Xcerra (XCRA) 10-K/A 2005 FY Annual report (amended)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K /A

Amendment No. 2

For Annual and Transition Reports Pursuant to

Sections 13 or 15(d) of the Securities Exchange Act of 1934

(Mark One)

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

For the fiscal year ended July 31, 2005

OR

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

For the transition period from                    to                    

Commission File No. 000-10761

LTX Corporation

(Exact name of registrant as specified in its charter)

MASSACHUSETTS	04-2594045
(State or other jurisdiction of Incorporation or organization)	(I.R.S. Employer Identification No.)

50 Rosemont Road

Westwood, Massachusetts 02090

(781) 461-1000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
None	None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.05 per share

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨ No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  ¨ No  x

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  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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.

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

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

The aggregate market value of the Common Stock held by non-affiliates of the registrant on January 31, 2005 was $354,950,551.

Number of shares outstanding of each of the issuer’s classes of Common Stock as of September 29, 2005:

Common Stock, Par Value $0.05 Per Share, 61,536,392 shares.

DOCUMENTS INCORPORATED BY REFERENCE

None.

2

EXPLANATORY NOTE

LTX Corporation (the “Company”) is filing this Amendment No. 2 to its Annual Report on Form 10-K for the fiscal year ended July 31, 2005, as originally filed with the Securities and Exchange Commission (the “SEC”) on October 11, 2005, for the sole purpose of filing a signed report of the Independent Registered Public Accounting Firm. The version of the report filed on October 11, 2005 accidentally omitted the Independent Registered Public Accounting Firm’s conformed signature. This Amendment No. 2 on Form 10-K/A does not change or update the previously reported financial statements or any of the other disclosure contained in the original Form 10-K. In accordance with SEC rules, new certifications relating to this Amendment No. 2 are also being filed herewith.

TABLE OF CONTENTS

PART II.

Item 8. Financial Statements and Supplementary Data

3

PART II.

Item 8. Financial Statements and Supplementary Data

LTX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	July 31,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	55,269		$	95,112
Marketable securities		122,205			149,601
Accounts receivable—trade, net of allowances of $1,906 and $2,016, respectively		19,776			32,961
Accounts receivable—other		5,497			11,494
Inventories		41,181			69,220
Prepaid expense		4,942			9,828
Total current assets		248,870			368,216
Property and equipment, net		47,135			71,329
Goodwill and other intangible assets		16,162			15,763
Other assets		4,225			4,256
Total assets	$	316,392		$	459,564
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	606		$	321
Accounts payable		27,934			37,438
Deferred revenues and customer advances		2,712			3,520
Deferred gain on leased equipment		2,215			6,852
Other accrued expenses		32,390			27,179
Total current liabilities		65,857			75,310
Long-term debt, less current portion		147,687			150,000
Stockholders’ equity:
Common stock, $0.05 par value:
100,000,000 shares authorized; 61,531,881 and 60,903,163 shares issued and outstanding, respectively		3,077			3,045
Additional paid-in capital		558,192			555,447
Unrealized loss on marketable securities		(1,563	)		(106	)
Accumulated deficit		(456,858	)		(324,132	)
Total stockholders’ equity		102,848			234,254
Total liabilities and stockholders’ equity	$	316,392		$	459,564

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

4

LTX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share data)

	Year ended July 31,
	2005			2004			2003
Net product sales	$	103,026		$	217,310		$	87,346
Net service sales		31,505			38,491			32,103
Net sales		134,531			255,801			119,449
Cost of sales		90,806			154,672			97,368
Inventory related provision		47,457			—			48,483
Gross profit (loss)		(3,732	)		101,129			(26,402	)
Engineering and product development expenses		66,302			67,655			66,088
Selling, general and administrative expenses		29,366			28,037			27,321
In-process research and development		—			—			16,100
Reorganization costs		31,726			—			6,696
Income (loss) from operations		(131,126	)		5,437			(142,607	)
Other income (expense):
Interest expense		(6,832	)		(6,626	)		(6,747	)
Investment income		5,232			3,150			4,286
Net income (loss)	$	(132,726	)	$	1,961		$	(145,068	)
Net income (loss) per share:
Basic	$	(2.17	)	$	0.04		$	(2.92	)
Diluted	$	(2.17	)	$	0.03		$	(2.92	)
Weighted-average common shares used in computing net income (loss) per share:
Basic		61,144			55,927			49,614
Diluted		61,144			58,057			49,614
Comprehensive income:
Net income (loss)	$	(132,726	)	$	1,961		$	(145,068	)
Unrealized loss on marketable securities		(1,457	)		(857	)		(140	)
Comprehensive income (loss)	$	(134,183	)	$	1,104		$	(145,208	)

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

5

LTX CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

	Common Stock						Unrealized Gain (Loss) On Marketable Securities
	Shares	Amount			Additional Paid-In Capital
Balance at July 31, 2002	49,184,962	$	2,599		$	403,068	$	891
Exercise of stock options	153,474		7			316		—
Acquisition of StepTech, Inc.	1,995,625		100			17,003		—
Issuance of shares under employees’ stock purchase plan and other	299,737		15			1,322		—
Unrealized loss on marketable securities	—		—			—		(140	)
Net loss	—		—			—		—
Balance at July 31, 2003	51,633,798		2,721			421,709		751
Exercise of stock options	797,482		40			4,324		—
StepTech escrow share release	144,062		7			1,092		—
Issuance of shares under employees’ stock purchase plan and other	277,821		(126	)		2,200		—
Unrealized loss on marketable securities	—		—			—		(857	)
Public offering of common stock	8,050,000		403			126,122		—
Net income	—		—			—		—
Balance at July 31, 2004	60,903,163		3,045			555,447		(106	)
Exercise of stock options	196,169		11			264
StepTech escrow share release	144,063		7			1,092		—
Issuance of shares under employees’ stock purchase plan and other	288,486		14			1,389		—
Unrealized loss on marketable securities	—		—			—		(1,457	)
Net loss	—		—			—		—
Balance at July 31, 2005	61,531,881	$	3,077		$	558,192	$	(1,563	)

	Accumulated Deficit			Total Stockholders’ Equity
Balance at July 31, 2002	$	(181,025	)	$	225,533
Exercise of stock options		—			323
Acquisition of StepTech, Inc.		—			17,103
Issuance of shares under employees’ stock purchase plan and other		—			1,337
Unrealized loss on marketable securities		—			(140	)
Net loss		(145,068	)		(145,068	)
Balance at July 31, 2003		(326,093	)		99,088
Exercise of stock options		—			4,364
StepTech escrow share release		—			1,099
Issuance of shares under employees’ stock purchase plan and other		—			2,074
Unrealized loss on marketable securities		—			(857	)
Public offering of common stock		—			126,525
Net income		1,961			1,961
Balance at July 31, 2004		(324,132	)		234,254
Exercise of stock options					275
StepTech escrow share release		—			1,099
Issuance of shares under employees’ stock purchase plan and other		—			1,403
Unrealized loss on marketable securities		—			(1,457	)
Net loss		(132,726	)		(132,726	)
Balance at July 31, 2005	$	(456,858	)	$	102,848

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

6

LTX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year ended July 31,
	2005			2004			2003
Cash Flows from Operating Activities:
Net income (loss)	$	(132,726	)	$	1,961		$	(145,068	)
Add (deduct) non-cash items:
Depreciation and amortization		18,494			18,699			16,896
In-process research and development charge		—			—			16,100
Asset impairment		18,058			—			—
Charge for inventory related provision		47,457			—			48,483
Other		(1,493	)		645			1,221
(Increase) decrease in:
Accounts receivable		19,286			(27,095	)		12,316
Inventories		(19,354	)		(2,389	)		(19,694	)
Prepaid expenses		4,905			1,276			19,705
Other assets		(337	)		893			485
Increase (decrease) in:
Accounts payable		(9,570	)		23,816			(10,566	)
Accrued expenses		5,237			663			(4,871	)
Deferred revenues and customer advances		(5,436	)		(4,738	)		(4,844	)
Net cash (used in) provided by operating activities		(55,479	)		13,731			(69,837	)
Cash Flows from Investing Activities:
Acquisition investment, net of cash acquired		—			—			(6,533	)
Expenditures for property and equipment		(11,616	)		(17,496	)		(17,506	)
Purchases of marketable securities		(112,890	)		(240,414	)		(117,706	)
Proceeds from sale of marketable securities		138,830			153,372			126,981
Net cash provided by (used in) investing activities		14,324			(104,538	)		(14,764	)
Cash Flows from Financing Activities:
Proceeds from stock plans:
Employees’ stock purchase plan		1,403			2,086			1,356
Exercise of stock options		275			4,364			323
Proceeds from equity offering, net		—			126,525			—
(Payment) advances of short-term debt		(217	)		(19,459	)		4,589
Proceeds from term loan		60,000			—			—
Proceeds from lease financing		—			—			9,184
Payments of long-term debt		(60,057	)		(1,022	)		(2,026	)
Net cash provided by financing activities		1,404			112,494			13,426
Effect of exchange rate changes on cash		(92	)		258			(125	)
Net (decrease) increase in cash and cash equivalents		(39,843	)		21,945			(71,300	)
Cash and cash equivalents at beginning of year		95,112			73,167			144,467
Cash and cash equivalents at end of year	$	55,269		$	95,112		$	73,167
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for interest	$	7,431		$	3,748		$	9,699

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

7

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY

LTX Corporation (“LTX” or the “Company”) designs, manufactures, and markets automatic semiconductor test equipment. Semiconductor designers and manufacturers worldwide use semiconductor test equipment to test devices at different stages during the manufacturing process. These devices are incorporated in a wide range of products, including mobile internet equipment such as wireless access points and interfaces, broadband access products such as cable modems and DSL modems, personal communication products such as cell phones and personal digital assistants, consumer products such as televisions, videogame systems, digital cameras and automobile electronics, and for power management in portable and automotive electronics. The Company also sells hardware and software support and maintenance services for its test systems. The Company is headquartered, and has development and manufacturing facilities, in Westwood, Massachusetts, a development facility in San Jose, California, and worldwide sales and service facilities to support its customer base.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly owned domestic subsidiaries and wholly owned foreign subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to previously reported financial data to conform to the 2005 presentation.

Preparation of Financial Statements and Use of Estimates

The accompanying financial statements have been prepared by the Company, and reflect all adjustments, which, in the opinion of management, are necessary for fair statement of the results. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting periods.

Foreign Currency Translation

The financial statements of the Company’s foreign subsidiaries are translated in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation”. The Company’s functional currency is the U.S. dollar. Accordingly, the Company’s foreign subsidiaries translate monetary assets and liabilities at year-end exchange rates while non-monetary items are translated at historical rates. Income and expense accounts are translated at the average rates in effect during the year, except for sales, cost of sales and depreciation, which are primarily translated at historical rates. Net realized gains or losses resulting from foreign currency remeasurement and transaction gains or losses were a gain of $17,000 and $234,000 and loss of $143,000 in fiscal 2005, 2004 and 2003, respectively. Transaction gains and losses are included in the consolidated results of operations.

Revenue Recognition

The Company recognizes revenue based on guidance provided in SEC Staff Accounting Bulletin No. 101 (SAB 101), “Revenue Recognition in Financial Statements” and SAB 104, “Revenue Recognition”. In December 2003, the SEC issued SAB 104, “Revenue Recognition”, which codifies, revises and rescinds certain sections of SAB 101. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable and collectibility is reasonably assured.

Revenue related to equipment sales is recognized when: (a) we have a written sales agreement; (b) delivery has occurred or services rendered; (c) the price is fixed or determinable; (d) collectibility is reasonably assured; (e) the product delivered is proven technology with historically demonstrated acceptance; and (f) there is no unique customer acceptance provision or payment tied to acceptance or an undelivered element significant to the functionality of the system. Generally, payment terms are net 30 days from shipment. Certain sales include payment terms tied to customer acceptance. If a portion of the payment is linked to product acceptance, which is 20% or less, the revenue is deferred on only the percentage holdback until payment is received or written evidence of acceptance is delivered to the Company. If the portion of the holdback is greater than 20%, the full value of the equipment is deferred until payment is received or written evidence of acceptance is delivered to the Company. When sales to a customer involve multiple elements, revenue is recognized on the delivered

8

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

element provided that (1) the undelivered element is a proven technology, (2) there is a history of acceptance on the product with the customer, (3) the undelivered element is not essential to the customer’s application, (4) the delivered item(s) has value to the customer on a stand-alone basis, (5) objective and reliable evidence of the fair value of the undelivered item(s) exists, (6) if the arrangement included a general right of return relative to the delivered item(s),delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company, and (7) if objective and reliable evidence of fair value exists for all units of accounting in the arrangement, the arrangement consideration is allocated based on the relative fair values of each unit of accounting. If the fair value of a delivered item is unknown, but the fair value of undelivered items are known, the residual method is used for allocating arrangement consideration. Revenue related to spare parts is recognized on shipment. Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts.

Allowance for Doubtful Accounts

An allowance for doubtful accounts is maintained for potential credit losses based upon assessment of the expected collectibility of all accounts receivable. The allowance for doubtful accounts is reviewed periodically to assess the adequacy of the allowances. In any circumstances in which we are aware of a customer’s inability to meet its financial obligations, we take a certain percentage of the accounts receivable balance as an allowance, which is based on the age of the receivables, the circumstances surrounding the customer’s financial situation and our historical experience. If circumstances change, and the financial condition of our customers were adversely affected resulting in their inability to meet their financial obligations to us, we may need to record additional allowances.

Engineering and Product Development Costs

The Company expenses all engineering, research and development costs as incurred. Expenses subject to capitalization in accordance with the SFAS No. 86, “Accounting for the Costs of Computer Software To Be Sold, Leased or Otherwise Marketed”, relating to certain software development costs, were insignificant.

Shipping and Handling Costs

Shipping and handling costs are included in cost of sales in the consolidated statements of operations. Shipping and handling costs were $0.8 million, $1.7 million, and $1.1 million for fiscal years July 31, 2005, 2004, and 2003, respectively. These costs, when included in the sales price charged for products, are recognized in net sales.

Income Taxes

In accordance with SFAS No. 109, “Accounting for Income Taxes”, the Company recognizes deferred income taxes based on the expected future tax consequences of differences between the financial statement bases and the tax bases of assets and liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return. Research and development tax credits are recognized for financial reporting purposes to the extent that they can be used to reduce the tax provision.

Accounting for Stock-Based Compensation

The Company, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148 “Accounting for Stock-Based Compensation Transition and Disclosure”, has elected to continue to apply the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations in accounting for its employee stock option and stock purchase plans. No stock-based employee compensation is reflected in net income (loss), as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

9

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provision of SFAS No. 123 to stock-based employee compensation:

	Year ended July 31,
	2005			2004			2003
	(in thousands except per share)
Net income (loss):
As reported	$	(132,726	)	$	1,961		$	(145,068	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		26,090			17,640			12,904
Pro forma	$	(158,816	)	$	(15,679	)	$	(157,972	)
Net income (loss) per share:
Basic
As reported	$	(2.17	)	$	0.04		$	(2.92	)
Pro forma		(2.60	)		(0.28	)		(3.18	)
Diluted
As reported		(2.17	)		0.03			(2.92	)
Pro forma		(2.60	)		(0.28	)		(3.18	)

The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Year ended July 31,
	2005		2004		2003
Volatility	80	%	87	%	88	%
Dividend yield	0	%	0	%	0	%
Risk-free interest rate	4.11	%	4.78	%	4.43	%
Expected life of options	7.18 years		8.83 years		8.31 years

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

Product Warranty Costs

Our products are sold with warranty provisions that require us to remedy deficiencies in quality or performance of our products over a specified period of time at no cost to our customers. Our policy is to establish warranty reserves at levels that represent our estimate of the costs that will be incurred to fulfill those warranty requirements at the time that revenue is recognized.

10

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table shows the change in the product warranty liability, as required by FASB Interpretation No. (FIN) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, for the fiscal years ended July 31, 2005 and 2004:

	(in thousands)
Product Warranty Activity	2005			2004
Balance at beginning of period	$	4,394		$	1,935
Warranty expenditures for current period		(6,186	)		(6,933	)
Changes in liability related to pre-existing warranties		74			375
Provision for warranty costs in the period		4,261			9,017
Balance at end of period	$	2,543		$	4,394

Comprehensive Income

Comprehensive income is comprised of two components, net income and other comprehensive income. Other comprehensive income consists of unrealized gains and losses on the Company’s marketable securities.

Net Income (Loss) per Share

Basic net income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted income (loss) per common share reflects the maximum dilution that would have resulted from the assumed exercise and share repurchase related to dilutive stock options and is computed by dividing net income (loss) by the weighted average number of common shares and all dilutive securities outstanding.

A reconciliation between basic and diluted earnings (loss) per share is as follows:

	Fiscal Year Ended July 31,
	2005			2004		2003
	(in thousands, except per share data)
Net income (loss)	$	(132,726	)	$	1,961	$	(145,068	)
Basic EPS
Basic common shares		61,144			55,927		49,614
Basic EPS	$	(2.17	)	$	0.04	$	(2.92	)
Diluted EPS
Basic common shares		61,144			55,927		49,614
Plus: impact of stock options and warrants		—			2,130		—
Diluted common shares		61,144			58,057		49,614
Diluted EPS	$	(2.17	)	$	0.03	$	(2.92	)

Options to purchase 8,077,136, 4,224,203, and 4,242,703 shares of common stock were outstanding at July 31, 2005, 2004, and 2003, respectively, but were not included in the calculation of diluted shares because the effect of including the options would have been anti-dilutive.

Cash and Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments that are readily convertible to cash and that have original maturity dates of three months or less to be cash equivalents. Cash and cash equivalents consist primarily of repurchase agreements and commercial paper. Marketable securities consist primarily of debt securities that are classified as available-for-sale, in accordance with the SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Securities available for sale include corporate and governmental obligations with various contractual maturity dates some of which are greater than one year. The Company considers the securities to be liquid and convertible to cash within 30 days. The Company has the ability and intent, if necessary, to liquidate any security that the Company holds to fund operations over the next twelve months and as such has classified these securities as short-term. Governmental obligations include U.S. Government, State, Municipal and Federal Agency securities.

11

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The market value and maturities of the Company’s marketable securities are as follows:

	Total Amount
	(in thousands)
July 31, 2005
Due in less than one year	$	30,401
Due in 1 to 3 years		33,171
Due in 3 to 5 years		25,965
Due in 5 to 10 years		12,746
Due in greater than 10 years		19,922
Total	$	122,205

The market value and amortized cost of marketable securities are as follows:

	Market Value		Amortized Cost
	(in thousands)
July 31, 2005
Corporate	$	100,833	$	101,356
Government		21,372		21,370
	$	122,205	$	122,726
July 31, 2004
Corporate	$	134,216	$	133,422
Government		15,385		15,368
	$	149,601	$	148,790

Gross unrealized losses were $1.5 million in fiscal 2005 and $0.9 million in fiscal 2004. The realized profits, losses and interest are included in the investment income in the Statements of Operations. Unrealized gains and losses are reflected as a separate component of comprehensive income and are included in Stockholders’ Equity. The gross unrealized losses were primarily a result of rising interest rates. The Company evaluates its portfolio for impairment based on certain factors including, credit quality, structure of the security and the ability to hold the security to maturity.

The following interest income and realized gains and losses from sales of marketable securities is as follows:

	Fiscal Year Ended July 31,
	2005		2004		2003
	(in thousands)
Interest income	$	4,807	$	2,534	$	2,811
Realized gain from sales of available-for-sale securities		—		262		409
	$	4,807	$	2,796	$	3,220

At July 31, 2005, marketable securities of approximately $1.0 million were restricted from withdrawal. These assets served as collateral supporting letters of credit issued to a financial institution for leasing equipment.

Fair Value of Financial Instruments

SFAS No. 107, “Disclosures About Fair Value of Financial Instruments”, requires that disclosure be made of estimates of the fair value of financial instruments. The carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate fair value due to their short maturities. In accordance with SFAS No. 115, marketable securities classified as available for sale are all debt securities and are recorded at fair value based upon quoted market prices. The fair value of the Company’s notes payable and long-term liabilities is estimated based on quoted market prices for the same or similar issues or on current rates offered to the

12

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Company for debt of the same remaining maturities. At July 31, 2005, the carrying value of $606,000 for the current portion of long-term debt approximates fair value.

As of July 31, 2005, the estimated fair value of the Company’s convertible subordinated notes was approximately $87.1 million compared to the carrying value of $88.3 million. The estimated fair value of the convertible subordinated notes is based on the quoted market price of the notes on July 31, 2005. The book value of the term loan approximates fair value.

Concentration of Credit Risk

Revenue from our top four customers accounted for 61%, 73%, and 71% of total revenues in fiscal 2005, 2004, and 2003, respectively. Accounts receivable from these customers amounted to approximately $11.6 million and $18.2 million at July 31, 2005 and 2004, respectively. Sales to customers outside the United States were $93.3 million, or 69% of net sales in fiscal 2005, $168.9 million, or 66% of net sales in fiscal 2004, $67.8 million, or 57% of net sales, in fiscal 2003.

Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash equivalents, marketable securities and accounts receivable. All of the Company’s cash equivalents and marketable securities are maintained by major financial institutions. Concentration of credit risk with respect to accounts receivable is limited to certain customers to whom the Company makes substantial sales. To reduce risk, the Company routinely assesses the financial strength of its customers. The Company does not require collateral, although the Company will obtain a letter of credit on sales to certain foreign customers. Write-offs related to accounts receivable have been within management’s expectations.

Inventories

Inventories are stated at the lower of cost or market, determined on the first-in, first-out (“FIFO”) method, and include materials, labor and manufacturing overhead. The components of inventories are as follows:

	As of July 31,
	2005		2004
	(in thousands)
Raw materials	$	26,101	$	28,088
Work-in-process		4,668		11,787
Finished goods		10,412		29,345
	$	41,181	$	69,220

Our policy is to establish inventory reserves when conditions exist that suggest our inventory may be in excess of anticipated demand or is obsolete based upon our assumptions about future demand for our products or market conditions. We regularly evaluate the ability to realize the value of our inventory based on a combination of factors including the following: forecasted sales or usage, estimated product end of life dates, estimated current and future market value and new product introductions. Purchasing and alternative usage options are also explored to mitigate inventory exposure. When recorded, our reserves are intended to reduce the carrying value of our inventory to its net realizable value. As of July 31, 2005 and 2004, our inventory is stated net of inventory reserves of $99.6 million and $78.9 million, respectively. If actual demand for our products deteriorates or market conditions are less favorable than those that we project, additional inventory reserves may be required. Such reserves are not reversed until the related inventory is sold or otherwise disposed of. During fiscal year 2005, the Company utilized $29.6 million of reserves related to the disposal of previously reserved items.

In the first quarter of fiscal 2005, the Company’s major customers reduced their forecasts for capital equipment purchases, which resulted in a sudden and substantial drop in revenues and orders for the Company. These conditions continued into its second quarter of fiscal 2005. As a result of the shorter than expected upturn in business conditions, and the completion of the Company’s transition to its second generation Fusion, the Company deemed it appropriate to make an adjustment to the inventory valuation and recorded a $47.5 million excess and obsolete inventory provision, primarily related to the Fusion HF product line, in fiscal 2005. Inventory reserves establish a new cost basis for inventory and such reserves are not reversed until the related inventory is sold or otherwise disposed. For the twelve months ended July 31, 2005, the Company recorded $1.4 million of gain from sales of previously reserved items. As of July 31, 2005, the inventory of $41.2 million is stated net of inventory reserves of $99.6 million and consists of second generation Fusion products and engineering materials. Of the $26.1 million comprising the raw materials inventory, $4.1 million consists of “last time buy” custom components for Fusion HFi and $22.0 million consists of raw materials for Fusion HFi and CX, which the Company believes

13

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

will be consumed over the next 24 months. If actual demand for the Company’s products deteriorates or market conditions are less favorable than those that are projected, additional inventory reserves may be required.

Prepaid Expense

Certain amounts in the prepaid expense balance relate to inventory capacity purchases and payments for projects not completed. The amount of prepaid expense that relates to cash deposits with suppliers against inventory commitments totaled $0.2 million as of July 31, 2005 and $2.0 million as of July 31, 2004. The inventory related to the July 31, 2004 deposits were delivered to the Company during fiscal 2005. There are no other cash commitments to prepay inventory purchases as of July 31, 2005. There were no prepayments outstanding for engineering projects not completed as of July 31, 2005.

Property and Equipment

Property and equipment is recorded at cost. The Company provides for depreciation and amortization on the straight-line method. Charges are made to operating expenses in amounts that are sufficient to amortize the cost of the assets over their estimated useful lives. Machinery, equipment and internal manufactured systems include spare parts used for service and LTX test systems used for testing components, engineering and applications development. Internally manufactured equipment is recorded at cost and depreciated over 3 to 7 years. Repairs and maintenance costs that do not extend the lives of property and equipment are expensed as incurred. Property and equipment are summarized as follows:

	As of July 31,						Depreciable Life in Years
	2005			2004
	(in thousands)
Machinery, equipment and internal manufactured systems	$	129,140		$	161,922		3-7
Office furniture and equipment		5,677			7,634		3-7
Leasehold improvements		6,321			11,876		10 or term of lease
		141,138			181,432
Accumulated depreciation and amortization		(94,003	)		(110,103	)
	$	47,135		$	71,329

Impairment of Long-Lived Assets Other Than Goodwill

On an on-going basis, management reviews the value and period of amortization or depreciation of long-lived assets. In accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”, the Company reviews whether impairment losses exist on long-lived assets when indicators of impairment are present. During this review, the Company reevaluates the significant assumptions used in determining the original cost of long-lived assets. Although the assumptions may vary, they generally include revenue growth, operating results, cash flows and other indicators of value. Management then determines whether there has been a permanent impairment of the value of long-lived assets based upon events or circumstances that have occurred since acquisition. The extent of the impairment amount recognized is based upon a determination of the impaired asset’s fair value.

Goodwill and Other Intangibles

The Company has adopted the provisions of Statement No. 142, “Goodwill and Other Intangible Assets”, which requires that goodwill and intangible assets with indefinite useful lives are not amortized. Intangible assets with a definitive useful life are amortized over their estimated useful life. Assets recorded in these categories are tested for impairment at least annually or when a change in circumstances may result in future impairment. Intangible assets are recorded at historical cost. Intangible assets acquired in an acquisition, including purchased research and development, are recorded under the purchase method of accounting. Assets acquired in an acquisition are recorded at their estimated fair values at the date of acquisition. Management uses a discounted cash flow analysis which requires that certain assumptions and estimates be made regarding industry economic factors and future profitability of the acquired business to assess the need for an impairment charge. If the carrying value of the asset is in excess of the present value of the expected future cash flows, the carrying value is written down to fair value in the period identified.

14

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Goodwill totaling $14.8 million and $13.7 million at July 31, 2005 and July 31, 2004, respectively, represents the excess of acquisition costs over the estimated fair value of the net assets acquired from StepTech, Inc. (“StepTech”) on June 10, 2003. The change in goodwill during fiscal 2005 was due to the payment to certain of the StepTech stockholders of contingent purchase price, in the form of shares of the Company’s common stock, based on the achievement of certain milestones.

Other intangible assets consisted of core technology and amounted to the following at:

Core Technology (In thousands)	Gross Intangible		Accumulated Amortization		Net Intangible Asset		Estimated Useful Life
July 31, 2005	$	2,800	$	1,400	$	1,400	4 years
July 31, 2004	$	2,800	$	700	$	2,100	4 years

Amortization expense for each of the years ended July 31, 2005 and 2004 was $700,000. The estimated aggregate amortization expense for each of the two succeeding years is $700,000.

In-Process Research and Development

The income approach is used to determine the fair value of in-process research and development (IPR&D). Under the income approach, the fair value reflects the present value of the projected earnings that will be generated by the in-process projects if successfully completed. The income approach focuses on the income producing capability of the acquired in-process projects and best represents the present value of the future economic benefits expected to be derived from these projects. The IPR&D projects must also meet the following criteria: qualify as research and development; no alternative future use; high degree of uncertainty about the future benefits; and, project is in research and development stage and not completed.

In October 2000, we acquired 19% of the outstanding common stock of StepTech, Inc. On June 10, 2003, we acquired the remaining 81% of the outstanding shares of StepTech for a net cash payment of $6.5 million and 2,283,750 shares of LTX common stock, of which 288,125 shares were contingent upon certain milestones being met. In addition, all outstanding stock options to purchase shares of StepTech stock were converted into options to purchase 263,112 shares of LTX stock and options to purchase 300,000 shares of LTX stock with an exercise price equal to the fair market value of LTX stock on the date of grant were also issued. The acquisition was accounted for under the provisions of SFAS No. 141, “Business Combinations”. SFAS No. 141 requires that all business combinations be accounted for under the purchase method. The Company’s Consolidated Financial Statements include the operating results of StepTech from the date of acquisition. The purchase price recorded for the StepTech acquisition has been allocated to the assets acquired and the liabilities assumed based on their fair value at the date of acquisition. The estimated excess of purchase price over the fair value of the net tangible assets was allocated to identifiable intangible assets. We recorded an in-process research and development (IPR&D) charge of $16.1 million in the fourth quarter of fiscal 2003.

Deferred Gain on Leased Equipment

The Company has entered into certain equipment sale/leaseback transactions to finance the cost of new test equipment. The cash proceeds from these leases were based on the fair market value of the equipment and these leases qualify as operating leases in accordance with SFAS No. 13. Cash proceeds received in excess of the cost of the equipment are recorded as deferred gain in accordance with SFAS Nos. 13 and 28 and amortized over the life of the lease.

Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share Based Payment” (“SFAS No. 123R”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). SFAS No. 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and amends Statement No. 95, “Statement of Cash Flows”. Under SFAS No. 123R, companies must calculate and record in the statement of operations the cost of equity instruments, such as stock options, awarded to employees for services received; pro forma disclosure is no longer permitted. The cost of the equity instruments is to be measured based on the fair value of the instruments on the date they are granted and is required to be recognized over the period during which the employees are required to provide services in exchange for the equity instruments. The statement is effective on August 1, 2005 for the Company.

15

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SFAS No. 123R provides two alternatives for adoption: (1) a “modified prospective” method in which compensation cost is recognized for all awards granted subsequent to the effective date of this statement as well as for the unvested portion of awards outstanding as of the effective date; or (2) a “modified retrospective” method which follows the approach in the “modified prospective” method, but also permits entities to restate prior periods to record compensation cost calculated under SFAS No. 123 for the pro forma disclosure. We plan to adopt SFAS No. 123R using the modified prospective method. Since we currently account for stock options granted to employees and shares issued under our employee stock purchase plans in accordance with the intrinsic value method permitted under APB Opinion No. 25, no compensation expense is recognized. The adoption of SFAS No. 123R is expected to have a significant impact on our results of operations. The impact of adopting SFAS No. 123R cannot be accurately estimated at this time, as it will depend on the market value and the amount of share based awards granted in future periods. SFAS No. 123R also requires that tax benefits received in excess of compensation cost be reclassified from operating cash flows to financing cash flows in the Consolidated Statement of Cash Flows. This change in classification could reduce net operating cash flows and increase net financing cash flows in the periods after adoption.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 modifies the accounting for abnormal inventory costs, and the manner in which companies allocate fixed overhead expenses to inventory. SFAS 151 is effective for inventory costs incurred during annual periods beginning after June 15, 2005. LTX does not expect SFAS 151 to have a material impact on its financial positions and results of operations.

3. BUSINESS COMBINATIONS

In October 2000, the Company made an equity investment by acquiring 19% of the outstanding common stock of StepTech, Inc. The Company also entered into a development agreement at that time that provided LTX with test technology to broaden the reach of Fusion’s single platform, scalable architecture into the high volume, commodity semiconductor market. StepTech was a privately held company that specialized in the design and manufacture of cost effective test instrument solutions and software encompassing key growth areas such as wireless and mixed signal semiconductor testing.

On June 10, 2003, the Company acquired the remaining 81% of the outstanding shares of StepTech for a net cash outlay of $6.5 million and 2,283,750 shares of LTX common stock of which 288,125 shares are contingent upon certain milestones being met. In addition, all outstanding stock options to purchase shares of StepTech stock were automatically converted into options to purchase 263,112 shares of LTX stock. Proforma results have not been presented as the results of StepTech’s operations were not material to the Company’s results of operations prior to the date of acquisition.

The purchase price recorded for this acquisition was allocated to the assets acquired and the liabilities assumed based on their fair values at the date of acquisition. The estimated excess of purchase price over the fair value of the net tangible assets is allocated to identifiable intangible assets as valued by an independent appraiser using information provided by management.

The allocation of the purchase price is presented below in $ millions:

Working Capital and Equipment	$	6.2
Goodwill	$	12.0
Core Technology	$	2.8
In-Process Research and Development	$	16.1
Total Purchase Valuation	$	37.1

Of the 2,283,750 shares issued to purchase StepTech, 288,125 shares are contingent upon certain milestones being met. On December 31, 2003, 144,062 of escrow shares were released and the Company recorded $1.1 million of additional goodwill as certain milestones were achieved. The remaining 144,063 contingent shares were released on June 20, 2005 and the Company recorded an additional $1.1 million of goodwill as the remaining milestones were achieved, in accordance with SFAS No. 141.

In determining the valuation of the purchased core technology, the independent appraisal used the income approach. Core technology is being amortized over its useful life of four years on a straight-line basis.

16

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. OTHER ACCRUED EXPENSES

Other accrued expenses consisted of the following at July 31, 2005 and July 31, 2004:

	(in thousands)
	2005		2004
Accrued compensation	$	6,843	$	7,715
Accrued income and local taxes		5,362		5,889
Warranty reserve		2,543		4,394
Ando reserve		603		1,587
Accrued restructuring		9,999		—
Other accrued expenses		7,040		7,594
	$	32,390	$	27,179

5. LONG-TERM DEBT

Long-term debt consists of the following:

	As of July 31,
	(in thousands)
	2005			2004
Convertible subordinated notes	$	88,287		$	150,000
Five year bank term loan		60,000			—
Lease purchase obligations, net of deferred interest		6			321
		148,293			150,321
Less: current portion		(606	)		(321	)
	$	147,687		$	150,000

On August 8, 2001, the Company received net proceeds of $145.2 million from a private placement of $150 million, 4.25% Convertible Subordinated Notes (“the Notes”) due 2006. The private placement was effected through a Rule 144A offering to qualified institutional buyers. Interest on the Notes is payable on February 15 and August 15 of each year, commencing February 15, 2002. The Notes are convertible into shares of our common stock at any time prior to the close of business on August 15, 2006, unless previously redeemed, at a conversion price of $29.04 per share, subject to certain adjustments. Prior to August 19, 2004, the Company may redeem any of the Notes at a certain redemption price, plus accrued interest, if the closing price of the common stock has exceeded 150% of the conversion price for at least 20 trading days in any consecutive 30-day trading period and certain other conditions are satisfied. On or after August 19, 2004, the Company may redeem any of the Notes at designated redemption prices, plus accrued interest. The Notes are unsecured and subordinated in right of payment in full to all existing and future senior indebtedness of the Company. Expenses associated with the offering of approximately $4.8 million are being amortized using the straight-line method, which approximates the effective interest method, over the term of the Notes. The stated interest rate is 4.25% and the effective rate is 4.39% due to the amortization of capitalized costs associated with the offering. During the fourth fiscal quarter of 2005, the Company repurchased $61.7 million of the outstanding principal balance. As of July 31, 2005 the outstanding principal balance was $88.3 million which is due on August 15, 2006.

On June 3, 2005, the Company closed a $60.0 million term loan with a lender. The loan has a five year term, with interest only payable in the first year. Interest is at the lender’s variable prime rate and the loan is secured by all assets of the Company located in the United States. The proceeds from this loan were used to finance repurchases of the 4.25% Convertible Subordinated Notes and other working capital purposes. During the quarter ended July 31, 2005, the Company repurchased $61.7 million principal amount of the convertible subordinated notes. As of July 31, 2005 the outstanding loan amount is $60.0 million of which $0.6 million is classified as current portion of long-term debt that will be repaid in fiscal 2006. The $60.0 million will be paid in 48 payments as follows: (i) twelve monthly installments of $0.6 million, commencing June 1, 2006 and ending on May 1, 2007; (ii) twelve monthly installments of $1.2 million, commencing on June 1, 2007 and

17

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

ending on May 1, 2008, (iii) twelve monthly installments of $1.5 million, commencing on June 1, 2008 and ending on May 1, 2009; and, (iv) twelve monthly installments of $1.7 million, commencing on June 1, 2009 and ending on May 1, 2010. The Company has a covenant in its loan agreement that requires it to maintain minimum cash and cash equivalents and marketable securities balances with the lender of no less than the aggregate of the outstanding term loan plus $30.0 million. However, in the event the Company’s cash and cash equivalents and marketable securities are less than this amount, the impact to the Company is the imposition of additional bank fees. The additional fees would not have a material impact on the Company’s financial position or results of operations.

The Company has a second credit facility with another lender for a revolving credit line of $20.0 million. This facility is secured by cash and bears interest (at our option) at either: (i) the greater of the federal funds rate plus 0.5% or the bank’s prime rate, in each case, minus 1.0% or (ii) LIBOR plus 0.4%. This facility expired on July 23, 2005 and was extended to October 20, 2005. No amounts were outstanding under this credit facility at July 31, 2005 or 2004. At July 31, 2005, this line supported letters of credit which totaled $0.1 million to a financial institution for leasing equipment.

Lease purchase obligations of $0 and $321,000 at July 31, 2005 and July 31, 2004, respectively, represent capital leases of equipment.

6. INCOME TAXES

Reconciliation of the U.S. federal statutory rate to the Company’s effective tax rate are as follows:

	Year ended July 31,
	2005		2004		2003
U.S. Federal statutory rate	(35.0	)%	35.0	%	(35.0	)%
Change in valuation allowance/utilization of net operating loss carryforwards	35.0		(35.0	)	35.0
Effective tax rate	0.0	%	0.0	%	0.0	%

The temporary differences and carryforwards that created the deferred tax assets and (liabilities) as of July 31, 2005, and 2004 are as follows:

	As of July 31,
	2005			2004
	(in thousands)
Deferred tax assets:
Net operating loss and tax credit carryforwards	$	157,853		$	94,250
Tax credits		30,242			30,917
Inventory valuation reserves		39,858			31,550
Deferred revenue		1,057			2,741
Other		11,638			9,212
Total deferred tax assets, net		240,648			168,670
Valuation allowance		(240,648	)		(168,670	)
Net deferred tax assets	$	—		$	—

Compliance with SFAS No. 109 requires the Company to periodically evaluate the necessity of establishing or increasing a valuation allowance for deferred tax assets depending on whether it is more likely than not that a related benefit will be realized in future periods. Because of the cumulative loss position of the Company and the uncertainty of profitability in future periods, the Company maintains a valuation allowance for 100% of net deferred tax assets.

As of July 31, 2005, the Company had federal net operating loss carryforwards of $390,724,000, which expire in 2019 to 2025, and tax credit carryforwards of $20,838,000, which expire from 2005 to 2024. State tax credits and carryforwards of $9,404,000 at July 31, 2005 expire from 2005 to 2019. The Company also has foreign net operating loss carryforwards of $950,000 in the United Kingdom and $2,500,000 in Japan.

In accordance with SFAS No. 109 and SFAS No. 5,Accounting For Contingencies,we established reserves for tax contingencies that reflect our best estimate of the transactions and deductions that we may be unable to sustain or that we

18

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

would be willing to concede as part of a broader tax settlement. We are currently undergoing routine tax examinations by various state and foreign jurisdictions. Tax authorities periodically challenge certain transactions and deductions we reported on our income tax returns. We do not expect the outcome of these examinations, either individually or in the aggregate, to have a material adverse effect on our financial position, results from operations or cash flows; however, if the anticipated outcomes any of such matters change, there could be such a material effect on the Company’s financial position or operations in future periods.

On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law. The Act contains a one-time foreign dividend repatriation provision, which provides for a special deduction with respect to certain qualifying dividends from foreign subsidiaries for a limited period. The deduction is subject to a number of limitations and uncertainty remains as to the interpretation of numerous provisions in the Act. However, the Company believes that it has the information necessary to make an informed decision on the impact of the Act on its repatriation plans and has determined that it does not have any foreign earnings to repatriate under the foreign dividend repatriation provisions of the Act.

7. STOCKHOLDERS’ EQUITY

Public Offering

In January 2004, the Company filed a shelf registration statement on Form S-3 to register up to $250.0 million of common stock, debt securities and warrants. On February 19, 2004, an offering was closed pursuant to the registration statement relating to the sale of 8,050,000 shares of common stock at $16.50 per share. The offering included 1,050,000 shares sold as a result of the exercise, in full, by the underwriters of their option to purchase additional shares of common stock. Gross proceeds from the stock offering totaled approximately $132.8 million. Proceeds to LTX, net of $6.3 million in underwriters’ commissions and discounts and other expenses, totaled approximately $126.5 million.

Rights Agreement

The Company has a Rights Agreement whereby each common stock shareholder has one common share purchase right for each share of common stock held. The rights will become exercisable only if a person or group acquires 15% or more of the Company’s common stock or announces a tender offer that would result in ownership of 15% or more of the common stock. Initially, each right will entitle a stockholder to buy one share of common stock of the Company at a purchase price of $45.00 per share, subject to significant adjustment depending on the occurrence thereafter of certain events. Before any person or group has acquired 15% or more of the common stock of the Company, the rights are redeemable by the Board of Directors at $0.001 per right. The rights expire on April 30, 2009 unless redeemed by the Company prior to that date.

Reserved Unissued Shares

At July 31, 2005, the Company had reserved 14,691,091 unissued shares of its common stock for possible issuance under stock-based compensation plans and the Company’s Employee Stock Purchase Plan. In addition, at July 31, 2005, the Company has reserved 3,040,186 shares of its common stock for issuance relating to the Company’s 4.25% Convertible Subordinated Notes.

8. EMPLOYEE BENEFIT PLANS

Stock Option Plans

The Company has five active stock option plans: the 2004 Stock Plan (“2004 Plan), the 2001 Stock Plan (“2001 Plan”), the 1999 Stock Plan (“1999 Plan”), the 1995 LTX (Europe) Ltd. Approved Stock Option Plan (“U.K. Plan”) and, in addition, the Company assumed the StepTech, Inc. Stock Option Plan (the “STI 2000 Plan”) as part of its acquisition of StepTech. The STI 2000 Plan, 2004 Plan, 2001 Plan, 1999 Plan, and the U.K. Plan provide for the granting of options to employees to purchase shares of common stock at not less than 100% of the fair market value at the date of grant. The 2004 Plan, 2001 Plan and 1999 Plan also provide for the granting of options to an employee, director or consultant of the Company or its subsidiaries to purchase shares of common stock at prices to be determined by the Board of Directors. Options under the plans are exercisable over vesting periods, which typically have been three to four years from the date of grant. In fiscal 2005, the Company granted 533,750 options tied to certain performance milestones which management believes will be achieved no later than fiscal year 2008. At July 31, 2005, 5,750 shares were subject to future grant under the 2001 Plan,

19

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3,185,375 shares were subject to future grant under the 2004 Plan and 15,307 shares were subject to future grant under the U.K. Plan.

Stock Option Activity

	2005				2004
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Options outstanding, beginning of year	9,035,317		$	11.46	8,170,946		$	10.36
Granted	2,151,225			5.75	1,722,750			13.51
Exercised	(78,285	)		3.13	(797,482	)		5.10
Forfeited	(385,252	)		10.24	(60,897	)		9.51
Options outstanding, end of year	10,723,005			10.40	9,035,317			11.43
Options exercisable	8,600,755			11.69	4,604,552			11.81
Options available for grant	3,206,432				991,432
Weighted average fair value of options granted during year			$	3.51			$	11.70

	2003
	Number of Shares		Weighted Average Exercise Price
Options outstanding, beginning of year	6,557,742		$	12.00
Granted	1,865,667			6.11
Exercised	(153,474	)		2.10
Forfeited	(98,989	)		13.51
Options outstanding, end of year	8,170,946			10.37
Options exercisable	3,892,491			10.71
Options available for grant	2,663,104
Weighted average fair value of options granted during year			$	4.61

20

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of July 31, 2005, the status of the Company’s outstanding and exercisable options is as follows:

Options Outstanding					Options Exercisable
Range of Exercise Price ($)	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price ($)		Number Exercisable	Weighted Average Exercise Price ($)
0.00—4.63	1,057,867	6.5	$	3.50	589,717	$	3.11
4.64—9.25	4,087,435	7.1	$	6.77	2,433,335	$	7.63
9.26—13.88	4,103,550	6.1	$	12.73	4,103,550	$	12.73
13.89—18.50	1,035,203	4.6	$	15.37	1,035,203	$	15.37
18.51—23.13	272,250	5.3	$	21.14	272,250	$	21.14
23.14—27.75	27,000	4.4	$	26.15	27,000	$	26.15
27.76—32.38	9,250	1.9	$	28.34	9,250	$	28.34
32.39—37.00	33,250	3.4	$	33.63	33,250	$	33.63
37.01—41.63	37,500	4.6	$	37.75	37,500	$	37.75
41.64—46.25	59,700	1.4	$	46.25	59,700	$	46.25
	10,723,005	6.3	$	10.40	8,600,755	$	11.69

On June 7, 2005, the Board of Directors, upon recommendation of the Board’s Compensation Committee, approved the accelerated vesting of certain unvested and “out-of-the-money” stock options held by employees, executive officers and non-employee directors with exercise prices greater than $7.50 per share. The closing sale price of LTX’s common stock on the Nasdaq National Market on June 7, 2005 was $5.20. As a result of this vesting acceleration, which became effective on June 7, 2005, options to purchase approximately 2.3 million shares of LTX’s common stock that would otherwise have vested at various times within the next four years became fully vested.

The decision to accelerate these unvested options was made primarily to reduce compensation expense that might be recorded in future periods following our adoption of SFAS No. 123R beginning with our next fiscal year, which starts on August 1, 2005. Accelerating the vesting of these stock options will reduce the Company’s aggregate compensation expense in future periods by a total of approximately $10.4 million, before taxes, based upon value calculations using the Black-Scholes methodology (approximately $6.2 million in fiscal year 2006, $4.1 million in fiscal year 2007, and $0.1 million in fiscal year 2008).

Employees’ Stock Purchase Plan

The Company instituted an employee stock purchase plan in 1993 (“1993 ESPP”). Under the 1993 ESPP, eligible employees may contribute up to 15% of their annual compensation for the purchase of common stock of the Company, subject to an annual limit of $25,000. The price paid for the common stock is equal to 85% of the lower of the fair market value of LTX’s common stock on the first business day or the last business day of a six-month offering period. The 1993 ESPP limits the number of shares that can be issued over the term of the plan to 3,000,000 shares. In December 2003, the 1993 ESPP expired and at the annual meeting on December 10, 2003 the shareholders approved a new employee stock purchase plan (“2004 ESPP”). The 2004 ESPP provides the same provisions as the 1993 ESPP and allows for the issuance of 1,200,000 shares of common stock to eligible employees. In September 2005, the Company amended the 2004 ESPP to provide that the price paid for the common stock is equal to 85% of the fair market value of LTX’s common stock on the first business day of a six month offering period. In fiscal years 2005, 2004, and 2003, shares issued under these employee stock purchase plans were 288,486, 277,821 and 299,737, respectively.

Other Compensation Plans

The Company has established a Profit Sharing Bonus Plan, wherein a percentage of pretax profits are distributed semi-annually to all employees. Under the Profit Sharing Bonus Plan, the Company distributed to all eligible employees approximately $0, $396,000, and $0, for fiscal years 2005, 2004, and 2003, respectively.

The Company has a 401(k) Growth and Investment Program (“401(k) Plan”). Eligible employees may make voluntary contributions to the 401(k) Plan through a salary reduction contract up to the statutory limit or 20% of their annual compensation. The Company matches employees’ voluntary contributions, up to certain prescribed limits. Company

21

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

contributions vest at a rate of 20% per year. The Company suspended the match as of June of fiscal year 2001. The Company match will be reinstated beginning August 2005.

9. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION

The Company operates predominantly in one industry segment: the design, manufacture and marketing of automated test equipment for the semiconductor industry that is used to test system-on-a-chip, digital, analog and mixed signal integrated circuits.

In fiscal years 2005, 2004, and 2003, Texas Instruments accounted for 47%, 58%, and 58%, of net sales, respectively. Sales to the top ten customers were 77%, 88%, and 83%, of net sales in fiscal 2005, 2004, and 2003, respectively.

The Company’s operations by geographic segment for the three years ended July 31, 2005 are summarized as follows:

	Year ended July 31,
	2005		2004		2003
	(in thousands)
Sales to unaffiliated customers:
United States	$	41,253	$	86,907	$	51,614
Taiwan		11,815		17,832		9,900
Japan		5,978		6,380		3,685
Singapore		53,706		115,698		37,897
All other countries		21,779		28,984		16,353
Total sales to unaffiliated customers	$	134,531	$	255,801	$	119,449
Long-lived assets (property and equipment):
United States	$	43,395	$	62,685	$	52,800
Taiwan		670		1,502		3,247
Japan		22		19		20
Singapore		1,996		4,410		10,645
All other countries		1,052		2,713		6,731
Total long-lived assets	$	47,135	$	71,329	$	73,443

Transfer prices on products sold to foreign subsidiaries are intended to produce profit margins that correspond to the subsidiary’s sales and support efforts. Sales to customers in North America are 100% within the United States.

10. COMMITMENTS AND LEGAL MATTERS

The Company has operating lease commitments for certain facilities and equipment and capital lease commitments for certain equipment that expire at various dates through 2010. Minimum lease payments under noncancelable leases at July 31, 2005, are as follows:

Year ended July 31,	Real Estate		Equipment		Total Operating Leases
	(in thousands)
2006	$	4,799	$	5,452	$	10,251
2007		4,362		2,810		7,172
2008		2,785		682		3,467
2009		2,190		14		2,204
2010		321		1		322
Total minimum lease payments	$	14,457	$	8,959	$	23,416

Total rental expense for fiscal 2005, 2004, and 2003 was $9,261,863, $14,084,063, and $15,412,970, respectively.

22

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company is, from time to time, subject to legal proceedings, claims and investigations that arise in the ordinary course of business. There are no such matters that the Company believes are material with respect to its business, financial position or results of operations.

11. REORGANIZATION CHARGES AND INVENTORY PROVISIONS

In calendar 2001, the Company was faced with a sudden drop in demand as a result of the beginning phases of an industry-wide slowdown, which has continued through and into our fiscal year 2005. Continued sluggish worldwide macro-economic conditions, combined with world events such as the war in Iraq and the SARS epidemic, led to depressed conditions for a longer period than past industry cycles and earlier projections.

The major variables impacting inventory usage are the demand for current products, overall industry conditions, key sale initiatives underway and the impact that our new product introductions (Fusion HFi and Fusion CX) have on current product demand. The longer the duration of the depressed industry conditions, the greater the chance for impairment of the Company’s current products due to market and product transitions. Fusion HFi was formally introduced in the third quarter of fiscal year 2003. The HFi is a higher performance machine with significant added capability and reduced maintenance cost. As a result of continued depressed industry conditions and growing market acceptance of Fusion HFi, in the fourth quarter of fiscal 2003, the Company recorded an inventory related provision of $48.5 million to reduce inventory (primarily related to older products) to its estimated net realizable value.

Reorganization costs were $6.7 million in fiscal 2003. In August 2002, we reduced our workforce by 94 employees due to adverse business conditions. In November 2002, we further reduced our workforce by 195 employees and contractors. The combination of these two actions account for $5.6 million of the $6.7 million charge for the fiscal year ended July 31, 2003. The majority of the severance costs of the August 2002 and November 2002 workforce reductions were paid by April 30, 2003, although some costs were paid through August 2003.

In July 2003, the Company further reduced headcount by 7 employees and recorded a $0.3 million reorganization severance charge and an $0.8 million asset impairment charge for certain manufacturing related leasehold improvements in our Westwood facility. These assets were deemed to be impaired as a result of outsourcing the remaining elements of the Company’s final test and integration process to a third party. During the second quarter of fiscal 2004, we completed the reorganization program that we had initiated in July 2003.

The Company recorded a reorganization charge in the quarter ended October 31, 2004 of $3.1 million, of which $1.5 million consisted of severance costs relating to a worldwide workforce reduction and $1.6 million related to consolidation of the Company’s facilities in the United Kingdom. The $1.6 million reorganization charge related to the consolidation of the Company’s facilities in the United Kingdom consisted of future lease obligations net of any rental income. In the first quarter of fiscal 2005, the Company’s major customers reduced their forecasts for capital equipment purchases, which resulted in a sudden and substantial drop in revenues and orders for the Company. These conditions continued into the second quarter of fiscal 2005. As a result of the shorter than expected upturn in business conditions, and the completion of the Company’s transition to its second generation Fusion, the Company deemed it appropriate to make an adjustment to its inventory and recorded a $47.5 million excess and obsolete inventory provision, primarily related to Fusion HF, in the quarter ended October 31, 2004.

During the quarter ended April 30, 2005, the Company recorded a reorganization charge of $28.6 million as a result of a significant corporate-wide restructuring undertaken to more effectively align the Company’s resources with our current business strategy. Of the $28.6 million, approximately $4.0 million related to headcount reduction and approximately $24.6 million related to fixed asset impairment and facilities consolidation.

The $24.6 million reorganization charge relating to fixed asset impairment and facilities consolidation was undertaken as a result of an asset impairment review. This review was triggered by the workforce reduction and business unit reorganization. Of the $24.6 million impairment charge, $18.1million was related to fixed asset equipment, $4.6 million related to future lease obligations on equipment that will no longer be used and $1.9 million related to facilities consolidation. The equipment, which has or will be disposed of over the next three to six months, consists primarily of older technology having little or no resale value.

23

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table sets forth the Company’s restructuring activity for the fiscal years ended 2005, 2004 and 2003:

	Severance Costs			Equipment leases			Facility leases			Asset impairment			Total
	(in thousands)
Balance July 31, 2002	$	0.2		$	—		$	—		$	—		$	0.2
Additions to expense		6.7			—			—			0.8			7.5
Non-cash utilization					—			—			(0.8	)		(0.8	)
Cash paid		(6.5	)		—			—			—			(6.5	)
Balance July 31, 2003	$	0.4		$	—		$	—		$	—		$	0.4
Additions to expense		—			—			—			—			—
Non-cash utilization		—			—			—			—			—
Cash paid		(0.4	)		—			—			—			(0.4	)
Balance July 31, 2004	$	—		$	—		$	—		$	—		$	—
Additions to expense		5.5			4.6			3.5			18.1			31.7
Elimination of deferred gain		—			2.8			—			—			2.8
Non-cash utilization		—			—			—			(18.1	)		(18.1	)
Cash paid		(4.8	)		(0.8	)		(0.8	)		—			(6.4	)
Balance July 31, 2005	$	0.7		$	6.6		$	2.7		$	—		$	10.0

24

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. QUARTERLY RESULTS OF OPERATIONS (unaudited)

	Year Ended July 31, 2005
	First Quarter (1)			Second Quarter			Third Quarter (2)			Fourth Quarter
	(In thousands, except per share data)
Net sales	$	43,033		$	27,036		$	25,534		$	38,928
Gross profit		(32,658	)		7,153			6,839			14,934
Net income (loss)		(61,673	)		(19,183	)		(45,656	)		(6,214	)
Net income (loss) per share:
Basic	$	(1.01	)	$	(0.31	)	$	(0.75	)	$	(0.10	)
Diluted	$	(1.01	)	$	(0.31	)	$	(0.75	)	$	(0.10	)
Accounting for Stock-Based Compensation:
Net income (loss)
As reported		(61,673	)		(19,183	)		(45,656	)		(6,214	)
Deduct: Total stock based employee compensations expense determined under fair value based method for all awards, net of related tax effects		3,546			3,900			3,983			14,661
Proforma net income (loss)		(65,219	)		(23,083	)		(49,639	)		(20,875	)
Net income (loss) per share:
Basic
As Reported		(1.01	)		(0.31	)		(0.75	)		(0.10	)
Proforma		(1.07	)		(0.38	)		(0.81	)		(0.34	)
Diluted
As Reported		(1.01	)		(0.31	)		(0.75	)		(0.10	)
Proforma		(1.07	)		(0.38	)		(0.81	)		(0.34	)
Volatility		88	%		87	%		58	%		88	%
Dividend Yield		0	%		0	%		0	%		0	%
Risk-free interest rate		4.20	%		4.28	%		3.74	%		4.29	%
Expected life of options		8.68 yrs			8.78 yrs			2.73 yrs			8.45 yrs

(1) Includes reorganization costs of $3.1 million and an inventory charge of $47.5 million.

(2) Includes reorganization costs of $4.0 million and a fixed asset impairment charge of $24.6 million.

25

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	First Quarter			Second Quarter
Net sales	$	46,619		$	58,415
Gross profit		14,096			23,088
Net income (loss)		(9,806	)		(1,435	)
Accounting for Stock-Based Compensation:
Net income (loss)
As reported	$	(0.19	)	$	(0.03	)
Deduct: Total stock based employee compensations expense determined under fair value based method for all awards, net of related tax effects	$	(0.19	)	$	(0.03	)
Net income (loss)		(9,806	)		(1,435	)
Compensation Expense		4,335			4,404
Proforma net income (loss)		(14,141	)		(5,839	)
Net income (loss) per share:
Basic
As Reported		(0.19	)		(0.03	)
Proforma		(0.27	)		(0.11	)
Diluted
As Reported		(0.19	)		(0.03	)
Proforma		(0.27	)		(0.11	)
Volatility		88	%		87	%
Dividend Yield		0	%		0	%
Risk-free interest rate		4.33	%		4.34	%
Expected life of options		9.11 yrs			8.90 yrs

26

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Third Quarter			Fourth Quarter
Net sales	$	70,333		$	80,434
Gross profit		29,228			34,717
Net income (loss)		4,306			8,896
Accounting for Stock-Based Compensation:
Net income (loss)
As reported	$	0.07		$	0.15
Deduct: Total stock based employee compensations expense determined under fair value based method for all awards, net of related tax effects	$	0.07		$	0.14
Net income (loss)		4,306			8,896
Compensation Expense		4,435			4,466
Proforma net income (loss)		(129	)		4,430
Net income (loss) per share:
Basic
As Reported		0.07			0.15
Proforma		(0.00	)		0.07
Diluted
As Reported		0.07			0.14
Proforma		(0.00	)		0.07
Volatility		87	%		87	%
Dividend Yield		0	%		0	%
Risk-free interest rate		4.73	%		4.78	%
Expected life of options		8.86 yrs			8.83 yrs

The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model with the above weighted average assumption. The Company has presented the quarterly effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provision of SFAS No. 123 to stock-based employee compensation. The amounts included above for the first, second and third quarters differ from the amounts previously reported.

27

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of LTX Corporation

We have audited the accompanying consolidated balance sheets of LTX Corporation (the “Company”) as of July 31, 2005 and 2004, and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended July 31, 2005. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of LTX Corporation at July 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended July 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of LTX Corporation’s internal control over financial reporting as of July 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 7, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Boston, Massachusetts

October 7, 2005

28

INDEX TO EXHIBITS

Exhibit Number	Description
23.1	Consent of Ernst & Young LLP
31.5	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.6	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

29

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) 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.

LTX Corporation
By:	/s/ Mark J. Gallenberger
	Vice President and Chief Financial Officer

March 17, 2006

30