Verigy 10Q 2007 Q2 Quarterly report

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 APRIL 30, 2007

		OR

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

		FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 000-52038

VERIGY LTD.

(Exact Name of Registrant as Specified in Its Charter)

SINGAPORE		N/A
(State or Other Jurisdiction of Incorporate 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 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 o

Accelerated filer o

Non-accelerated filer x

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 June 1, 2007, there were 59,137,431 outstanding ordinary shares, no par value.

VERIGY LTD.

TABLE OF CONTENTS

		Page Number
Part I. Financial Information		3
Item 1.	Financial Statements
	Condensed combined and consolidated Statements of Operations for the three and six months ended April 30, 2007 and 2006	3
	Condensed consolidated Balance Sheets at April 30, 2007 and October 31, 2006	4
	Condensed combined and consolidated Statements of Cash Flows for the six months ended April 30, 2007 and 2006	5
	Notes to condensed combined and consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
Part II. Other Information		30
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Submission of Matters to a Vote of Security Holders	43
Item 5.	Other Information	43
Item 6.	Exhibits	44
Signature		45
Exhibit Index		46

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VERIGY LTD.

CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(Unaudited)

	Three Months Ended April 30,					Six Months Ended April 30,
	2007		2006			2007		2006
Net revenue:
Products	$	147	$	158		$	275	$	301
Services	36		34			73		61
Total net revenue	183		192			348		362
Costs of sales:
Cost of products	79		81			148		155
Cost of services	25		25			50		49
Total costs of sales	104		106			198		204
Operating expenses:
Research and development	22		25			45		50
Selling, general and administrative	35		40			69		77
Restructuring charges	—		8			—		14
Separation costs	1		20			3		35
Total operating expenses	58		93			117		176

Income (loss) from operations	21		(7		)	33		(18		)
Other income (expense), net	4		—			7		—

Income (loss) before taxes	25		(7		)	40		(18		)
Provision for income taxes	3		4			5		9
Net income (loss)	$	22	$	(11	)	$	35	$	(27	)

Net income (loss) per share – basic:	$	0.37	$	(0.22	)	$	0.59	$	(0.54	)

Net income (loss) per share – diluted:	0.36		(0.22		)	0.59		(0.54		)

Weighted average shares (in thousands) used in computing net income (loss) per share
Basic:	59,004		50,000			58,884		50,000
Diluted:	59,945		50,000			59,567		50,000

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

VERIGY LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

(Unaudited)

	April 30, 2007			October 31, 2006

ASSETS
Current assets:
Cash and cash equivalents	$	168		$	300
Short-term marketable securities	180			—
Trade accounts receivable, net	71			108
Receivables from Agilent	—			8
Inventory	73			87
Other current assets	55			48
Total current assets	547			551
Property, plant and equipment, net	41			44
Goodwill	18			18
Other long-term assets	60			61
Total assets	$	666		$	674

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	71		$	75
Payables to Agilent	5			37
Employee compensation and benefits	43			43
Deferred revenue, current	53			58
Income taxes and other taxes payable	9			23
Other current liabilities	15			15
Total current liabilities	196			251

Long-term liabilities	33			34
Total liabilities	229			285

Commitments and contingencies (Note 16)

Shareholders’ equity
Ordinary shares, no par value; 59,056,065 issued and outstanding at April 30, 2007
Additional paid in capital	371			358
Retained earnings	69			34
Accumulated other comprehensive loss	(3		)	(3		)
Total shareholders’ equity	437			389
Total liabilities and shareholders’ equity	$	666		$	674

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

VERIGY LTD.

CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF CASHFLOWS

(in millions)

(Unaudited)

	Six Months Ended April 30,
	2007			2006
Cash flows from operating activities:
Net income (loss)	$	35		$	(27	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	6			4
Excess and obsolete inventory-related charges	5			14
Loss on disposal of property, plant and equipment	—			2
Share-based compensation	7			7
Asset impairment and other exit costs	—			3
Changes in assets and liabilities:
Trade accounts receivable, net	37			(46		)
Receivables from Agilent	8			—
Inventory (Note 8)	7			(9		)
Accounts payable	(4		)	12
Employee compensation and benefits	—			10
Payables to Agilent	(27		)	—
Deferred revenue, current	(5		)	8
Income taxes and other taxes payable	(14		)	8
Other current assets and accrued liabilities	(7		)	17
Other long term assets and long term liabilities	2			2
Net cash provided by operating activities	50			5
Cash flows from investing activities:
Investments in property, plant and equipment	(7		)	(24		)
Purchases of available-for-sale marketable securities	(297		)	—
Proceeds from sales and maturities of available-for-sale marketable securities	117			—
Net cash used in investing activities	(187		)	(24		)
Cash flows from financing activities:
Issuance of ordinary shares under employee stock plans	5			—
Distribution of share-based compensation (Note 6)	—			(7		)
Net Agilent invested equity	—			26
Net cash provided by financing activities	5			19

Effect of exchange rate movements	—			—
Net decrease in cash and cash equivalents	(132		)	—

Cash and cash equivalents at beginning of period	300			—

Cash and cash equivalents at end of period	$	168		$	—

Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	4		$	—

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

VERIGY LTD.

NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. OVERVIEW AND BASIS OF PRESENTATION

Overview

Verigy (“we,” “us” or the “Company”) designs, develops and manufactures semiconductor test equipment and provides test system solutions that are used in the manufacture 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 consulting, service and support offerings such as start-up assistance, application services and system calibration and repair.

Our fiscal year end is October 31, and our fiscal quarters end on January 31, April 30, and July 31.

Amounts included in the accompanying condensed combined and consolidated financial statements are expressed in U.S. dollars.

Basis of Presentation

The accompanying condensed combined and consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. have been condensed or omitted pursuant to such rules and regulations. The following discussion should be read in conjunction with our 2006 Annual Report on Form 10-K.

Prior to June 1, 2006, we operated as part of Agilent, and not as a stand-alone company. Therefore, the condensed combined and consolidated financial statements for the three and six months ended April 30, 2006, were derived from the accounting records of Agilent using the historical basis of assets and liabilities of Verigy. For the three and six months ended April 30, 2006, expense and cost allocations have been determined on a basis we consider to be a reasonable reflection of the utilization of services provided by Agilent or the benefit received by us from Agilent. However, the amounts recorded for these transactions and allocations are not necessarily representative of the amounts that would have been reflected in the financial statements had we operated independently of Agilent. See Note 4, “Transactions with Agilent” for further information regarding our relationships with Agilent.

In the opinion of management, the accompanying condensed combined and consolidated financial statements reflect all adjustments which are of 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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of combination . Our condensed combined and consolidated financial statements include the global historical assets, liabilities and operations of Verigy. All significant intra-company transactions within Verigy have been eliminated. All significant transactions between us and Agilent are included in these condensed combined and consolidated financial statements. All transactions with Agilent, prior to our separation from Agilent, were considered to be effectively settled for cash in the condensed combined and consolidated statements of cash flows at the time the transaction is recorded.

Principles of consolidation . The condensed combined and 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 combined and 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 and asset impairment charges, inventory valuation, warranty, share-based compensation, retirement and post-retirement plan assumptions, valuation of goodwill and intangible assets and accounting for income taxes.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109” (“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 is applied 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. The cumulative effect of applying the provisions of FIN 48 should be reported as an adjustment to the opening balance of retained earnings (or other appropriate components of equity) for that fiscal year. We expect to adopt this pronouncement beginning in our fiscal year 2008 and we have not yet determined the potential financial impact of adopting FIN 48.

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. The measurement and disclosure requirements are effective for the Company beginning in the first quarter of fiscal 2008. We are currently evaluating whether SFAS No. 157 will result in a change to our fair value measurements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans, an amendment of FASB statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”), which requires companies to recognize a net liability or asset to report the funded status of their defined benefit pension and other postretirement benefit plans on their balance sheets. Except for the measurement date requirement, SFAS No. 158 is effective for fiscal years ending after December 15, 2006. The measurement date requirement will not be effective until fiscal years ending after December 15, 2008. SFAS No. 158 will be applied prospectively. Our adoption of SFAS No. 158 will have no impact on our consolidated combined results of operations or cash flows. We are currently evaluating the impact of adopting SFAS No. 158 on our financial position.

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 2008. We are currently evaluating the impact of adopting SFAS No. 159 on our financial position, cash flows and results of operations.

4. TRANSACTIONS WITH AGILENT

Prior to our separation, we were a wholly owned subsidiary of Agilent, and, thus, our transactions with Agilent were considered inter-company. After our separation date and prior to November 1, 2006, our transactions with Agilent were considered related party transactions since Agilent owned approximately 85% of our outstanding ordinary shares until October 31, 2006.

During the three and six months ended April 30, 2007, we had no revenue from sale of products to Agilent. During the three and six months ended April 30, 2006, we had net revenue of $0.5 million and $1 million, respectively, from the sale of products to Agilent. This revenue was recorded using a cost plus methodology and may not necessarily represent a price an unrelated third party would pay.

During the three months ended April 30, 2007, we purchased $1.4 million of materials from Agilent, compared to $0.5 million in the three months ended April 30, 2006. During the six months ended April 30, 2007, we purchased $3.7 million of materials from Agilent, compared to $4 million in the six months ended April 30, 2006. The purchases for the three and six months ended April 30, 2006, were recorded in cost of sales based on cost plus methodology.

Receivables from and Payables to Agilent

	April 30,		October 31,
	2007		2006
	(in millions)
Receivables from Agilent	$	—	$	8
Payables to Agilent	$	5	$	37

As of April 30, 2007, we had no receivables from Agilent, unchanged from January 31, 2007. During the first quarter of fiscal 2007, we received approximately $3 million from Agilent for cash collected from our customers for sales of our products that occurred prior to November 1, 2006. In addition, during the first quarter of fiscal 2007, Agilent contributed approximately $3 million into our pension trust accounts, completing its obligation to fund our Germany, Taiwan and Korea defined benefit plans at 100% of the accumulated benefit obligation level as of the separation date in accordance with the employee matters agreement between Agilent and us. Also in the first quarter of fiscal 2007, Agilent completed its obligation to fund the transferred Germany flexible time-off plan by contributing approximately $2 million into our Germany flexible time-off trust account.

As of April 30, 2007, payables to Agilent consisted of approximately $5 million accrued liabilities for transition-related services provided to us by Agilent, of which approximately $0.8 million related to transition services provided to us in the three months ended April 30, 2007.

Allocated Costs

The condensed combined and consolidated statement of operations for the three and six months ended April 30, 2006 include our direct expenses as well as allocations of expenses arising from shared services and infrastructure provided to us by Agilent for the period prior to our separation. These allocated expenses include costs of centralized research and development, legal and accounting services, employee benefits, real estate and facilities, corporate advertising, insurance services, information technology, treasury and other corporate and infrastructure services. These expenses are allocated to us using estimates that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by us. The allocation methods include headcount, square footage, actual consumption and usage of services, adjusted invested capital and others.

Allocated costs included in the accompanying condensed combined and consolidated statement of operations are as follows:

	Three Months Ended April 30,				Six Months Ended April 30,
	2007		2006		2007		2006
	(in millions)

Cost of products	$	—	$	7	$	—	$	14
Research and development	—		5		—		9
Selling, general and administrative	—		17		—		35
Total allocated costs	$	—	$	29	$	—	$	58

See Note 13 “Separation Costs,” for separation cost details.

5. NET INCOME (LOSS) PER SHARE

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

	Three Months Ended April 30,					Six Months Ended April 30,
	2007		2006			2007		2006
Basic Net Income (loss) Per Share
Net income (loss) (in millions)	$	22	$	(11	)	$	35	$	(27	)
Weighted average number of ordinary shares (1)	59,004		50,000			58,884		50,000
Basic net income (loss) per share	$	0.37	$	(0.22	)	$	0.59	$	(0.54	)

Diluted Net Income (loss) Per Share
Net income (loss) (in millions)	$	22	$	(11	)	$	35	$	(27	)
Weighted average number of ordinary shares (1)	59,004		50,000			58,884		50,000
Potentially dilutive common stock equivalents—stock options, restricted share units and other employee stock plans (1)	941		—			683		—
Total shares for purpose of calculating diluted net income (loss) per share (1)	59,945		50,000			59,567		50,000
Diluted net income (loss) per share	$	0.36	$	(0.22	)	$	0.59	$	(0.54	)

(1)Weighted average shares are presented in thousands.

The dilutive effect of outstanding options and restricted share units 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 April 30,			Six Months Ended April 30,
	2007		2006	2007		2006
Non-qualified share options
Number of options to purchase ordinary shares (in thousands)	2,919		Not Applicable	3,167		Not Applicable
Weighted-average exercise price	$	15.15	Not Applicable	$	15.08	Not Applicable
Average ordinary share price	$	23.05	Not Applicable	$	20.33	Not Applicable

Restricted share units
Number of restricted share units (in thousands)	342		Not Applicable	334		Not Applicable
Weighted-average grant date price	$	17.89	Not Applicable	$	17.85	Not Applicable
Average ordinary share price	$	23.05	Not Applicable	$	20.33	Not Applicable

6. 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”). There are 10,300,000 ordinary shares authorized for issuance under the plan. The 2006 EIP provides for grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted shares and share units. At April 30, 2007, there were approximately 5.6 million ordinary shares available for issuance under the 2006 EIP.

Except for replacement options granted in connection with our separation from Agilent, employee nonqualified stock options have an exercise price no less than 100% of the fair market value of a share on the date of grant, and generally vest at an aggregate 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 shares of stock, and generally vest at an aggregate 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 due to age, 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.

Outside director options vest on the first anniversary of the date of grant and have a maximum term of 5 years. Outside director restricted share units vest on the first anniversary of the date of grant and are payable on the third anniversary of the date of grant. All awards granted to an outside director become fully vested upon the director’s termination of services, if due to death, disability, retirement, or after age 65, the termination is in connection with a change in control.

Ordinary shares are issued for 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 number of shares available 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 Purchase Plan restricts the maximum number of shares that an employee can purchase to 2,500 shares each offering period and to $25,000 worth of ordinary shares each calendar year.

Effective November 30, 2006, we issued 144,357 ordinary shares purchased by participants in our Employee Shares Purchase Plan (“ESPP”).

Share-Based Compensation for Verigy Options

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 employee stock option awards and employee stock purchases made under our Employee Share Purchase Plan (“ESPP”).

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 combined and 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.

Share-Based Payment Award Activity

The following table summarizes stock option activity during the six months ended April 30, 2007:

	Options
	Shares		Weighted Average Exercise Price
	(in thousands)
Outstanding as of October 31, 2006	3,504		$	14.14
Granted	283		$	20.09
Exercised	(255	)	$	12.58
Cancelled/Forfeited/Expired	(46	)	$	14.09
Outstanding as of April 30, 2007	3,486		$	14.66

The following table summarizes restricted share unit activity during the six months ended April 30, 2007:

	Restricted Share Units (RSU)
	Shares		Weighted Average Grant Date Share Price
	(in thousands)
Outstanding as of October 31, 2006	197		$	15.47
Granted	773		$	18.59
Vested	(10	)	$	17.48
Forfeited	(2	)	$	18.66
Outstanding as of April 30, 2007	958		$	17.96

The following table summarizes information about all outstanding employee options to purchase shares of Verigy ordinary shares at April 30, 2007:

	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	1,946	6.62 years	$	13.09	$	23,705
$15.01 — 20.00	1,428	7.93 years	$	16.06	13,157
$20.01 — 25.00	78	6.64 years	$	23.42	144
$25.01 — 30.00	34	5.32 years	$	25.71	—
	3,486	7.15 years	$	14.66	$	37,006

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on Verigy’s closing stock price of $25.27 at April 30, 2007, 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 April 30, 2007, approximately 548,000 outstanding options were vested and exercisable and the weighted average exercise price was $13.00. All exercisable options were in-the-money as of April 30, 2007.

The following table summarizes information about all outstanding restricted share unit awards of Verigy ordinary shares at April 30, 2007:

	Restricted Share Units Outstanding
Range of Grant Date Share Prices	Number Outstanding	Weighted Average Grant Date Share Price		Aggregate Intrinsic Value
	(in thousands)			(in thousands)
$14.75 — 15.00	139	$	14.95	$	3,505
$15.01 — 20.00	808	$	18.38	20,423
$25.01 — 30.00	11	$	25.77	270
	958	$	17.96	$	24,198

Impact of the Adoption of SFAS No. 123 (R) Related to Agilent Options Held by Verigy Employees

Agilent adopted SFAS No. 123 (R) using the modified prospective transition method beginning November 1, 2005. Accordingly, for the periods prior to our separation, we recorded share-based compensation expense for awards granted prior to, but not yet vested, as of November 1, 2005 as if the fair value method required for pro forma disclosure under SFAS No. 123 was in effect for expense recognition purposes, adjusted for estimated forfeitures. For these awards, we have continued to recognize compensation expense using the accelerated amortization method under FIN 28. For share-based awards granted after November 1, 2005, we have recognized compensation expense based on the estimated grant date fair value method required under SFAS No. 123 (R). For these awards we have recognized compensation expense 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 for all periods presented has been reduced for estimated forfeitures.

We recorded the allocation of share-based compensation expenses for Agilent options as an increase in Agilent’s invested equity in Verigy.

Impact of the Adoption of SFAS No. 123 (R)

The impact on our results for share-based compensation for Verigy options for the three and six months ended April 30, 2007 and Agilent options held by Verigy employees for the three and six months ended April 30, 2006, respectively, were as follows:

	Three Months				Six Months
	Ended				Ended
	April 30,				April 30,
	2007		2006		2007		2006
	(in millions, except per share data)

Cost of products and services	$	0.6	$	0.7	$	1.2	$	1.2
Research and development	0.4		0.4		0.9		0.9
Selling, general and administrative	2.2		1.5		4.8		4.5
Total share-based compensation expense	$	3.2	$	2.6	$	6.9	$	6.6

For the three and six months ended April 30, 2007 and 2006, 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 six months ended April 30, 2007, was $9.39 and $7.88 per share and was determined using the Black Scholes option pricing model. For the three and six months ended of both periods April 30, 2007 and 2006, the tax benefit realized from exercised stock options and similar awards was insignificant.

As of April 30, 2007, the total unrecorded share-based compensation expense balance for unvested options and similar awards, net of expected forfeitures was approximately $28.4 million.

Valuation Assumptions for Verigy Options and Agilent Options Held by Verigy Employees

The fair value of Verigy options granted during the three and six months ended April 30, 2007, and Agilent options held by Verigy employees, granted during the three and six months ended April 30, 2006 was estimated at grant date using a Black-Scholes options-pricing model with the following weighted-average assumptions:

	Three Months Ended April 30,				Six Months Ended April 30,
	2007		2006		2007		2006
	Verigy Options		Agilent Options Held by Verigy Employees		Verigy Options		Agilent Options Held by Verigy Employees

Risk-free interest rate for options	4.5	%	4.7	%	4.5	%	4.3	%
Risk-free interest rate for the ESPP	4.9	%	—		4.9	%	4.3	%

Dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Volatility for options	39.8	%	28.0	%	40.6	%	29.0	%
Volatility for the ESPP	40.2	%	—		40.2	%	30.0	%

Expected option life	4.4 years		4.25 years		4.3 years		4.25 years
Expected life for the ESPP	6 months		—		6 months		6 months – 1 year

Assumptions for Verigy options

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 Company’s underlying stock. The price volatility of our stock 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 more reflective of market conditions and the most appropriate measure of the expected volatility of our stock 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 US Treasury Strips as of the grant dates.

7. COMPREHENSIVE INCOME (LOSS)

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

	Three Months Ended April 30,					Six Months Ended April 30,
	2007		2006			2007		2006
	(in millions)

Net income (loss)	$	22	$	(11	)	$	35	$	(27	)
Other comprehensive loss:
Foreign currency translation adjustments	—		—			—		—
Change in unrealized gain (loss) on marketable securities	—		—			—		—
Comprehensive income (loss)	$	22	$	(11	)	$	35	$	(27	)

8. INVENTORY

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

	April 30,		October 31,
	2007		2006
	(in millions)
Raw materials	$	32	$	37
Work in progress	7		8
Finished goods	34		42
Total inventory	$	73	$	87

Finished goods inventory includes demonstration products of $14 million as of April 30, 2007 and $18 million as of October 31, 2006.

9. PROPERTY, PLANT AND EQUIPMENT, NET

	April 30,			October 31,
	2007			2006
	(in millions)
Buildings and leasehold improvements	$	12		$	12
Software	22			22
Machinery and equipment	46			46
Total property, plant and equipment	80			80
Accumulated depreciation and amortization	(39		)	(36		)
Total property, plant and equipment, net	$	41		$	44

We recorded approximately $3 million and $2 million of depreciation and amortization expense during the three months ended April 30, 2007 and 2006, respectively. We recorded approximately $6 million and $4 million of depreciation and amortization expense during the six months ended April 30, 2007 and 2006, respectively.

10. MARKETABLE SECURITIES

In the three months ended April 30, 2007, we started investing in short-term marketable securities which we account for in accordance with Statement of Financial Accounting Standards No. 115, or (“SFAS No. 115”), Accounting for Certain Investments in Debt and Equity Securities. 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, and 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 bond and government securities and auction rate securities. Auction rate securities are securities that are structured with short-term interest rate reset dates of generally less than ninety days but with contractual maturities in excess of ninety days. At the end of each reset period, which occurs every seven to thirty-five days, investors can sell or continue to hold the securities at par.

Our marketable securities 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. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method. Net realized and unrealized losses for the three and six months ended April 30, 2007 were not material.

The following table summarizes our marketable security investments as of April 30, 2007:

	Cost		Gross Unrealized Gains (losses)		Estimated Fair Market Value
	(in millions)
Short-term marketable securities
Money market funds	$	112	$	—	$	112
U.S. treasury securities and government agency securities	17		—		17
Corporate debt securities	80		—		80
Auction rate securities	103		—		103
Total available-for-sale investments	$	312	$	—	$	312

As Reported:
Cash equivalents					$	132
Short-term marketable securities					180
Total at April 30, 2007					$	312

The amortized cost and estimated fair value of cash equivalents and marketable securities classified as available-for sale at April 30, 2007 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	$	201	$	—	$	201
Due in 1 to 2 years	8		—		8
Due after 2 years	103		—		103
Total at April 30, 2007	$	312	$	—	$	312

11. GUARANTEES

Standard Warranty

A summary of our standard warranty accrual activity during the six months ended April 30, 2007 and 2006, is shown in the table below: also see Note 15 “Other Current Liabilities and Long-Term Liabilities”:

	Six Months Ended April 30,
	2007			2006
	(in millions)
Beginning balance at November 1,	$	6		$	6
Accruals for warranties issued during the period	5			5
Accruals related to pre-existing warranties (including changes in estimates)	4			(1		)
Settlements made during the period	(8		)	(4		)
Ending balance at April 30,	$	7		$	6

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

Extended Warranty

A summary of our extended warranty deferred revenue activity for the six months ended April 30, 2007 and 2006 is shown in the table below:

	Six Months Ended April 30,
	2007			2006
	(in millions)
Beginning balance at November 1,	$	20		$	13
Recognition of revenue	(4		)	(3		)
Deferral of revenue for new contracts	7			6
Ending balance at April 30,	$	23		$	16

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

Indemnifications

As is customary in our industry and as 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. In our experience, claims made under such indemnifications are rare and the associated estimated fair value of the liability is not material.

Under the agreements with Agilent, 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.

12. RESTRUCTURING

A summary of the statement of operations impact of the charges resulting from all restructuring plans for the three and six months ended April 30, 2007 and 2006, is shown below:

	Three Months Ended April 30,				Six Months Ended April 30,
	2007		2006		2007		2006
	(in millions)

Restructuring charges (included in cost of sales)	$	1	$	2	$	2	$	3
Restructuring charges (included in operating expenses)	—		8		—		14
Total restructuring charges	$	1	$	10	$	2	$	17

The $1 million and $2 million charges in the three and six months ended April 30, 2007, respectively, include the amortization of approximately $3 million that we paid to Flextronics on June 1, 2006, in connection with the transfer of our manufacturing activities and the transfer of 85 employees. Also, we have a potential liability of an additional $2 million associated with these transferred employees. We are also amortizing these costs ratably over the employees’ remaining period of service with Flextronics. The $10 million and $17 million restructuring charges during the three and six months ended April 30, 2006, related to Agilent’s 2005 restructuring plan to further reduce operational costs, primarily through closing, consolidating and relocating some sites and reducing and realigning our workforce.

As of April 30, 2007, we had approximately $0.7 million accrued restructuring liability, compared to $3 million as of April 30, 2006, related to Agilent’s 2005 restructuring plan. In accordance with the separation agreements with Agilent, Agilent retained and paid for all restructuring liabilities associated with its 2005 restructuring plan.

13. SEPARATION COSTS

In connection with our separation from Agilent, we incurred one-time internal and external separation costs, such as information technology set-up costs and consulting and legal and other professional fees of approximately $1 and $3 million, during the three and six months ended April 30, 2007, respectively, compared to $24 million and $39 million in the comparable periods in fiscal 2006.

All separation-related costs which were incurred during the three and six months ended April 30, 2006, remained as Agilent’s responsibility.

14. 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.

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

Effective June 1, 2006, Verigy established a new defined contribution benefit plan (“Verigy 401(k) plan”) for its U.S employees. Verigy’s 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) accounts if certain annual financial targets are achieved.

For the three and six months ended April 30, 2007, our matching expenses for our U.S. employees under the Verigy 401(k) and the Verigy profit sharing plans were $0.9 million and $1.7 million, respectively. During the three and six months ended April 30, 2006, our employees benefited from Agilent 401(k) matching contributions. These amounts were reflected in the respective costs of sales, research and development, and selling, general and administrative in the accompanying condensed combined and consolidated statement of operations. Agilent allocated the 401(k) matching amounts to Verigy on a headcount basis.

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. As of October 31, 2006, the present value of Verigy’s responsibility for the retiree medical benefit obligation was approximately $2 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 six months ended April 30, 2007, the amount of expenses recognized under the RMA plan was approximately $0.2 million and $0.4 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 were insignificant, 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 million into our pension trust accounts during the three months ended January 31, 2007.

Costs for All U.S. and Non-U.S. Plans. The following tables provide the principal components of total retirement-related benefit plans impact on income (loss) of Verigy for the three and six months ended April 30, 2007 and 2006:

	U.S. Plans				Non-U.S. Plans				Total
	Three Months Ended April 30,
	2007		2006		2007		2006		2007		2006
	(in millions)

Defined benefit pension plan costs	$	—	$	0.3	$	1.5	$	1.1	$	1.5	$	1.4
Defined contribution pension plan costs	0.9		0.2		—		—		0.9		0.2
Non-pension post-retirement benefit costs	0.2		—		—		—		0.2		—
Total retirement-related plans costs	$	1.1	$	0.5	$	1.5	$	1.1	$	2.6	$	1.6

	U.S. Plans				Non-U.S. Plans				Total
	Six Months Ended April 30,
	2007		2006		2007		2006		2007		2006
	(in millions)

Defined benefit pension plan costs	$	—	$	0.6	$	2.9	$	2.1	$	2.9	$	2.7
Defined contribution pension plan costs	1.7		0.4		0.2		—		1.9		0.4
Non-pension post-retirement benefit costs	0.4		—		—		—		0.4		—
Total retirement-related plans costs	$	2.1	$	1.0	$	3.1	$	2.1	$	5.2	$	3.1

Non-U.S. Defined Benefit. For the three and six months ended April 30, 2007 and 2006, the net pension costs related to our employees participating in our non-U.S. defined benefit plans were comprised of:

	Three Months Ended April 30,						Six Months Ended April 30,
	2007			2006			2007			2006
	(in millions)

Service cost — benefits earned during the year	$	1.0		$	0.8		$	2.0		$	1.6
Interest cost on benefit obligation	0.7			0.6			1.3			1.1
Expected return on plan assets	(0.5		)	(0.6		)	(1.0		)	(1.2		)
Amortization and deferrals:
Actuarial loss	0.3			0.3			0.6			0.6
Net transition obligation	—			—			—			—
Total net plan costs	$	1.5		$	1.1		$	2.9		$	2.1

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.

15. OTHER CURRENT LIABILITIES AND LONG-TERM LIABILITIES

Other current liabilities at April 30, 2007 and October 31, 2006, were as follows:

	April 30, 2007		October 31, 2006
	(in millions)
Supplier liabilities	$	4	$	6
Accrued warranty costs	7		6
Other	4		3
Total other current liabilities	$	15	$	15

Supplier liabilities reflect the amount by which our firmly committed inventory purchases from our suppliers exceed our forecasted production needs. See Note 11, “Guarantees” for additional information regarding warranty accruals.

Long-term liabilities at April 30, 2007 and October 31, 2006, were as follows:

	April 30, 2007		October 31, 2006
	(in millions)
Long-term extended warranty and deferred revenue	$	15	$	15
Retirement plan accruals	15		15
Other	3		4
Total long-term liabilities	$	33	$	34

See Note 14, “Retirement and Post-Retirement Pension Plans” for additional information regarding retirement plan accruals.

16. COMMITMENTS AND CONTINGENCIES

As of April 30, 2007, there was no material change in our long-term debt obligations, 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, 2006.

Rent expense was $1.5 million and $0.6 million for the three months ended April 30, 2007 and 2006, respectively. Rent expense was $2.8 million and $1.1 million for the six months ended April 30, 2007 and 2006, respectively. Prior to our separation from Agilent, Agilent had allocated to us our pro rata portion of expenses for rent, property tax, insurance and routine maintenance.

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

17. SEGMENT & GEOGRAPHIC INFORMATION

SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” requires us to identify the segment or segments we operate in. Based on the standards set forth in SFAS 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 Ended April 30,				Six Months Ended April 30,
	2007		2006		2007		2006
	(in millions)

Net revenue from products
SOC/SIP/High-Speed Memory	$	69	$	118	$	118	$	232
Memory	78		40		157		69
Net revenue from products	147		158		275		301

Net revenue from services	36		34		73		61
Total net revenue	$	183	$	192	$	348	$	362

Major customers

For the three months ended April 30, 2007, two of our customers accounted for 41.8% of our net revenue, with one customer accounting for 24.8% and the other customer accounting for 17.0% of our total net revenue. For the three months ended April 30, 2006, one of our customers accounted for 12.1% of our net revenue.

For the six months ended April 30, 2007, two of our customers accounted for 36.1% of our net revenue, with one customer accounting for 20.3% and the other customer accounting for 15.8% of our total net revenue. For the six months ended April 30, 2006, one of our customers accounted for 11.9% of our net revenue.

Geographic Net Revenue Information:

	Three Months Ended April 30,				Six Months Ended April 30,
	2007		2006		2007		2006
	(in millions)

United States	$	63	$	38	$	142	$	107
Singapore	91		98		148		171
Japan	11		28		26		39
Rest of the World	18		28		32		45
Total net revenue	$	183	$	192	$	348	$	362

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:

	April 30, 2007		October 31, 2006
	(in millions)
United States	$	12	$	13
Singapore	19		20
China	4		4
Rest of the World	6		7
Total geographic property, plant and equipment	$	41	$	44

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

The following discussion should be read in conjunction with the condensed combined and 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 the transfer of manufacturing of our 93000 Series platform to China, 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, 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, our lease payment obligations and expected savings from our restructuring programs 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

Verigy became an independent company on June 1, 2006, when we separated from Agilent Technologies Inc. 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 Versatest 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. 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 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. We also provide test and application expertise, and service and support through our worldwide service organization.

We have a broad customer installed base, having sold over 1,500 of our 93000 Series systems and over 2,400 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.

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 combined and consolidated financial statements are expressed in U.S. dollars.

We are incorporated in Singapore. We separated form Agilent and became a stand-alone company as of June 1, 2006. On June 13, 2006, we completed our initial public offering.

Overview of Results

Our net revenue for the three months ended April 30, 2007, was $183 million, down $9 million, or 4.7%, from the comparable period in fiscal 2006. This decrease was primarily due to lower revenue from sales of our SOC/SIP test systems, partially offset by higher revenue from sales of our memory test systems, spurred by continued strong demand for hand-held consumer products as well as expansion of addressable markets into NAND flash and flash final test.

In the three months ended April 30, 2007, two of our customers, Chipmos Technologies (Bermuda) Ltd. and Spansion Inc., each accounted for more than 10% of our net revenue, while one of our customers, Chipmos Technologies (Bermuda) Ltd. accounted for more than 10% of our net revenue for the three months ended April 30, 2006.

Our total operating expenses, including separation and restructuring charges, were $58 million in the three months ended April 30, 2007, down $35 million, or 37.6%, from the comparable period in fiscal 2006. Our research and development and sales, general and administrative expenses were $57 million in the three months ended April 30, 2007, down $8 million, or 12.3%, from the comparable period in fiscal 2006. This decrease was primarily due our continuing efforts to streamline our cost structure and achieve our focused operating model, lower sales commission expenses and lower project material expenditures for research and development, partially offset by higher SFAS 123(R) share-based compensation expense.

In the three months ended April 30, 2007, we recorded approximately $1 million under the 2005 restructuring plan, all of which was recorded to cost of sales, compared to $10 million during the comparable period in fiscal 2006, of which $2 million was recorded to cost of sales and $8 million to operating expenses. Also, in connection with our separation from Agilent, we incurred separation costs such as information technology set-up costs, consulting, legal and other professional fees and other spin-off related costs. In the three months ended April 30, 2007, we incurred approximately $1 million in separation costs, all of which were recorded in operating expenses, compared to $20 million in the comparable period in fiscal 2006, all of which were also recorded in operating expenses. All separation-related costs which were incurred as of the separation date remained as Agilent liabilities, while separation costs incurred after the separation date were paid for by us.

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. Upturns and downturns 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. Furthermore, we sell to a variety of customers, including subcontractors. Because we sell to 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 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.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in our condensed combined and 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 and asset impairment charges, inventory valuation, warranty, share-based compensation, retirement and post-retirement plan assumptions, valuation of goodwill and intangible assets 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 six months ended April 30, 2007, 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, 2006.

Recent Accounting Pronouncements

after December 15, 2006 and is applied 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. The cumulative effect of applying the provisions of FIN 48 should be reported as an adjustment to the opening balance of retained earnings (or other appropriate components of equity) for that fiscal year. We expect to adopt this pronouncement beginning in our fiscal year 2008 and we have not yet determined the potential financial impact of adopting FIN 48.

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. Our third and fourth fiscal quarters tend to be our strongest quarters for new orders, while our first fiscal quarter tends to be our weakest quarter for orders. 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, however, 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.

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

	Three Months April 30,				Six Months Ended April 30,
	2007		2006		2007		2006
Net revenue:
Products	80.3	%	82.3	%	79.0	%	83.1	%
Services	19.7		17.7		21.0		16.9
Total net revenue	100.0		100.0		100.0		100.0
Cost of sales:
Cost of products	43.2		42.2		42.5		42.8
Cost of services	13.7		13.0		14.4		13.5
Total cost of sales	56.9		55.2		56.9		56.3
Gross margin	43.1		44.8		43.1		43.7
Operating expenses:
Research and development	12.0		13.0		12.9		13.8
Selling, general and administrative	19.1		20.8		19.8		21.3
Restructuring charges	—		4.2		—		3.9
Separation costs	0.5		10.4		0.9		9.7
Total operating expenses	31.6		48.4		33.6		48.7
Income (loss) from operations	11.5		(3.6	)	9.5		(5.0	)
Other income (expense), net	2.2		—		2.0		—
Income (loss) before income taxes	13.7		(3.6	)	11.5		(5.0	)
Provision for income taxes	1.7		2.1		1.4		2.5
Net income (loss)	12.0	%	(5.7	)%	10.1	%	(7.5	)%

Net Revenue

	Three Months Ended April 30,				2007 over 2006		Six Months Ended April 30,				2007 over 2006
	2007		2006		Change		2007		2006		Change
	($ in millions)						($ in millions)
Net revenue from products:
SOC/SIP/High-Speed Memory	$	69	$	118	(41.5	)%	$	118	$	232	(49.1	)%
Memory Test	78		40		95.0	%	157		69		127.5	%
Net revenue from products	147		158		(7.0	)%	275		301		(8.6	)%

Net revenue from services	36		34		5.9	%	73		61		19.7	%
Total net revenue	$	183	$	192	(4.7	)%	$	348	$	362	(3.9	)%

Our revenue by geographic region for the three and six months ended April 30, 2007 and 2006 is as follows:

	Three Months Ended April 30,						2007 over 2006		Six Months Ended April 30,						2007 over 2006
	2007			2006			Change		2007			2006			Change
	($ in millions)								($ in millions)
North America	$	64		$	38		68.4	%	$	144		$	107		34.6	%
As a percent of total net revenue	35.0		%	19.8		%			41.4		%	29.5		%

Europe	$	7		$	13		(46.2	)%	$	15		$	25		(40.0	)%
As a percent of total net revenue	3.8		%	6.8		%			4.3		%	6.9		%

Asia-Pacific, excluding Japan	$	101		$	113		(10.6	)%	$	163		$	191		(14.7	)%
As a percent of total net revenue	55.2		%	58.9		%			46.8		%	52.8		%

Japan	$	11		$	28		(60.7	)%	$	26		$	39		(33.3	)%
As a percent of total net revenue	6.0		%	14.5		%			7.5		%	10.8		%

Total net revenue	$	183		$	192		(4.7	)%	$	348		$	362		(3.9	)%

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 April 30, 2007 was $183 million, a decrease of $9 million, or 4.7%, from the $192 million achieved in the three months ended April 30, 2006. Net product revenue in the three months ended April 30, 2007 was $147 million, a decrease of $11 million, or 7.0%, from the $158 million achieved in the three months ended April 30, 2006. This decrease was primarily due to lower revenue from sales of our SOC/SIP test systems, partially offset by higher revenue from sales of our memory test systems, spurred by continued strong demand for hand-held consumer products as well as expansion of addressable markets into NAND flash and flash final test.

Services revenue for the three months ended April 30, 2007, accounted for $36 million, or 19.7% of net revenue, compared to $34 million, or 17.7% of net revenue for the three months ended April 30, 2006. The increase in services revenue is attributed to our growing installed base and increased services associated with increased shipments made during the last half of fiscal 2006 and the first half of fiscal 2007.

Net revenue in the six months ended April 30, 2007, was $348 million, a decrease of $14 million, or 3.9%, from the $362 million achieved in the corresponding six months ended 2006. Net product revenue in the six months ended April 30, 2007, was $275 million, a decrease of $26 million, or 8.6%, from the $301 million achieved in the six months ended April 30, 2006. This decrease was primarily due to lower revenue from

sales of our SOC/SIP test systems, partially offset by higher revenue from sales of our memory test systems, spurred by continued strong demand for hand-held consumer products as well as expansion of addressable markets into NAND flash and flash final test.

Service revenue for the six months ended April 30, 2007, accounted for $73 million, or 21.0% of net revenue, compared to $61 million, or 16.9% of net revenue for the six months ended April 30, 2006. The increase in service revenue dollars is attributed to our growing installed base and increased services associated with increased shipments made during fiscal 2006 and the first half of fiscal 2007.

Net revenue in North America was higher by 15.2 percentage points in the three months ended April 30, 2007, compared to the three months ended April 30, 2006, primarily due to increased sales to key customers for memory test systems in the U.S.. Net revenue from customers located in Asia represented 61.2% of total net revenue for the three months ended April 30, 2007, compared to 73.4% in the three months ended April 30, 2006. Despite this decrease as a percentage of net revenue, we expect the trend of increasing sales in the Asia region to continue as semiconductor manufacturing activities continue to concentrate in that region.

Cost of Sales

Cost of Products

	Three Months Ended April 30,						Six Months Ended April 30,
	2007			2006			2007			2006
	($ in millions)
Cost of products	$	79		$	81		$	148		$	155
As a percent of product revenue	53.7		%	51.3		%	53.8		%	51.5		%

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 $2 million in the three months ended April 30, 2007, compared to the three months ended April 30, 2006, was primarily due to a decrease in product shipments, $4.6 million lower restructuring and $3.2 million lower corporate infrastructure costs. These decreases were partially offset by $2.6 million higher warranty costs and $0.6 million higher freight and duty expenses. Also, our cost of products included $0.4 million of SFAS 123(R) share-based compensation expense in the three months ended April 30, 2007, compared to $0.7 million in the three months ended April 30, 2006.

Cost of products as a percent of net product revenue increased by 2.4 percentage points in the three months ended April 30, 2007, compared to the three months ended April 30, 2006, primarily due to lower sales volume, product mix and higher warranty, freight and duty expenses, partially offset by lower restructuring and separation costs and lower corporate infrastructure costs.

Excess and obsolete inventory-related charges in the three months ended April 30, 2007 were $3 million, compared to $4 million in the comparable period in fiscal 2006. We also sold previously written down inventory for $1 million and $5 million in the three months ended April 30, 2007 and 2006, respectively. The sales of previously written down inventory improved our cost of products gross margins by approximately 0.7 percentage points in the three months ended April 30, 2007 and by 3.2 percentage points in the three months ended April 30, 2006.

The decrease in cost of products of approximately $7 million in the six months ended April 30, 2007, compared to the six months ended April 30, 2006, was primarily due to a decrease in product shipments, $5.8 million lower corporate infrastructure costs, $4.2 million lower restructuring and separation costs, $9 million lower excess and obsolete inventory-related charges and lower performance-based compensation variable pay expenses. These decreases were partially offset by $4.1 million higher warranty costs, $3.1 million higher freight and duty expenses and incremental costs associated with transitioning our manufacturing operations to Flextronics in China. Also, our cost of products included $0.8 million of SFAS 123(R) share-based compensation expense in the six months ended April 30, 2007 compared to $1.2 million in the six months ended April 30, 2006.

Cost of products as a percent of net product revenue increased by 2.3 percentage points in the six months ended April 30, 2007, compared to the six months ended April 30, 2006, primarily due to lower sales volume, product mix and higher warranty, freight and duty expenses, partially offset by lower restructuring and separation costs, lower corporate infrastructure costs and lower performance-based compensation variable pay expenses.

Excess and obsolete inventory-related charges in the six months ended April 30, 2006, were $5 million compared to inventory-related charges of $14 million in the six months ended April 30, 2006. In addition, we sold previously written down inventory for $2 million and

$7 million in the six months ended April 30, 2007 and 2006, respectively. The sales of previously written down inventory increased gross margin by approximately 0.7 and 2 percentage points for the six months ended April 30, 2007 and 2006, respectively. Our cost of products also included $2.8 million of restructuring and separation charges in the six months ended April 30, 2007, compared to $7.0 million of such charges in the same period of fiscal 2006.

As of April 30, 2007, we held $73 million of inventory, net of $33 million of reserves, composed of $32 million of raw materials, $7 million of work in progress and $34 million of finished goods. Raw materials include approximately $20 million of support inventory. We continue to dispose of previously written down inventory on a recurring basis.

Cost of Services

	Three Months Ended April 30,						Six Months Ended April 30,
	2007			2006			2007			2006
	($ in millions)
Cost of services	$	25		$	25		$	50		$	49
As a percent of services revenue	69.4		%	73.5		%	68.5		%	80.3		%

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 April 30, 2007, were flat compared to the three months ended April 30, 2006 while cost of services as a percent of service revenue decreased by 4.1 percentage points, from 73.5% in the three months ended April 30, 2006, to 69.4% in the three months ended April 30, 2007. This margin improvement reflects our lowered cost structure as well as better utilization of our service personnel in support of our installed base, partially offset by higher material, freight and duty costs needed to support our increased installed base. Our cost of services also includes $0.2 million of SFAS 123(R) share-based compensation expense in the three months ended April 30, 2007 compared to no such charges in the three months ended April 30, 2006.

Cost of services in the six months ended April 30, 2007, were slightly higher than the six months ended April 30, 2006, reflecting increased costs needed to support a higher installed base. Cost of services as a percent of service revenue decreased by 11.8 percentage points, from 80.3% in the six months ended April 30, 2006, to 68.5% in the six months ended April 30, 2007. This margin improvement is primarily due to higher service revenue as well as our lowered cost structure and better utilization of our service personnel in support of our installed base, partially offset by higher material, freight and duty costs needed to support our increased installed base. Our cost of services also included $0.4 million of SFAS 123(R) share-based compensation expense in the six months ended April 30, 2007 compared to no such charges in the three months ended April 30, 2006.

As a percent of net services revenue, cost of services will vary depending on a variety of factors, including our ability to weather 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 April 30,						2007 over 2006		Six Months Ended April 30,						2007 over 2006
	2007			2006			Change		2007			2006			Change
	($ in millions)
Research and development	$	22		$	25		(12.0	)%	$	45		$	50		(10.0	)%
As a percent of net revenue	12.0		%	13.0		%			12.9		%	13.8		%

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

· effective fiscal year 2006, share-based compensation.

Research and development costs have generally been expensed as incurred.

Research and development expense declined in absolute dollars as well as a percentage of net revenue in the three months ended April 30, 2007, compared to the three months ended April 30, 2006, primarily due to lower expenditures on project materials, cost savings realized from the streamlining of our infrastructure costs and lower performance-based compensation variable pay expenses. Research and development expense also included $0.4 million and $0.3 million of SFAS 123(R) share-based compensation expense for the three months ended April 30, 2007 and 2006, respectively.

Research and development expense declined in absolute dollars as well as a percentage of net revenue in the six months ended April 30, 2007, compared to the six months ended April 30, 2006, primarily due to lower project material expenditures, cost savings realized from the streamlining of our infrastructure costs and lower performance-based variable pay expenses. Research and development expense also included $0.9 million and $0.8 million of SFAS 123(R) share-based compensation expense for the six months ended April 30, 2007 and 2006, 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 dollars.

Selling, General and Administrative Expenses

	Three Months Ended April 30,						2007 over 2006		Six Months Ended April 30,						2007 over 2006
	2007			2006			Change		2007			2006			Change
	($ in millions)
Selling, general and administrative	$	35		$	40		(12.5	)%	$	69		$	77		(10.4	)%
As a percent of net revenue	19.1		%	20.8		%			19.8		%	21.3		%

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; and

· facility and other overhead and support costs for the above.

The $5 million decrease in selling, general and administrative expense in the three months ended April 30, 2007, compared to the three months ended April 30, 2006, was primarily due to lower sales commission expenses and cost savings realized from the streamlining of our infrastructure costs, partially offset by $0.7 million increase in SFAS 123(R) share-based compensation expense. SG&A expense included approximately $2.2 million of share-based compensation expenses in the three months ended April 30, 2007, compared to $1.5 million of such expenses for the three months ended April 30, 2006.

Selling, general and administrative expenses decreased 10.4% to $69 million for the six months ended April 30, 2007, compared to the six months ended April 30, 2006. This decrease was primarily due to lower sales commission expenses and cost savings realized from the streamlining of our infrastructure costs, partially offset by higher share-based compensation expenses. SG&A expenses included approximately $4.8 million of SFAS 123(R) share-based compensation expenses in the six months ended April 30, 2007, compared to $4.5 million of such expenses in the six months ended April 30, 2006.

The savings realized from our cost reduction efforts have partially been offset by incremental costs associated with operating as a stand-alone public company, including professional fees such as legal, regulatory and accounting costs. In addition, we expect incremental costs during the rest of fiscal year 2007 as we prepare to be in compliance with Section 404 of the Sarbanes Oxley Act. Selling, general and administrative expenses can fluctuate due to changes in commission expenses which are tied to changes in sales volume and customer mix.

Restructuring Charges

A summary of the statement of operations impact of the charges resulting from all restructuring plans in the three and six months ended April 30, 2007 and 2006, is shown below:

	Three Months Ended April 30,				Six Months Ended April 30,
	2007		2006		2007		2006
	(in millions)

Restructuring charges (included in cost of sales)	$	1	$	2	$	2	$	3
Restructuring charges (included in operating expenses)	—		8		—		14
Total restructuring charges	$	1	$	10	$	2	$	17

Separation Costs

All separation-related costs which were incurred during the three and six months ended April 20, 2006, remained as Agilent’s responsibility.

Provision for Income Taxes

We recorded income tax expense of approximately $3 million and $4 million in the three months ended April 30, 2007 and 2006, respectively. During the six months ended April 30, 2007 and 2006, we recorded approximately $5 million and $9 million, respectively, of income tax expense. For the six months ended April 30, 2006, Verigy’s income tax expense reflected amounts based on Agilent’s consolidated tax profile, thus our income tax expense consisted of allocated expense from Agilent. Since our separation from Agilent, our tax expense is based on our new business model and tax status in the countries where we do business.

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, completion of separation, restructuring and other one-time charges, as well as discrete events, such as settlements of future audits. We will also be subject to audits and examinations of our tax returns by tax authorities in various jurisdictions, including the Internal Revenue Service. We will regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

Financial Condition

Liquidity and Capital Resources

As of April 30, 2007, we had $348 million in cash, cash equivalents and marketable securities, compared to $300 million as of October 31, 2006.

Prior to June 1, 2006, Agilent used a centralized approach to cash management and financing of its operations. As such, transactions relating to our business prior to June 1, 2006, were accounted for through the Agilent net invested equity account for our business. Accordingly, none of the cash, cash equivalents or debt at the Agilent corporate level had been assigned to our business in our condensed combined and consolidated financial statements for the three and six months ended April 30, 2006.

Net Cash Provided by (Used in) Operating Activities

In the six months ended April 30, 2007, we generated $50 million in cash from operating activities, compared to cash provided by operating activities of $5 million in the six months ended April 30, 2006. The $50 million cash generation during the six months ended April 30, 2007 was a result of $35 million of net income, $45 million reduction in receivables and a $7 million decrease in inventory. These impacts were partially offset by decreases of $31 million in payables, $14 million in income and other taxes payable and $5 million in deferred revenue. Also, in the six three months ended April 30, 2007, we had non-cash charges of $5 million from inventory write-offs, $7 million of non-cash SFAS 123(R) share-based compensation costs and $6 million in depreciation and amortization expense.

The $5 million net cash provided by operating activities in the six months ended April 30, 2006, were primarily due to liability increases of $12 million in accounts payable, $10 million in employee compensation and benefits, $8 million in deferred revenue and $8 million in income and other taxes payable. These impacts were partially offset by our net loss from operations of $27 million and increases in working capital of $46 million for accounts receivable and $9 million for inventory. Also, in the six three months ended April 30, 2006, we had non-cash charges of $14 million from inventory write-offs, $7 million of non-cash SFAS 123(R) share-based compensation costs and $4 million in depreciation and amortization expense.

Net Cash Used in Investing Activities

Net cash used in investing activities in the six months ended April 30, 2007, was $187 million, compared to $24 million in the six months ended April 30, 2006. The $187 million net investment in the six months ended April 30, 2007, primarily related to $297 million invested in available-for-sale marketable securities and $7 million cash payments for site-set-ups and leasehold improvements, partially offset by $117 million proceeds from sales and maturities of available-for-sale marketable securities. Our marketable securities include commercial paper, corporate bond and 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. The $24 million net cash used in investing activities in the six months ended April 30, 2006, was primarily related to investments in our enterprise resource planning (ERP) system and other IT infrastructure set-up costs.

Net Cash Provided by Financing Activities

Net cash provided by financing activities in the six months ended April 30, 2007, was $5 million, compared to $19 million in the six months ended April 30, 2006. The $5 million cash proceeds, in the six months ended April 30, 2007, was comprised of approximately $3 million from the exercise of employee stock options and approximately $2 million from contributions by participants of our Employee Share Purchase Plan (“ESPP”) program. In the six months ended April 30, 2006, our business required net cash infusion from Agilent of $19 million because our cash from operations was not sufficient to cover our operating expenses.

Other

For up to two years following our separation from Agilent on June 1, 2006, Agilent will continue to provide services and access to resources necessary for our operations. In general, these services and resources include facilities management, site information technology infrastructure, use of various applications and support systems, as well as employee related services for transitional employees remaining with Agilent. Under the transition services agreement, we may negotiate with Agilent for the provision of additional transition services not set forth in the agreement, which additional services will generally be subject to the provisions of the agreement. The agreement will terminate, and Agilent will have no obligation to provide any further transition services to Verigy, two years after the separation date. For the three and six months ended April 30, 2007, our total transition services costs from Agilent were approximately $1 million and $3 million, respectively. We expect that the majority of transition services provided by Agilent will end at the end of fiscal year 2007.

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 our cash position and marketable securities as of April 30, 2007, together with future cash generation 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.

The following table summarizes our contractual obligations at April 30, 2007 (in millions):

	Total		Less than one year		One to three years		Three to five years		More than five years
Operating leases	$	63	$	10	$	17	$	13	$	23
Commitments to contract manufacturers and suppliers	134		134		—		—		—
Other purchase commitments	32		30		2		—		—
Long term liabilities	33		—		18		15		—
Total	$	262	$	174	$	37	$	28	$	23

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 site of our 93000 Series platform development. 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 35% 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 $4 million as of April 30, 2007 and $6 million as of October 31, 2006. These amounts are included in other current liabilities in our condensed consolidated balance sheets at April 30, 2007 and October 31, 2006.

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 from professional service providers are typically cancelable with a notice of 90 days or less without significant penalties. Our agreement with our primary IT service provider requires a notification period of 120 days and includes a termination charge of up to approximately $1.7 million in order to cancel our long-term contract.

Long-term liabilities: Long-term liabilities relate primarily to $15 million of defined benefit and defined contribution retirement obligations, $15 million of extended warranty and deferred revenue obligations and approximately $3 million of other deferred gains. 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 were insignificant, 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 million into our pension trust accounts during the three months ended January 31, 2007.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of April 30, 2007.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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 three months or less. These contracts are used to reduce our risk associated with exchange rate movements, as gains and losses on these contracts are intended to offset exchange losses and gains on underlying exposures. Verigy does 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 April 30, 2007 and October 31, 2006, the analysis indicated that these hypothetical market movements would not have a material effect on our consolidated financial position, results of operations or cash flows.

Prior to our separation from Agilent, Agilent hedged net cash flow and balance sheet exposures that were not denominated in the functional currencies of its subsidiaries on a short-term and anticipated basis and gains or losses associated with Agilent’s derivative instrument contracts had been allocated to us. As such, the historical results of our business in the three months ended April 30, 2006 reflected the hedging program in place at Agilent.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the period covered by this report. There were no changes in our internal control over financial reporting during the three or six months ended April 30, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 Quarterly 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 and sole source suppliers and our transition to a completely outsourced manufacturing model may prevent us from delivering our products on a timely basis,” “The loss of, or significant reduction in the number of sales to, our significant customers could materially harm our business,” “We are in the process of implementing the governance and accounting practices and policies required of a company publicly-traded in the United States and incorporated in Singapore. Any delay in implementing such governance and accounting practices and policies could harm our business,” “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 “Some of our directors and executive officers may have conflicts of interest because of their ownership of Agilent common stock, options to acquire Agilent common stock and positions with Agilent” 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, 2006.

Risks Relating to Our Business

We have undertaken a significant restructuring of our operations and continue to incur significant expenses to increase operational efficiencies.

If we are unable to successfully execute our wide-ranging cost saving initiative or if it fails to generate significant cost savings, our business, financial condition and results of operation could be materially adversely affected. We continue to incur significant expenses associate with our cost saving initiative, which affects our operations both domestically and internationally. This initiative involves a number of significant ongoing changes, including:

· changes to our employee compensation structure, as we recently introduced flexible pay structures which include a significant variable pay component based on overall company performance;

· consolidation of our operations to a fewer number of facilities;

· migration of portions of certain activities to Asia;

· migration to a completely outsourced manufacturing model; and

· establishing and stabilizing a new, free-standing IT environment in conjunction with our recent separation from Agilent.

This initiative is multi-faceted and complex. Our management will continue to have to respond to a variety of risks related to the execution of this initiative, including the loss of key employees who desire more certain compensation structures or are unwilling or unable to relocate to different locations, the operational and administrative complexity associated with transitioning to new supply chain and manufacturing processes and the inherent intricacy of installing a new IT environment. If we fail to successfully implement these initiatives in full in a timely manner, or if they fail to generate significant cost savings, our business, financial condition, results of operations and cash flows would be materially adversely affected.

Our dependence on contract manufacturers and sole source suppliers and our transition to a completely outsourced manufacturing model may prevent us from delivering our products on a timely basis.

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 products that we previously conducted internally to Flextronics. As a result of this transition, we now rely entirely on contract manufacturers.

Our current reliance on third-party manufacturers 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. We expect that the volume manufacturing activities currently conducted by Flextronics in Germany will be substantially transitioned to China during the second half of fiscal 2007. 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. Should our contract manufacturers be 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 impacted.

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. One sole source supplier recently relocated its manufacturing activities to a new facility and, in connection with this transition, experienced significant difficulties in meeting our requirements for components. Another sole source supplier recently 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 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, as well as our having been previously a wholly owned subsidiary of Agilent, 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 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 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. In addition, our products require long manufacturing lead times, which require us to make material purchasing commitments from our suppliers well in advance of product sales. 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 the three months ended April 30, 2007, revenue from our top ten customers accounted for approximately 70.1% of our total net revenue, with two of our customers each accounting for more than 10% of our total net revenue. In comparison, for the three months ended April 30, 2006, revenue from our top ten customers accounted for approximately 55.6% of our total net revenue, with one of our customers accounting for more than 10% of our total net revenue. For the six months ended April 30, 2007, revenue from our top ten customers accounted for approximately 67.5% of our total net revenue with two customers accounting for more than 10% of our total net revenue. In comparison, for the six months ended April 30, 2006, revenue from our top ten customers accounted for approximately 52.6% of our total net revenue with one customer accounting for more than 10% of our total 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 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.

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.

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 Versatest 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.

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, Nextest Systems Corporation, Teradyne, Inc. and Yokogawa Electric Corporation. Many 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 have. 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, except as described below, for a period of three years after the date in which Agilent distributes to its stockholders all of our ordinary shares that it holds, Agilent agreed not to develop, manufacture, distribute, support or service automated semiconductor test systems for providing high-volume functional test of 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 providing 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 these areas has provided material revenue to us in the past, nor are they expected to become areas of our focus for the near future, 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. 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 will allow Agilent to fulfill its obligations to a semiconductor manufacturer pursuant to which Agilent will develop and sell 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 fulfilling 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 the three-year non-compete period, 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.

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 expand significantly 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 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.

Our brand identity is still relatively new in the marketplace, which could cause our product sales to suffer, and continuing to build our brand identity will require significant amounts of time and resources.

Prior to our separation from Agilent in June 2006, we conducted our business under Agilent’s brand name. Since our separation, we have conducted our business under the “Verigy” brand name. We believe that, historically, sales of our products have benefited from the use of the “Agilent” brand name. Our customers and suppliers, as well as potential employees we are trying to recruit, may not recognize the “Verigy” brand name, which could negatively influence their business decisions concerning us. We need to continue to expend significant time, effort and resources to establish the “Verigy” brand name in the marketplace. We cannot guarantee that this effort will ultimately be successful. If our effort to establish a new brand identity is unsuccessful, our business, financial condition and results of operations may suffer.

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, some of whom are relatively new to our business. 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.

We may need additional financing, which could be difficult to obtain on favorable terms or at all.

In the event we need to raise additional funds, we cannot be certain that we will be able to obtain such additional financing on favorable terms, if at all. Our future capital requirements will depend on many factors, including the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity, market acceptance of our products and the cyclical and seasonal demand for our products. If we issue additional equity securities, shareholders may experience additional dilution and the new equity securities may have rights, preferences or privileges senior to those of existing holders of our ordinary shares. If we incur debt, we may become subject to restrictions on how we operate our business. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products and services, take advantage of future opportunities, grow our business or respond to competitive pressures, which could materially adversely affect our business, financial condition and results of operations. In addition, our agreements with Agilent, and in particular the tax sharing agreement, may limit our ability to incur debt or sell equity securities or to obtain additional financing.

We are in the process of implementing the governance and accounting practices and policies required of a company publicly-traded in the United States and incorporated in Singapore. Any delay in implementing such governance and accounting practices and policies could harm our business.

Prior to becoming a stand alone company, we relied on the financial resources and the administrative and operational support systems of Agilent to operate our business. In conjunction with our separation from Agilent, we have separated our assets from those of Agilent and created our own financial, administrative, operational and other support systems or contract with third parties to replace Agilent’s systems. Many of the new systems, including our enterprise resource planning (“ERP”) system, have been in effect only since the separation date. We have experienced, and may continue to experience periodic interruptions in our ERP system, and it may take additional time to fully implement and stabilize the ERP system as well as other support systems.

As a publicly-traded company in the United States, we are subject to many rules and regulations, including the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. We are also required to comply with the Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations implemented thereunder. We are required to comply with Section 404 of the Sarbanes-Oxley Act, beginning with our fiscal year ending October 31, 2007. While we are diligently developing the systems, procedures and processes to enable us to fully meet the requirements associated with being publicly traded in the United States, we may encounter problems or delays in completing these activities. Any failure on our part to meet the requirements of operating as a publicly-traded company could jeopardize our ability to produce reliable financial statements, subject us to disciplinary proceedings by the SEC or the Nasdaq Global Select Market, cause investors to lose confidence in the accuracy and reliability of our financial reporting, or otherwise harm our business or results of operations.

Our results could be adversely affected if we do not comply with certain operating conditions agreed to with the Singapore authorities. In addition, our new legal structure could cause our effective income tax rate to 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 10- to 15-year incentive periods is subject to reduced rates of Singapore income tax. The Singapore corporate income tax rate that would apply, absent the incentives, is 20%. 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 2- to 9-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 five and ten 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 will vary 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.

Since we sell our products and services worldwide, our business is subject to risks associated with doing business internationally. Revenue from customers in Asia accounted for approximately 61.2% and 73.4% for the three months ended April 30, 2007 and 2006, respectively, and revenue from customers in Europe accounted for approximately 3.8% and 6.8% of total net revenue for the three months ended April 30, 2007 and 2006, respectively. Revenue from customers in Asia accounted for approximately 54.3% and 63.6% for the six months ended

April 30, 2007 and 2006, respectively, and revenue from customers in Europe accounted for approximately 4.3% and 6.9% of total net revenue for the six months ended April 30, 2007 and 2006, 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 establishing our headquarters in Singapore and transitioning our contract manufacturing processes to Flextronics in China.

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 in the Japanese Yen. 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.

We may incur a variety of costs to engage in future acquisitions of companies, products or technologies, and the anticipated benefits of any acquisitions 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.

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.

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 Our Separation from Agilent

Our historical financial information as a business segment of Agilent may not be representative of our results as an independent public company.

The historical financial statements prior to June 1, 2006, have been derived from the condensed combined and consolidated financial statements of Agilent and do not necessarily reflect what our financial position, results of operations or cash flows would have been had we been an independent entity during the historical periods presented. The historical costs and expenses reflected in our condensed combined and consolidated financial statements include an allocation for certain corporate functions historically provided by Agilent, including centralized legal, accounting, tax, treasury, information technology and other corporate services and infrastructure costs, which we believe are reasonable reflections of the historical utilization levels of these services in support of our business. The historical financial information is not necessarily indicative of our future results of operations, financial position, cash flows or costs and expenses. We did not make adjustments to periods prior to our separation from Agilent to reflect many significant changes that will occur in our cost structure, funding and operations as a result of our separation from Agilent, including changes in our employee base, changes in our legal structure, potential increased costs associated with reduced economies of scale, increased marketing expenses related to establishing a new brand identity and increased costs associated with being an independent publicly traded company.

Our tax sharing agreement with Agilent may require us to indemnify Agilent for certain tax liabilities, including liabilities that may arise in connection with a distribution of our ordinary shares by Agilent, and may limit our ability to obtain additional financing or participate in future acquisitions.

Under our tax sharing agreement with Agilent, we and Agilent agreed to indemnify one another for certain taxes and similar obligations that the other party could incur under certain circumstances. In general, under the tax sharing agreement we are responsible for taxes relating to our business that arise after our separation from Agilent.

Agilent’s distribution of our ordinary shares to its stockholders was intended by Agilent to qualify as a distribution subject to Section 355 of the Internal Revenue Code of 1986, as amended. Under our tax sharing agreement with Agilent, we are obligated to indemnify Agilent for any taxes imposed on Agilent under Section 355(e) of the Code arising as a result of our actions. If we are required to indemnify Agilent for additional taxes imposed on Agilent with respect to the distribution of our ordinary shares to its stockholders, our results of operations may be materially impaired.

We are subject to certain covenants that restrict our ability to obtain additional financing or to engage in acquisition or disposition transactions for a period of two years after the distribution.

Our ability to obtain additional financing or to engage in transactions that would result in a change in control of Verigy is limited by the intellectual property matters agreement and the tax sharing agreement that we entered into with Agilent as part of our separation. Specifically, under the intellectual property matters agreement, Agilent’s consent is required for us to transfer intellectual property rights we have licensed from Agilent, which may act as a deterrent to an acquisition of us by a third party. Under our tax sharing agreement with Agilent, for two years following the distribution, we are subject to certain covenants that are intended to ensure that the distribution of our ordinary shares by Agilent is not fully taxable to Agilent. Those covenants require us to obtain the consent of Agilent (which cannot be unreasonably withheld) before we can:

· sell assets outside the ordinary course of business for consideration in excess of $50 million (including assumption of liabilities related to such assets);

· merge or liquidate our parent company or its subsidiaries that operate our business into another company; or

· enter into any other corporate transaction that would cause us to undergo a greater than 35% change in our share ownership.

The restrictive covenants in our tax sharing agreement with Agilent restrict our ability to obtain additional financing or to engage in acquisition or disposition transactions for a period of two years after the distribution, even if the financing or transaction might be in the best interest of our shareholders. If we breach those covenants, we may incur substantial additional liabilities and may be exposed to costly and time-consuming litigation.

Any disputes that arise between us and Agilent with respect to our past and ongoing relationships could harm our business operations.

Disputes may arise between Agilent and us in a number of areas relating to our past and ongoing relationships, including:

· intellectual property and technology matters, including related non-compete provisions applicable to Agilent and us;

· labor, tax, employee benefit, indemnification and other matters arising from our separation from Agilent

· employee retention and recruiting;

· business combinations involving us;

· sales or distributions by Agilent of all or any part of its ownership interest in us;

· the nature, quality and pricing of transitional services Agilent has agreed to provide us; and

· business opportunities that may be attractive to both Agilent and us.

We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party.

Some of our directors and executive officers may have conflicts of interest because of their ownership of Agilent common stock, options to acquire Agilent common stock and positions with Agilent.

Some of our executive officers own Agilent common stock and options to purchase Agilent common stock. In addition, one of our directors is an executive officer of Agilent and owns Agilent common stock and options to purchase Agilent common stock. Ownership of Agilent common stock and options to purchase Agilent common stock by one of our directors and the presence of an executive officer of Agilent on our board of directors could create, or appear to create, potential conflicts of interest and other issues with respect to their fiduciary duties to us when our directors and officers are faced with decisions that could have different implications for Agilent than for us.

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 develop or 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.

It may be difficult for investors to effect service of process within the United States upon 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.

In addition to our tax sharing and intellectual property matters agreements with Agilent, 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.

For a limited period of time, our board of directors has 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 2007 annual general meeting, our shareholders provided general authority to issue new shares. This authority will remain effective until the earlier to occur of (i) the conclusion of our 2008 annual general meeting or (ii) the expiration of the period within which the next annual general meeting is required to be held. Subject to the shareholder 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 board of directors may adversely impact the market price of our ordinary shares.

Our public 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.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

Not applicable

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

The following matters were submitted to a vote of security holders during the Verigy’s annual general meeting of shareholders held on April 11, 2007.

		For	Against	Abstentions
1.	Election of Directors:

	C. Scott Gibson, as a Class I director	51,331,468	652,841	77,451

	Eric Meurice, as a Class I director	51,875,914	107,887	77,959

	Claudine Simson, as a Class I director	51,878,558	107,739	75,463

	Adrian T. Dillon, as a Class II director	51,854,455	138,824	68,481

	Ernest L. Godshalk, as a Class II director	51,529,276	451,019	81,465

	Keith L. Barnes, as a Class III director	51,846,722	135,450	79,588

	Paul Chan Kwai Wah, as a Class III director	51,512,143	467,550	82,067

		For	Against	Abstentions
2.	Proposal to approve the reappointment of PricewaterhouseCoopers as independent Singapore auditor for the fiscal year ending October 31, 2007, and authorization for the directors to fix PricewaterhouseCoopers’ remuneration	51,921,200	77,275	63,285

3.	Proposal to approve the authorization for the directors to allot and issue ordinary shares	49,825,904	2,138,457	97,399

4.	Proposal to approve, ratify and confirm the non-employee director cash compensation and additional cash compensation for the respective chairpersons of the Audit, Compensation and Nominating and Governance Committees paid during fiscal year 2006	50,667,246	637,726	756,788

5.	Proposal to approve, ratify and confirm the director cash compensation and additional cash compensation for the respective chairpersons of the Audit, Compensation and Nominating and Governance Committees paid for the approximately 17.5-month period from November 1, 2007 through the 2008 annual general meeting of shareholders	50,520,631	650,392	890,737

ITEM 5. OTHER INFORMATION

Not applicable

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

10.5.1**

Modification to Employment Offer Letter, entered into between Verigy and Keith Barnes

8-K

000-52038

99.1

5/31/2007

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.

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: June 7, 2007	By:	/s/ Robert J. Nikl
		ROBERT J. NIKL
		Vice President and Chief Financial Officer

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

10.5.1**

Modification to Employment Offer Letter, entered into between Verigy and Keith Barnes

8-K

000-52038

99.1

5/31/2007

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.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Good

Verigy (VRGY) Inactive 10-Q2007 Q2 Quarterly report

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