Xcerra (XCRA) 10-Q 2009 Q2 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 January 31, 2009

OR

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

For the transition period from             to             

Commission file number: 000-10761

LTX-CREDENCE 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.)

1355 California Circle, Milpitas, California	95035
(Address of principal executive offices)	(Zip Code)

(408) 635-4300

(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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	x

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 March 5, 2009
Common Stock, $0.05 par value per share	127,108,869 shares

LTX-CREDENCE CORPORATION

Index

		Page Number
Part I.	FINANCIAL INFORMATION
Item 1.	Consolidated Balance Sheets as of January 31, 2009 and July 31, 2008	3
	Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended January 31, 2009 and January 31, 2008	4
	Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2009 and January 31, 2008	5
	Notes to Consolidated Financial Statements	6-22
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	41
Part II.	OTHER INFORMATION
Item 6.	Exhibits	41
	SIGNATURE	42

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LTX-CREDENCE CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)

	January 31, 2009			July 31, 2008
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	99,978		$	51,052
Marketable securities		15,851			20,410
Accounts receivable—trade, net of allowances of $1,159 and $659, respectively		21,599			24,160
Inventories		37,012			22,505
Deferred income taxes		9,473			—
Prepaid expenses and other current assets		16,142			3,995
Total current assets		200,055			122,122
Property and equipment, net		46,545			27,213
Intangible assets, net		31,290			—
Goodwill		45,148			14,368
Other assets		5,835			6,024
Total assets	$	328,873		$	169,727
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	8,637		$	5,700
Accounts payable		26,174			14,058
Deferred revenues and customer advances		8,843			1,777
Accrued restructuring		19,269			915
Other accrued expenses		38,653			13,166
Total current liabilities		101,576			35,616
Long-term debt, less current portion		56,531			12,200
Long-term deferred income taxes		9,471			—
Other long-term liabilities		21,663			4,631
Stockholders’ equity:
Common stock		6,329			3,150
Additional paid-in capital		693,171			573,736
Accumulated other comprehensive loss		(1,231	)		(865	)
Accumulated deficit		(558,637	)		(458,741	)
Total stockholders’ equity		139,632			117,280
Total liabilities and stockholders’ equity	$	328,873		$	169,727

See accompanying Notes to Consolidated Financial Statements

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LTX-CREDENCE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share data)

	Three Months Ended January 31,						Six Months Ended January 31,
	2009			2008			2009			2008
Net product sales	$	12,790		$	23,868		$	44,034		$	46,749
Net service sales		17,611			7,154			33,500			13,908
Net sales		30,401			31,022			77,534			60,657
Cost of sales		23,754			16,194			50,080			31,373
Inventory related provision		5,629			—			19,311			—
Gross profit		1,018			14,828			8,143			29,284
Engineering and product development expenses		21,705			11,347			42,173			22,983
Selling, general and administrative expenses		15,001			6,921			29,382			13,432
Impairment charges		779			—			5,799			—
Amortization of purchased intangible assets		4,446			—			7,410			—
Acquired in-process research and development		—			—			6,200			—
Restructuring		14,667			—			18,530			—
Loss from operations		(55,580	)		(3,440	)		(101,351	)		(7,131	)
Other income (expense):
Interest expense		(1,057	)		(259	)		(2,096	)		(732	)
Investment income		762			593			1,693			1,282
Other income (expense)		(560	)		—			279			—
Gain on extinguishment of debt, net		1,954			—			2,217			—
Loss before provision (benefit) for taxes		(54,481	)		(3,106	)		(99,258	)		(6,581	)
Provision (benefit) for income taxes		65			72			638			(3,179	)
Net loss	$	(54,546	)	$	(3,178	)	$	(99,896	)	$	(3,402	)
Net income (loss) per share:
Basic and Diluted	$	(0.43	)	$	(0.05	)	$	(0.85	)	$	(0.05	)
Weighted-average common shares used in computing net loss per share:
Basic and Diluted		126,918			62,510			116,981			62,490
Comprehensive loss:
Net loss	$	(54,546	)	$	(3,178	)	$	(99,896	)	$	(3,402	)
Unrealized gain on marketable securities		292			445			12			679
Cumulative translation adjustment		85			—			(583	)		—
Pension liability gain (loss)		81			(19	)		205			(9	)
Comprehensive loss	$	(54,088	)	$	(2,752	)	$	(100,262	)	$	(2,732	)

See accompanying Notes to Consolidated Financial Statements

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LTX-CREDENCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands, except per share data)

	Six Months Ended January 31,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(99,896	)	$	(3,402	)
Add (deduct) non-cash items:
Inventory-related provision		19,311			—
Stock-based compensation		2,403			2,450
Depreciation and amortization		19,279			6,193
Benefit for income taxes		—			(3,251	)
Acquired in-process research and development		6,200			0
Non-cash restructuring charge		1,161			—
Gain on extinguishment of debt, net		(2,217	)		—
Impairment charges		5,799			—
Loss on disposal of property and equipment		508			—
Other		148			144
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable		43,769			(1,752	)
Inventories		(12,577	)		2,440
Prepaid expenses		3,186			802
Other assets		(261	)		(4	)
Accounts payable		(2,557	)		(1,689	)
Accrued expenses		(6,721	)		(4,357	)
Deferred revenues and customer advances		(1,490	)		(413	)
Net cash used in operating activities		(23,955	)		(2,839	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from merger with Credence Systems Corporation, net of fees paid		134,280			—
Maturities of marketable securities		14,436			7,371
Purchases of property and equipment		(5,165	)		(4,510	)
Net cash provided by investing activities		143,551			2,861
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of tax withholdings for vested RSUs, net of proceeds from stock option exercises		(437	)		(72	)
Employees’ stock purchase plan		37			297
Payments of debt		(2,100	)		(27,521	)
Payments of convertible senior subordinated notes		(66,567	)		—
Net cash used in financing activities		(69,067	)		(27,296	)
Effect of exchange rate changes on cash		(1,603	)		(140	)
Net increase (decrease) in cash and cash equivalents		48,926			(27,414	)
Cash and cash equivalents at beginning of period		51,052			63,302
Cash and cash equivalents at end of period	$	99,978		$	35,888
BUSINESS ACQUISITION, NET OF CASH ACQUIRED:
Fair value of tangible assets acquired	$	138,293
Fair value of liabilities assumed		(231,733	)
Fair value of stock issued		(117,723	)
Fair value of stock options and RSUs exchanged		(2,863	)
Cost in excess of fair value (goodwill)		31,231
Fair value of acquired identifiable intangible assets		38,700
In-process research and development		6,200
Less acquisition costs paid		3,615
Net cash received from merger with Credence Systems Corporation	$	(134,280	)

See accompanying Notes to Consolidated Financial Statements

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LTX-CREDENCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. THE COMPANY

LTX-Credence Corporation (“LTX-Credence” or the “Company”) provides focused, cost-optimized automated test equipment (ATE) solutions. We design, manufacture, market and service ATE solutions that address the broad, divergent test requirements of the wireless, computing, automotive and entertainment market segments. Semiconductor designers and manufacturers worldwide use our equipment to test their devices during the manufacturing process. After testing, these devices are then incorporated in a wide range of products, including computers, mobile internet equipment such as wireless access points and interfaces, broadband access products such as cable modems and DSL modems, personal communication products such as cell phones and personal digital assistants, consumer products such as televisions, videogame systems, digital cameras and automobile electronics, and for power management in portable and automotive electronics. The Company also sells hardware and software support and maintenance services for its test systems. The Company is headquartered, and has a development facility in Milpitas, California, a development facility in Norwood, Massachusetts, and worldwide sales and service facilities to support its customer base.

On August 29, 2008, LTX Corporation (“LTX”) and Credence Systems Corporation (“Credence”) completed a merger of equals (“the Merger”). In connection with the merger, LTX Corporation changed its name to “LTX-Credence Corporation” and changed the symbol under which its common stock trades on the NASDAQ Global Market to “LTXC” and Credence Systems Corporation became a wholly-owned subsidiary of LTX-Credence. On January 30, 2009, the Company completed a merger of Credence with and into the Company with the Company being the surviving corporation. The Company’s results of operations for the six months ended January 31, 2009 include Credence’s operating results from August 29, 2008 through January 31, 2009. The Company’s consolidated balance sheet as of July 31, 2008 and results of operations for the three and six months ended January 31, 2008 do not include Credence’s results.

Recent Developments and Liquidity

During the quarters ended October 31, 2008 and January 31, 2009, the Company’s stock price dropped significantly below book value. The Company believes the following factors have contributed to the drop in its stock price:

• investors’ concerns about the Company’s ability to successfully integrate LTX and Credence and gain the synergy cost savings as forecasted by management, which will not fully impact the Company’s results of operations until the quarter ended July 31, 2009.

• the size and resources of LTX-Credence relative to its major competitors, Teradyne, Verigy and Advantest.

• declining revenues in recent months and the uncertainty around industry projections going forward.

• lack of institutional investor activity due to restrictions on investments with stock prices below prescribed levels.

• increased operating losses and cash consumption during the six months ended January 31, 2009.

The Company believes that declining business and consumer confidence and increased unemployment have precipitated an economic slowdown and fears of a long recession. An economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, has severely impacted many technology manufacturers and has significantly lowered the demand for the Company’s products. The Company believes that it has competitive products, however, challenging market conditions have severely limited the Company’s ability to increase sales and market share. The Company believes that a combination of these factors accounts for the difference between its stock trading price and its book value.

These conditions give rise to certain accounting and reporting considerations including recoverability of goodwill, long-lived assets and inventory, which are discussed further in the Notes to the consolidated financial statements. These conditions also have a significant impact on the Company’s liquidity, which is discussed further in the Management’s Discussion and Analysis section of this Report.

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

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the financial statements and notes included in our Annual Report on Form 10-K for the year ended July 31, 2008. 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 and six months ended January 31, 2009 are not necessarily indicative of future trends or the Company’s 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 Emerging Issues Task Force (“EITF”) No. 00-21 “Revenue Arrangements 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 time based after product 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 and six months ended January 31, 2009 and 2008, respectively.

Income Taxes

Income tax expense relates principally to operating results in foreign entities in jurisdictions primarily in Asia and Europe. The Company recorded an income tax provision of $0.6 million for the six months ended January 31, 2009 primarily due to foreign tax on earnings generated in foreign jurisdictions. For the six months ended January 31, 2008, the Company recorded an income tax benefit of $3.3 million related to the de-recognition of a liability related to an uncertain tax position. The uncertain tax position related to potential dual taxation of a gain recorded in fiscal 2002 as part of the settlement with a vendor. The statute of limitations expired on the potential tax exposure on September 14, 2007, triggering the reversal of the reserve and non-cash benefit recorded in the six months ended January 31, 2008.

As of January 31, 2009 and July 31, 2008, the total liability for unrecognized income tax benefits was $15.2 million and $0.8 million, Unrecognized income tax benefits of $6.0 million of the total liability as of January 31, 2009, if recognized would be recorded as a reduction of goodwill until the Company’s adoption of SFAS 141(R), after which such recognition would be recorded as a reduction of income tax expense in the Company’s statement of operations. The increase in the unrecognized income tax benefits was attributable to companies acquired.

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The Company recognized interest related to liabilities for unrecognized tax benefits in the income tax provision. As of January 31, 2009, the Company had approximately $1.1 million of accrued interest and penalties to unrecognized income tax benefits of which less than $0.1 million was recorded during each of the three and six months ended January 31, 2009 and January 31, 2008.

The Company conducts business globally and, as a result, the Company and its subsidiaries or branches file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Singapore and Germany. With few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations for years before 2000.

Due to the acquisition of Credence, utilization of the Company’s net operating loss and tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of a portion of net operating losses before utilization.

Accounting for Stock-Based Compensation

The Company has various stock-based compensation plans, including 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”). In addition, the Company assumed the StepTech, Inc. Stock Option Plan (the “STI 2000 Plan”) as part of its acquisition of StepTech as well as the Credence 2005 Stock Incentive Plan (the “Credence 2005 Plan”) as part of its acquisition of Credence. The Company can only grant options from the 2004 Plan or the Credence 2005 Plan.

Under the terms of the 2004 Plan, any unused shares of Common Stock as a result of termination, surrender, cancellation or forfeiture of options from the 2001 Plan and the 1999 Plan will be available for grant of equity awards under the 2004 Plan. The 2004 Plan provides 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 also provides 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 also allows both restricted stock awards and stock awards. Generally, options under the 2004 Plan have a ten-year contractual life and typically vest over three or four years from the date of grant. The Company’s policy of issuing shares is to either buy shares in the open market or issue new shares. The Company’s general practice has been to issue new shares.

In connection with the merger with Credence, the Company assumed all outstanding Credence stock options and other equity-based awards, which were converted into options and equity-based awards of the Company. The Company also assumed the Credence 2005 Plan. The Credence 2005 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock (“RSAs”), restricted stock units (“RSUs”), stock appreciation rights and dividend equivalent rights to employees, directors, and consultants. Generally, options under the Credence 2005 Plan have a ten-year contractual life and typically vest over four years from the date of grant.

Effective August 1, 2005, the Company adopted SFAS 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. The Company recorded expense of approximately $1.1 million and $1.0 million, for the three months ended October 31, 2008 and 2007, respectively, in connection with its share-based payment awards.

In October 2008 and December 2008, in connection with the acquisition of Credence, the Company modified the vesting terms of certain executive RSU awards that were originally granted on September 13, 2006 with performance milestones. The modification was made to remove the performance conditions. There was no incremental value to these awards as a result of the modification, and the remaining expense associated with these awards will be recognized on a straight-line basis over the remaining requisite service period.

During the three and six months ended January 31, 2009, the Company granted 360,000 and 1,905,000 of service-based RSUs, respectively, to certain directors and executives with vesting terms between one and four years.

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The following is a summary of activities for the Company’s Stock Option Plans for the six months ended January 31, 2009:

Stock Options

	Number of Shares		Weighted Average Exercise Price
Options outstanding, beginning of period	7,990,708		$	10.17
Credence options converted upon merger	6,652,747			12.27
Granted	—			—
Exercised	—			—
Forfeited	(3,542,453	)		16.61
Options outstanding, end of period	11,101,002		$	9.37

RSU and Restricted Stock Awards

	RSU Six Months Ended January 31, 2009				Restricted Stock Awards Six Months Ended January 31, 2009
	Number of Shares		Weighted Average Grant-Date Fair Value		Number of Shares		Weighted Average Grant-Date Fair Value
RSUs outstanding, beginning of period	2,312,466		$	4.29	—			—
Credence RSUs and RSAs converted upon merger	1,023,542			1.30	184,661		$	2.30
Granted	1,905,000			0.89	—			—
Vested/lapsed	(468,799	)		1.88	(147,096	)		2.31
Forfeited	(619,658	)		4.34	(30,316	)		4.80
RSUs and RSAs outstanding, end of period	4,152,551		$	2.26	7,249		$	8.41

Product Warranty Costs

The Company’s products are sold with warranty provisions that require it to remedy deficiencies in quality or performance of products over a specified period of time at no cost to our customers. The Company offers a one or two year warranty for all of its products, the terms and conditions of which are based on the product sold and the customer. For all testers sold, the Company accrues a liability for the estimated cost of standard warranty at the time of tester shipment and defers the portion of product revenue attributed to the fair value of non-standard warranty. Costs for non-standard warranty are expensed as incurred. Factors that impact the warranty liability include the number of installed units, historical and anticipated product failure rates, material usage and service labor costs. The Company periodically assesses the adequacy of its recorded liability and adjusts amounts as necessary.

The table on the following page shows the change in the product warranty liability, as required by FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, for the three months ended January 31, 2009 and 2008:

	Six Months Ended January 31,
Product Warranty Activity	2009			2008
	(in thousands)
Balance at beginning of period	$	908		$	1,819
Balance assumed from Credence		5,519			—
Warranty expenditures for current period		(3,531	)		(1,134	)
Changes in liability related to pre-existing warranties		(9	)		(143	)
Provision for warranty costs in the period		1,209			744
Balance at end of period	$	4,096		$	1,286

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Comprehensive loss

Comprehensive loss is comprised of two components, net loss and other comprehensive loss. Other comprehensive loss consists of unrealized gains and losses on the Company’s marketable securities, cumulative translation adjustments and the effects of the pension liability gain or loss.

Net loss per Share

Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net 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 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 January 31,						Six Months Ended January 31,
	2009			2008			2009			2008
	(in thousands, except per share data)
Net loss	$	(54,546	)	$	(3,178	)	$	(99,896	)	$	(3,402	)
Basic EPS
Basic common shares		126,918			62,510			116,981			62,490
Basic EPS	$	(0.43	)	$	(0.05	)	$	(0.85	)	$	(0.05	)
Diluted EPS
Basic common shares		126,918			62,510			116,981			62,490
Plus: Impact of stock options		—			—			—			—
Diluted common shares		126,918			62,510			116,981			62,490
Diluted EPS	$	(0.43	)	$	(0.05	)	$	(0.85	)	$	(0.05	)

For the three and six months ended January 31, 2009, options to purchase 11,101,002 shares and for the three and six months ended January 31, 2008, options to purchase 8,682,530 shares and 8,461,945 shares, respectively, of common stock were not included in the calculation of diluted net loss per share because their inclusion would have been anti-dilutive. These options could be dilutive in the future. The calculation of diluted net loss per share also excludes 45,000 and 638,000 RSUs at January 31, 2009 and 2008, 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 and six months ended January 31, 2009 and January 31, 2008 were not significant. The realized profits, losses and interest are included in investment income in the Statements of Operations.

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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 significant impairment losses recorded in the three and six months ended January 31, 2009 and January 31, 2008.

Inventories

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

	January 31, 2009		July 31, 2008
	(in thousands)
Purchased components and parts	$	19,460	$	12,451
Units-in-progress		8,500		2,777
Finished units		9,052		7,277
Total inventories	$	37,012	$	22,505

The Company establishes inventory reserves when conditions exist that indicate inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for the Company’s products or market conditions. The Company regularly evaluates the ability to realize the value of 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 usage alternatives are also explored to mitigate inventory exposure. When recorded, reserves are intended to reduce the carrying value of inventory to its net realizable value. As of January 31, 2009 and July 31, 2008, inventory is stated net of inventory reserves of $54.6 million and $35.2 million, respectively. The reserve as of January 31, 2009 includes provisions of $5.6 million and $13.7 million, which were recorded during the three months ended January 31, 2009 and the three months ended October 31, 2008, consisting of excess and obsolete inventory as a result of the implementation of the combined Company product roadmap. For the three months ended January 31, 2009, product roadmap decisions related eliminating further development of the ASL3KMS line accounted for $0.8 million of the total inventory related provision. The balance of the inventory related provision, or $4.8 million, was a result of the Company’s review of all future service requirements for last time buys based on current products and legacy products based on the implementation of the product road map. For the three months ended October 31, 2008, product roadmap decisions to eliminate the ASL 3RF and the Diamond D40 products accounted for $5.9 million of the total inventory related provision. In addition, $6.6 million of the inventory related provision was a result of a significant reduction in the demand for the Sapphire products which have been negatively impacted by the current business conditions. The balance of the inventory related provision of approximately $1.2 million was related to the Company’s Fusion CX product line which is being phased out in favor of the Company’s Fusion MXc product line. If actual demand for products deteriorates or market conditions are less favorable than projected, additional inventory reserves may be required. Such reserves are not reversed until the related inventory is sold or otherwise disposed of. The Company did not have any sales of previously fully-written off inventory for the three or six months ended January 31, 2009. For the six months ended January 31, 2008, the Company had sales of $1.2 million of previously written off inventory. The Company had no sales of previously reserved inventory during the three months ended January 31, 2008.

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Property and Equipment

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

	(in thousands)
	January 31, 2009			July 31, 2008			Estimated Useful Lives
Equipment spares	$	66,862		$	52,978		5 or 7
Machinery, equipment and internally manufactured systems		46,273			40,246		3-7
Office furniture and equipment		3,170			2,168		3-7
Leasehold improvements		12,410			9,958		Shorter of 10 years or term of lease
Land		2,524			—		—
Purchased software		1,736			—		3
Property and equipment, gross		132,975			105,350
Less: accumulated depreciation and amortization		(86,430	)		(78,137	)
Property and equipment, net	$	46,545		$	27,213

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” (“SFAS No. 144”), 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.

In connection with the recent merger with Credence, during the quarter ended October 31, 2008, the Company developed a product roadmap for the combined company which led to the phase out of approximately $3.7 million of certain consignment testers and property and equipment related to the ASL 3KRF, Diamond D40, and Sapphire product lines. In light of the current economic conditions, the Company also wrote down $1.3 million of certain consignment testers for which it does not believe it will recover the cost. Accordingly, the Company recorded an impairment loss for the three months ended October 31, 2008 of $5.0 million. In the quarter ended January 31, 2009, the Company recorded additional impairment charges of $0.8 million related to the reduction in the fair value of the land that the Company owns adjacent to its Hillsboro, Oregon facility. There were no significant impairment losses for the six months ended January 31, 2008.

Due to the significant decline in the Company’s stock price and lower than expected revenues for the three and six months ended January 31 , 2009, the Company conducted recoverability tests in accordance with SFAS No. 144, based on probability-weighted, undiscounted cash flows of the Company’s long-lived assets which contemplates significant cost-savings. As a result of these tests, the Company determined there were no additional impairment losses on long-lived assets for the three and six months ended January 31, 2009. However, actual performance in the near-term and longer-term could be materially different from these forecasts, which could impact future estimates of undiscounted cash flows and may result in the impairment of the carrying amount of long-lived assets. This could be caused by events such as strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on the Company’s customer base, or a material negative change in its relationships with significant customers.

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Goodwill and Other Intangibles

In accordance with FASB Statement No. 142,Goodwill and Other Intangible Assets (SFAS 142), the Company is required to review goodwill for impairment at least annually or more often if there are indicators of impairment present. Historically, the Company has performed its annual impairment analysis during the fourth quarter of each year. The provisions of SFAS 142 require that a two-step impairment test be performed for goodwill. In the first step, the Company compares the fair value of each reporting unit to which goodwill has been allocated to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to the difference.

Determining the number of reporting units and the fair value of a reporting unit requires the Company to make judgments and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. The Company bases its fair value estimates on assumptions it believes to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, the Company makes judgments and assumptions in allocating assets and liabilities to its reporting units.

Of the $45.1 million of total goodwill, $14.4 million at January 31, 2009 and July 31, 2008, represents the excess of acquisition costs over the estimated fair value of the net assets acquired from StepTech, Inc. (“StepTech”) on June 10, 2003. In connection with the acquisition of Credence, the Company has recorded approximately $30.7 million of goodwill in its consolidated balance sheet at January 31, 2009. This amount represents the excess purchase price over the fair value of the net tangible and intangible assets acquired at January 31, 2009. The Company has concluded it has two distinct reporting units under SFAS No. 142, Credence and LTX. The determination of the number of reporting units, (two) was based on the following:

• The merger with Credence Corporation was completed on August 29, 2008. Two separate accounting books and records were maintained for the quarters ended October 31, 2008 and January 31. 2009.

• The Company was able to calculate and determine two separate cash flows for each entity.

• While the Company and its chief operating decision maker had access to two separate accounting books and records during the quarters ended October 31, 2008 and January 31. 2009, strategic and operational decisions about allocation of resources are made based on financial information of the combined company. Accordingly, as discussed in footnote 4, the Company operates as one reporting segment.

The Company has continued to integrate all operational and financial reporting functions and systems of both companies. During the quarter ended April 30, 2009, the Company expects that financial accounting systems and organizational structure will be fully integrated and discrete financial information and cash flows will no longer be available. As such, future impairment reviews will likely be performed on a single reporting unit basis.

During October of 2008 and January of 2009, pursuant to LTX-Credence’s accounting policy, the Company determined that certain circumstances, primarily related to a significant decline in our stock price, product roadmap decision, and lower than expected revenues constituted a triggering event which suggested that the carrying amount of goodwill may not be recoverable. Accordingly, the Company performed an impairment test of the carrying value of goodwill as of October 31, 2008 and January 31, 2009. As a result of this analysis, the Company concluded that goodwill was not impaired at October 31, 2008 and January 31, 2009. The Company considered the income approach in determining the fair value, which requires estimates of future operating results and discounted cash flows of the reporting unit.

The estimates of future operating results and cash flows were principally derived from the Company’s long-term financial forecast. This long-term financial forecast represents the best estimate that the Company has at this time and the Company believes that its underlying assumptions are reasonable based primarily on current product performance. The underlying assumptions contemplate revenue to continue at the current levels in the near term with some improvement in economic conditions that will drive industry growth and increased revenues in subsequent years of the analysis. Cost structures are consistent with the Company’s merger integration plan. However, actual performance in the near-term and longer-term could be materially different from these forecasts, which could impact future estimates of fair value and may result in the impairment of the carrying amount of goodwill. This could be caused by events such as, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on the Company’s customer base, or a material negative change in its relationships with significant customers.

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For purposes of the discounted cash flow analysis, the Company assumed a cash flow period of 10 years, terminal value based upon terminal growth rate of 2.0 percent and an estimated discount rate of 18 percent, which is based on our weighted average cost of capital, adjusted for the risks associated with obtaining the revenue plan and market penetration. A variance in these assumptions could have a significant impact on the assessment as to whether goodwill may or may not be impaired. Accordingly, the Company will continue to perform this analysis no less than quarterly for the foreseeable future.

In connection with the goodwill impairment review, the Company determined its market capitalization was lower than both the stockholders’ equity and the estimate of the Company’s enterprise value based on discounted future cash flows as of the periods ended October 31, 2008 and January 31, 2009. The Company believes that the difference between the estimated enterprise value and the market capitalization could be a result of:

• investors’ concerns about the Company’s ability to successfully integrate LTX and Credence and gain the synergy cost savings as forecasted by management.

• the size and resources of LTX-Credence relative to its major competitors, Teradyne, Verigy and Advantest.

• declining revenues in recent months and the uncertainty around industry projections going forward.

• lack of institutional investor activity due to restrictions on investments with stock prices below prescribed levels.

• increased operating losses and cash consumption during the six months ended January 31, 2009.

The Company has announced that it has exceeded its original estimate of merger related synergy savings of $25.0 million with $75.0 million of actual savings. The full benefit to the statement of operations will be in place by the quarter ending July 31, 2009. The merger will provide the opportunity to streamline all areas of its business, enabling the Company to operate efficiently by continuous focus on an efficient and flexible business model. Additionally, the merger has created new business opportunities that management believes will lead to growth over the medium to long term, including expansion into market segments not previously addressed and growth in the China and Taiwan markets due to the strong presence of the Credence operations in these regions.

The following is a summary of activity for the Company’s goodwill for the six months ended January 31, 2009 and 2008:

	Six Months Ended January 31,
Goodwill Activity	2009			2008
	(in thousands)
Balance at beginning of period	$	14,368		$	14,762
Acquisition of Credence		31,231			—
Resolution of uncertain tax position		(451	)		—
Total	$	45,148		$	14,762

Intangible assets, all of which relate to the Credence merger, consist of the following:

		As of January 31, 2009
Description	Estimated Useful Life (in years)	Gross Carrying Amount (in thousands)		Accumulated Amortization (in thousands)		Net Amount (in thousands)
Tradenames	1.0	$	300	$	137	$	163
Distributor relationships	2.0		3,000		933		2,067
Key customer relationships	3.0		8,900		2,574		6,326
Developed technology—ASL	6.0		15,700		2,338		13,362
Developed technology—Diamond	9.0		9,200		1,428		7,772
Maintenance agreements	7.0		1,600		—		1,600
Total intangible assets		$	38,700	$	7,410		31,290

Intangible assets are amortized based upon the pattern of estimated economic use, over their estimated useful lives. The weighted average estimated useful life over which these intangible assets will be amortized is 5.5 years.

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The Company expects amortization for these intangible assets to be:

Year ending July 31,	Amount (in thousands)
Remainder of 2009	$	8,891
2010		10,617
2011		5,832
2012		3,075
2013		1,518
Thereafter		1,357
Total	$	31,290

3. BUSINESS COMBINATION

Merger with Credence Systems Corporation

On August 29, 2008, the Company and Credence completed the merger contemplated by the Merger Agreement, pursuant to which Credence became a wholly-owned subsidiary of the Company and the Company changed its name to “LTX-Credence Corporation”. Pursuant to the Merger Agreement, each share of Credence common stock outstanding as of immediately prior to the effective time of the merger (the “Effective Time”) was converted into the right to receive 0.6129 shares of the Company’s common stock. As a result of this conversion, an aggregate of 63.0 million shares of the Company’s common stock were issued to former stockholders of Credence and, immediately after the Effective Time, the former stockholders of Credence held 50.02% of the outstanding shares of the Company’s common stock and the continuing Company stockholders held 49.98% of the outstanding shares of the Company’s common stock. In addition, at the Effective Time, all outstanding options and other equity-based awards to acquire shares of Credence common stock were converted into options and other equity-based awards to acquire shares of the Company’s common stock, as adjusted to reflect the exchange ratio of the merger.

In accordance with SFAS No. 141, “Business Combinations” (“SFAS No. 141”) and based on the terms of the merger, the Company is the accounting acquirer. This conclusion was based on the facts that LTX board members and senior management control and represent a majority of the board of directors and senior management of the combined company, as well as the terms of the merger consideration, pursuant to which the Credence stockholders received a premium over the fair market value of their shares on the merger completion date. There were no preexisting relationships between the two companies.

The estimated aggregate purchase price of approximately $129.4 million includes 63.0 million shares of LTX common stock at an estimated fair value of $117.7 million; approximately 4.0 million of fully vested stock options granted to Credence employees in exchange for their vested Credence stock options, with an estimated fair value of approximately $1.5 million; and approximately $10.2 million of direct acquisition costs. There are no potential contingent consideration arrangements payable to the former Credence shareholders in connection with this transaction.

The Company has measured the fair value of the 63.0 million shares of the Company common stock issued as consideration in connection with the merger under EITF Issue No. 99-12, “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination”. The Company determined the measurement date to be August 29, 2008, the date the transaction was completed, as the number of shares to be issued according to the exchange ratio was fixed without subsequent revision on that date. The Company valued the securities based on the average market price two days before and after the measurement date. The average stock price was determined to be approximately $1.87.

The following is a summary of the preliminary estimate of the purchase price for Credence:

	(in thousands, except exchange ratio and price per share)
Number of Credence shares to be acquired		102,824
Multiplied by the exchange ratio		0.6129
Number of shares of LTX common stock to be issued to the holders of Credence common stock		63,021
Multiplied by the price per share of LTX common stock	$	1.87	$	117,723

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	(in thousands, except exchange ratio and price per share)
Estimated fair value of outstanding Credence stock options and restricted stock exchanged for LTX stock options and restricted stock (options calculated using the Company’s option pricing model)		1,508
Estimated transaction costs		6,300
Other consideration		3,859
Estimated purchase price	$	129,390

The above preliminary estimate of purchase price has been allocated based on a preliminary estimate of the fair value of net assets acquired as follows:

Allocation of purchase consideration

	(in thousands)
Cash and cash equivalents, net of acquisition costs	$	134,280
Working capital as of August 29, 2008, net of cash and cash equivalents acquired		11,671
Identifiable intangible assets		38,700
Goodwill		31,231
In-process research and development		6,200
Property and equipment		17,532
Other long-term assets		31,060
Convertible Senior Subordinated Notes due 2010		(114,974	)
Other long-term liabilities		(26,310	)
Estimated purchase price	$	129,390

The estimated purchase price and allocation thereof is preliminary and changes as additional information related to merger consideration and values of acquired assets and assumed liabilities becomes available.

Valuation of Intangible Assets and Goodwill

The estimated purchase price for the merger with Credence has been allocated to assets acquired and liabilities assumed based on their estimated fair values. The Company has then allocated the purchase price in excess of net tangible assets acquired to identifiable intangible assets, including in process research and development, based upon a detailed valuation that uses information and assumptions provided by management, as further described below. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill.

Identifiable Intangible Assets

As part of the preliminary purchase price allocation Credence’s identifiable intangible assets include existing technology, customer relationships and trade names. Credence’s existing technology relates to patents, patent applications and know-how with respect to the technologies embedded in its currently marketed products.

LTX-Credence primarily used the income approach to value the existing technology and other intangibles. This approach calculates fair value by estimating future cash flows attributable to each intangible asset and discounting them to present value at a risk-adjusted discount rate.

In estimating the useful life of the acquired assets, the Company considered paragraph 11 of SFAS No. 142, which lists the pertinent factors to be considered when estimating the useful life of an intangible asset. These factors included a review of the expected use by the combined company of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets, legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset or may enable the extension of the useful life of an acquired asset without substantial cost, the effects of obsolescence, demand, competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset. The Company expects to amortize these intangible assets over their estimated useful lives using a method that is based on estimated future cash flows as the Company believes this will approximate the pattern in which the economic benefits of the assets will be derived.

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Acquired In-Process Research and Development

As part of the preliminary purchase price allocation for Credence, approximately $6.2 million of the purchase price has been allocated to acquired in-process research and development projects primarily related to Credence’s ASL and Diamond tester product lines. The amount allocated to acquired in-process research and development represents the estimated value based on risk-adjusted cash flows related to in-process projects that have not yet reached technological feasibility and have no alternative future uses as of the date of the acquisition. The primary basis for determining the technological feasibility of these projects was a detailed review of the development status of each project including factors such as costs incurred/remaining, technological risks achieved/remaining, and incompleteness.

The fair value assigned to acquired in-process technology was determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. The revenue projection used to value the acquired in-process research and development was based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by us and our competitors. The resulting net cash flows from such projects were based on our estimates of cost of sales, operating expenses, and income taxes from such projects.

The rates utilized to discount the net cash flows to their present value were based on estimated cost of capital calculations and the implied rate of return from the transaction model plus a risk premium. Due to the nature of the forecasts and the risks associated with the developmental projects, appropriate risk-adjusted discount rates were used for the in-process research and development projects. The discount rates are based on the stage of completion and uncertainties surrounding the successful development of the purchased in-process technology projects.

In accordance with SFAS No. 141, the Company recorded a charge in the six months ended January 31, 2009 for the full amount of the acquired in-process research and development.

Supplemental Pro-Forma Information

The following unaudited pro-forma information presents the consolidated results of operations of LTX and Credence as if the acquisition had occurred at the beginning of each period presented, with pro-forma adjustments to give effect to amortization of intangible assets and certain other adjustments (in thousands):

	Three Months Ended January 31,			Six Months Ended January 31,
	2008			2009			2008
Net sales	$	94,224		$	89,819		$	221,528
Net loss	$	(59,305	)	$	(130,559	)	$	(53,948	)
Net loss per share—basic and diluted	$	(0.47	)	$	(1.12	)	$	(0.33	)

The pro forma net loss for the six months ended January 31, 2009 includes $51.1 million of charges related to Credence for excess and obsolescence inventory provisions, property and equipment impairment, amortization of acquired intangible assets and restructuring, all of which was incurred after August 29, 2008. The unaudited pro forma results are not necessarily indicative of the results that the Company would have attained had the acquisition of Credence occurred at the beginning of the periods presented.

4. SEGMENT REPORTING

As a result of the Credence merger, the Company reassessed its segment reporting based on the operating and reporting structure of the combined company, in accordance with the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). The Company determined that it continues to operate as one reporting segment, that is, the design, manufacture and marketing of automated test equipment for the semiconductor industry that is used to test system-on-a-chip, digital, analog and mixed signal integrated circuits. While the Company and its chief operating decision maker have access to discrete financial information for two operating segments, LTX and Credence, the Company has determined it has as one reporting segment based on the following aggregation criteria from SFAS No. 131:

• similar products and services

• similar production processes

• similar class of customer for products and services

• similar methods to distribute the products and services

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Further, the strategic and operational decisions about allocation of resources are made based on financial information for the combined company, including near term plans for full integration of operations. The Company’s October 31, 2008 and January 31, 2009 Goodwill and Long Lived Assets impairment reviews were completed on a two reporting unit basis as the Company was able to determine two separate cash flows from the legacy Credence and LTX accounting and financial reporting systems. As a result of further integration of operations and financial reporting systems, that will no longer be possible or meaningful going forward.

For the three and six months ended January 31, 2009, sales to three customers each accounted for 10% or more of net sales.

The Company’s net sales by geographic area for the three and six months ended January 31, 2009 and 2008, along with the long-lived assets at January 31, 2009 and July 31, 2008, are summarized as follows:

	Three Months Ended January 31,				Six Months Ended January 31,
	2009		2008		2009		2008
	(in thousands)
Net sales:
United States	$	11,809	$	13,661	$	36,483	$	29,974
Taiwan		2,048		1,303		6,621		2,617
Japan		442		830		962		2,042
Singapore		3,266		6,435		7,108		8,722
Philippines		4,433		3,028		11,589		5,058
All other countries		8,403		5,765		14,771		12,244
Total Net Sales	$	30,401	$	31,022	$	77,534	$	60,657

Long-lived assets consist of property and equipment:

	January 31, 2009		July 31, 2008
	(in thousands)
Long-lived assets:
United States	$	41,998	$	23,397
Taiwan		40		45
Japan		435		158
Singapore		2,031		1,717
All other countries		2,041		1,896
Total long-lived assets	$	46,545	$	27,213

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

5. RESTRUCTURING

As a result of the Credence merger, the Company assumed previous Credence management approved restructuring plans designed to reduce headcount, consolidate facilities and to align that company’s capacity and infrastructure to anticipated customer demand and transition of its operations for higher utilization of facility space. In connection with these plans, the Company assumed a total liability of approximately $6.0 million. Subsequent to the completion of the Merger the Company incurred approximately $0.9 million related to these actions.

Additionally, the Company recorded as part of its purchase accounting a liability of approximately $13.9 million in accordance with EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination” (“EITF 95-3”) primarily related to termination of certain Credence employees in connection with the Company’s merger with Credence. In addition, the Company recorded a liability of approximately $3.0 million for legacy LTX employees related to the merger with Credence and other post-employment obligations. The Company believes its plan will be finalized within one year of the date of acquisition and that any adjustments to severance and/or retention costs directly related to the Credence restructuring would be an adjustment to goodwill. The following table sets forth the Company’s reorganization accrual activity for the three and six months ended January 31, 2009 (in thousands):

	Severance Costs			Facility Leases			Asset/ Liability Impairment			Total
Balance July 31, 2008	$	296		$	619		$	—		$	915
Provided for under EITF 95-3 in connection with the Credence merger		13,860			—			—			13,860
Balance acquired from Credence, August 29, 2008		5,994			—			—			5,994
Restructuring expense		12,853			4,074			1,603			18,530
Elimination of deferred rent and unfavorable lease liability		—			2,764			—			2,764
Non-cash utilization		—			—			(1,603	)		(1,603	)
Cash paid		(16,062	)		(171	)		—			(16,233	)
Balance January 31, 2009	$	16,941		$	7,286		$	—		$	24,227

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Approximately $4.9 million of the accrued restructuring liability is related to facility lease payments that are due more than one year from January 31, 2009. Accordingly, the Company has recorded this amount to other long-term liabilities as of January 31, 2009. The remainder of the accrued restructuring balance at January 31, 2009 of $19.3 million is shown separately in the current liabilities section of the consolidated balance sheet.

6. COMMITMENTS AND CONTINGENCIES

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 the Company’s products. Also, from time to time in agreements with suppliers, licensors and other business partners, we agree to indemnify these partners against certain liabilities arising out of the sale or use of the Company’s 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 the Company 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 January 31, 2009 or July 31, 2008.

Subject to certain limitations, LTX-Credence indemnifies its current and former officers and directors for certain events or occurrences. Although the maximum potential amount of future payments LTX-Credence 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 January 31, 2009 or July 31, 2008.

The Company has operating lease commitments for certain facilities and equipment and capital lease commitments for certain equipment. Minimum lease payments (including amounts for vacated facilities accrued for in accrued restructuring) under noncancelable leases at January 31, 2009, are as follows:

Lease Commitments:

Year ending July 31,	Amount (in thousands)
2009	$	4,677
2010 – 2011		12,070
2012 – 2013		8,822
Thereafter		12,366
Total minimum lease payments	$	37,935

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7. ACCRUED EXPENSES

Other accrued expenses consisted of the following at January 31, 2009 and July 31, 2008:

	(in thousands)
	January 31, 2009		July 31, 2008
Accrued compensation	$	9,847	$	4,636
Accrued vendor liability		9,410		—
Accrued income and local taxes		1,028		2,249
Product warranty		4,096		908
Accrued interest		406		58
Accrued professional fees		853		3,213
Other accrued expenses		13,013		2,102
Total other accrued expenses	$	38,653	$	13,166

Accrued vendor liability represents inventory physically located at the Company’s outsourced suppliers which the Company is obligated to purchase.

8. LONG TERM DEBT

Long-term debt consists of the following:

	(in thousands)
	January 31, 2009			July 31, 2008
Bank term loan	$	15,800		$	17,900
Convertible Senior Subordinated Notes due 2010		49,368			—
		65,168			17,900
Less: current portion		(8,637	)		(5,700	)
Total Long-term debt	$	56,531		$	12,200

On December 7, 2006, the Company entered into a new Loan and Security Agreement (the “2006 Loan Agreement”) with Silicon Valley Bank (“SVB”). Under the terms of the 2006 Loan Agreement, LTX borrowed $20.0 million under a term loan at an interest rate of prime minus 1.25% with interest-only payable during the first 12 months. The loan is secured by all assets of the Company located in the United States. 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. No amount was outstanding under the revolving credit facility as of January 31, 2009. The loan agreement with SVB requires SVB approval of a change in ownership or control of the Company. The Company has received a waiver and approval of the merger from SVB as of August 29, 2008. The Company’s revolving credit facility expired on December 6, 2008. On February 25, 2009, the Company entered into a modification of its existing loan agreement with SVB to provide for a two year revolving line of credit agreement (the “First Loan Modification Agreement”). The First Loan Modification Agreement was effective as of February 25, 2009. The Company intends to use the proceeds from the revolving line of credit for working capital and other general corporate purposes, as needed.

The First Loan Modification Agreement allows for cash borrowings, letters of credit and cash management facilities under a secured revolving credit facility of up to a maximum of $40.0 million. Any amounts outstanding under the revolving credit facility will accrue interest at a floating per annum rate equal to SVB’s prime rate, or if greater, 4.5%. The Company’s debt obligations under the credit facility with SVB may be accelerated upon the occurrence of an event of default, which includes customary events of default, including payment defaults, defaults in the performance of affirmative and negative

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covenants, the inaccuracy of representations or warranties, a cross-default related to indebtedness in an aggregate amount of $0.5 million or more, bankruptcy and insolvency related defaults, defaults relating to judgments and a material adverse change (as defined in the agreement). The credit facility contains negative covenants applicable to LTX-Credence and its subsidiaries, including a financial covenant requiring us to maintain a minimum level of liquidity equal to cash and cash equivalents maintained in accounts at SVB in excess of amounts owed to SVB under the term loan and revolving credit facility plus $20 million, as well as restrictions on liens, capital expenditures, investments, indebtedness, fundamental changes to the Borrower’s business, dispositions of property, making certain restricted payments (including restrictions on dividends and stock repurchases), entering into new lines of business and transactions with affiliates. The Company has not drawn down any funds under the revolving credit facility as of the date of filing this report on Form 10-Q.

At the time of the completion of the merger, Credence had outstanding $122.5 million aggregate principal amount of 3.5% Convertible Senior Subordinated Notes due 2010 (“Notes”). In the first six months of fiscal 2009, the Company repurchased approximately $72.0 million of principal amount of the Notes at a discount to their par value.

The Company has accounted for the repurchase of the Notes as an extinguishment of debt in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, a Replacement of SFAS No. 125” and has recorded a net gain on extinguishment of debt of $1.9 million and $2.2 million in the three and six months ended January 31, 2009.

9. FAIR VALUE MEASUREMENTS

On August 1, 2008, the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), for certain financial assets and financial liabilities that are measured at fair value on a recurring basis. In August 2008, the Company adopted FSP 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13”, which removed leasing transactions accounted for under Statement No. 13 and related guidance from the scope of SFAS No. 157. In August 2008, the Company also adopted FSP 157-2, “Partial Deferral of the Effective Date of Statement 157”, which deferred the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities measured at fair value on a nonrecurring basis to fiscal years beginning after November 15, 2008. SFAS 157 provides a consistent definition of fair value, with a focus on exit price from the perspective of a market participant. The adoption of SFAS 157 and its related pronouncements did not have a material impact on the Company’s consolidated financial statements.

The Company holds short-term money market investments and certain other financial instruments which are carried at fair value. The Company determines fair value based upon quoted prices, when available, or through the use of alternative approaches when market quotes are not readily accessible or available.

Valuation techniques for fair value are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s best estimate, considering all relevant information. These valuation techniques involve some level of management estimation and judgment. The valuation process to determine fair value also includes making appropriate adjustments to the valuation model outputs to consider risk factors.

The fair value hierarchy of the Company’s inputs used in the determination of fair value for assets and liabilities during the current period consists of three levels. Level 1 inputs are comprised of unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2 inputs include quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 inputs incorporate the Company’s own best estimate of what market participants would use in pricing the asset or liability at the measurement date where consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. If inputs used to measure an asset or liability fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the asset or liability. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following table presents financial assets and liabilities measured at fair value on a recurring basis and their related valuation inputs as of January 31, 2009 (in thousands):

			Fair Value Measurements at Reporting Date Using
	Total Fair Value of Asset or Liability		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents	$	82,194	$	74,072	$	8,122	—
Short-term investments		15,851		—		15,851	—
Other assets (1)		3,062		1,936		1,126	—
Total assets	$	101,107	$	76,008	$	25,099	—
Other long-term liabilities (1)	$	581	$	581		—	—
Total liabilities	$	581	$	581		—	—

(1) The Company has assets held in a Rabbi Trust, which generally include actively traded mutual funds and money market accounts.

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10. RECENTLY ISSUED ACCOUNTING STANDARDS

In April 2008, the FASB issued Staff Position No. 142-3 (FSP No. 142-3), “Determination of the Useful Life of Intangible Assets”. This FSP amends the guidance in SFAS No. 142, about estimating useful lives of recognized intangible assets and requires additional disclosures related to renewing or extending the terms of a recognized intangible asset. In estimating the useful life of a recognized intangible asset, the FSP requires companies to consider their historical experience in renewing or extending similar arrangements together with the asset’s intended use, regardless of whether the arrangements have explicit renewal or extension provisions. The FSP is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements are to be applied prospectively to all intangible assets. The Company is currently evaluating the potential impact that the adoption of FSP No. 142-3 will have on its consolidated financial statements.

In March 2008, the Financial Accounting Standards Board issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 expands the current disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, such that entities must now provide enhanced disclosures on a quarterly basis regarding how and why the entity uses derivatives; how derivatives and related hedged items are accounted for under SFAS No. 133 and how derivatives and related hedged items affect the entity’s financial position, performance and cash flow. SFAS No. 161 is effective prospectively for periods beginning on or after November 15, 2008. The adoption of this standard is not expected to have any impact on the Company’s financial condition or results of operations.

In December 2007, the FASB issued Statement No. 141(R), Business Combinations (“Statement 141(R)”), a replacement of FASB Statement No. 141. Statement 141(R) is effective for fiscal years beginning on or after December 15, 2008 and applies to all business combinations. Statement 141(R) provides that, upon initially obtaining control, an acquirer shall recognize 100 percent of the fair values of acquired assets, including goodwill, and assumed liabilities, with only limited exceptions, even if the acquirer has not acquired 100 percent of its target. As a consequence, the current step acquisition model will be eliminated. Additionally, Statement 141(R) changes current practice, in part, as follows: (1) contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration; (2) transaction costs will be expensed as incurred, rather than capitalized as part of the purchase price; (3) pre-acquisition contingencies, such as legal issues, will generally have to be accounted for in purchase accounting at fair value; (4) in order to accrue for a restructuring plan in purchase accounting, the requirements in FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, would have to be met at the acquisition date; and (5) In-process research and development charges will no longer be recorded. Upon adoption of Statement 141(R) we will no longer reduce goodwill when utilizing net operating loss carry forwards for which a full valuation allowance exists as was required under Statement 141. The adoption of Statement 141(R) on August 1, 2010 could materially change the accounting for business combinations consummated subsequent to that date.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51, (“SFAS 160”), which amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB 51’s consolidation procedures for consistency with the requirements of SFAS 141(R), Business Combinations. This Statement will be effective for financial statements issued for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this statement is not expected to have a material impact to the Company’s consolidated financial statements.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Industry Conditions and Outlook

LTX-Credence Corporation (“LTX-Credence” or the “Company”), provides focused, cost-optimized automated test equipment (ATE) solutions. We design, manufacture, market and service ATE solutions that address the broad, divergent test requirements of the wireless, computing, automotive and entertainment market segments. Semiconductor designers and manufacturers worldwide use our equipment to test their devices during the manufacturing process. After testing, these devices are then incorporated in a wide range of products, including computers, 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.

LTX-Credence focuses its marketing and sales efforts on integrated device manufacturers (IDMs), outsource assembly and test providers (OSATs), which perform manufacturing services for the semiconductor industry, and fabless companies, which design integrated circuits but have no manufacturing capability. We provide our customers with a comprehensive portfolio of test systems and a global network of strategically deployed applications and support resources.

LTX-Credence Corporation was incorporated in Massachusetts in 1976. Our executive offices are located at 1355 California Circle, Milpitas, California 95035 and our telephone number is 408-635-4300. The terms “LTX-Credence” and the “Company” refer to LTX-Credence Corporation and its wholly owned subsidiaries unless the context otherwise indicates. The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports available, free of charge, in the Investor Relations section of the Company’s website at www.ltx-credence.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.

On August 29, 2008, LTX Corporation (“LTX”) and Credence Systems Corporation (“Credence”) completed a merger of equals (“the Merger”). In connection with the merger, LTX Corporation changed its name to “LTX-Credence Corporation” and changed the symbol under which its common stock trades on the NASDAQ Global Market to “LTXC” and Credence Systems Corporation became a wholly-owned subsidiary of LTX-Credence. On January 30, 2009, the Company completed a merger of Credence with and into the Company with the Company being the surviving corporation. The Company’s results of operations for the six months ended January 31, 2009 include Credence’s operating results from August 29, 2008 through January 31, 2009. The Company’s consolidated balance sheet as of July 31, 2008 and results of operations for the three and six months ended January 31, 2008 do not include Credence’s results.

Industry Overview

Today, most electronic products contain a combination of integrated circuits (ICs). Each of these ICs has electrical circuitry that requires validation or testing during and after the manufacturing process. The final usability of the IC is determined by ATE. The testing of devices is a critical step during the semiconductor production process. Typically,

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semiconductor companies test each device at two different stages during the manufacturing process to ensure its functional and electrical performance prior to shipment to the device user. These companies use semiconductor testing equipment to first test a device after it has been fabricated but before it has been packaged to eliminate non-functioning parts. Then, after the functioning devices are packaged, they are tested again to determine if they fully meet performance specifications. Testing is an important step in the manufacturing process because it allows devices to be fabricated at both maximum density and performance—a key to the competitiveness of semiconductor manufacturers.

Three primary factors ultimately drive demand for semiconductor test equipment:

• increases in unit production of semiconductor devices;

• increases in the complexity and performance level of devices used in electronic products; and

• the emergence of next generation device technologies.

Increases in unit production result primarily from the proliferation of the personal computer, growth of the telecommunications industry, consumer electronics, the mobile internet, broadband network access, the increased use of digital signal processing (DSP) devices, and automotive and power management applications. These increases in unit production, in turn lead to a corresponding increase in the need for test equipment.

Furthermore, demand is increasing worldwide for smaller, more highly integrated electronic products. This has led to ever higher performance and more complex semiconductor devices, which, in turn, results in a corresponding increase in the demand for equally sophisticated test equipment.

Finally, the introduction and adoption of a new generation of end-user products requires the development of next generation device technologies. For example, access to information is migrating from the stand-alone desktop computer, which might be physically linked to a local network, to the seamless, virtual network of the internet, which is accessible from anywhere by a variety of new portable electronic communication products. A critical enabling technology for this network and multimedia convergence is system in package (“SIP”). SIP provides the benefits of lower cost, smaller size and higher performance by combining advanced digital, analog and embedded memory technologies on a single device. Historically, these discrete technologies were only available on several separate semiconductor devices, each performing a specific function. By integrating these functions in a single package, SIP enables lower cost, smaller size, higher performance, and lower power consumption.

The increases in unit production of devices, the increase in complexity of those devices, and, ultimately, the emergence of new semiconductor device technology have mandated changes in the design, architecture and complexity of such test equipment. Semiconductor device manufacturers must still be able to test the increasing volume and complexity of devices in a reliable, cost-effective, efficient and flexible manner. However, the increased pace of technological change, together with the large capital investments required to achieve economies of scale, are changing the nature and urgency of the challenges faced by device designers and manufacturers.

The combination of ever increasing price pressure and the fact that technology that is not always cost effective to integrate into SIP has led to the need for testing solutions that cover segments of the semiconductor market. There is a need to maximize utilization on the semiconductor test floor and at the same time have the most cost effective test solution for various points or integration levels in technology. This requires a suite of test solution products that are optimized in technology and cost for the segment they are addressing thus maximizing efficiency and minimizing overall cost of test.

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 goods 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. Our 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,

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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, 2008. For the second quarter of fiscal 2009, we believe the following critical accounting estimates significantly affected our estimates and judgments, in the preparation of our consolidated financial statements.

Inventory Valuation

At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analysis of sales levels by product and projections of future demand. These projections assist us in determining the carrying value of our inventory and are also used for near-term factory production planning. Generally, inventories on hand in excess of historical usage or forecasted demand are not valued. In addition, we write off inventories that are considered obsolete. Among other factors, management considers forecasted demand in relation to the inventory on hand, competitiveness of product offerings, and market conditions when determining obsolescence and net realizable value. We adjust remaining specific inventory balances to approximate the lower of our manufacturing cost or market value. If actual future demand or market conditions are less favorable than our projections as forecasted, additional inventory write-downs may be required and would be reflected in cost of sales in the period the revision is made. This would have a negative impact on our gross margin in that period. If in any period we are able to sell inventories that were not valued or that had been written off in a previous period, related revenues would be recorded without any offsetting charge to cost of sales, resulting in a net benefit to our gross margin in that period.

For the six months ended January 31, 2009, we recorded an inventory-related provision of $19.3 million which consisted of excess and obsolete inventory as a result of the determination and implementation of our current combined company product roadmap following the merger of LTX Corporation and Credence Systems Corporation, as well as declining customer demand in the current industry environment.

Valuation of Goodwill

The estimated purchase price for the merger with Credence has been allocated to assets acquired and liabilities assumed based on their estimated fair values. We then allocated the purchase price in excess of net tangible assets acquired to identifiable intangible assets, including in process research and development, based upon a detailed valuation that uses information and assumptions provided by management, as further described below. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill.

We follow the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), 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. 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. The provisions of SFAS 142 require that a two-step impairment test be performed for goodwill. In the first step, we will compare the fair value of the reporting unit to which goodwill has been allocated to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test and determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.

Determining the number of reporting units and the fair value of a reporting unit requires us to make judgments and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determining appropriate market comparables. We believe these assumptions to be reasonable but actual conditions are unpredictable and inherently uncertain. Actual future results may differ from our estimates.

As discussed in Note 2 to the consolidated financial statements, during the quarter we conducted analyses of the potential impairment of goodwill and concluded that this asset was not impaired at January 31, 2009. We will continue to perform these analyses on a quarterly basis for the foreseeable future.

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Valuation of Identifiable Intangible Assets

As part of the preliminary purchase price allocation Credence’s identifiable intangible assets include existing technology, customer relationships and trade names. Credence’s existing technology relates to patents, patent applications and know-how with respect to the technologies embedded in its currently marketed products.

We primarily used the income approach to value the existing technology and other intangibles. This approach calculates fair value by estimating future cash flows attributable to each intangible asset and discounting them to present value at a risk-adjusted discount rate.

In estimating the useful life of the acquired assets, we considered paragraph 11 of SFAS No. 142, which lists the pertinent factors to be considered when estimating the useful life of an intangible asset. These factors included a review of the expected use by the combined company of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets, legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset or may enable the extension of the useful life of an acquired asset without substantial cost, the effects of obsolescence, demand, competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset. We expect to amortize these intangible assets over their estimated useful lives using a method that is based on estimated future cash flows as we believe this will approximate the pattern in which the economic benefits of the assets will be derived.

Impairment of Long-Lived Assets

In connection with the recent merger with Credence, during the quarter ended October 31, 2008, we developed a product roadmap for the combined company which led to the phase out of approximately $3.7 million of certain consignment testers and property and equipment related to the ASL 3KRF, Diamond D40, and Sapphire product lines. In light of market conditions, we also wrote down $1.3 million of certain consignment testers for which we do not believe we will recover the cost. Accordingly, we recorded an impairment loss for the three months ended October 31, 2008 of $5.0 million. In the quarter ended January 31, 2009, we recorded additional impairment charges of $0.8 million related to the reduction in the fair value of the land that we own adjacent to its Hillsboro, Oregon facility. There were no significant impairment losses for the six months ended January 31, 2008.

Due to the decline in our stock price and lower than expected revenues for the three months and six months ended January 31, 2009, we conducted recoverability tests in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) based on probability-weighted, undiscounted cash flows of our long-lived assets which contemplates significant cost savings. As a result of these tests, we determined there were no additional impairment losses on long-lived assets for the three months and six months ended January 31, 2009. However, actual performance in the near-term and longer-term could be materially different from these forecasts, which could impact future estimates of undiscounted cash flows and may result in the impairment of the carrying amount of long-lived assets. This could be caused by events such as strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, or a material negative change in its relationships with significant customers. Accordingly, we will continue to perform this analysis on a quarterly basis for the foreseeable future.

Valuation of Acquired In-Process Research and Development

As part of the preliminary purchase price allocation for Credence, approximately $6.2 million of the purchase price has been allocated to acquired in-process research and development projects, primarily related to Credence’s ASL and Diamond tester product lines. The amount allocated to acquired in-process research and development represents the estimated value based on risk-adjusted cash flows related to in-process projects that have not yet reached technological feasibility and have no alternative future uses as of the date of the acquisition. The primary basis for determining the technological feasibility of these projects was a detailed review of the development status of each project including factors such as costs incurred/remaining, technological risks achieved/remaining, and incompleteness.

The fair value assigned to acquired in-process technology was determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. The revenue projection used to value the acquired in-process research and development was based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by us and our competitors. The resulting net cash flows from such projects were based on our estimates of cost of sales, operating expenses, and income taxes from such projects.

The rates utilized to discount the net cash flows to their present value were based on estimated cost of capital calculations and the implied rate of return from the transaction model plus a risk premium. Due to the nature of the forecasts and the risks associated with the developmental projects, appropriate risk-adjusted discount rates were used for the in-process research and development projects. The discount rates are based on the stage of completion and uncertainties surrounding the successful development of the purchased in-process technology projects.

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In accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS No. 141”), we recorded a charge in the six months ended January 31, 2009 for the full amount of the acquired in-process research and development.

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.

	Percentage of Net Sales
	Three Months Ended January 31,				Six Months Ended January 31,
	2009		2008		2009		2008
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	78.1		52.2		64.6		51.7
Inventory-related provision	18.5		—		24.9		—
Gross profit	3.4		47.8		10.5		48.3
Engineering and product development expenses	71.4		36.6		54.4		37.9
Selling, general and administrative expenses	49.3		22.3		37.9		22.1
Impairment charges	2.6		—		7.5		—
Amortization of purchased intangible assets	14.6		—		9.6		—
Acquired in-process research and development	—		—		8.0		—
Restructuring	48.2		—		23.9		—
Loss from operations	(182.7	)	(11.1	)	(130.8	)	(11.7	)
Other income (expense):
Interest expense	(3.5	)	(0.8	)	(2.7	)	(1.2	)
Investment income	2.5		1.9		2.2		2.1
Other income	(1.8	)	—		0.4		—
Gain on extinguishment of debt, net	6.4		—		2.9		—
Loss before provision (benefit) for income taxes	(179.1	)	(10.0	)	(128.0	)	(10.8	)
Provision (benefit) for income taxes	0.2		0.2		0.8		(5.2	)
Net loss	(179.3	)%	(10.2	)%	(128.8	)%	(5.6	)%

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.

Our results of operations for the six months ended January 31, 2009 include the results of Credence’s operations from August 29, 2008 to January 31, 2009. Credence’s results of operations are not included in our comparative three and six months ended January 31, 2008.

Three and Six Months Ended January 31, 2009 Compared to the Three and Six Months Ended January 31, 2008

Net sales. Net sales consist of semiconductor test equipment, system support and maintenance services, net of returns and allowances. Net sales for the three months ended January 31, 2009 decreased 2.0% to $30.4 million as compared to $31.0 million in the same quarter of the prior year. Net sales for the six months ended January 31, 2009 increased 27.8% to $77.5 million as compared to $60.7 million for the same six month period of the prior year. The decrease in net sales in the quarter ended January 31, 2009 as compared to the same period in the prior year is due to the deterioration of the overall economic environment, offset by net sales of approximately $16.1 million from Credence. The increase in net sales in the six months ended January 31, 2009 as compared to the same period in the prior year is due to the inclusion in the period ended January 31,

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2009 of five months of Credence revenue or approximately $41.1 million as a result of the merger with Credence. The incremental net sales from Credence’s operations were partially offset by reduced shipment volume across all products during the six months ended January 31, 2009 due to prolonged unfavorable industry and market conditions that have significantly impacted the semiconductor industry capital expenditures for automated test equipment.

Service revenue, included in net sales, accounted for $17.6 million, or 57.9% of net sales, and $7.2 million, or 23.1% of net sales, for the three months ended January 31, 2009 and 2008, respectively, and $33.5 million or 43.2% of net sales, and $13.9 million or 22.9% of net sales for the six months ended January 31, 2009 and 2008, respectively. The increase in service revenue is primarily a result of the inclusion of Credence-generated service revenue for the three and six months ended January 31, 2009 of approximately $11.9 million and $22.0 million, respectively.

Geographically, sales to customers outside of the United States were 61.2 % and 56.0% of net sales for the three months ended January 31, 2009 and 2008, respectively, and 52.9% and 50.6% of net sales for the six months ended January 31, 2009 and 2008, respectively. The increase in sales to customers outside the United States was a result of a change in sales mix.

Inventory-related provision. We recorded an inventory-related provision of $5.6 million or 18.5% of net sales in the three months ended January 31, 2009 The provision consisted of $0.8 million related to the implementation of product roadmap decisions related to the ASL 3KMS line and $4.8 million related to future requirements of last time buy components related to the implementation of the product roadmap decisions. For the six months ended January 31, 2009, we recorded an inventory-related provision of $19.3 million, or 24.9% of net sales, which in addition to the $5.6 million noted above also included excess and obsolete inventory as a result of the determination of the current combined company product roadmap, as well as declining customer demand due to the current industry environment. Product roadmap decisions to eliminate the ASL 3KRF and the Diamond D-40 products accounted for $5.9 million of the total inventory related provision. In addition, $6.6 million of the inventory related provision was a result of a significant reduction in the demand for the Sapphire products which have been negatively impacted by the current business conditions. The balance of the inventory related provision of approximately $1.2 million was related to our Fusion CX product line which is being phased out in favor of our Fusion MXc product line.

Gross profit margin. The gross profit margin was $1.0 million or 3.3% of net sales in the three months ended January 31, 2009, as compared to $14.8 million or 47.8% of net sales in the same quarter of the prior year. For the six months ended January 31, 2009, the gross profit margin was $8.1 million or 10.5% of net sales as compared to $29.3 million or 48.3% of net sales for the six months ended January 31, 2008. The decrease in the gross profit margin for the three months ended January 31, 2009 as compared to January 31, 2008 was a result of the $5.6 million inventory related provision recorded for the three months ended January 31, 2009 and increased manufacturing overhead as a result of the merger with Credence. The decrease in the gross profit margin for the six months ended January 31, 2009 as compared to the six months ended January 31, 2008 was primarily the result of the inventory-related provision of $19.3 million and increased manufacturing overhead as a result of the merger with Credence which were partially offset by added gross margin on $26.8 million of additional revenue related to the merger. Excluding the inventory-related provision, gross profit margin was $27.5 million or 35.4% of net sales for the six months ended January 31, 2009.

Engineering and product development expenses. Engineering and product development expenses were $21.7 million, or 71.4% of net sales, in the three months ended January 31, 2009, as compared to $11.3 million, or 36.6% of net sales, in the same quarter of the prior year. For the six months ended January 31, 2009, engineering and product development expenses were $42.2 million or 54.4% of net sales, compared to $23.0 million or 37.9% of net sales for the six months ended January 31, 2008. The increase in engineering and product development expenses for the three and six months ended January 31, 2009 as compared to the three and six months ended January 31, 2008 is principally a result of increased engineering and product development expense associated with the inclusion of Credence’s operations.

Selling, general and administrative expenses. Selling, general and administrative expenses were $15.0 million, or 49.3% of net sales, in the three months ended January 31, 2009, as compared to $6.9 million, or 22.3% of net sales, in the same quarter of the prior year. For the six months ended January 31, 2009, selling, general and administrative expenses were $29.4 million or 37.9% of net sales as compared to $13.4 million or 22.1% of net sales for the six months ended January 31, 2008. The increase is primarily driven by the inclusion of Credence-related selling, general and administrative expenses in the results for the three and six months ended January 31, 2009, offset by cost savings associated with the reductions in force.

Impairment charges.Impairment charges were $0.8 million or 2.6% of net sales in the three months ended January 31, 2009. For the six months ended January 31, 2009, impairment charges were $5.8 million or 7.5% of net sales. For the three months ended January 31, 2009, we recorded an impairment charge of $0.8 million related to the revaluation of our land in Hillsboro, Oregon, for the excess of book value over fair value. The impairment charges of $5.0 million for the quarter ended October 31, 2008 were primarily related to write-offs of certain consigned inventory and internal capital equipment acquired

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from Credence. The charge was based on our determination of the current combined company product roadmap, as well as declining customer demand due to the current industry environment. We have initiated a phase out of the Diamond D40 and ASL 3RF product lines and as such determined that the demonstration equipment and other equipment to support development of these products are no longer needed or useable in other products. There were no impairment charges recorded for the three or six months ended January 31, 2008.

Amortization of purchased intangible assets. Amortization associated with intangible assets acquired from Credence was $4.4 million or 14.6% of net sales for the three months ended January 31, 2009. For the six months ended January 31, 2009, amortization associated with these assets was $7.4 million or 9.6% of net sales. The underlying intangible assets relate to acquired technology, customer and distributor relationships. These intangible assets acquired in the Credence merger are being amortized over their estimated useful lives of between one and nine years.

Acquired in-process research and development.In connection with the Credence merger, we recorded a charge associated with the write-off of in-process research and development of $6.2 million or 8.0% of net sales for the six months ended January 31, 2009. The most significant acquired in-process research and development relates to Credence’s ASL and Diamond tester product lines.

Restructuring. Restructuring expense was $14.7 million or 48.2% of net sales and $18.5 million or 23.9% of net sales for the three and six months ended January 31, 2009, respectively. The restructuring expense includes employee termination-related severance and outplacement costs, post-employment benefits associated with the merger, as well as costs associated with closing certain facilities. On September 9, 2008, we announced and initiated a restructuring plan. The total cost of the severance related cash charges was $16.5 million of which $12.6 million was recorded as a component of the merger cost in the August 29, 2008 opening balance sheet of Credence and $3.9 million related to the LTX workforce reductions were recorded through the statement of operations as a restructuring charge. These initiatives are expected to result in $45.0 million of annual expense reduction with the full impact of such savings not expected until our quarter ending July 31, 2009. On January 20, 2009, we announced additional restructuring actions that resulted in a total cash charge of $8.8 million and will result in $20.0 million of annual expense reduction with the full impact of such savings beginning in the quarter ended April 30, 2009. The additional restructuring expense recorded during the three months ended January 31, 2009 was related to costs associated with vacating several facilities that are no longer being utilized by us. There were no restructuring costs recorded for the three and six months ended January 31, 2008.

Interest expense.Interest expense was $1.1 million of income for the three months ended January 31, 2009 as compared to $0.3 million for the three months ended January 31, 2008. For the six months ended January 31, 2009, interest expense was $2.1 million compared to $0.7 million for the same period in 2008. The increase in interest expense is a result of the long-term debt acquired from Credence. Interest expense for the three and six months ended January 31, 2009 relates to our bank term loan which bears an interest rate of prime rate minus 1.25%, as well as the Convertible Senior Subordinated Notes due 2010, which bear an interest rate of 3.5%.

Investment income.Investment income was $0.8 million for the three months ended January 31, 2009, as compared to $0.6 million for the three months ended January 31, 2008. For the six months ended January 31, 2009, investment income was $1.7 million, compared to $1.3 million for the same period in 2008. The increase was due to a higher average cash balance due to net cash acquired in the Credence merger.

Gain on extinguishment of debt, net.At the time of the completion of the merger, Credence had outstanding $122.5 million aggregate principal amount of 3.5% Convertible Senior Subordinated Notes due 2010 (“Notes”). In the three and six months ended January 31, 2009, we repurchased approximately $2.7 million and $72.0 million, respectively, of principal amount of the Notes at a discount to their par value. The discount to the par value resulted in a net gain on extinguishment of debt of approximately $1.9 million and $2.2 million in the three and six months ended January 31, 2009.

Income tax.We recorded an income tax provision of $0.6 million for the six months ended January 31, 2009 primarily due to foreign tax on earnings generated in foreign jurisdictions. For the six months ended January 31, 2008, we recorded an income tax benefit of $3.3 million related to the de-recognition of a liability related to an uncertain tax position, offset by income tax expense of $0.1 million. The uncertain tax position related to potential dual taxation of a gain recorded in fiscal 2002 as part of the settlement with a vendor. The statute of limitations expired on the potential tax exposure on September 14, 2007, triggering the reversal of the reserve and non-cash benefit recorded in the current period.

As of January 31, 2009 and July 31, 2008, the total liability for unrecognized income tax benefits was $15.2 million and $0.8 million, respectively. Unrecognized income tax benefits of $6.0 million of the total liability as of January 31, 2009, if recognized would be recorded as a reduction of goodwill until our adoption of SFAS 141(R), after which such recognition would be recorded as a reduction of income tax expense in our statement of operations. The increase in the unrecognized income tax benefit was attributable to companies acquired.

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We expect to maintain a full valuation allowance on United States deferred tax assets until we can sustain an appropriate level of profitability to insure utilization of existing tax assets. Until such time, we would not expect to recognize any significant tax benefits in our results of operations.

Net loss.Net loss was $54.5 million, or $(0.43) per basic share, in the three months ended January 31, 2009, as compared to net loss of $3.2 million, or $0.05 per basic and diluted share, in the same quarter of the prior year. For the six months ended January 31, 2009, the net loss was $99.9 million or $(0.85) per basic share as compared to $3.4 million $0.05 per basic and diluted share for the six months ended January 31, 2008. The $51.3 million increase in net loss in the three months ended January 31, 2009 was principally due to historically low levels of sales in the ATE sector combined with the effect of increased operating expenses associated with the acquired Credence operations, and $25.5 million of merger-related charges, as well as impairment charges and inventory-related provisions associated with the current product roadmap determination.

Liquidity and Capital Resources

As of January 31, 2009, we had $115.8 million in cash and cash equivalents and marketable securities and net working capital of $98.5 million, as compared to $71.5 million of cash and cash equivalents and marketable securities and $86.5 million of net working capital at July 31, 2008. The increase in the cash and cash equivalents and marketable securities was due primarily to the cash and cash equivalents and marketable securities acquired in the Credence merger of $134.3 million, offset by our repurchase, during the six months ended January 31, 2009, of approximately $72.0 million of principal amount of the Notes at a discount to their par value.

Accounts receivable from trade customers, net of allowances, was $21.6 million at January 31, 2009, as compared to $24.2 million at July 31, 2008. The principal reason for the $2.6 million decrease in accounts receivable is a result of an additional $40.5 million of accounts receivable acquired from Credence, offset by a net reduction of receivables of $43.1 million related to decreasing quarter over quarter revenues, and cash collections. The allowance for sales returns and doubtful accounts was $1.2 million, or 5.1% of gross trade accounts receivable, at January 31, 2009 and $0.7 million, or 2.7% of gross trade accounts receivable at July 31, 2008.

Net inventories increased by $14.5 million to $37.0 million at January 31, 2009 as compared to $22.5 million at July 31, 2008 primarily due to the acquisition of net inventory from Credence of $11.9 million.

Prepaid expenses and other current assets increased by $12.8 million to $16.1 million at January 31, 2009 as compared to $4.0 million at July 31, 2008 primarily due to the acquisition of prepaid expenses and other current assets from Credence.

Capital expenditures totaled approximately $5.2 million for the six months ended January 31, 2009, as compared to $4.5 million for the six months ended January 31, 2008. Expenditures for the six months ended January 31, 2009 were composed of testers and tester spare parts. Expenditures for the six months ended January 31, 2008 included $1.4 million of leasehold improvements related to our move to a facility in Milpitas, California and $3.1 million of equipment related to capital expenditures to support the X-Series product line.

On December 7, 2006, the Company closed a new Loan and Security Agreement (the “2006 Loan Agreement”) with Silicon Valley Bank (“SVB”). Under the terms of the 2006 Loan Agreement, LTX borrowed $20.0 million under a term loan at an interest rate of prime minus 1.25% with interest-only payable during the first 12 months. The loan is secured by all assets of the Company located in the United States. Principal of this term loan is repayable over four years as follows:

• months 13 to 24: $300,000.00 per month (first payment due January 1, 2008)

• 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. No amount was outstanding under the revolving credit facility as of October 31, 2008 and July 31, 2008.

The loan agreement with SVB requires SVB approval of a change in ownership or control of the company. We have received a waiver and approval of the merger from SVB as of August 29, 2008. Our revolving credit facility expired on December 6, 2008. On February 25, 2009, we entered into a modification of its existing loan agreement with SVB to provide for a two year revolving line of credit agreement (the “First Loan Modification Agreement”). The First Loan Modification Agreement was effective as of February 25, 2009. We intend to use the proceeds from the revolving line of credit for working capital and other general corporate purposes as needed.

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The First Loan Modification Agreement allows for cash borrowings, letters of credit, and cash management facilities under a secured revolving credit facility of up to a maximum of $40.0 million. Any amounts outstanding under the revolving credit facility will accrue interest at a floating per annum rate equal to SVB’s prime rate, or if greater, 4.5%. Our debt obligations under the credit facility with SVB may be accelerated upon the occurrence of an event of default, which includes customary events of default, including payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, a cross-default related to indebtedness in an aggregate amount of $0.5 million or more, bankruptcy and insolvency related defaults, defaults relating to judgments and a material adverse change (as defined in the agreement). The credit facility contains negative covenants applicable to LTX-Credence and its subsidiaries, including a financial covenant requiring us to maintain a minimum level of liquidity equal to cash and cash equivalents maintained in accounts at SVB in excess of amounts owed to SVB under the term loan and revolving credit facility plus $20 million, as well as restrictions on liens, capital expenditures, investments, indebtedness, fundamental changes to the Borrower’s business, dispositions of property, making certain restricted payments (including restrictions on dividends and stock repurchases), entering into new lines of business and transactions with affiliates. We have not drawn down any funds under the revolving credit facility as of the date of filing this report on Form 10-Q.

At the time of the completion of the merger, Credence had outstanding $122.5 million aggregate principal amount of 3.5% Convertible Senior Subordinated Notes due 2010 (“Notes”). In the first six months of fiscal 2009, we repurchased approximately $72.0 million of principal amount of the Notes at a discount to their par value.

We have accounted for the repurchase of the Notes as an extinguishment of debt in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, a Replacement of SFAS No. 125” and have recorded a net gain on extinguishment of debt of $1.9 million and $2.2 million in the three and six months ended January 31, 2009.

As of January 31, 2009, we are in compliance with all underlying covenants associated with our various debt obligations.

We have a defined benefit pension plan related to our 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. The plan has 71 participants of which 2 remain as active employee members and 69 are non-active former employees but for whom benefits are preserved. The plan has been closed to all new members since December 31, 2000. Annually, we obtain an actuarial valuation of the pension plan. The plan was under-funded by $3.5 million and $4.2 million as of January 31, 2009 and July 31, 2008, respectively. We have recorded this liability as other long-term liabilities of $3.2 million and $3.9 million as of January 31, 2009 and July 31, 2008, respectively. We recorded the current portion of this liability as other accrued expenses of $0.3 million and $0.3 million as of January 31, 2009 and July 31, 2008. Cash payments were projected to be approximately $0.3 million in fiscal 2009, none of which has been paid at January 31, 2009. Actual cash payments were $0.5 million in fiscal 2008.

We operate in a highly cyclical industry and we have and may continue to experience, with relatively short notice, significant fluctuations in demand for our products. This could result in a material effect on our liquidity position. In addition, our loan arrangement with Silicon Valley Bank includes a material adverse change clause, that could permit the bank to demand current payment of our long term loan in the event a material adverse change occurs under the terms of the loan agreement. We have met all financial and contractual agreements with Silicon Valley Bank and management believes we have not triggered a materially adverse condition as of January 31, 2009. To mitigate the impact on significant fluctuations in our business risk, we have completed a substantial and lengthy process of converting our manufacturing process to an outsource model. In addition, we continue to maintain other cost reduction measures, such as the strict oversight of 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. 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 and funds available under our credit facilities will be sufficient to meet our cash requirements over the next twelve months, which includes the payment of the outstanding principal installments of the 2006 Loan Agreement. We also believe our access to capital markets for competitively priced instruments will be limited based on current market conditions.

The world’s financial markets are currently experiencing significant turmoil, resulting in reductions in available credit, dramatically increased costs of credit, extreme volatility in security prices, potential changes to existing credit terms, rating downgrades of investments and reduced valuations of securities generally. These events have materially and adversely impacted the availability of financing to a wide variety of businesses, and the resulting uncertainty has led to reductions in capital investments, overall spending levels, inventory levels, future product plans, and sales projections across industries and markets, including our own. These trends could have a material and adverse impact on the overall demand for our products

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and our ability to achieve targeted financial results, as well as our overall financial results from operations. In addition, our suppliers may also be adversely affected by economic conditions that may impact their ability to provide important components used in our manufacturing processes on a timely basis, or at all.

These conditions could also result in reduced capital resources because of reduced credit availability, higher costs of credit and the stretching of payables by creditors seeking to preserve their own cash resources. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S. and other countries, but the longer the duration the greater risks we face in operating our business.

Commitments and Contingencies

Our major outstanding contractual obligations are related to our bank term loan, facilities, leases, inventory purchase commitments and other operating leases.

The aggregate outstanding amount of the contractual obligations is $138.3 million as of January 31, 2009. 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 our contractual obligations, net of sub-lease revenue, at January 31, 2009 and the effect such obligations are expected to have on our liquidity and cash flow in the future periods:

	Payments Due by Period (in thousands)
Financial Obligations	Total		Remainder of 2009		2010–2011		2012–2013		Thereafter
Convertible Senior Subordinated Notes due 2010 (including interest)	$	53,197	$	885	$	52,312
Term loan (including interest)		16,279		3,880		12,399	$	—	$	—
Inventory commitments		9,158		8,545		613		—		—
Operating leases		37,935		4,677		12,070		8,822		12,366
Pension		3,500		341		682		682		1,795
Severance		16,941		15,942		999		—		—
Other note payable		1,313		—		1,313		—		—
Total contractual obligations	$	138,323	$	34,270	$	80,388	$	9,504	$	14,161

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 fiscal 2006. However, our incoming product orders in the fourth quarter of fiscal 2006 decreased from the third quarter’s levels and continued to decrease in the first two quarters of fiscal 2007. Industry order rates did not increase significantly in fiscal 2008. Industry conditions deteriorated further during the first two quarters of fiscal 2009 resulting in a decrease in revenues. The timing and level of an industry recovery is uncertain at this time. 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.

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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. From the fourth quarter of fiscal 2006 through the second quarter of fiscal 2009, our revenue and operating results were negatively impacted by a downturn in the semiconductor industry. 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 in package (“SIP”), 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 portion 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.

We have substantial indebtedness.

As of the date of this report, we have $49.4 million principal amount of 3.5% Credence Convertible Senior Subordinated Notes (the “Notes”) due May 2010 as well as $15.8 million in principal outstanding as of January 31, 2009 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;

• 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 for indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures;

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

• 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 pay our debt and other obligations.

If our cash flow is inadequate to meet our obligations, we could face substantial liquidity problems. During the six months ended January 31, 2009, we repurchased approximately $72.0 million principal amount of Credence’s 3.5% Convertible Senior Subordinated Notes due May 2010, reducing our cash and cash equivalents. In addition, we have monthly principal and interest payments through December 2010 related to our $20.0 million term loan from a commercial lender. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payment on the term loan, 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. In addition, in the event of a material adverse change (as such term is defined in our loan agreements with Silicon Valley Bank) we would be in default under our term loan which could permit the bank to accelerate the maturity of the term loan. 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 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.

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

We expect that our existing cash and cash equivalents 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 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.

We may be unable to integrate successfully the businesses of LTX and Credence and realize the anticipated benefits of the merger.

The recent merger of LTX and Credence involved the combination of two organizations that have operated as independent public companies. We will be required to devote significant management attention and resources to integrating the two companies and delays in this process could adversely affect our business, financial results, financial condition and stock price.

Achieving the anticipated benefits of the merger will depend, in part, on our ability to integrate operations, personnel and technology of LTX and Credence. If we are unable to successfully combine the businesses of LTX and Credence in a manner that permits us to achieve the cost savings and operating synergies anticipated to result from the merger, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected.

Potential difficulties we may encounter in the integration process include the following:

• lost sales and customers as a result of certain customers of either of LTX or Credence deciding not to do business with us;

• the inability to procure goods and services on favorable terms as a result of suppliers of either of LTX or Credence deciding not to do business with us;

• the inability to retain, recruit or motivate key personnel;

• complexities associated with managing our combined businesses;

• difficulties associated with integrating personnel from diverse corporate cultures while maintaining focus on providing consistent, high quality products and customer service;

• potential unknown liabilities and unforeseen increased expenses or delays associated with the merger;

• disruption or interruption of, or loss of momentum in, our ongoing businesses; and

• inconsistencies in standards, controls, procedures and policies.

Any of these difficulties could adversely affect our ability to maintain relationships with suppliers, customers and employees or our ability to achieve the anticipated benefits of the merger, or could reduce our earnings or otherwise adversely affect our business and financial results.

Even if we are able to integrate the business operations successfully, this integration may not result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that may be possible from this integration and these benefits may not be achieved within a reasonable period of time.

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

The semiconductor industry is highly concentrated, and 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 30% of our net sales in fiscal 2008 and 38% of our net sales in fiscal 2007. Sales to our ten largest customers accounted for 78% of revenues in fiscal year 2008 and 79% in fiscal year 2007. 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.

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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:

• 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;

• order cancellations by customers;

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

• our product mix,

• the configurations of test systems sold,

• the customers to whom we sell these systems, or

• volume.

• 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

• changes in the timing of product orders due to:

• unexpected delays in the introduction of products by our customers,

• shorter than expected lifecycles of our customers’ semiconductor devices,

• uncertain market acceptance of products developed by our customers, or

• 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.

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 our test systems 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 and delivery of our products, which could cause us to lose revenues and customers.

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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 our outsource suppliers is terminated for any reason, which would cause us to lose revenues and customers.

We are dependent on certain semiconductor device manufacturers as sole source suppliers of components manufactured in accordance with our proprietary design and specifications. We have no written supply agreement with these sole source suppliers 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. For example, in August 2008 we completed our merger with Credence Systems Corporation and in June 2003, we completed our acquisition of StepTech, Inc. 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:

• difficulties in managing our growth following acquisitions;

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

• uncertainties concerning the intellectual property rights we purport to acquire;

• unanticipated costs or liabilities associated with the acquisitions;

• diversion of managements’ attention from other business concerns;

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

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

• 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 53% of our revenues for the six months ended January 31, 2009 and 61% of our revenues for fiscal year 2008. 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

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changes in the countries from which we derive sales and obtain supplies. Our recently announced plans to transition our outsource manufacturing to Penang, Malaysia increases our exposure to these types of international risks. International sales and our relationships with suppliers may be hurt by many factors, including:

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

• political and economic instability in our target international markets;

• longer payment cycles common in foreign markets;

• difficulties of staffing and managing our international operations;

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

• 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, Teradyne, Verigy and Yokogawa. 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

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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. 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

• 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 January 31, 2009, our stock price ranged from a low of $0.09 to a high of $3.71. 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:

• quarterly variations in operating results;

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

• changes in financial estimates and recommendations by securities analysts;

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

• 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.

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Our business and results of operations may be negatively impacted by general economic and financial market conditions and such conditions may increase the other risks that affect our business.

The world’s financial markets are currently experiencing significant turmoil, resulting in reductions in available credit, dramatically increased costs of credit, extreme volatility in security prices, potential changes to existing credit terms, rating downgrades of investments and reduced valuations of securities generally. These events have materially and adversely impacted the availability of financing to a wide variety of businesses, and the resulting uncertainty has led to reductions in capital investments, overall spending levels, inventory levels, future product plans, and sales projections across industries and markets, including our own. These trends could have a material and adverse impact on the overall demand for our products and our ability to achieve targeted financial results, as well as our overall financial results from operations. In addition, our suppliers may also be adversely affected by economic conditions that may impact their ability to provide important components used in our manufacturing processes on a timely basis, or at all.

These conditions could also result in reduced capital resources because of reduced credit availability, higher costs of credit and the stretching of payables by creditors seeking to preserve their own cash resources. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S. and other countries, but the longer the duration the greater risks we face in operating our business.

We may record impairment charges which would adversely impact our results of operations.

We review our goodwill, intangible assets and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable, and also review goodwill annually in accordance with SFAS No. 142,Goodwill and Other Intangibles.

One potential indicator of goodwill impairment is whether the Company’s fair value, as measured by its market capitalization, has remained below its net book value for a significant period of time. Whether the Company’s market capitalization triggers an impairment charge in any future period will depend on the underlying reasons for the decline in stock price, the significance of the decline, and the length of time the stock price has been trading at such prices.

In the event that we determine in a future period that impairment exists for any reason, we would record an impairment charge in the period such determination is made, which would adversely impact our financial position and results of operations.

If we do not meet the NASDAQ Global Market continued listing requirements, our common stock may be delisted.

As of January 30, 2009, the closing bid price of our common stock on the NASDAQ Global Market was $0.29, which is below the minimum $1.00 per share requirement for continued inclusion on the NASDAQ Global Market pursuant to NASDAQ Marketplace Rule 4450(a)(5), or the Rule. In accordance with the Rule, if our stock price were to remain below $1.00 for a period of 30 consecutive business days, NASDAQ would provide written notification that our securities may be delisted unless the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days within 180 calendar days from such notification.

Given the current extraordinary market conditions, NASDAQ has determined to suspend the bid price and market value of publicly held shares requirements through April 17, 2009. In that regard, on October 16, 2008, NASDAQ filed an immediately effective rule change with the Securities and Exchange Commission which was subsequently extended on December 18, 2008, such that companies will not be cited for any new concerns related to bid price or market value of publicly held shares deficiencies. This Rule will be reinstated on April 20, 2009.

When the Rule is reinstated on April 20, 2009, there can be no assurance that the bid price of our common stock will be above $1.00 per share, or that we will be able to achieve compliance with the Rule within the given compliance period.

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Uncertainty about the recently completed merger of LTX and Credence may adversely affect our relationships with customers, suppliers and employees.

In response to the merger of LTX and Credence, existing or prospective customers or suppliers of LTX-Credence may:

• delay, defer or cease purchasing goods or services from or providing goods or services to us;

• delay or defer other decisions concerning LTX-Credence, or refuse to extend credit to us; or

• otherwise seek to change the terms on which they do business with us.

Any such delays or changes to terms could seriously harm the business of the Company.

In addition, as a result of the merger current and prospective employees could experience uncertainty about their future with the Company. These uncertainties may impair our ability to retain, recruit or motivate key personnel.

We have incurred significant costs in connection with the merger.

We have incurred substantial expenses related to the merger. We have incurred direct transaction costs of approximately $10.0 million in connection with the merger, the majority of which will be paid as of April 30, 2009.

In addition, there are a large number of systems that must be integrated, including management information, purchasing, accounting and finance, sales, billing, payroll and benefits, fixed assets and lease administration systems, and regulatory compliance. While we have assumed that a certain level of expenses would be incurred from the integration of the companies, there are a number of factors beyond our control that could affect the total amount or the timing of all the expected integration expenses. Moreover, many of the expenses that will be incurred, by their nature, are impracticable to estimate. These expenses could, particularly in the near term, exceed the savings that we expect to achieve from the

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elimination of duplicative expenses, the realization of economies of scale, and cost savings and revenue synergies related to the integration of the two companies following the completion of the merger. The amount and timing of any these charges are uncertain at the present. In addition, we may incur additional material charges in subsequent fiscal quarters to reflect additional costs in connection with the merger.

The combined company will face uncertainties related to the effectiveness of internal controls.

Public companies in the United States are required to review their internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002. Any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, any design may not achieve its stated goal under all potential future conditions, regardless of how remote.

Although in the past each of LTX’s and Credence’s management has determined, and each of their respective independent registered public accounting firms have attested, that their respective internal controls were effective as of the end of their most recent fiscal years, the integration of LTX and Credence, and their respective internal control systems and procedures, may result in or lead to a future material weakness in our internal controls, or we or our independent registered public accounting firm may identify a material weakness in our internal controls in the future. A material weakness in internal controls over financial reporting would require management and our independent public accounting firm to evaluate our internal controls as ineffective. If our internal controls over financial reporting are not considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and stock price.

Internal control deficiencies or weaknesses that are not yet identified could emerge.

Over time we may identify and correct deficiencies or weaknesses in our internal controls and, where and when appropriate, report on the identification and correction of these deficiencies or weaknesses. However, the internal control procedures can provide only reasonable, and not absolute, assurance that deficiencies or weaknesses are identified. Deficiencies or weaknesses that have not been identified by us could emerge and the identification and correction of these deficiencies or weaknesses could have a material impact on our results of operations.

Charges to earnings resulting from the application of the purchase method of accounting may adversely affect the market value of our common stock following the completion of the merger.

In accordance with United States generally accepted accounting principles, which we refer to in this Report as GAAP, the merger of LTX and Credence has been accounted for using the purchase method of accounting, which will result in charges to earnings that could have an adverse impact on the market value of our common stock following the completion of the merger. Under the purchase method of accounting, the total estimated purchase price has been allocated to Credence’s net tangible assets, identifiable intangible assets or expense for in-process research and development based on their respective fair values as of August 29, 2008. Any excess of the purchase price over the fair value of those assets has been preliminarily recorded as goodwill. We will incur additional amortization expense based on the identifiable amortizable intangible assets acquired in connection with the merger agreement and their relative useful lives. Additionally, to the extent the value of goodwill or identifiable intangible assets or other long-lived assets may become impaired, we will be required to incur material charges relating to the impairment. These amortization and potential impairment charges could have a material impact on our results of operations.

Compliance with current and future environmental regulations may be costly and disruptive to our operations.

We may be subject to environmental and other regulations due to our production and marketing of products in certain states and countries. We are in the process of planning for and evaluating the impact of a directive to reduce the amount of hazardous materials in certain electronic components such as printed circuit boards. The directive is known as Directive 2002/95/EC of the European Parliament and of the Council of 27 January 2003 on the restriction of the use of certain hazardous substances in electrical and electronic equipment. “RoHS” is short for restriction of hazardous substances. The RoHS Directive banned the placing on the EU market of new electrical and electronic equipment containing more than agreed levels of lead, cadmium, mercury, hexavalent chromium, polybrominated biphenyl (PBB) and polybrominated diphenyl ether (PBDE), except where exemptions apply, from 1 July 2006. Manufacturers are required to ensure that their products, including their constituent materials and components, do not contain more than the minimum levels of the six restricted materials in order to be allowed to export goods into the Single Market (i.e. of the European Community’s 25 Member States). We are uncertain as to the impact of compliance on future expenses and supply of materials used to manufacture our equipment. Any interruption in supply due to the unavailability of lead free products could have a significant impact on the manufacturing and delivery of our products. 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 and delivery of our products, which could cause us to lose revenues and customers.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in our Market Risk exposure since the filing of the 2008 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 January 31, 2009 that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

As a result of our merger with Credence on August 29, 2008, we are integrating certain business processes and systems. Accordingly, certain changes have been made and will continue to be made to our internal controls over financial reporting until such time as these integrations are complete. There have been no other changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our 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 6. Exhibits

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

(ii) Exhibit 32—Section 1350 Certifications

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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-Credence Corporation
Date: March 12, 2009	By:	/S/ MARK J. GALLENBERGER
		Mark J. Gallenberger
		Chief Financial Officer and Treasurer
		(Principal Financial Officer)

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