Xcerra 10Q 2007 Q1 Quarterly report

UNITED STATES

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 October 31, 2006

¨	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: 000-10761

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.)

825 University Avenue,
Norwood, Massachusetts

02062

(Zip Code)

(Address of principal executive offices)

(781) 461-1000

(Registrant’s telephone number, including area code)

[None]

(Former name, former address and former fiscal year, if changed since last report)

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 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 filerx		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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at December 05, 2006
Common Stock, $0.05 par value per share		62,017,319 shares

LTX CORPORATION

Index


		Page Number
Part I.	FINANCIAL INFORMATION

Item 1.	Consolidated Balance Sheets October 31, 2006 and July 31, 2006	3

	Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended October 31, 2006 and October 31, 2005	4

	Consolidated Statements of Cash Flows for the Three Months Ended October 31, 2006 and October 31, 2005	5

	Notes to Consolidated Financial Statements	6-17

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17-31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	32

Part II.	OTHER INFORMATION

Item 5.	Other Information	32

Item 6.	Exhibits and Reports on Form 8-K	33

	SIGNATURE	34

LTX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)


	October 31, 2006			July 31, 2006
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	73,448		$	106,445
Marketable securities		65,832			87,776
Accounts receivable—trade, net of allowances		32,532			38,704
Accounts receivable—other		1,549			3,269
Inventories		29,360			29,847
Prepaid expenses		4,257			4,156

Total current assets		206,978			270,197
Property and equipment, net		37,476			37,633
Goodwill		14,762			14,762
Other intangible assets		525			700
Other assets		4,519			4,398

Total assets	$	264,260		$	327,690

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	37,424		$	70,071
Accounts payable		22,059			20,995
Deferred revenues and customer advances		2,638			3,646
Deferred gain on leased equipment		263			644
Other accrued expenses		25,607			31,554

Total current liabilities		87,991			126,910
Long-term debt, less current portion		46,800			77,620
Other long-term liabilities		5,617			5,521
Stockholders’ equity:
Common stock		3,102			3,101
Additional paid-in capital		565,031			563,959
Accumulated other comprehensive loss		(1,396	)		(1,946	)
Accumulated deficit		(442,885	)		(447,475	)

Total stockholders’ equity		123,852			117,639

Total liabilities and stockholders’ equity	$	264,260		$	327,690

See accompanying Notes to Consolidated Financial Statements

LTX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands, except per share data)


	Three Months Ended October 31,
	2006			2005
Net product sales	$	42,042		$	36,819
Net service sales		7,798			8,132

Net sales		49,840			44,951
Cost of sales (includes stock-based compensation expense of $22 for Q1 FY07; $43 for Q1 FY06)		24,704			26,257

Gross profit		25,136			18,694
Engineering and product development expenses (includes stock-based compensation expense of $228 for Q1 FY07; $231 for Q1 FY06)		12,933			15,166
Selling, general and administrative expenses (includes stock-based compensation expense of $691 for Q1 FY07; $430 for Q1 FY06)		7,065			7,071
Reorganization costs		—			4,227

Income (loss) from operations		5,138			(7,770	)
Other income (expense):
Interest expense		(1,932	)		(1,925	)
Investment income		1,384			1,312

Net income (loss)	$	4,590		$	(8,383	)

Net income (loss) per share:
Basic	$	0.07		$	(0.14	)
Diluted		0.07		$	(0.14	)
Weighted-average common shares used in computing net income (loss) per share:
Basic		62,019			61,535
Diluted		62,445			61,535
Comprehensive income (loss):
Net income (loss)	$	4,590		$	(8,383	)
Unrealized gain (loss) on marketable securities		557			(414	)
Minimum pension liability		(7	)		—

Comprehensive income (loss)	$	5,140		$	(8,797	)

See accompanying Notes to Consolidated Financial Statements

LTX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Three Months Ended October 31,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	4,590		$	(8,383	)
Add (deduct) non-cash items:
Stock-based compensation		941			704
Depreciation and amortization		3,434			3,643
Other		109			(27	)
(Increase) decrease in:
Accounts receivable		7,868			1,977
Inventories		487			1,609
Prepaid expenses		(109	)		(699	)
Other assets		(111	)		189
Increase (decrease) in:
Accounts payable		1,067			2,111
Accrued expenses		(5,959	)		1,022
Deferred revenues and customer advances		(1,390	)		(291	)

Net cash provided by (used in) operating activities		10,927			1,855
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities		—			(32,452	)
Proceeds from sale of marketable securities		22,501			20,753
Purchases of property and equipment		(3,334	)		(1,949	)

Net cash provided by (used in) investing activities		19,167			(13,648	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options		200			48
Payments of short-term notes payable, net		(63,467	)		—

Net cash (used in) provided by financing activities		(63,267	)		48
Effect of exchange rate changes on cash		176			265

Net decrease in cash and cash equivalents		(32,997	)		(11,480	)
Cash and cash equivalents at beginning of period		106,445			55,269

Cash and cash equivalents at end of period	$	73,448		$	43,789

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest	$	3,453		$	2,896

See accompanying Notes to Consolidated Financial Statements

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. THE COMPANY

LTX Corporation (“LTX” or the “Company”) designs, manufactures, and markets and services semiconductor test solutions. 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. We provide test systems, global applications consulting, repair services and operational support to over 100 customers in more that 15 countries. The Company is headquartered, and has research and development facilities, in Norwood, Massachusetts, a research and 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 accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, accordingly, these footnotes condense or omit information and disclosures which substantially duplicate information provided in our latest audited financial statements. These financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended July 31, 2006. In the opinion of our management, these financial statements reflect all adjustments, including normal recurring accruals, necessary for a fair presentation of the results for the interim periods presented. The operating results for the three months ended October 31, 2006 are not necessarily indicative of future trends or our results of operations for the entire year.

Revenue Recognition

The Company recognizes revenue based on guidance provided in SEC Staff Accounting Bulletin No. 104, (SAB 104), “Revenue Recognition” and EITF No. 00-21 “Revenue Arrangement with Multiple Deliverables”. 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; (c) the price is fixed or determinable; (d) collectibility is reasonably assured; (e) the product delivered is standard product 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 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 which requires discounts in the sales value of the entire arrangement to be recognized in connection with the sale of the delivered items only. 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.

Engineering and Product Development Costs

The Company expenses all engineering, research and development costs as incurred. Expenses subject to capitalization in accordance with the Statement of Financial Accounting Standards (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. These costs, when included in the sales price charged for products, are recognized in net sales. Shipping and handling costs were insignificant for the three months ended October 31, 2006 and 2005.

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 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 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 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 and they allow both restricted stock awards and stock awards. Options under the plans are exercisable over vesting periods, which typically have been three to four years from the date of grant. The general term of our stock options is 10 years. Our policy of issuing shares is to either buy shares in the open market or issue new shares. Our general practice has been to issue new shares. In fiscal 2005, the Company granted 533,750 options tied to certain performance milestones. As of October 31, 2006, 75% of these options have vested as they have met the performance milestones. We are expensing these options and other performance based awards on an accelerated vesting schedule over the performance period as per our current estimate of whether the performance criteria will be achieved. The remaining 25% will vest in 4 years regardless of the milestones being achieved. During the quarter ended January 31, 2006, the Company granted 983,600 restricted stock units (RSUs). Of the 983,600 RSUs, vesting for 742,600 is tied to certain profit break-even milestones for executives. The first milestone was achieved May 16, 2006, resulting in 185,650 shares vesting on May 16, 2006. The remaining executive RSUs will vest annually over the next three years unless another performance milestone is achieved , accelerating vesting otherwise scheduled on an annual basis.

The remaining 241,000 RSUs are service vested for key employees over a four year period, including 60,250 shares that vested on May 16, 2006, when the Company achieved a profit break-even milestone. The remaining shares will vest annually over the next three years, unless another performance milestone is achieved, accelerating vesting otherwise scheduled on an annual basis. During the quarter ended October 31, 2006, the Company granted 973,000 RSUs. Of the 973,000 RSUs, vesting for 721,000 is tied to certain profit milestones for executives. The remaining 252,000 RSUs are service vested for key employees and are earned over a four year period.

Effective August 1, 2005, the Company adopted Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R). Under SFAS No. 123R, the Company is required to recognize, as expense, the estimated fair value of all share-based payments to employees. In accordance with this standard, the Company has elected to recognize the compensation cost of all service based awards on a straight-line basis over the vesting period of the award. Performance based awards are recognized ratably for each vesting tranche. For the three months ended October 31, 2006 and 2005, the Company recorded expense of approximately $0.9 million and $0.7 million, respectively, in connection with its share-based payment awards. As of October 31, 2006, there is approximately $9.0 million of unrecognized compensation expense related to share-based payments to employees that will be recognized over the next 16 quarters.

The Company adopted SFAS No. 123R under the modified prospective method. Under this method, the Company recognized compensation cost for all share-based payments to employees based on the grant date estimate of fair value for those awards, beginning on August 1, 2005. Options granted prior to August 1, 2005 and accounted for under SFAS No. 123, were valued using a binomial Black-Scholes model at the date of grant. Options granted subsequent to the adoption of SFAS No. 123R were valued using a trinomial lattice model.

The Company chose a trinomial lattice model upon adoption of SFAS No. 123R versus the binomial Black-Scholes method used for the periods prior to the adoptions of SFAS No. 123R for the following reasons: 1) the trinomial lattice supports a changing volatility assumption with little computation complexity and 2) the trinomial lattice accounts for changing employee behavior as the stock price changes, as behavior is solely represented by a time component. The use of a lattice model captures the observed pattern of increasing rates of exercise as the stock price increases. The Black-Scholes model does not contain the interaction among economic and behavioral assumptions. The volatility assumption used in our trinomial lattice model uses a term structure of expected volatilities reflecting a 1-to-10 year average volatility based on historical stock prices. Our volatility assumption is redeveloped quarterly and calculated using the stock price history ending on the last day of the prior quarter. The forfeiture assumption is based on our historical employee behavior over the last 15 years, which is largely driven by stock price increase.

For periods prior to the adoption of SFAS No. 123R, the Company had elected to follow Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (APB 25), 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.

Weighted-average assumptions used in determining fair value of option grants:


	Three months ended October 31, 2005
Volatility	54 – 83	%
Dividend yield	0	%
Risk-free interest rate	3.84 – 4.65	%
Expected life options	7.11 years

NOTE:

There were no options granted during the three months ended October 31, 2006.

The following is a summary of activities for the Company’s Stock Option Plans for the three months ended October 31, 2006:

Stock Option Activity


	Number of Shares		Weighted Average Exercise Price
Options outstanding, beginning of period	8,534,284		$	9.17
Granted	—			—
Exercised	(21,600	)		10.75
Forfeited	(44,912	)		11.97

Options outstanding, end of period	8,467,772			9.97

Options exercisable	7,758,515			10.44

Options available for grant	3,860,844			N/A

Weighted average fair value of options granted during period	—		$	N/A

As of October 31, 2006, the status of the Company’s outstanding and exercisable options is as follows:


		Options Outstanding		Exercisable
Range of Exercise Price	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price	Number Exercisable	Weighted Average Exercise Price
$ 0.01–4.63	961,735	3.6	$ 3.60	700,353	$ 3.49
4.64–9.25	3,306,609	6.1	6.77	2,858,734	6.99
9.26–13.88	3,214,975	5.3	12.76	3,214,975	12.76
13.89–18.50	689,453	4.2	15.40	689,453	15.40
18.51–23.13	244,000	4.3	21.09	244,000	21.09
23.14–27.75	16,000	5.4	26.20	16,000	26.20
27.76–32.38	1,000	4.6	28.34	1,000	28.34
32.39–37.00	18,500	3.6	33.63	18,500	33.63
41.63–46.25	15,500	3.4	46.25	15,500	46.25

	8,467,772	6.3	$ 9.97	7,758,515	$10.44

RSU Activity


	Three Months Ended October 31, 2006
	Number of Shares		Weighted Average Grant-Date Fair Value
RSUs outstanding, beginning of period	759,900		$	4.50
Granted	973,000			4.86
Exercised	—			—
Forfeited	(3,750	)		4.44

RSUs outstanding, end of period	1,729,150		$	4.70

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.

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 three months ended October 31, 2006 and 2005:


	Three Months Ended October 31,
Product Warranty Activity	2006			2005
	(in thousands)
Balance at beginning of period	$	3,543		$	2,543
Warranty expenditures for current period		(853	)		(827	)
Changes in liability related to pre-existing warranties		(47	)		—
Provision for warranty costs in the period		771			779

Balance at end of period	$	3,414		$	2,495

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists of unrealized gains and losses on the Company’s marketable securities and the effects of the minimum pension liability.

Net Income (Loss) per Share

Basic net income (loss) per 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 net income (loss) per 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 the dilutive effect of all securities outstanding.

Reconciliation between basic and diluted earnings per share is as follows:


	Three Months Ended October 31,
	2006		2005
	(in thousands, except per share data)
Net income (loss)	$	4,590	$	(8,383	)
Basic EPS
Basic common shares		62,019		61,535
Basic EPS	$	0.07	$	(0.14	)
Diluted EPS
Basic common shares		62,019		61,535
Plus: impact of options and restricted stock units		426		—

Diluted common shares		62,445		61,535
Diluted EPS	$	0.07	$	(0.14	)

At October 31, 2006 and 2005, options to purchase 7,138,162 shares and 8,866,683 shares of common stock, respectively, were not included in the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive. These options could be dilutive in the future. The calculation of diluted net income (loss) per share excludes 721,000 and 0 RSUs at October 31, 2006 and 2005, respectively, in accordance with the contingently issuable shares guidance of SFAS No. 128, “Earnings Per Share”.

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.

Gross unrealized gains and losses for the three months ended October 31, 2006 and October 31, 2005 were not significant. The realized profits, losses and interest are included in investment income in the Statements of Operations. Unrealized gains and losses are reflected as a separate component of comprehensive income (loss) and are included in Stockholders’ Equity. The Company analyzes its securities portfolio for impairment on a quarterly basis or upon occurrence of a significant change in circumstances. There were no impairment losses recorded for the three months ended October 31, 2006 and October 31, 2005.

At October 31, 2006, there was no cash restricted from withdrawal.

Inventories

Inventories are stated at the lower of cost or market, determined on the first-in, first-out method, and include materials, labor and manufacturing overhead. Inventories consisted of the following at:


	October 31, 2006		July 31, 2006
	(in thousands)
Purchased components and parts	$	18,561	$	20,597
Units-in-progress		3,022		5,132
Finished units		7,777		4,118

	$	29,360	$	29,847

Our policy is to establish inventory reserves when conditions exist that indicate 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 October 31, 2006 and July 31, 2006, our inventory is stated net of inventory reserves of $42.8 million and $46.5 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. We

recognized sales of previously written off inventory of $2.0 million for the three months ended October 31, 2006 and $0.8 million for the three months ended October 31, 2005. The $2.0 million and $0.8 million recorded for the three months ended October 31, 2006 and 2005, respectively, represents the gross cash received from the customer. The net incremental gross margin and net income effect for these transactions of $0.5 million and $0.1 million for the three months ended October 31, 2006, did not have a significant impact on normal operating margins and the results of operations.

Property and Equipment

Property and equipment are summarized as follows:


	October 31, 2006			July 31, 2006			Depreciable Life In Years
	(in thousands)
Machinery, equipment and internal manufactured systems	$	107,078		$	99,520		3-7
Office furniture and equipment		3,066			4,531		3-7
Leasehold improvements		8,008			8,358		10 or term of lease

		118,152			112,409
Less Accumulated depreciation and amortization		(80,676	)		(74,776	)

	$	37,476		$	37,633

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. There were no significant impairment losses for the three months ended October 31, 2006 and October 31, 2005.

Goodwill and Other Intangibles

The Company follows 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 to test goodwill, at least annually or when indicators of impairment exist, 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 Company’s net asset is in excess of the present value of the expected future cash flows, the carrying value of goodwill is written down to fair value in the period identified. Definitive useful life assets are tested for impairment under the provision of SFAS No. 144.

Goodwill totaling $14.8 million at each of October 31, 2006 and July 31, 2006, represents the excess of acquisition costs over the estimated fair value of the net assets acquired from StepTech, Inc. on June 10, 2003.

Other intangible assets consisted of core technology and amounted to the following at October 31, 2006 and July 31, 2006:


Core Technology (In thousands)	Gross Intangible		Accumulated Amortization		Net Intangible Asset		Estimated Useful Life
October 31, 2006	$	2,800	$	2,275	$	525	4 years
July 31, 2006	$	2,800	$	2,100	$	700	4 years

Amortization expense for each of the three months ended October 31, 2006 and 2005 was $175,000. The estimated aggregate amortization expense for the remainder of fiscal 2007 is $525,000.

3. SEGMENT REPORTING

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

The Company’s net sales by geographic area for the three months ended October 31, 2006 and 2005, along with the long-lived assets at October 31, 2006 and July 31, 2006, are summarized as follows:


	Three Months Ended October 31,
	2006		2005
	(in thousands)
Net Sales:
United States	$	18,883	$	22,745
Taiwan		1,604		2,027
Japan		2,027		231
Singapore		8,251		1,904
Philippines		9,300		7,247
All other countries		9,775		10,797

Total Net Sales	$	49,840	$	44,951


	October 31, 2006		July 31, 2006
	(in thousands)
Long-lived Assets:
United States	$	49,469	$	49,618
Taiwan		332		394
Japan		53		54
Singapore		1,568		1,545
All other countries		816		784

Total Long-lived Assets	$	52,238	$	52,395

Transfer prices on products sold to foreign subsidiaries are intended to produce profit margins that correspond to the subsidiary’s sales and support efforts.

4. REORGANIZATION CHARGES AND INVENTORY PROVISIONS

There were no reorganization charges recorded for the quarter ended October 31, 2006. For the quarter ended July 31, 2006, the Company recorded a reorganization charge of approximately $0.2 million, relating primarily to the relocation of the Company’s corporate headquarters.

For the quarter ended January 31, 2006, the Company recorded a reorganization charge of approximately $1.9 million, of which $0.6 million consisted of severance and employee benefit costs relating to Europe workforce reductions, $1.2 million for future lease obligations and $0.3 million of plant closure expenses and legal costs related to the closure of the Company’s facilities in the United Kingdom. These expenses were partially offset by a $0.2 million reversal of a previously recorded liability for the remaining lease payments of the Company’s Westwood, Massachusetts facility. The Company signed an agreement during the quarter ended January 31, 2006 which reduced the future liability previously recorded in fiscal 2005. Approximately $1.1 million of cash payments relating to the $1.9 million reorganization charge were made during the fiscal year ended July 31, 2006. The remaining $0.8 million will be paid out over fiscal years 2007, 2008 and 2009. In addition, we continued to maintain other cost reduction measures, such as the strict oversight and reduction in discretionary travel and other variable overhead expenses. We believe that these reductions in operating costs have reduced our costs while preserving our ability to fund critical product research and development efforts and continue to provide our customers with the levels of responsiveness and service they require.

On October 25, 2005, LTX Corporation took actions to reduce its operating expenses, including reducing its worldwide workforce by approximately 15%, eliminating 77 positions. Of the 77 positions, 74% were from engineering, 14% from administration, 7% from manufacturing and 5% were from sales and marketing. The Company took these actions based on a continuing review of its business plans and operations. The Company expects to realize annual savings in operating expenses of approximately $8.0 million as a result of these actions. For the quarter ended October 31, 2005, the Company recorded a reorganization charge of $4.2 million relating to workforce reductions and the separation agreement with its Chief Executive Officer, of which $2.3 million consisted of severance costs relating to a worldwide workforce reduction, which was paid during the fiscal year ending July 31, 2006, and a $1.9 million charge relating to the separation of the Company’s Chief Executive Officer. The separation agreement with the Company’s Chief Executive Officer has a $1.2 million cash component, and a non-cash component consisting of the acceleration of stock option expensing of $0.7 million. For more information, please refer to the Company’s current reports of Form 8-K filed on October 27, 2005 and November 4, 2005.

The following table sets forth the Company’s restructuring accrual activity for fiscal 2006 and the three months ended October 31, 2006:


	Severance Costs			Equipment leases			Facility leases			Asset impairment			Total
	(in millions)
Balance July 31, 2005	$	0.7		$	6.6		$	2.7		$	—		$	10.0
Additions to expense		4.9			(0.1	)		1.4			0.1			6.3
Elimination of deferred gain		—			(0.7	)		—			—			(0.7	)
Non-cash utilization		(0.3	)		—			(0.1	)		(0.1	)		(0.5	)
Cash paid		(3.2	)		(1.7	)		(2.2	)		—			(7.1	)

Balance July 31, 2006		2.1			4.1			1.8			—			8.0
Additions to expense		—			—			—			—			—
Elimination of deferred gain		—			(1.2	)		—			—			(1.2	)
Non-cash utilization		(0.1	)		—			—			—			(0.1	)
Cash paid		(0.1	)		(1.1	)		(0.3	)		—			(1.5	)

Balance October 31, 2006	$	1.9		$	1.8		$	1.5		$	—		$	5.2

5. CONTINGENCIES AND GUARANTEES

In the ordinary course of business, we agree from time to time to indemnify certain customers against certain third party claims for property damage, bodily injury, personal injury or intellectual property infringement arising from the operation or use of our products. Also, from time to time in agreements with our suppliers, licensors and other business partners, we agree to indemnify these partners against certain liabilities arising out

of the sale or use of our products. The maximum potential amount of future payments we could be required to

make under these indemnification obligations is theoretically unlimited; however, we have general and umbrella insurance policies that enable us to recover a portion of any amounts paid and many of our agreements contain a limit on the maximum amount, as well as limits on the types of damages recoverable. Based on our experience with such indemnification claims, we believe the estimated fair value of these obligations is minimal. Accordingly, we have no liabilities recorded for these agreements as of October 31, 2006 or July 31, 2006.

Subject to certain limitations, LTX indemnifies its current and former officers and directors for certain events or occurrences. Although the maximum potential amount of future payments LTX could be required to make under these agreements is theoretically unlimited, as there were no known or pending claims, we have not accrued a liability for these agreements as of October 31, 2006 or July 31, 2006.

On December 21, 2005, the Company signed a new lease for a Norwood, Massachusetts facility. The new ten year lease began on July 1, 2006 with rent payments of $794,958 per year for the first three years, $855,848 for the second three year period, and $921,813 per year for the remaining four years. The Westwood lease rent payments of $1,800,636 per year terminated in June, 2006.

The Company has operating lease commitments for certain facilities and equipment and capital lease commitments for certain equipment. Minimum lease payments under noncancelable leases at October 31, 2006, are as follows:


Year ended July 31,	(in thousands) Amount
2007	$	4,826
2008		2,836
2009		1,511
2010		1,197
2011		982
Thereafter		4,492

Total minimum lease payments	$	15,844

6. LONG TERM DEBT

On November 14, 2005, the Company exchanged $27.2 million in aggregate principal amount of new notes plus all accrued and unpaid interest on the outstanding notes for an equal principal amount of outstanding notes due August 2007. Please refer to the Company’s current report on Form 8-K filed on November 14, 2005 for further details. As of October 31, 2006, the outstanding principal balance of the 4.25% Convertible Subordinated Notes was $27.2 million due in August 2007. On August 8, 2006, the Company paid with its existing short term cash the $61.1 million 4.25% Convertible Subordinated Notes due.

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 the repurchase of the $61.7 million 4.25% Convertible Subordinated Notes and other working capital purposes. As of October 31, 2006 the outstanding loan amount is $57.0 million of which $6.6 million is classified as current portion of long-term debt that will be repaid in fiscal 2007. The $57.0 million will be paid in 43 payments as follows: (i) seven monthly installments of $0.6 million through May 1, 2007; (ii) twelve monthly installments of $1.2 million, commencing on June 1, 2007 and 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 $5.0 million. This facility is secured by cash and marketable securities. This line of credit secures obligations of operating leases and existing stand-by letters of credit. The line is fully utilized as of October 31, 2006. The facility expires on August 1, 2007.

7. RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2006, the FASB issued FASB Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109”, which clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, “Accounting for Income Taxes”. FIN No. 48 clarifies the application of SFAS No. 109 by defining criteria that an individual tax position must meet for any part of the benefit of that position to be recognized in the financial statements. Additionally, FIN No. 48 provides guidance on the measurement, de-recognition, classification and disclosure of tax positions along with the accounting for the related interest and penalties. The provisions of FIN No. 48 are effective for the fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We will be required to adopt FIN No. 48 for our fiscal year beginning August 1, 2007. We are in the process of determining the impact of FIN No. 48 on our Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for more information about (1) the extent to which companies measure assets and liabilities at fair value, (2) the information used to measure fair value, and (3) the effect that fair-value measurements have on earnings. SFAS No. 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value to any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company will adopt this requirement for our fiscal year beginning August 1, 2008. The Company is currently evaluating the potential impact that the adoption of SFAS No. 157 will have on its financial statements.

In October 2006, the FASB issued Statement of Financial Accounting Standard No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS No. 158), an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 represents the completion of the first phase in the FASB’s postretirement benefits accounting project and requires an entity to recognize in its statement of financial position an asset for a defined benefit postretirement plan’s over-funded status or a liability for a plan’s under-funded status, measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year, and recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. The requirement to recognize the funded status of a defined benefit postretirement plan and the disclosure requirements are effective for fiscal years ending after December 15, 2006. The Company has adopted this requirement beginning May 1, 2006, which had no effect on the October 31, 2006 financials. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company will adopt this requirement for our fiscal year beginning August 1, 2007. We are in the process of determining the impact of SFAS No. 158 on the Company’s Consolidated Financial Statements.

8. SUBSEQUENT EVENTS

LTX Corporation (“LTX”) entered into a Loan and Security Agreement (the “2006 Loan Agreement”), dated as of December 7, 2006, with Silicon Valley Bank (“SVB”) to refinance its $60 million term loan that closed on June 3, 2005. Under the terms of the 2006 Loan Agreement, LTX has borrowed $20.0 million in a term loan at an interest rate of prime minus 1.25% with interest-only payable during the first 12 months. Principal of this term loan is repayable over four years as follows:

•

months 13 to 24: $300,000.00 per month

•

months 25 to 36: $600,000.00 per month

•

months 37 to 48: $766,666.67 per month

The financing arrangement under the 2006 Loan Agreement also provides LTX with a $30.0 million revolving credit facility.

In connection with this refinancing, LTX has terminated the Loan and Security Agreement (the “2005 Loan Agreement”), dated as of May 31, 2005, between LTX and SVB, pursuant to which SVB extended the $60 million term loan, and LTX has repaid all outstanding amounts under the 2005 Loan Agreement.

The net effect of this transaction will reduce operating cash by approximately $36.5 million in the quarter ending January 31, 2007. Management believes the Company has adequate cash balances to fund operations over the next twelve to twenty four-months without utilizing the funds available through the new $30.0 million credit facility. However, should events or circumstances change, the Company has the availability of the $30.0 million line of credit as a source of financing.

Item 2.

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

Industry Conditions and Outlook

We sell capital equipment and services to companies that design, manufacture, assemble or test semiconductor devices. The semiconductor industry is highly cyclical, causing in turn a cyclical impact on our financial results. As a capital equipment provider, our revenue is driven by the capital expenditure budgets and spending patterns of our customers, who often delay or accelerate purchases in reaction to variations in their business. The level of capital expenditures by these semiconductor companies depends on the current and anticipated market demand for semiconductor devices and the products that incorporate them. Therefore, demand for our semiconductor test equipment is dependent on growth in the semiconductor industry. In particular, three primary characteristics of the semiconductor industry drive the demand for semiconductor test equipment:

•

increases in unit production of semiconductor devices;

•

increases in the complexity of semiconductor devices used in electronic products; and

•

the emergence of next generation device technologies, such as SOC.

Our operating results were negatively impacted by a severe industry-wide slowdown in the semiconductor industry, which began to affect the semiconductor test industry in fiscal 2001 and continued through our fiscal year ended July 31, 2003. However the industry entered a period of growth during our fiscal year ended July 31, 2004 and the Company’s quarterly revenues increased sequentially each quarter during fiscal year 2004. The period of growth was short and we experienced a sharp decline in orders in the first quarter of fiscal year 2005, which continued into our second fiscal quarter of fiscal year 2005. The Company experienced improved order levels in our third quarter of fiscal year 2005 continuing until our third quarter of fiscal year 2006. Incoming orders decreased significantly in our fourth quarter of fiscal year 2006 and in our first quarter of fiscal year 2007 as compared to our third quarter of fiscal year 2006. This unfavorable trend is indicating that the industry is

experiencing another slowdown across the semiconductor test industry, and it’s unclear how long or severe the slowdown will be.

Consistent with our business strategy, we have continued to invest significant amounts in engineering and product development to develop and enhance our Fusion platform during industry slowdowns. Our engineering and development expense decreased sequentially on a quarterly basis during fiscal 2006 as next generation Fusion product development projects were completed. Engineering and development expense for the first quarter of fiscal 2007 was $12.9 million compared to $15.2 million in the first quarter of fiscal 2006. The decrease in quarterly expenditure is a result of the completion of next generation Fusion product development projects for Fusion HFi, CX, EX, and MX. We believe that our competitive advantage in the semiconductor test industry is primarily driven by the ability of our Fusion platform to meet or exceed the highest technical specifications required for the testing of advanced semiconductor devices in a cost-efficient manner. We believe this will continue to differentiate the Fusion platform from the product offerings of our competitors.

In addition, over the past several years, we have increasingly transitioned the manufacture of certain components and subassemblies to contract manufacturers, thereby reducing our fixed manufacturing costs associated with direct labor and overhead. In fiscal 2002, we completed the transition of our final assembly, system integration and testing operations for Fusion HF to Jabil Circuit, our principal contract manufacturer. In fiscal 2004, we completed the transition of our Fusion HFi, CX and DX manufacturing to Jabil Circuit; in fiscal 2005 and 2006 we transitioned Fusion EX and Fusion MX, respectively, and we are in the process of transitioning the new Fusion LX in fiscal 2007. We believe that transforming product manufacturing costs into variable costs will in the future allow us to improve our performance during cyclical downturns while preserving our historic gross margins during cyclical upturns.

During fiscal years 2005 and 2006, we took several additional cost reduction measures to further mitigate the adverse effect of cyclical downturns on our profitability. Our total worldwide headcount was reduced from 635 employees and 55 temporary workers at the end of fiscal 2004 to 418 employees and 20 temporary workers at the end of fiscal 2006. In addition, we continued to maintain other cost reduction measures, such as the strict oversight and reduction in discretionary travel and other variable overhead expenses. We believe that these reductions in operating costs have reduced our costs while preserving our ability to fund critical product research and development efforts and continue to provide our customers with the levels of responsiveness and service they require.

We are also exposed to the risks associated with the volatility of the U.S. and global economies. The lack of visibility regarding whether or when there will be sustained growth periods for the sale of electronic products and information technology equipment, and uncertainty regarding the amount of sales, underscores the need for caution in predicting growth in the semiconductor test equipment industry in general and in our revenues and profits specifically. Slow or negative growth in the domestic economy may continue to materially and adversely

affect our business, financial condition and results of operations for the foreseeable future. The Company’s results of operations would be further adversely affected if we were to experience lower than anticipated order levels, cancellations of orders in backlog, extended customer delivery requirements or pricing pressure as a result of a slowdown. At lower levels of revenue, there is a higher likelihood that these types of changes in our customers’ requirements would adversely affect our results of operations because in any particular quarter a limited number of transactions accounts for an even greater portion of sales for the quarter.

Critical Accounting Policies and the Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical experience, and evaluate them on an on-going basis to ensure they remain reasonable under current conditions. Actual results could differ from those estimates. We discuss the development and

selection of the critical accounting estimates with the audit committee of our board of directors on a quarterly basis, and the audit committee has reviewed the Company’s critical accounting estimates as described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2006. For the three months ended October 31, 2006, there have been no changes to these critical accounting policies.

Effective August 1, 2005, we adopted accounting rules (SFAS No. 123R, “Share-Based Payment”) requiring the expense recognition of the estimated fair value of all share-based payments issued to employees using the modified prospective transition method. Prior to this, the estimated fair value associated with such awards was not recorded as an expense, but rather was disclosed in a footnote to our financial statements. For the quarter ended October 31, 2006, we recorded approximately $0.9 million of expense associated with share-based payments attributable to employee stock options and $0.7 million for the three months ended October 31, 2005.

A trinomial lattice option pricing model was applied to stock options that we granted subsequent to our adoption of SFAS No. 123R. The majority of the stock based compensation expense recorded in the quarter ended October 31, 2006 relates to the vesting of restricted stock units that were granted during the quarter ended January 31, 2006 and during the quarter ended October 31, 2006. In accordance with the transition provisions of SFAS No. 123R, the grant date estimates of fair value associated with awards granted prior to adoption, which were calculated using a Black-Scholes option pricing model, have not been changed. The specific valuation assumptions that were utilized for purposes of developing an estimate of fair value at the time that prior awards were issued are as disclosed in our prior annual reports on Form 10-K, as filed with the SEC.

Results of Operations

The following table sets forth for the periods indicated the principal items included in the Consolidated Statement of Operations as percentages of net sales.


	Three Months Ended October 31,
	2006		2005
Net sales	100.0	%	100.0	%
Cost of sales	49.6		58.4

Gross profit	50.4		41.6
Engineering and product development expenses	25.9		33.7
Selling, general and administrative expenses	14.2		15.7
Reorganization costs	—		9.4

Income (loss) from operations	10.3		(17.2	)
Other income (expense):
Interest expense	(3.9	)	(4.3	)
Investment income	2.8		2.9

Net income (loss)	9.2	%	(18.6	)%

The discussion below contains certain forward-looking statements relating to, among other things, estimates of economic and industry conditions, sales trends, expense levels and capital expenditures. Actual results may vary from those contained in such forward-looking statements. See “Business Risks” below.

Three Months Ended October 31, 2006 Compared to the Three Months Ended October 31, 2005.

Net sales. Net sales consist of both semiconductor test equipment and related hardware and software support and maintenance services, net of returns and allowances. Net sales for the three months ended October 31, 2006

increased 10.9% to $49.8 million as compared to $45.0 million in the same quarter of the prior year. Net sales decreased quarter over quarter, by 26.1% or $17.6 million from fourth quarter of fiscal year 2006 sales of $67.4 million. The decrease in net sales from fourth quarter fiscal 2006 is due to an overall industry wide slowdown which began during the fourth quarter of fiscal year 2006, continuing into the first quarter of fiscal year 2007. The increase in net sales for the three months ended October 31, 2006 compared to the three months ended October 31, 2005, is primarily a result of new business wins at customers who have adopted our Fusion X-Series (CX, DX, EX, MX, LX).

Service revenue, included in net sales, accounted for $7.8 million, or 15.6% of net sales, and $8.1 million, or 18.1% of net sales, for the three months ended October 31, 2006 and 2005, respectively. Geographically, sales to customers outside of the United States were 62.1% and 49.4% of net sales for the three months ended October 31, 2006 and October 31, 2005, respectively.

Gross Profit Margin. The gross profit margin was $25.1 million or 50.4% of net sales in the three months ended October 31, 2006, as compared to $18.7 million or 41.6% of net sales in the same quarter of the prior year. The increase in the gross profit margin for the three months ended October 31, 2006 as compared to October 31, 2005 was primarily a result of more favorable profit margins from our Fusion X-Series products, reduced fixed production cost and material cost reductions and higher sales volume.

Inventory Related Provision. The Company reviews excess and obsolete inventory 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 also evaluate our excess and obsolete inventory on a quarterly basis identifying and addressing significant events that might have an impact on inventories and related reserves. The major variables impacting inventory usage are the demand for current products, overall industry conditions, key sales initiatives and the impact that our new product introductions have on current product demand. There were $2.0 million and $0.8 million in sales of previously written off inventory for the three months ended October 31, 2006 and 2005, respectively. The $2.0 million recorded for the three months ended October 31, 2006 represents the gross cash received from the customer. The net incremental gross margin and net income effect for these transactions of $0.5 for the three months ended October 31, 2006, and $0.1 million for the three months ended October 31, 2005 did not have a significant impact on normal operating margins and the results.

Engineering and Product Development Expenses. Engineering and product development expenses were $12.9 million, or 25.9% of net sales, in the three months ended October 31, 2006, as compared to $15.2 million, or 33.7% of net sales, in the same quarter of the prior year. The decrease in engineering and product development expenses for the three months ended October 31, 2006 as compared to the three months ended October 31, 2005 is principally a result of completion of second generation Fusion product development projects for Fusion HFi, CX and EX which enabled us to initiate workforce reductions in fiscal year 2006 and 2005. Additionally, we have been able to leverage and re-use X-Series engineering development initiatives across a broader range of applications than in the past with our Fusion HF and HFi products. This has resulted in more efficient use of engineering resources and lower costs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $7.1 million, or 14.2% of net sales, in the three months ended October 31, 2006, as compared to $7.1 million, or 15.7% of net sales, in the same quarter of the prior year. Savings of approximately $1.0 million from our fiscal 2006 cost reduction and corporate restructuring actions were offset by a $0.7 million increase in employee profit sharing and $0.3 million increase in stock option expenses.

Reorganization Costs.There were no reorganization charges recorded for the quarter ended October 31, 2006. For the quarter ended July 31, 2006, the Company recorded a reorganization charge of approximately $0.2 million, relating primarily to the relocation of the Company’s corporate headquarters.

For the quarter ended October 31, 2005, LTX Corporation took actions to reduce its operating expenses, including reducing its worldwide workforce by approximately 15%, eliminating 77 positions. Of the 77 positions, 74% were from engineering, 14% from administration, 7% from manufacturing and 5% were from sales and marketing. The Company took these actions based on a continuing review of its business plans and operations. The Company expects to realize annual savings in operating expenses of approximately $8.0 million as a result of these actions. For the quarter ended October 31, 2005, the Company recorded a reorganization charge relating to workforce reductions and the separation agreement with its Chief Executive Officer of $4.2 million, of which $2.3 million consisted of severance costs relating to a worldwide workforce reduction, which was paid during the fiscal year ended July 31, 2006, and a $1.9 million charge relating to the separation of the Company’s Chief Executive Officer. The separation agreement with the Company’s Chief Executive Officer has a $1.2 million cash component, and a non-cash component consisting of the acceleration of stock option expensing of $0.7 million. For more information, please refer to the Company’s current reports of Form 8-K filed on October 27, 2005 and November 4, 2005.

Interest Expense.Interest expense was $1.9 million for the three months ended October 31, 2006 as compared to $1.9 million for the three months ended October 31, 2005. Interest expense for the three months ended October 31, 2006 relates to $27.2 million 4.25% Convertible Subordinated Notes and $60.0 million five year term loan, and 2005 relates to the Company’s $88.3 million 4.25% Convertible Subordinated Notes and the Company’s $60.0 million five year term loan with a commercial lender. The net effect of debt refinancing and pay off of $61.1 million 4.25% Convertible Subordinated Notes had a favorable impact to interest expense of $0.2 million that was offset by gains of $0.2 million from the deferred compensation plan.

Investment Income.Investment income was $1.4 million for the three months ended October 31, 2006, as compared to $1.3 million for the three months ended October 31, 2005. Decreases in the amount of income on a lower average cash balance were offset by the favorable impact of higher interest rates on short term investments.

Income Tax.For the three months ended October 31, 2006 and 2005, the Company recorded no income tax provision due to the uncertainty related to utilization of net operating loss carryforwards. As a result of a review undertaken at October 31, 2006 and 2005 and our cumulative loss position at those dates, management concluded that it was appropriate to maintain a full valuation allowance for its operating loss carryforwards and its other net deferred tax assets.

Net Income (Loss).Net income was $4.6 million, or $0.07 per diluted share, in the three months ended October 31, 2006, as compared to a net loss of $8.4 million, or $0.14 per diluted share, in the same quarter of the prior year. The $13.0 million improvement in net income (loss) was principally due to higher net sales related to new business with our Fusion X-Series products, a more favorable product mix and higher gross profit margin of X-Series products and lower operating expenses as a result of our cost reduction and reorganization actions.

Liquidity and Capital Resources

At October 31, 2006, the Company had $139.3 million in cash and cash equivalents and marketable securities and net working capital of $119.0 million, as compared to $194.2 million of cash and cash equivalents and marketable securities and $143.3 million of net working capital at July 31, 2006. The decrease in the cash and cash equivalents and marketable securities was due primarily to the principle payment of $61.1 million of the 4.25% Convertible Subordinated Notes and capital expenditures of $3.3 million partially offset by $10.9 million cash provided by operating activities. Working capital decreased from July 31, 2006 as a result of the shift in classification from long term to short term of our $27.2 million Convertible Subordinated Notes that are now due in August of 2007. Accounts receivable from trade customers, net of allowances, was $32.5 million at October 31, 2006, as compared to $38.7 million at July 31, 2006. The principal reason for the $6.2 million decrease in accounts receivable is a result of decreased sales. The allowance for sales returns and doubtful accounts was $1.7 million, or 4.9% of gross trade accounts receivable, at October 31, 2006 and $1.4 million, or 3.5% of gross trade accounts receivable at July 31, 2006. The increase in the allowance of $0.3 million was

principally a result of amounts due that are in dispute. Accounts receivable from other sources decreased $1.7 million to $1.6 million at October 31, 2006, as compared to $3.3 million at July 31, 2006. The decrease was attributed to the decrease in the sales and increased cash collections of component inventory to our outsource suppliers.

Net inventories decreased by $0.4 million to $29.4 million at October 31, 2006 as compared to $29.8 million at July 31, 2006. The decrease was consistent with planned consumption of our inventory.

Prepaid expense increased by $0.1 million to $4.3 million at October 31, 2006 as compared to $4.2 million at July 31, 2006. The increase was attributed to the renewal of several insurance policies.

Capital expenditures totaled $3.3 million for the three months ended October 31, 2006, as compared to $1.9 million for the three months ended October 31, 2005. The principal reason for the $1.4 million increase in expenditures is attributed to the leasehold improvements made to the new Norwood facility, a renovation of our Singapore facility, spare parts and application development equipment to support new targeted growth opportunities.

On June 3, 2005, the Company closed a $60.0 million term loan with a commercial lender. The loan has a five year term. Interest is at the lender’s variable prime rate and is payable monthly. The loan is secured by all assets of the Company located in the United States. As of October 31, 2006, the outstanding principal of the term loan is $57.0 million. The balance of the principal is payable as follows: (i) seven monthly installments of $0.6 million through May 1, 2007; (ii) twelve monthly installments of $1.2 million, commencing on June 1, 2007 and 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.

In August 2001, we received net proceeds of $145.2 million from a private placement of 4.25% Convertible Subordinated Notes due August, 2006. Interest on the 4.25% Convertible Subordinated 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. 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 of depreciation, which approximates the effective interest method, over the term of the notes. During the fourth fiscal quarter of 2005, the Company repurchased $61.7 million of the outstanding principal balance of the notes for a purchase price of $60.0 million. On November 14, 2005, the Company exchanged $27.2 million in aggregate principal amount of the notes plus all accrued and unpaid interest on the outstanding notes for an equal principal amount of newly issued 4.25% Convertible Senior Notes (the “New Notes”) due August 2007. Please refer to the Company’s current report on Form 8-K filed on November 14, 2005 for further details. On August 8, 2006, the Company utilized existing cash on hand to pay the outstanding balance of the $61.1 million 4.25% Convertible Subordinated Notes. The Company intends to pay the remaining $27.2 million outstanding principal of New Notes in August 2007 with existing cash balances.

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 a 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.

The Company has a defined benefit pension plan for its operation in the United Kingdom. The plan was constituted in October 1981 to provide defined benefit pension and lump sum benefits, payable on retirement, for employees of LTX(Europe) Limited, (“UK”). The plan has 71 participants of which 3 remain as active employee members and 68 are non-active former employees but for whom benefits are preserved. The plan has been closed to all new members since December 31, 2000. During fiscal 1998 LTX initiated a significant worldwide headcount reduction. This restructuring involved the termination of 28 of the then 71 UK pension plan participants. Additionally, the Company announced the intent to divest its iPTest business in the UK in August 1998. The Company subsequently sold its iPTest subsidiary in the UK in fiscal 2000. These actions resulted in the termination of 19 of the then 43 active UK pension plan participants. The Company determined that these actions met the requirements of paragraph 6 of SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and Termination Benefits” in fiscal 1998 and resulted in a curtailment of this plan at that date. The plan was under-funded as of July 31, 2006 by $4.6 million. The Company has recorded this liability as other long-term liabilities of $4.3 million and accrued short-term liabilities of $0.3 million on the consolidated balance sheet as of July 31, 2006. Additionally, the Company has recorded a $0.7 million unrecognized transition obligation asset, a $0.4 million accumulated other comprehensive loss in stockholders’ equity and an adjustment to opening accumulated deficit of $2.9 million. The adjustment to opening accumulated deficit resulted from the correction of an error related to the 1998 and 2000 curtailments of this plan. The Company intends to make contributions over a 10 year period in order to reach fully funded status. The Company does not anticipate significant pension expense going forward from July 31, 2006. Factors that could impact the amount of expense recorded include but are not limited to: 1) the rate of return on the assets invested or 2) the discount rate used to determine the net present value of the future liabilities. The expected rate of return on assets is 6.0% and the discount rate is 5.1%. Cash payments are projected to be approximately $0.3 million in fiscal 2007 and actual cash payments were $0.2 million in fiscal 2006. Actual cash payments to fund this plan were $0.1 million for the three months ended October 31, 2006. The net pension expense recorded was not significant for the three months ended October 31, 2006.

•

months 13 to 24: $300,000.00 per month

•

months 25 to 36: $600,000.00 per month

•

months 37 to 48: $766,666.67 per month

The financing arrangement under the 2006 Loan Agreement also provides LTX with a $30.0 million revolving credit facility.

The net effect of this transaction will reduce operating cash by approximately $36.5 million in the quarter ending January 31, 2007. Management believes the Company has adequate cash balances to fund operations over the next twelve to twenty-four months without utilizing the funds available through the new $30.0 million credit facility. However, should events or circumstances change, the Company has the availability of the $30.0 million line of credit as a source of financing.

The Company operates in a highly cyclical industry and we may experience, with relatively short notice, significant fluctuations in demand for our products. This could result in a material effect on our liquidity position. To mitigate the risk, we have completed a substantial and lengthy process of converting our manufacturing process to an outsource model. As such, we believe we can react to a downturn or a significant upturn much faster than in the past. We believe that our balances of cash and cash equivalents and marketable securities, cash flows expected to be generated by future operating activities, our access to capital markets for competitively priced instruments and funds available under our credit facilities will be sufficient to meet our cash requirements over the next twelve to twenty-four months, which includes the payment or restructuring of the outstanding principal of the notes discussed in the preceding paragraph.

Commitments and Contingencies

Our major outstanding contractual obligations are related to our convertible subordinated notes, facilities leases and other capital and operating leases. The Company has 4.25% Convertible Subordinated Notes, with $27.2 million due in August 2007. Interest on the notes is payable on February 15 and August 15 of each year, commencing February 15, 2002. As of October 31, 2006, the Company also has $57.0 million in principal outstanding under a commercial loan.

The aggregate outstanding amount of the contractual obligations is $116.7 million as of October 31, 2006. These obligations and commitments represent maximum payments based on current operating forecasts. Certain of the commitments could be reduced if changes to our operating forecasts occur in the future.

The following summarizes LTX’s contractual obligations, net of sub-lease revenue, at October 31, 2006 and the effect such obligations are expected to have on its liquidity and cash flow in the future periods:


	Payments Due by Period (in thousands)
Financial Obligations	Total		Remainder of 2007		2008–2009		2010–2011		Thereafter
Convertible subordinated notes (including interest)	$	29,669	$	578	$	29,091	$	—	$	—
Term loan (including interest)		66,608		9,965		39,109		17,534		—
Operating leases		15,844		4,826		4,347		2,179		4,492
LT liabilities, pensions		4,534		198		528		528		3,280

Total contractual obligations	$	116,655	$	15,567	$	73,075	$	20,241	$	7,772

BUSINESS RISKS

This report includes or incorporates forward-looking statements that involve substantial risks and uncertainties and fall within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by our use of the words “believes,” “anticipates,” “plans,” “expects,” “may,” “will,” “would,” “intends,” “estimates,” and similar expressions, whether in the negative or affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements, particularly under the heading “Business Risks,” that we believe could cause our actual results to differ materially from the forward-looking statements that we make. We do not assume any obligation to update any forward-looking statement we make.

Our sole market is the highly cyclical semiconductor industry, which causes a cyclical impact on our financial results.

We sell capital equipment to companies that design, manufacture, assemble, and test semiconductor devices. The semiconductor industry is highly cyclical, causing in turn a cyclical impact on our financial results. In fiscal 2006, the industry entered a growth period that was reflected in our improving operating results during the year. However, the industry is now entering into an industry-wide slowdown, evidenced by our significant decline in orders in our fourth quarter fiscal 2006 and our most recent first quarter fiscal 2007. Any failure to expand in cycle upturns to meet customer demand and delivery requirements or contract in cycle downturns at a pace consistent with cycles in the industry could have an adverse effect on our business.

Any significant downturn in the markets for our customers’ semiconductor devices or in general economic conditions would likely result in a reduction in demand for our products and would hurt our business. Downturns in the semiconductor test equipment industry have been characterized by diminished product demand, excess production capacity, accelerated erosion of selling prices and excessive inventory levels. We believe the markets for newer generations of devices, including system-on-a-chip (“SOC”), will also experience similar characteristics. Our market is also characterized by rapid technological change and changes in customer demand. In the past, we have experienced delays in commitments, delays in collecting accounts receivable and significant declines in demand for our products during these downturns, and we cannot be certain that we will be able to maintain or exceed our current level of sales.

Additionally, as a capital equipment provider, our revenue is driven by the capital expenditure budgets and spending patterns of our customers who often delay or accelerate purchases in reaction to variations in their businesses. Because a high proportion of our costs are fixed, we are limited in our ability to reduce expenses and inventory purchases quickly in response to decreases in orders and revenues. In a contraction, we may not be able to reduce our significant fixed costs, such as continued investment in research and development and capital equipment requirements and materials purchases from our suppliers.

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

The semiconductor industry is highly concentrated. A small number of semiconductor device manufacturers and contract assemblers account for a substantial portion of the purchases of semiconductor test equipment generally, including our test equipment. Sales to Texas Instruments accounted for 56% of our net sales in fiscal 2006 and 47% of our net sales in fiscal 2005. Sales to our ten largest customers accounted for 87.0% of revenues in the three months ended October 31, 2006 and 88.0% in the three months ended October 31, 2005. Our customers may cancel orders with few or no penalties. If a major customer reduces orders for any reason, our revenues, operating results, and financial condition will be affected.

Our ability to increase our sales will depend in part upon our ability to obtain orders from new customers. Semiconductor manufacturers select a particular vendor’s test system for testing the manufacturer’s new generations of devices and make substantial investments to develop related test program software and interfaces. Once a manufacturer has selected one test system vendor for a generation of devices, that manufacturer is more likely to purchase test systems from that vendor for that generation of devices, and, possibly, subsequent generations of devices as well. Therefore, the opportunities to obtain orders from new customers may be limited.

Our sales and operating results have fluctuated significantly from period to period, including from one quarter to another, and they may continue to do so.

Our quarterly and annual operating results are affected by a wide variety of factors that could adversely affect sales or profitability or lead to significant variability in our operating results or our stock price. This may be caused by a combination of factors, including the following:

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sales of a limited number of test systems account for a substantial portion of our net sales in any particular fiscal quarter, and a small number of transactions could therefore have a significant impact;

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order cancellations by customers;

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lower gross margins in any particular period due to changes in:

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our product mix,

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the configurations of test systems sold,

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the customers to whom we sell these systems, or

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volume.

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a long sales cycle, due to the high selling price of our test systems, the significant investment made by our customers, and the time required to incorporate our systems into our customers’ design or manufacturing process; and

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changes in the timing of product orders due to:

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unexpected delays in the introduction of products by our customers,

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shorter than expected lifecycles of our customers’ semiconductor devices,

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uncertain market acceptance of products developed by our customers, or

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our own research and development.

We cannot predict the impact of these and other factors on our sales and operating results in any future period. Results of operations in any period, therefore, should not be considered indicative of the results to be expected for any future period. Because of this difficulty in predicting future performance, our operating results may fall below expectations of securities analysts or investors in some future quarter or quarters. Our failure to meet these expectations would likely adversely affect the market price of our common stock.

A substantial amount of the shipments of our test systems for a particular quarter occur late in the quarter. Our shipment pattern exposes us to significant risks in the event of problems during the complex process of final integration, test and acceptance prior to shipment. If we were to experience problems of this type late in our quarter, shipments could be delayed and our operating results could fall below expectations.

We depend on Jabil Circuit to produce and test our family of Fusion products, and any failures or other problems at or with Jabil could cause us to lose customers and revenues.

We have selected Jabil Circuit, Inc. to manufacture our Fusion test systems. If for any reason Jabil cannot provide us with these products and services in a timely fashion, or at all, whether due to labor shortage, slow down or stoppage, deteriorating financial or business conditions or any other reason, we would not be able to sell or ship our Fusion family of products to our customers. All of the products Jabil tests and assembles for us are assembled in one facility in Massachusetts. If this facility were to become unable to meet our production requirements, transitioning assembly to an alternative Jabil facility could result it production delays of several weeks or more. We have no written supply agreement with Jabil. We also may be unable to engage alternative production and testing services on a timely basis or upon terms favorable to us, if at all. This relationship with Jabil may not result in a reduction of our fixed expenses.

We also may be unable to engage alternative production and testing services on a timely basis or upon terms favorable to us, if at all. If we are required for any reason to seek a new manufacturer of our test systems, an alternate manufacturer may not be available and, in any event, transitioning to a new manufacturer would require a significant lead time of six months or more and would involve substantial expense and disruption of our business. Our test systems are highly sophisticated and complex capital equipment, with many custom components, and require specific technical know-how and expertise. These factors could make it more difficult for us to find a new manufacturer of our test systems if our relationship with Jabil is terminated for any reason, which would cause us to lose revenues and customers.

Our dependence on subcontractors and sole source suppliers may prevent us from delivering an acceptable product on a timely basis.

We rely on subcontractors to manufacture Fusion and many of the components and subassemblies for our products, and we rely on sole source suppliers for certain components. We may be required to qualify new or additional subcontractors and suppliers due to capacity constraints, competitive or quality concerns or other risks that may arise, including a result of a change in control of, or deterioration in the financial condition of, a supplier or subcontractor. The process of qualifying subcontractors and suppliers is a lengthy process. Our reliance on subcontractors gives us less control over the manufacturing process and exposes us to significant risks, especially inadequate capacity, late delivery, substandard quality, and high costs. In addition, the manufacture of certain of these components and subassemblies is an extremely complex process. If a supplier became unable to provide parts in the volumes needed or at an acceptable price, we would have to identify and qualify acceptable replacements from alternative sources of supply, or manufacture such components internally. The failure to qualify acceptable replacements quickly would delay the manufacturing & delivery of our products, which could cause us to lose revenues and customers.

We are dependent on a semiconductor device manufacturer, Maxtek Components as a sole source supplier of components manufactured in accordance with our proprietary design and specifications. We have no written supply agreement with this sole source supplier and purchase our custom components through individual purchase orders.

Future acquisitions may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention.

We have in the past, and may in the future, seek to acquire or invest in additional complementary businesses, products, technologies or engineers. We may have to issue debt or equity securities to pay for future acquisitions, which could be dilutive to then current stockholders. We have also incurred and may continue to incur certain liabilities or other expenses in connection with acquisitions, which could continue to materially adversely affect our business, financial condition and results of operations.

Mergers and acquisitions of high-technology companies are inherently risky, and no assurance can be given that future acquisitions will be successful and will not materially adversely affect our business, operating results or financial condition. Our past and future acquisitions may involve many risks, including:

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difficulties in managing our growth following acquisitions;

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difficulties in the integration of the acquired personnel, operations, technologies, products and systems of the acquired companies;

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uncertainties concerning the intellectual property rights we purport to acquire;

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unanticipated costs or liabilities associated with the acquisitions;

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diversion of managements’ attention from other business concerns;

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adverse effects on our existing business relationships with our or our acquired companies’ customers;

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potential difficulties in completing projects associated with purchased in process research and development; and

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inability to retain employees of acquired companies.

Any of the events described in the foregoing paragraphs could have an adverse effect on our business, financial condition and results of operations and could cause the price of our common stock to decline.

We may not be able to deliver custom hardware options and software applications to satisfy specific customer needs in a timely manner.

We must develop and deliver customized hardware and software to meet our customers’ specific test requirements. Our test equipment may fail to meet our customers’ technical or cost requirements and may be replaced by competitive equipment or an alternative technology solution. Our inability to provide a test system that meets requested performance criteria when required by a device manufacturer would severely damage our reputation with that customer. This loss of reputation may make it substantially more difficult for us to sell test systems to that manufacturer for a number of years. We have, in the past, experienced delays in introducing some of our products and enhancements.

Our dependence on international sales and non-U.S. suppliers involves significant risk.

International sales have constituted a significant portion of our revenues in recent years, and we expect that this composition will continue. International sales accounted for 62.1% of our revenues for the three months ended October 31, 2006 and 49.4% of our revenues for the three months ended October 31, 2005. In addition, we rely on non-U.S. suppliers for several components of the equipment we sell. As a result, a major part of our revenues and the ability to manufacture our products are subject to the risks associated with international commerce. A reduction in revenues or a disruption or increase in the cost of our manufacturing materials could hurt our operating results. These international relationships make us particularly sensitive to changes in the countries from which we derive sales and obtain supplies. International sales and our relationships with suppliers may be hurt by many factors, including:

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changes in law or policy resulting in burdensome government controls, tariffs, restrictions, embargoes or export license requirements;

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political and economic instability in our target international markets;

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longer payment cycles common in foreign markets;

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difficulties of staffing and managing our international operations;

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less favorable foreign intellectual property laws making it harder to protect our technology from appropriation by competitors; and

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difficulties collecting our accounts receivable because of the distance and different legal rules.

In the past, we have incurred expenses to meet new regulatory requirements in Europe, experienced periodic difficulties in obtaining timely payment from non-U.S. customers, and been affected by economic conditions in several Asian countries. Our foreign sales are typically invoiced and collected in U.S. dollars. A strengthening in the dollar relative to the currencies of those countries where we do business would increase the prices of our products as stated in those currencies and could hurt our sales in those countries. Significant fluctuations in the exchange rates between the U.S. dollar and foreign currencies could cause us to lower our prices and thus reduce our profitability. These fluctuations could also cause prospective customers to push out or delay orders because of the increased relative cost of our products. In the past, there have been significant fluctuations in the exchange rates between the dollar and the currencies of countries in which we do business. While we have not entered into significant foreign currency hedging arrangements, we may do so in the future. If we do enter into foreign currency hedging arrangements, they may not be effective.

Our market is highly competitive, and we have limited resources to compete.

The test equipment industry is highly competitive in all areas of the world. Many other domestic and foreign companies participate in the markets for each of our products, and the industry is highly competitive. Our competitors in the market for semiconductor test equipment include Advantest, Credence Systems, Eagle Test Systems, Teradyne and Verigy. Certain of these major competitors have substantially greater financial resources and more extensive engineering, manufacturing, marketing, and customer support capabilities.

We expect our competitors to enhance their current products and to introduce new products with comparable or better price and performance. The introduction of competing products could hurt sales of our current and future products. In addition, new competitors, including semiconductor manufacturers themselves, may offer new testing technologies, which may in turn reduce the value of our product lines. Increased competition could lead to intensified price-based competition, which would hurt our business and results of operations. Unless we are able to invest significant financial resources in developing products and maintaining customer support centers worldwide, we may not be able to compete effectively.

Development of our products requires significant lead-time, and we may fail to correctly anticipate the technical needs of our customers.

Our customers make decisions regarding purchases of our test equipment while their devices are still in development. Our test systems are used by our customers to develop, test and manufacture their new devices. We therefore must anticipate industry trends and develop products in advance of the commercialization of our customers’ devices, requiring us to make significant capital investments to develop new test equipment for our customers well before their devices are introduced. If our customers fail to introduce their devices in a timely manner or the market does not accept their devices, we may not recover our capital investment through sales in significant volume. In addition, even if we are able to successfully develop enhancements or new generations of our products, these enhancements or new generations of products may not generate revenue in excess of the costs of development, and they may be quickly rendered obsolete by changing customer preferences or the introduction of products embodying new technologies or features by our competitors. Furthermore, if we were to make announcements of product delays, or if our competitors were to make announcements of new test systems, these announcements could cause our customers to defer or forego purchases of our existing test systems, which would also hurt our business.

Our success depends on attracting and retaining key personnel.

Our success will depend substantially upon the continued service of our executive officers and key personnel, none of whom are bound by an employment or non-competition agreement. Our success will depend on our ability to attract and retain highly qualified managers and technical, engineering, marketing, sales and support personnel. Competition for such specialized personnel is intense, and it may become more difficult for us to hire or retain them. Our volatile business cycles only aggravate this problem. Our layoffs in any industry downturn could make it more difficult for us to hire or retain qualified personnel. 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 positions, or by our inability to attract and retain skilled employees.

We may not be able to protect our intellectual property rights.

Our success depends in part on our ability to obtain intellectual property rights and licenses and to preserve other intellectual property rights covering our products and development and testing tools. To that end, we have obtained certain domestic patents and may continue to seek patents on our inventions when appropriate. We have also obtained certain trademark registrations. To date, we have not sought patent protection in any countries other than the United States, which may impair our ability to protect our intellectual property in foreign jurisdictions. The process of seeking intellectual property protection can be time consuming and expensive. We cannot ensure that:

•

patents will issue from currently pending or future applications;

•

our existing patents or any new patents will be sufficient in scope or strength to provide meaningful protection or any commercial advantage to us;

•

foreign intellectual property laws will protect our intellectual property rights; or

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others will not independently develop similar products, duplicate our products or design around our technology.

If we do not successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our operating results. We also rely on trade secrets, proprietary know-how and confidentiality provisions in agreements with employees and consultants to protect our intellectual property. Other parties may not comply with the terms of their agreements with us, and we may not be able to adequately enforce our rights against these people.

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

Intellectual property rights are uncertain and involve complex legal and factual questions. We may be unknowingly infringing on the intellectual property rights of others and may be liable for that infringement, which could result in significant liability for us. If we do infringe the intellectual property rights of others, we could be forced to either seek a license to intellectual property rights of others or alter our products so that they no longer infringe the intellectual property rights of others. A license could be very expensive to obtain or may not be available at all. Similarly, changing our products or processes to avoid infringing the rights of others may be costly or impractical.

We are responsible for any patent litigation costs. If we were to become involved in a dispute regarding intellectual property, whether ours or that of another company, we may have to participate in legal proceedings. These types of proceedings may be costly and time consuming for us, even if we eventually prevail. If we do not prevail, we might be forced to pay significant damages, obtain licenses, modify our products or processes, stop making products, or stop using processes.

Our stock price is volatile.

In the twelve-month period ending on October 31, 2006, our stock price ranged from a low of $3.40 to a high of $7.65. The price of our common stock has been and likely will continue to be subject to wide fluctuations in response to a number of events and factors, such as:

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quarterly variations in operating results;

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variances of our quarterly results of operations from securities analyst estimates;

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changes in financial estimates and recommendations by securities analysts;

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announcements of technological innovations, new products, or strategic alliances; and

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news reports relating to trends in our markets.

In addition, the stock market in general, and the market prices for semiconductor-related companies in particular, have experienced significant price and volume fluctuations that often have been unrelated to the operating performance of the companies affected by these fluctuations. These broad market fluctuations may adversely affect the market price of our common stock, regardless of our operating performance.

We have substantial indebtedness.

We have $27.2 million principal amount of 4.25% Convertible Subordinated Notes (the “Notes”) due August 2007, as well as $57.0 million in principal outstanding under a commercial loan. We may incur substantial additional indebtedness in the future. The level of indebtedness, among other things, could

•

make it difficult for us to make payments on our debt and other obligations;

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make it difficult for us to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;

•

require the dedication of a substantial portion of any cash flow from operations to service debt payments, thereby reducing the amount of cash flow available for other purposes, including capital expenditures and engineering development;

•

limit our flexibility in planning for, or reacting to changes in, its business and the industries in which we compete;

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place us at a possible competitive disadvantage with respect to less leveraged competitors and competitors that have better access to capital resource; and

•

make us more vulnerable in the event of a further downturn in our business.

There can be no assurance that we will be able to meet our debt service obligations, including our obligations under the Notes.

We may not be able to satisfy a change in control offer.

The indenture governing the Notes contains provisions that apply to a change in control of LTX. If someone triggers a fundamental change as defined in the indenture, we may be required to offer to purchase the Notes with cash. If we have to make that offer, we cannot be sure that we will have enough funds to pay for all the Notes that the holders could tender.

We may not be able to pay our debt and other obligations.

If our cash flow is inadequate to meet our obligations, we could face substantial liquidity problems. One of our credit facilities expired in April 2006, and was not renewed by us as we felt we had sufficient funds to pay off our debt when due. We have $27.2 million principal amount of 4.25% Convertible Subordinated Notes due August 2007 and monthly principal and interest payments through May 2010 related to our term loan. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payment of our Notes, or certain of our other obligations, we would be in default under the terms thereof, which could permit the holders of those obligations to accelerate their maturity and also could cause default under future indebtedness we may incur. Any such default could have material adverse effect on our business, prospects, financial position and operating results. In addition, we may not be able to repay amounts due in respect of our Notes, or certain of our other obligations, if payment of those obligations were to be accelerated following the occurrence of any other event of default as defined in the instruments creating those obligations. Moreover, we may not have sufficient funds or be able to arrange for financing to pay the principal amount of our Notes at their maturity. See Part II Item 5 Other Information.

We may need additional financing, which could be difficult to obtain.

We expect that our existing cash and marketable securities, and borrowings from available bank financings, will be sufficient to meet our cash requirements to fund operations and expected capital expenditures for the foreseeable future. In the event, we may 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. Further, if we issue additional equity securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. Future financings may place 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 seriously harm our business.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in the Company’s Market Risk exposure since the filing of the 2006 Annual Report on Form 10-K.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Based on the evaluation by management, with the participation of the Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (1) were designed to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, including information regarding its consolidated subsidiaries, is recorded, processed, summarized and reported within the time periods specified by the SEC.

Changes in Internal Controls. No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended October 31, 2006 that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on the Effectiveness of Controls

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or the Company’s internal controls can prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The inherent limitations in all control systems include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons or by collusion of two or more people. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II—OTHER INFORMATION

Item 5.

Other Information

(a)

LTX Corporation (“LTX”) entered into a Loan and Security Agreement (the “2006 Loan Agreement”), dated as of December 7, 2006, with Silicon Valley Bank (“SVB”) to refinance its $60.0 million term loan that closed on June 3, 2005. Under the terms of the 2006 Loan Agreement, LTX has borrowed $20.0 million in a term loan at an interest rate of prime minus 1.25% with interest-only payable during the first 12 months. Principal of this term loan is repayable over four years as follows:

•

months 13 to 24: $300,000.00 per month

•

months 25 to 36: $600,000.00 per month

•

months 37 to 48: $766,666.67 per month

The financing arrangement under the 2006 Loan Agreement also provides LTX with a $30.0 million revolving credit facility.

In connection with this refinancing, LTX has terminated the Loan and Security Agreement (the “2005 Loan Agreement”), dated as of May 31, 2005, between LTX and SVB, pursuant to which SVB extended the $60.0 million term loan, and LTX has repaid all outstanding amounts under the 2005 Loan Agreement.

over the next twelve to twenty-four months without utilizing the funds available through the new $30.0 million credit facility. However, should events or circumstances change, the Company has the availability of the $30.0 million line of credit as a source of financing.

(b)	The Company currently maintains a nonqualified deferred compensation arrangement for a select group of management or highly compensated employees.

The Company has two plans: (1) the LTX Corporation Deferred Compensation Plan that was adopted effective December 1, 2001, which the Company discontinued with respect to new deferrals into the plan as of December 31, 2004 (referred to herein as the “Frozen Plan”), and (ii) a new plan that complies with the requirements of Code Section 409A and related Treasury guidance and that governs all amounts deferred on or after January 1, 2005 (referred to herein as the “New Plan”);

The Frozen Plan shall be terminated with respect to all plan participants effective December 31, 2006, and all account balances accumulated under such plan shall be distributed in a lump sum as soon as administratively practicable following the effective date of such plan termination which is expected to be in February of 2007, and the New Plan shall be terminated with respect to all plan participants effective December 31, 2006, and all account balances accumulated under such plan shall be distributed in a lump sum on or as soon as administratively practicable following January 1, 2008.

There will be no net cash effect of this termination as the Company maintains $3.1 million of assets in life insurance policies sufficient to cover the $3.1 million of liabilities associated with this plan. Proceeds from the cash surrender values of these policies will be used to fund the cash distribution to the participants in the plans.

Item 6.

Exhibits and Reports on Form 8-K

(a)

(i)

Exhibit 31.1 and 31.2 Rule 13a-14(a)/15d-14(a) Certifications

(ii)

Exhibit 32 Section 1350 Certifications

(b)

(i)

On August 30, 2006, the Company furnished a current report on Form 8-K under Item 2.02 (Results of Operations and Financial Condition) describing and furnishing the press release announcing its earnings for the fiscal quarter and year ended July 31, 2006, which press release included its consolidated financial statements for the period.

(ii)

On September 14, 2006, the Company furnished a current report on Form 8-K under Item 1.01 (Entry into Material Definitive Agreement) to disclose the award of restricted stock units to executive officers.

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.


	LTX Corporation

Date: December 11, 2006	By:	/S/ MARK J. GALLENBERGER
		Mark J. Gallenberger Chief Financial Officer and Treasurer (Principal Financial Officer)

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

Xcerra (XCRA) Inactive 10-Q2007 Q1 Quarterly report

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