability;



•

flexibility;



•

reliability;



•

technical service and support;

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•

quality and availability of supporting hardware and software;



•

size of installed base; and



•

the level of training and customer support provided.

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

Employees

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

Backlog

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

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

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

Intellectual Property

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

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

Financial Information about Geographic Areas

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

Investor Information

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

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

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

Item 1A.    Risk Factors

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

Risks Relating to Our Business

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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 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;

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•

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.

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

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

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

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

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

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

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

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

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

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

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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;



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



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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 Versatest V5500 Series system for memory testing.

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

        As our customers' product requirements are diverse and subject to frequent change, we will also need to ensure that we have an adequate mix of products that meet our customers' varying requirements. If we fail to adequately predict our customers' needs and technological advances, we may invest heavily in research and development of test equipment that does not lead to significant revenue, or we may fail to invest in technology necessary to meet changing customer dem