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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended July 31, 2001

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

For the transition period from to

Commission File No. 000-10761

LTX Corporation
(Exact name of registrant as specified in its charter)

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

University Avenue
Westwood, Massachusetts 02090
(781) 461-1000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

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

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

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

Common Stock, par value $0.05 per share

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

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

The aggregate market value of the Common Stock held by non-affiliates of the
registrant on August 30, 2001 was $849,195,743

Number of shares outstanding of each of the issuer's classes of Common Stock
as of August 30, 2001:

Common Stock, Par Value $0.05 Per Share, 48,525,471 shares.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement in connection with its 2001
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Form 10-K Report. The Compensation Committee Report, Stock Performance
Graph and Audit Committee Report of the Registrant's Proxy Statement are
expressly not incorporated herein by reference.

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LTX CORPORATION
INDEX

Page
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PART I
Item 1. Business Introduction.......................................... 1
Industry Overview.............................................. 1
Fusion(R), the LTX Solution.................................... 3
The LTX Business Strategy...................................... 4
Product Overview............................................... 4
Service........................................................ 6
Engineering and Product Development............................ 6
Sales and Distribution......................................... 6
Strategic Alliances............................................ 7
Customers...................................................... 7
Manufacturing and Supply....................................... 7
Competition.................................................... 8
Backlog........................................................ 8
Proprietary Rights............................................. 8
Employees...................................................... 9
Environmental Affairs.......................................... 9
Item 2. Properties..................................................... 9
Item 3. Legal Proceedings.............................................. 9
Item 4. Submission of Matters to a Vote of Security Holders............ 10
PART II
Item 5. Market Value for the Registrant's Common Stock and Related
Security Holder Matters....................................... 11
Item 6. Selected Consolidated Financial Data........................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 13

Page
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 25
Item 8. Financial Statements and Supplementary Data................... 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 50
PART III
Item 10. Directors and Executive Officers of the Registrant............ 50
Item 11. Executive Compensation........................................ 50
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 50
Item 13. Certain Relationships and Related Transactions................ 50
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K..................................................... 50
Financial Statements.......................................... 50
Schedules..................................................... 51
Exhibits...................................................... 52
Listing of Exhibits........................................... 52
Reports on Form 8-K........................................... 53
Exhibits...................................................... 54
Signatures.................................................... 55

PART I

Item 1. Business Introduction

LTX designs, manufactures, markets and services semiconductor test equipment.
We sell our test systems to semiconductor designers and manufacturers
worldwide, such as Texas Instruments, Philips Semiconductor, National
Semiconductor, Motorola, NEC, Vitesse Semiconductor, Agere Systems, Infineon
Technologies, and Hitachi. These customers use semiconductor test equipment to
test every semiconductor device at two different stages during the
manufacturing process. These devices are incorporated in a wide range of
products, including data communications equipment such as switches, routers and
servers, broadband access products such as cable modems and Ethernet
accessories, personal communication devices such as cell phones and personal
digital assistants, consumer products such as televisions, videogame systems,
digital cameras and automobile electronics, and personal computer accessory
products such as disk drives and 3D graphics accelerators.

We offer our customers the LTX Fusion(R) platform, which combines our
enVision++ software with either our Fusion HF or Fusion HT/AC products. We
believe that Fusion HF is the first of a new class of test systems that can
test system-on-a-chip, or SOC, devices in a single test step. With Fusion HF,
we believe we have the only test system capable of testing a broad range of
analog, digital, and mixed signal (a combination of digital and analog)
devices, and most importantly, SOC devices, on a single platform. We have over
100 customers in more than 15 countries, to which we provide test systems,
global applications consulting, repair services and operational support.

In late 1996, we changed our strategic focus to develop a solution for the
testing needs of the then emerging SOC market. Building on our twenty-year
semiconductor test experience, we realigned our separate digital and mixed
signal research and development organizations to work together to develop and
deliver a single test platform incorporating our mixed signal test expertise
with our extensive digital test technology and embedded memory test capability.
We also restructured our operations and reorganized our management consistent
with our new strategic focus. Our Fusion platform is the result of this change
in strategy.

Industry Overview

The testing of devices is a critical step during the semiconductor production
process. Typically, 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. Shown below is a schematic
depiction of the major steps in the semiconductor fabrication and test process.

[graph appears here]

Two rectangular fields, the first representing the front end of the
manufacturing process and the second representing the back end of the
manufacturing process, each step represented by a particular graphic. The
process begins with "wafer fabrication," proceeds to a "wafer," through the
"probe test tester," to a "wafer cut," and ends with a "sorted die." The
back end field includes a second five-step process which continues the
front end process, each step also represented by a particular graphic. The
back end process begins with "device assembly and packaging," proceeds to a
"packaged device," through the "final test tester," to a "good device," and
ends in "shipment".

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, such as SOC.

In recent years, increases in unit production resulted primarily from the
proliferation of the personal computer and the continued growth of the
telecommunications industry. We expect that future unit production growth will
be led by a series of Internet hardware and software applications, Internet
infrastructure performance increases, and Internet access device simplification
and miniaturization. We also expect the continued proliferation of, and new
applications in, communication products and consumer electronics. 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 sophisticated
electronic products, such as cellular phones, laptop computers, camcorders,
wireless networking equipment and mobile Internet terminals. 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 SOC. SOC provides the
benefits of lower cost, smaller size and higher performance by combining
advanced digital, analog and embedded memory technologies on a single device.
These discrete technologies were, until recently, available only on several
separate semiconductor devices, each performing a specific function. By
integrating these functions on a single device, SOC enables lower cost, smaller
size, higher performance, and lower power consumption.

Although the SOC concept had been in development for several years, until
recently manufacturers did not have an efficient and comprehensive method of
testing these devices. Historically, device manufacturers used several narrowly
focused testers, each designed to test only digital, only memory, or only mixed
signal devices, but incapable of testing all three. SOC does not fit into any
one of these categories because it represents the convergence of these three
technologies and requires new testing technology.

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.

Designers and manufacturers historically have not been able to use their test
floors at peak efficiency because they had to use several separate digital and
mixed signal testers to perform all of their required testing. This increased
their cost of ownership as device mix changes led to some of these testers
sitting idle while there was a shortage of capacity in other testers, resulting
in overall decreased tester utilization. Furthermore, in the absence of a
single test platform solution, manufacturers cannot fully test new SOC designs
because their current testing equipment does not contain a sufficiently broad
range of mixed signal instrumentation. Manufacturers are subject to further
increased testing costs if their testing equipment lacks the flexibility and
capacity to run parallel tests on multiple devices at one time, or multi-site
testing. These problems are exacerbated when volume production of devices
increases.

Fusion, the LTX Solution

Our solution is the Fusion test platform. Fusion tests new generations of
highly-integrated mixed signal devices, advanced digital devices, and most
importantly, SOC devices, which incorporate these technologies. The testing
requirements of digital and mixed signal devices are essentially a subset of
the testing requirements of SOC devices. The test requirements of all of these
semiconductor devices are well within the range of Fusion's capability. The
Fusion HF single test platform allows our customers to use a single integrated
hardware and software system to test all of these devices, rather than the
multiple test systems typically required. By using a single testing platform,
our customers are able to optimize their asset utilization, thereby increasing
their manufacturing flexibility and lowering the overall cost of their testing
processes.

Fusion is a unique solution to the SOC test challenge because it provides all
of the following:

A single test platform. Thoroughly testing an SOC device on more than
one tester is either technically infeasible, because the device is not
partitioned for its mixed signal, digital and embedded memory functions to
operate independently from each other, or economically impractical due to
the significantly more expensive cost of multiple testers and insertions
required for comprehensive testing. Our Fusion test platform combines our
test station hardware with our enVision++ software to provide a flexible,
scalable test environment. By integrating the testing of mixed signal,
digital and embedded memory functions, Fusion provides better test
performance and lower cost of ownership for our customers. Our customers
are also using Fusion to raise the utilization rates of their test floors
in testing their digital and mixed signal devices. Not only have these
customers selected Fusion as part of their SOC strategy, but they are also
purchasing Fusion for capacity expansion on these traditional devices,
eliminating the need for separate digital and mixed signal testers.

Multi-site test capability. Multi-site testing, the parallel testing of
more than one device (of the same type) on one testing machine at a given
time, lowers the overall cost of testing devices by making possible the
more efficient use of each testing machine. We designed Fusion to make
multi-site testing easier for the test designer. Earlier generations of
testing equipment required test engineers to write specific software
programs to run tests in parallel. Our enVision++ software allows test
engineers to expand single-site testing programs into multi-site testing
programs with ease. Fusion can also be configured with a sufficient number
of instruments to perform multi-site testing even on highly complex SOC
devices.

A full range of mixed signal instrumentation. Testing different types of
SOC input/output interfaces requires radio frequency (RF), digital signal
processing (DSP), power, time measurement, and other instruments. Fusion
provides customers with the broad range of mixed signal instrumentation
necessary to test these devices to the customer's desired specifications.
Mixed signal test expertise is in short supply in the industry and one of
our strengths in SOC testing is the depth of our mixed signal intellectual
property, based on our heritage as a pioneer in this field.

Scalable performance. Semiconductor devices, depending upon their
application, require different levels of instrument performance for
testing. For example, complex SOC devices require the advanced digital
testing performance, including embedded memory testing, found in
traditional high-end, stand-alone digital testers, whereas consumer-
oriented digital and mixed signal devices typically have less stringent
test performance requirements. Fusion delivers scalable instrument
performance in an integrated, single platform at different price points,
providing our customers with the ability to match test performance exactly
to their needs.

Easy-to-use software for test program development. Our enVision++
software provides the customer's test engineer with an expandable library
of prepackaged, reusable test program modules and debugging tools, all
accessible through an easy-to-use graphical user interface. In most other
testers, test engineers can reuse test code only by cutting and pasting
lines of program code. enVision++ encapsulates

test techniques into software objects that are added to a library for reuse
in subsequent test programs. The test engineer can use these software
objects when designing new test programs simply by dragging them with a
mouse into the program flow. The ease-of-use of our software accelerates
our customers' development process, which allows them to introduce their
semiconductor devices to market more rapidly.

The LTX Business Strategy

LTX's objective is to be the leading supplier of semiconductor test
equipment. Key elements of our strategy include:

Extend our technological lead in single platform testing. We intend to
continue to focus our resources on a single integrated hardware and
software test platform solution. Rather than diluting our resources with a
multiple platform strategy, we believe our resources will provide a higher
return on investment by focusing on a single test platform for the advanced
digital, mixed signal, and SOC markets. In addition, we believe our
customers' requirements are better served by employing a single test
platform solution to address the test requirements of their various
devices.

Maintain our focus on the SOC test market. We believe that the fastest
growing segment of the semiconductor industry over the next several years
will be SOC. We designed our Fusion test platform specifically to provide
optimal test capability for this class of devices. We intend to maintain
and enhance our SOC test position by continuing to concentrate our
development efforts on advanced functions and options for Fusion.

Concentrate our sales, applications consulting, and service efforts on
key accounts. We have organized our selling, field service, and field
applications organizations around key customers, and located these
resources close to their facilities. We recognize that large, diversified
semiconductor device manufacturers and certain offshore test and assembly
companies purchase most of the world's test equipment, and that the level
of support we are able to provide to them has a direct impact on future
business. We believe that focusing our sales and support resources on these
customers is the most efficient way to maximize revenue. We have also
developed collaborative relationships with key customers and vendors that
help guide us in developing future applications and system options. We are
in the second phase of our Fusion selling strategy and are focusing selling
efforts on key accounts in the subcontract test and assembly market. We
believe this market represents an area of potential growth for us that will
be at least partially driven by our success with the integrated diversified
semiconductor manufacturers that use subcontract test and assembly services
since they substantially influence which test systems are purchased by test
and assembly companies.

Further improve the flexibility of our business model. To improve our
responsiveness to customer needs, reduce fixed costs and working capital
requirements, and manage the cyclicality of our industry more effectively,
we have implemented a more flexible business model. With the transition of
our assembly, system integration and testing operations to Jabil,
substantially all of our manufacturing functions will be outsourced to
third parties. We engage contract employees to address periods of peak
demand. We have implemented additional international distribution and sub-
contracted repair and support functions. We intend to continue to identify
and implement programs which improve our customer responsiveness and reduce
costs.

Build on our strategic alliances. We have established strategic
alliances with companies specializing in different aspects of our business
such as board repair and local sales and service. These alliances allow us
to focus our resources on the development of Fusion, maintain flexibility
in our business model, and expand our ability to provide our customers
throughout the world with local support. For example, during the fiscal
year, we made an equity investment in and entered into a development
agreement with StepTech, Inc. to provide us with test technology to address
the high-volume commodity semiconductor market. In addition, our alliance
with DI Corporation, our partner in Korea, provides local

sales and support to the Korean market. Our alliances with Flextech
Holding, based in Singapore, and MV Technical Sales, based in California,
provide us with board repair services for our customers.

Product Overview

Since late 1996, we have focused on designing, developing, marketing and
servicing the Fusion test platform with its enabling technology for testing a
broad range of devices, including SOC.

Fusion Test Platform

Fusion offers a unique solution for testing the full spectrum of SOC, mixed
signal, and digital devices. The Fusion test platform provides customers with
highly reliable test performance and cost-efficiency in their efforts to
accelerate their time-to-market for SOC, mixed signal, and digital devices. The
Fusion test platform combines our test station hardware with our enVision++
software. The Fusion platform is available in the Fusion HF and Fusion HT/AC
configurations. These configurations depend primarily on the complexity of the
device to be tested. We have also received our first order for a new Fusion
product being developed through our alliance with StepTech, Inc.

enVision++

Our enVision++ software helps customers design device test programs faster
and more efficiently by providing a customer's test engineer with an expandable
library of prepackaged, reusable test program modules and debugging tools, all
accessible through an easy-to-use graphical user interface. In most other
testers, test engineers can reuse test code only by cutting and pasting lines
of program code. enVision++ software circumvents much of this laborious process
by encapsulating test techniques into software objects that are added to the
library for reuse in subsequent test programs. The test engineer can use these
software objects when designing new test programs simply by dragging them with
a mouse into the program flow.

Fusion HF

Introduced in July 1998, our Fusion HF is one of the most advanced testers
available. Before the advent of Fusion HF, semiconductor manufacturers required
several narrowly focused testers, designed to test only digital, only memory,
or only mixed signal devices, but not all three. Since the Fusion HF single
platform can efficiently test complex devices ranging from mixed signal to
digital to SOC, it eliminates the need for mutually exclusive testers. The
Fusion HF test system offers the broadest range of leading-edge test capability
in a single platform, including advanced mixed signal, high-speed digital,
digital signal processing, RF wireless, embedded memory, power, and time
measurement. This range of instrumentation on a single platform allows
semiconductor manufacturers to optimize their asset utilization, thereby
increasing their manufacturing flexibility and lowering the overall cost of
their testing processes. Fusion's modular architecture has been designed so
that it can keep pace with today's rapid changes in test technology. As new
generations of devices require more advanced test capabilities, customers can
easily upgrade their Fusion testers to accommodate these requirements.

Fusion HT/AC

The Fusion HT/AC test systems are used for high throughput testing of mixed
signal devices primarily to satisfy capacity needs of customers using our prior
generation Synchro HT and Synchro AC products. These manufacturers are
producing the advanced mixed signal devices that are the precursors to, and the
foundations of, the next generation of SOC devices. As with Fusion HF, Fusion
HT and Fusion AC use the enVision++ development software, allowing customers to
easily upgrade to Fusion HF. The Fusion HT features up to 48 digital pins, RF
test instruments, and power management test technology. Typical device types
tested on the Fusion HT include radio frequency/wireless, power management and
consumer video and audio. The Fusion HT, powered by enVision++, is fully
compatible with our previous generation mixed signal product, the

Synchro HT. The Fusion AC features up to 96 digital pins and high-speed DSP
instruments. Typical device types tested on the Fusion AC include those used in
high-speed local area networks, disk drives and data communications. The Fusion
AC is also powered by enVision++, and is fully compatible with our previous
generation mixed signal product, the Synchro AC.

Other Products

The Delta/STE, introduced in 1995, is our previous generation digital tester.
The Synchro HT and Synchro AC testers are our previous generation of mixed
signal products. While still supported by our service organization, we no
longer manufacture or market the Synchro HT and Synchro AC. All of the
installed base of Synchro applications are fully compatible with Fusion HT/AC
testers.

Consistent with our business strategy to focus on the Fusion product family,
we sold the iPTest product line in fiscal 2000. The iPTest division
manufactured systems used to test specialized semiconductor components, such as
power transistors. The percentage of net sales contributed by iPTest, compared
to our total net sales, was 1.2%, or $3.8 million for the fiscal year ended
July 31, 2000, 3.2%, or $5.1 million and for the fiscal year ended July 31,
1999.

Service

We consider service to be an important aspect of our business. Our worldwide
service organization is capable of performing installations and all necessary
maintenance of test systems sold by us, including routine servicing of
components manufactured by third parties. We provide various parts and labor
warranties on test systems or options designed and manufactured by us, and
labor warranties on components that have been purchased from other
manufacturers and incorporated into our test systems. We also provide training
on the maintenance and operation of test systems we sell. Service revenue
totaled $37.3 million, or 11.3% of net sales, in fiscal 2001, $32.0 million, or
10.5% of net sales, in fiscal 2000, and $28.9 million, or 18.4% of net sales,
in fiscal 1999.

We offer a wide range of service contracts, which gives our customers the
flexibility to select the maintenance program best suited to their needs.
Customers may purchase service contracts which extend maintenance beyond the
initial warranty provided. Many customers enter into annual or multiple-year
service contracts over the life of the equipment. The pricing of contracts is
based upon the level of service provided to the customer and the time period of
the service contract. As the installed base of our test systems has grown,
service revenues have been increasing on an annual basis. We believe that
service revenues should be less affected by the cyclical nature of the
semiconductor industry than sales of test equipment. We maintain service
centers around the world.

Engineering and Product Development

The test equipment market is characterized by rapid technological change and
new product introductions, as well as advancing industry standards. Our
competitive position will depend upon our ability to successfully enhance
Fusion and develop new instrumentation, and to introduce these new products on
a timely and cost-effective basis. We devote a significant portion of personnel
and financial resources to the continued development of our single platform SOC
capabilities, including embedded memory, digital and mixed signal core
competencies. We also seek to maintain close relationships with our customers
in order to be responsive to their product needs. Our expenditures for
engineering and product development were $66.0 million, $50.6 million, and
$34.8 million, during fiscal 2001, 2000, and 1999, respectively.

Our engineering strategy is to focus on development of the Fusion single test
platform. We also intend to develop our future test systems in an evolutionary
manner so that they may be progressively upgraded. This approach preserves our
customers' substantial investments in our pre-existing test programs, and, in
general, helps us maintain market acceptance for our test systems. We work
closely with our customers and our strategic alliance partners to define new
product features and to identify emerging applications for our products.

Sales and Distribution

We sell our products primarily through a worldwide sales organization. Our
sales organization is structured around key accounts, with a sales force of 28
people. We use a small number of independent sales representatives and
distributors in certain other regions of the world.

Our sales to customers outside the United States are primarily denominated in
United States dollars. Sales outside North America were 48%, 62%, and 61%, of
total sales in fiscal 2001, 2000, and 1999, respectively.

Strategic Alliances

In October 2000, we made an equity investment in, and entered into a
development agreement with, StepTech, Inc., an outsource technology provider to
a broad range of semiconductor test equipment suppliers. Based in Hopkinton,
Massachusetts, StepTech is privately held and specializes in the design and
manufacture of cost-effective test instrument solutions and software
encompassing key growth areas such as wireless and mixed-signal semiconductor
testing. StepTech also provides product enhancements, engineering services and
turn-key applications software to vendors and users of automatic test
equipment. The development agreement with StepTech will provide LTX with test
technology to broaden the reach of Fusion's single platform, scalable
architecture into the high volume, commodity semiconductor market. We have
received our first order for the new Fusion product developed through this
alliance. The agreement also grants LTX exclusive rights, for a three-year
period, to certain StepTech technologies. In return, StepTech will receive
royalties on technology they have developed for the Fusion platform.

We have also established additional alliances that we believe will allow us
to achieve strategic goals such as focusing our resources on the further
development of Fusion, maintaining flexibility in our business model and
expanding our ability to provide our customers throughout the world with local
support. These alliances have also allowed us to provide more localized
support. For example, DI Corporation, our partner in Korea, provides local
sales and support to the Korean market resulting in improved communications for
our customers and better market access for us. Flextech Holdings, based in
Singapore, and MV Technical Sales, based in California, provide board repair
services for our customers, providing quick repair turnarounds for our
customers and allowing us to focus on new product development.

Customers

Our customers include many of the world's leading semiconductor device
manufacturers. In fiscal year 2001 and 2000, Texas Instruments accounted for
26% and 19%, Philips Semiconductor accounted for 12% and 13% and Vitesse
Semiconductor Corporation accounted for 22% and 11% of net sales, respectively.
In fiscal year 2001, Infineon Technologies accounted for 11% of net sales. No
single customer accounted for 10% or more of net sales in fiscal 1999.
Customers that have ordered Fusion products include the following:

Acer Labs Infineon Technologies SMSC
Agere Systems Maxim Integrated Samsung
Amkor Devices Siliconware
AMS International Motorola STATS
ASAT National Semiconductor STMicroelectronics
ASE NEC Texas Instruments
Hitachi On Semiconductor UTAC
Hynix Philips Semiconductor Vitesse Semiconductor
Qlogic

Because the semiconductor industry consists of a small number of device
manufacturers, we believe that sales to a limited number of customers will
continue to account for a high percentage of net sales for the foreseeable
future. The loss of or reduction or delay in orders from a significant customer
could hurt our business and financial results.

Manufacturing and Supply

Our principal manufacturing operations consist of final assembly, system
integration, and testing at our facilities in Westwood, Massachusetts. We also
perform some limited testing and assembly in our San Jose facility. In June
2001, we announced our intent to transition our assembly, system integration
and testing operations to Jabil Circuit. In addition, we outsource certain
components and subassemblies to other contract manufacturers. We use standard
components and prefabricated parts manufactured to our specifications. We
assemble these components and subassemblies to produce testers in
configurations specified by our customers. Most of the components for our
products are available from a number of different suppliers; however, certain
components are purchased from a single supplier or a limited group of
suppliers. Although we believe that all single source components currently are
available in adequate amounts, we cannot be certain that shortages will not
develop in the future. We are dependent on two semiconductor device
manufacturers, Vitesse Semiconductor and Maxtech Components, who are sole
source suppliers of custom components for our products, although Vitesse has
two separate manufacturing facilities capable of manufacturing our custom
components. We have no written supply agreements with these sole source
suppliers and purchase our custom components through individual purchase
orders. We are in the process of evaluating sources for our custom components.
We cannot assure you that such alternative sources will be qualified or
available to us.

Competition

Many other domestic and foreign companies participate in the markets for each
of our products and the industry is highly competitive. We compete principally
on the basis of performance, cost of test, reliability, customer service,
applications support, price and ability to deliver our products on a timely
basis. Our principal competitors in the market for test systems are Agilent
Technologies (formerly a division of Hewlett-Packard), Credence Systems,
Schlumberger Limited, and Teradyne. Most of our major competitors are also
suppliers of other types of automatic test equipment and have greater financial
and other resources than we do. We expect our competitors to enhance their
current products and they may introduce new products with comparable or better
price and performance. In addition, new competitors, including semiconductor
manufacturers themselves, may offer new technologies, which may in turn reduce
the value of our product lines.

Backlog

At July 31, 2001, our backlog of unfilled orders for all products and
services was $145.6 million, compared with $236.8 million at July 31, 2000.
Historically, test systems generally ship within six months of receipt of a
customer's purchase order. The semiconductor industry and demand for
semiconductor test equipment is highly cyclical. Customer delivery dates and
order patterns typically get delayed and become less predictable when the
semiconductor industry capacity exceeds demand. Recent business conditions
indicate that the industry is in an excess capacity situation and therefore LTX
cannot rely on historical trends to accurately determine firm delivery dates
for items remaining in our backlog of unfilled orders as of July 31, 2001.
While backlog is calculated on the basis of firm orders, all orders are subject
to cancellation or delay by the customer with limited or no penalty. Our
backlog at any particular date, therefore, is not necessarily indicative of
actual sales which may be generated for any succeeding period. Historically,
our backlog levels have fluctuated based upon the ordering patterns of our
customers and changes in our manufacturing capacity.

Proprietary Rights

The development of our products is largely based on proprietary information.
We rely upon a combination of contract provisions, copyright, trademark and
trade secret laws to protect our proprietary rights in products. We also have a
policy of seeking U.S. patents on technology considered of particular strategic
importance. Although we believe that the copyrights, trademarks and patents we
own are of value, we believe that they will not determine our success, which
depends principally upon our engineering, manufacturing, marketing and service
skills. However, we intend to protect our rights when, in our view, these
rights are infringed upon.

We license some software programs from third party developers and incorporate
them in our products. Generally, these agreements grant us non-exclusive
licenses with respect to the subject program and terminate only upon a material
breach by us. We believe that such licenses are generally available on
commercial terms from a number of licensors.

The use of patents to protect hardware and software has increased in the test
equipment industry. We have at times been notified of claims that we may be
infringing patents issued to others. Although there are no pending actions
against us regarding any patents, no assurance can be given that infringement
claims by third parties will not negatively impact our business and results of
operations. As to any claims asserted against us, we may seek or be required to
obtain a license under the third party's intellectual property rights. There
can be no assurance, however, that a license will be available under reasonable
terms or at all. In addition, we could decide to resort to litigation to
challenge such claims or a third party could resort to litigation to enforce
such claims. Such litigation could be expensive and time consuming and could
negatively impact our business and results of operations.

Employees

At July 31, 2001, we employed 840 employees and 79 temporary workers. None of
our employees are represented by a labor union, and we have experienced no work
stoppages. Many of our employees are highly skilled, and we believe our future
success will depend in large part on our ability to attract and retain these
employees. We consider relations with our employees to be good.

Environmental Affairs

Our manufacturing facilities are subject to numerous laws and regulations
designed to protect the environment. We do not anticipate that compliance with
these laws and regulations will have a material effect on its capital
expenditures, earnings or competitive position.

Item 2. Properties

All of our facilities are leased. We have achieved worldwide ISO 9001
certification at our facilities. We maintain our headquarters in Westwood,
Massachusetts, where corporate administration, sales and customer support and
manufacturing and engineering are located in a 167,500 square foot facility
under a lease which expires in 2009. In May 1995, we subleased to a third party
a 208,000 square foot facility in Westwood, Massachusetts for a ten year term.
Our lease of this facility expires in 2010. We also maintain an additional
development facility in a 71,000 square foot building in San Jose, California.
Our lease of this facility expires in 2004. We also lease sales and customer
support offices at various locations in the United States totaling
approximately 40,000 square feet.

We also maintain sales and support offices at locations in Europe and in
Asia. Office space leased in Asia and Europe totals approximately 113,816
square feet.

We believe that our existing facilities are adequate to meet our current and
foreseeable future requirements.

Item 3. Legal Proceedings

We have had various commercial relationships with Ando Electric Co., Ltd., a
Japanese test equipment manufacturer, since 1993 when Ando was a subsidiary of
NEC. In 1994, Ando loaned us $20 million, of which $8 million remains
outstanding as of July 31, 2001. This indebtedness matures in July 2003. In
1998, we entered into a six year development, manufacturing and marketing
agreement with Ando pursuant to which we granted Ando exclusive rights to
manufacture and sell Fusion in Japan, but retained exclusive rights to
manufacture and sell Fusion to certain customers in Japan and to manufacture
and sell Fusion outside of Japan.

We also granted Ando a license to develop Fusion improvements for certain
specific purposes, and, subject to certain conditions, a license to use,
manufacture and sell these improvements in Japan. We were granted rights to
use, improve and modify these Ando improvements outside Japan. Ando is required
to pay quarterly royalties on sales of Fusion in Japan.

In January 2001, Yokogawa Electric Corporation, a Japanese manufacturer of
semiconductor test equipment, announced the acquisition of most of NEC's
interest in Ando. On May 18, 2001, we served Ando with a Demand for Arbitration
pursuant to this agreement. Our demand asserts claims for breach of contract,
breach of fiduciary duty, unfair competition and other claims arising out of
Ando's conduct. We are seeking damages and equitable relief. Ando has filed an
answer and counterclaims to our demand or arbitration. Ando's answer denies
fault on its part and asserts breach of contract and breach of fiduciary duty
on our part. Ando seeks damages, equitable relief and termination of the
agreement. The arbitration will be conducted by the American Arbitration
Association in San Jose, California. We do not believe that this legal
proceeding will have any material adverse impact on our business and results of
operations.

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of stockholders during the fourth
quarter of fiscal 2001.

PART II

Item 5. Market Value for the Registrant's Common Stock and Related Security
Holder Matters Market Prices for Common Stock

Our common stock is quoted on the Nasdaq National Market under the symbol
"LTXX". The following table shows the high and low closing sale prices per
share of our common stock, as reported on the Nasdaq National Market, for the
periods indicated:

Period High Low
------ ------ ------

Fiscal Year Ended July 31, 2001
First Quarter............................................ $26.13 $12.25
Second Quarter........................................... 18.38 10.19
Third Quarter............................................ 27.25 13.69
Fourth Quarter........................................... 31.82 18.55
Fiscal Year Ended July 31, 2000
First Quarter............................................ $16.69 $10.38
Second Quarter........................................... 33.13 15.94
Third Quarter............................................ 52.25 25.00
Fourth Quarter........................................... 48.63 20.63
Fiscal Year Ended July 31, 1999
First Quarter............................................ $ 3.88 $ 1.00
Second Quarter........................................... 4.44 2.00
Third Quarter............................................ 6.91 3.44
Fourth Quarter........................................... 14.50 6.13

We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings to fund the development and growth of our
business. In addition, our credit agreement with a bank contains certain
covenants which prohibit us from paying cash dividends.

As of August 30, 2001, we had approximately 1,012 stockholders of record of
our common stock.

Item 6. Selected Consolidated Financial Data

The following table contains our selected consolidated financial data and is
qualified by the more detailed consolidated financial statements and notes
thereto included elsewhere in this report. The selected consolidated financial
data for and as of the end of each of the five fiscal years in the period ended
July 31, 2001 are derived from our consolidated financial statements, which
have been audited by Arthur Andersen LLP, independent public accountants. Prior
period financial statements have been reclassified to conform to the fiscal
year 2000 presentation. The reclassification had no impact on earnings for any
period.

Fiscal Years ended July 31
------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(In thousands, except per share data and
statistics)

Consolidated Statement of
Operations Data:
Sales....................... $194,343 $196,227 $157,326 $305,535 $330,030
Cost of Sales............... 119,699 127,837 93,451 161,078 177,034
Inventory related
provision.................. 9,250 40,718 -- -- 12,800
Engineering and product
development expenses....... 35,521 47,757 34,828 50,582 65,987
Selling, general and
administrative expenses.... 39,049 50,772 31,517 38,477 37,029
Reorganization costs........ 6,750 6,272 -- -- 1,200
-------- -------- -------- -------- --------
Income (loss) from
operations................. (15,926) (77,129) (2,470) 55,398 35,980
Net interest (expense)
income..................... 433 (21) (941) 3,123 7,894
Gain on liquidation/sale of
business units............. -- -- 3,786 -- --
Provision (benefit) for
income taxes............... 416 1,130 -- (20,214) 13,163
-------- -------- -------- -------- --------
Net income (loss) before
cumulative effect of change
in accounting principle.... (15,909) (78,280) 375 78,735 30,711
-------- -------- -------- -------- --------
Cumulative effect of change
in accounting principle,
net of $4,099 tax.......... -- -- -- -- 9,566
-------- -------- -------- -------- --------
Net income (loss)........... $(15,909) $(78,280) $ 375 $ 78,735 $ 21,145
======== ======== ======== ======== ========
Net income (loss) per share:
Basic..................... $ (0.45) $ (2.15) $ 0.01 $ 1.84 $ 0.44
Diluted................... $ (0.45) $ (2.15) $ 0.01 $ 1.70 $ 0.43
Weighted-average common
shares used in computing
net income (loss) per
shares:
Basic..................... 35,476 36,401 35,696 42,897 47,782
Diluted................... 35,476 36,401 36,958 46,201 49,634
Consolidated Balance Sheet
Data:
Working Capital............. $115,118 $ 33,958 $ 47,915 $307,887 $294,476
Property and equipment,
net........................ 42,958 35,427 31,942 38,125 66,739
Total assets................ 213,546 141,019 147,993 456,504 483,039
Total debt.................. 32,272 25,476 27,477 26,108 24,177
Stockholder's equity........ 140,198 55,950 58,928 339,676 369,269
Other Information
(unaudited):
Current ratio............... 3.19 1.49 1.71 3.92 3.73
Asset turnover.............. 0.91 1.39 1.06 0.67 0.68
Debt as a percentage of
total capitalization....... 18.8% 31.3% 31.8% 7.1% 6.1%
Additions to property and
equipment (net)............ $ 16,116 $ 8,795 $ 9,636 $ 17,850 $ 47,333
Depreciation and
amortization............... 11,038 12,510 11,291 10,613 14,139

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The following discussion should be read together with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this annual
report on Form 10-K. This report contains forward-looking statements that
involve risks and uncertainties. Actual results may differ materially from
those indicated in such forward-looking statements. See "Business Risks".

Results of Operations

The following table sets forth for the periods indicated statement of
operations data.

Fiscal Year ended July 31
----------------------------
1999 2000 2001
-------- -------- --------
(In thousands except per
share data)

Net Sales....................................... $157,326 $305,535 $330,030
Cost of sales................................... 93,451 161,078 177,034
Inventory related provision..................... -- -- 12,800
-------- -------- --------
Gross Profit.................................... 63,875 144,457 140,196
Engineering and product development expenses.... 34,828 50,582 65,987
Selling, general and administrative expenses.... 31,517 38,477 37,029
Reorganization costs............................ -- -- 1,200
-------- -------- --------
Income (loss) from operations................... (2,470) 55,398 35,980
Interest expense................................ (1,526) (2,065) (1,250)
Interest income................................. 585 5,188 9,144
Gain on liquidation/sale of business units...... 3,786 -- --
-------- -------- --------
Income before income taxes...................... 375 58,521 43,874
Provision (benefit) for income taxes............ -- (20,214) 13,163
-------- -------- --------
Income before cumulative effect of change in
accounting principle........................... 375 78,735 30,711
Cumulative effect of change in accounting
principle, net of $4,099 tax................... -- -- 9,566
-------- -------- --------
Net income...................................... $ 375 $ 78,735 $ 21,145
Net income per share:
Basic......................................... $ 0.01 $ 1.84 $ 0.44
Diluted....................................... $ 0.01 $ 1.70 $ 0.43

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

Percentage of Net
Sales Year Ended
July 31
-------------------
1999 2000 2001
----- ----- -----

Net Sales:............................................... 100.0% 100.0% 100.0%
Cost of sales:........................................... 59.4 52.7 53.6
Inventory related provision.............................. 0.0 0.0 3.9
Gross profit............................................. 40.6 47.3 42.5
Engineering and product development expenses............. 22.1 16.6 20.0
Selling, general and administrative expenses............. 20.0 12.6 11.2
Reorganization costs..................................... 0.0 0.0 0.4
Income (loss) from operations............................ NM 18.1 10.9
Interest expense......................................... NM (0.7) (0.4)
Interest income.......................................... 0.4 1.7 2.8
Gain on liquidation/sale of business units............... 2.4 0.0 0.0
Income before income taxes............................... 0.2 19.1 13.3
Provision (benefit) for income taxes..................... 0.0 (6.6) 4.0
Income before cumulative effect of change in accounting
principle............................................... 0.2 25.7 9.3
Cumulative effect of change in accounting principle, net
of tax.................................................. 0.0 0.0 2.9
Net income............................................... 0.2 25.7 6.4

Fiscal 2001 Compared to Fiscal 2000.

Net Sales. Net sales consist of both semiconductor test equipment and related
hardware and software support and maintenance services, net of returns and
allowances. Net sales were $330.0 million in 2001 and $305.5 million in 2000.
The net sales of $330.0 million in 2001 reflect the Company's adoption of SAB
101, discussed below in "Recent Accounting Pronouncements". The increase in
sales of $24.5 million was the result of stronger sales in the first half of
fiscal year 2001. Beginning in the latter half of the second quarter of fiscal
2001, the semiconductor industry experienced a severe industry-wide slow down.
Service revenue, consisting of sales of replacement and spare parts and labor
charges, totaled $37.3 million, or 11.3% of net sales, in fiscal 2001 and $32.0
million, or 10.5% of net sales, in fiscal 2000. Geographically, sales to
customers outside the United States were $157.7 million, or 48% of net sales,
in fiscal 2001 and $189.2 million, or 62% of net sales, in fiscal 2000.

Cost of Sales. Cost of sales consists of material, labor, depreciation and
associated overhead. Cost of sales increased by $16.0 million to $177.0 million
in fiscal 2001 from $161.1 million in fiscal 2000 primarily as a result of
higher net sales. As a percentage of net sales, cost of sales was 53.6% of net
sales in fiscal 2001 as compared to 52.7% in fiscal 2000. The major reason for
the year-to-year 0.9% decline in margin percentage relates to the 33.2% decline
in revenue during the latter half of fiscal year 2001 from the first half of
the year.

Inventory Related Provision. A $12.8 million inventory related provision was
charged to operations in fiscal 2001. The write down consisted of two
categories. The first category was a $9.4 million inventory charge to cost of
sales relating to non-Fusion components and subassemblies. Included in the $9.4
million write down was a provision for $2.5 million that related to Delta/STE
inventory that was transferred to our third party reseller of Delta/STE
products. The provision was established due to lack of demand for Delta/STE
legacy products. The $6.9 million of the $9.4 million inventory charge was a
write down of non-Fusion components included in LTX inventory that will have no
usage over the next twelve to twenty-four months. As a result of the transition
of the Company's manufacturing operations to Jabil Circuit, the Company will
have limited capacity over the next twelve to twenty-four months to convert
non-Fusion inventory into finished product for

resale. In addition, due to the current industry wide slowdown in the
semiconductor industry, the Company anticipates a significant reduction in
demand for non-Fusion products which may become technologically obsolete by our
next generation Fusion products.

The second category was a $3.4 million charge, which represented a write down
of Fusion product printed circuit boards. These boards will require a
substantial amount of reworking to make them useable in active production with
Jabil Circuit. We will have limited internal operations and capability to
rework these boards during this transition.

Engineering and Product Development Expenses. Engineering and product
development expenses were $66.0 million, or 20.0% of net sales, in fiscal 2001
as compared to $50.6 million, or 16.6% of net sales in fiscal 2000. The
increase in expenditures is principally a result of a higher level of
development expenses and key account support costs for our Fusion product line.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $37.0 million or 11.2% of net sales in fiscal 2001
as compared to $38.5 million, or 12.6% of net sales in fiscal 2000. The
decrease in the selling, general and administrative expenses of $1.5 million
for fiscal 2001 related to the reduction of certain variable costs resulting
from the reduced sales in the latter half of the fiscal year.

Reorganization Costs. In fiscal 2001, the Company selected Jabil Circuit,
Inc. to build its Fusion test systems. The manufacturing transition plan will
be implemented over the next 12 months and will result in approximately a 15
percent reduction in LTX's permanent employee headcount. As a result of this
transition plan, the Company recorded $1.2 million of reorganization costs in
the fourth quarter of 2001.

Interest Expense. Interest expense for fiscal year 2001 was $1.3 million as
compared to $2.1 million for fiscal year 2000. The decrease in expense is a
result of a decrease in outstanding bank loan balances with our domestic bank.

Interest Income. Interest income was $9.1 million for fiscal 2001 as compared
to $5.2 million for fiscal 2000. The increase in interest income occurred
because of the increased earnings resulting from the investment in available
for sale securities and the benefit of proceeds from the fiscal 2000 stock
offerings for the entire year.

Income Tax. The Company recorded a tax provision of $13.1 million in fiscal
2001 and a tax benefit of $20.2 million in fiscal 2000. The Company's effective
tax rate was 30.0% and (34.5%) in fiscal 2001 and fiscal 2000, respectively.
The effective tax rate in each period differs from the statutory income tax
rate primarily due to the generation of tax credits and the change in the
valuation allowance.

Cumulative Effect of Change in Accounting Principle. In fiscal year 2001, a
$9.6 million charge representing 2.9% of net sales, was recognized relating to
the cumulative effect of an accounting change as related to SAB 101 which is
described further in "Recent Accounting Pronouncements" below.

Industry Conditions. Industry conditions weakened significantly during the
second half of the fiscal year ended July 31, 2001. Management believes that
slow semiconductor equipment industry conditions will continue for the near
term. Until there is a substantial improvement in industry conditions, the
sluggish industry conditions will continue to adversely affect the Company's
results of operations. The Company's results of operations would be further
adversely affected if it were to experience lower than anticipated order
levels, cancellations of orders in backlog, extended customer delivery
requirements or lower than anticipated margins due to unfavorable product mix.
The Company has taken steps to reduce discretionary spending and capital
expenditures.

Fiscal 2000 Compared to Fiscal 1999.

Net Sales. Net sales consist of both semiconductor test equipment and related
hardware and software support and maintenance services, net of returns and
allowances. Net sales increased $148.2 million to $305.5

million in fiscal 2000 from $157.3 million in fiscal 1999, an increase of
94.2%. The increase in net sales was principally a result of the STE, or
semiconductor test equipment, and semiconductor industries experiencing an
increase in demand combined with key new sales account wins with Fusion.
Service revenue, consisting of sales of replacement and spare parts and labor
charges, totaled $32.0 million, or 10.5% of net sales, in fiscal 2000 and $28.9
million, or 18.4% of net sales, in fiscal 1999. Geographically, sales to
customers outside the United States were $189.2 million, or 62% of net sales,
in fiscal 2000 and $95.7 million, or 61% of net sales, in fiscal 1999.

Cost of Sales. Cost of sales consists of material, labor, depreciation and
associated overhead. Cost of sales increased by $67.6 million to $161.1 million
in fiscal 2000 from $93.5 million in fiscal 1999. As a percentage of net sales,
cost of sales was 52.7% of net sales in fiscal 2000 as compared to 59.4% in
fiscal 1999. The major reason for the year-to-year improvement in margin
percentage relates to gaining the full benefits of our consolidation of our
manufacturing operations and lower product cost as a percentage of net sales
for our Fusion product line. Net sales of our Fusion products increased
sequentially in each quarter in fiscal 1999 and fiscal 2000 which resulted in
improved profit margins. Effective November 1, 1999, we changed our accounting
policy to classify certain applications and engineering development costs
previously reported in cost of sales to research and development expenses in
our quarter ending January 31, 2000. Financial results for all prior periods
have been reclassified to conform to the January 31, 2000 presentation. Under
the prior method of classification, cost of sales would have been 57.2% and
65.5% of net sales for the year ended July 31, 2000 and July 31, 1999,
respectively.

Engineering and Product Development Expenses. Engineering and product
development expenses were $50.6 million, or 16.6% of net sales, in fiscal 2000
as compared to $34.8 million, or 22.1% of net sales in fiscal 1999. The
increase in expenditures is principally a result of a higher level of
development expenses and key account support costs for our Fusion product line.
Engineering and product development expenses include the reclassified
applications and engineering development costs described in the previous
paragraph. Under the prior method of classification, engineering and product
development expenses would have been $36.8 million or 12.0% of net sales, and
$25.2 million, or 16.0% of net sales, for fiscal 2000 and fiscal 1999,
respectively.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $38.5 million or 12.6% of net sales in fiscal 2000
as compared to $31.5 million, or 20.0% of net sales in fiscal 1999. The
increase in the selling, general and administrative expenses of $7.0 million
for fiscal 2000 related to the marketing and selling expenses of the Fusion
product line and support of key accounts, as well as $3.2 million of employee
profit sharing.

Interest Expense. Interest expense for fiscal year 2000 was $2.1 million as
compared to $1.5 million for fiscal year 1999. The increase in expense is a
result of an increase in outstanding bank loan balances with our domestic bank.
The increased borrowings were used to support growth in working capital.

Interest Income. Interest income was $5.2 million for fiscal 2000 as compared
to $585,000 for fiscal 1999. The increase in interest income occurred because
of the increase in our cash balance.

Other. We recorded gains of $3.8 million during the second quarter of fiscal
1999. These transactions consisted of the liquidation of our majority-owned
Japanese subsidiary, a joint venture with Sumitomo Metal Industries, Ltd.,
which resulted in a gain of $1.7 million and the sale of a portion of our
legacy board repair business in Singapore which resulted in a gain of $2.1
million. Both transactions are consistent with our strategic commitment to the
Fusion strategy and our focus on reducing costs.

Income Tax. In fiscal year 2000 we recorded a tax benefit of $20.2 million
and recorded deferred tax assets. Realization of the net deferred tax assets is
dependent on our ability to generate future taxable income. Management believes
that it is more likely than not that the assets will be realized, based on
forecasted income. However, there can be no assurance that we will meet our
expectations of future income. The remaining valuation allowance in fiscal 2000
relates to certain foreign losses and tax credits for which the reliability of
future tax benefits is uncertain. No tax provision was recorded in fiscal 1999.

Liquidity and Capital Resources

At July 31, 2001, we had $180.1 million in cash and equivalents and working
capital of $294.5 million as compared to $207.0 million in cash and equivalents
and $307.9 million of working capital at July 31, 2000. The decrease in the
cash balance was primarily a result of cash expenditures for capital assets and
our minority interest investment in a semiconductor test equipment company,
offset by net cash provided by operating activities. Working capital decreased
as a result of those cash expenditures.

Accounts receivable from trade customers were $25.6 million at July 31, 2001,
as compared to $74.9 million at July 31, 2000. The decrease in account
receivables was the result of cash collecting activities along with lower sales
for the latter part of fiscal year 2001. The reserve for sales returns and
doubtful accounts was $3.7 million, or 12.5% of gross accounts receivable on
July 31, 2001 and $3.6 million, or 4.6% of gross accounts receivable, on July
31, 2000.

Inventory increased by $21.0 million to $96.7 million at July 31, 2001 as
compared to $75.7 million at July 31, 2000. The increase is directly
attributable to the production ramp in the Fusion product along with a severe
drop in demand for semiconductor test equipment in the second half of the
fiscal year ended July 31, 2001.

Deferred tax assets decreased by $4.9 million to $33.9 million at July 31,
2001 as compared to $38.8 million at July 31, 2000. The decrease is attributed
to the recognition of certain deferred tax assets. Prepaid expense increased by
$48.8 million to $59.0 million at July 31, 2001 as compared to $10.2 million at
July 31, 2000. The increase is attributed to inventory related prepayments to
secure production capacity with vendors.

Capital expenditures totaled $47.3 million in fiscal 2001 as compared to
$17.9 million for fiscal year 2000. The principal reason for the $29.4 million
increase in expenditures relates to the addition of board test equipment,
increased system test cell capacity, the addition of spare parts and
investments in new application development equipment supporting the growth of
the Fusion product line.

Other assets increased by $9.1 million to $14.0 million at July 31, 2001 as
compared to $4.9 million at July 31, 2000. The increase is attributed to a
minority investment in a semiconductor test equipment company, which is
accounted for using the cost method.

On August 8, 2001, the Company received net proceeds of $145.5 million from a
private placement of 4.25% Convertible Subordinated Notes due 2006. The private
placement was effected through a Rule 144A offering to qualified institutional
buyers.

The Company anticipates that cash flow from operations combined with
available cash balance and credit facility enhancements will be adequate to
fund our currently proposed operating activities for the next twelve months.

Recent Accounting Pronouncements

In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--An Interpretation of APB Opinion No. 25 ("FIN

44")". FIN 44 clarifies the application of APB Opinion No. 25 and among other
issues clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a non-compensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards; and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 was effective July 1, 2000, but certain conclusions in FIN
44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. The application of FIN 44 did not have a material impact on
our financial position or results of operations.

The Securities and Exchange Commission ("SEC") released Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), on December 3, 1999. On June 26, 2000, the SEC staff announced that they
were delaying the required implementation date for SAB No. 101 with the
issuance of SAB No. 101B. The SAB provides additional guidance on the
accounting for revenue recognition, including both broad conceptual discussions
as well as certain industry-specific guidance. The new guidance concerns the
timing of revenue recognition for sales that involve contractual customer
acceptance provisions and installation of the product if these events occur
after shipment and transfer of title. The Company's previous revenue
recognition policy was to recognize revenue at the time the customer takes
title to the product, generally at the time of shipment.

The Company derives revenues from three sources--equipment sales, spare parts
and service contracts. SAB 101 has no effect on the Company's revenue
recognition policy for spare parts or service contracts. For equipment sales
there are different revenue recognition points under SAB 101, which are
described as follows:

Acceptance: For equipment sales to a new customer, existing products
with new specifications and/or a new product, revenue is recognized upon
customer acceptance.

Shipment and acceptance: Equipment sales to existing customers, who have
purchased the same equipment with the same customer-specified provisions in
the past, are accounted for as multiple-element arrangement sales. If a
portion of the payment is linked to product acceptance which is 20% or less
holdback, 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.

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.

As a result of SAB 101, we changed our method of accounting for revenue
recognition. We reported this change in accounting principle in accordance with
APB Opinion No. 20, "Accounting Changes", by a cumulative effect adjustment.
This change was adopted in the fourth quarter. No cumulative effect of the
change is included in net income in the fourth quarter. Instead, APB 20
requires that the change be made as of the beginning of the fiscal year (August
1, 2000) and that financial information for interim periods reported prior to
the change, in this case the first three quarters of fiscal 2001, be restated
by applying SAB 101 to those periods. No restatement of fiscal year 2000
information is necessary.

In accordance with guidance provided in SAB 101, we recorded a non-cash
charge of $9.6 million (after reduction for income taxes of $4.1 million), or
($0.19) per diluted share, to reflect the cumulative effect of the accounting
change as of the beginning of the fiscal year.

In July 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 141 "Business Combinations"
("SFAS 141") and Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 as well as all purchase method business combinations completed after
June 30, 2001. SFAS 142 will require that

goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually.

SFAS 141 is effective immediately, except with regard to business
combinations initiated prior to July 1, 2001 and SFAS 142 is effective January
1, 2002. Furthermore, any goodwill and intangible assets determined to have
indefinite useful lives that are acquired in a purchase business combination
completed after June 30, 2001 will not be amortized. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized until the adoption of SFAS 142.

SFAS 141 will require upon adoption of SFAS 142 that goodwill acquired in a
prior purchase business combination be evaluated and any necessary
reclassifications be made in order to conform to the new criteria in SFAS 141
for recognition apart from goodwill. Any impairment loss will be measured as of
the date of the adoption and recognized as a cumulative effect of a change in
accounting principles in the first interim period. The Company does not expect
that the adoption of these statements will result in any material impact on the
financial statements at this time. The Company will adopt these statements
effective August 1, 2002.

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. Our recent
operating results have been negatively impacted by an industry-wide slowdown in
the semiconductor industry which began to impact us in the latter half of the
second quarter of fiscal 2001. Any failure to expand in cycle upturns to meet
customer demand and delivery requirements or contract in cycle downturns at a
pace consistent with cycles in the industry could have an adverse effect on our
business.

Any significant downturn in the markets for our customers' semiconductor
devices or in general economic conditions would likely result in a reduction in
demand for our products and would hurt our business. Our revenue and operating
results are currently being negatively impacted by a sudden and severe downturn
that the semiconductor industry is currently experiencing. Downturns in the
semiconductor test equipment industry have been characterized by diminished
product demand, excess production capacity and accelerated erosion of selling
prices. We believe the markets for newer generations of devices, including
system-on-a-chip ("SOC"), will also experience similar characteristics. In the
past, we have experienced delays in commitments, delays in collecting accounts
receivable and significant declines in demand for our products during these
downturns, and we cannot be certain that we will be able to maintain or exceed
our current level of sales.

Additionally, as a capital equipment provider, our revenue is driven by the
capital expenditure budgets and spending patterns of our customers who often
delay or accelerate purchases in reaction to variations in their businesses.
Because a high proportion of our costs are fixed, we are limited in our ability
to reduce expenses quickly in response to revenue shortfalls. 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.

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, or

-- the customers to whom we sell these systems;

. the high selling prices of our test systems (which typically result in a
long selling 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, or

-- uncertain market acceptance of products developed by our customers.

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.

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 our ten largest customers accounted for
87.4% of revenues in fiscal year 2001 and 74.0% of revenues in fiscal year
2000. 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 hurt. In addition, 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.

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

We must develop and deliver 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 48% of our revenues for fiscal year 2001 and 62% for fiscal
year 2000. In addition, we rely on non-U.S. suppliers for several components of
the equipment we sell. As a result, a major part of our revenues and the
ability to manufacture our products are

subject to the risks associated with international commerce. A reduction in
revenues or a disruption or increase in the cost of our manufacturing materials
could hurt our operating results. These international relationships make us
particularly sensitive to changes in the countries from which we derive sales
and obtain supplies. International sales and our relationships with suppliers
may be hurt by many factors, including:

. 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 the recession 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.

Our future rate of growth is highly dependent on the growth of the SOC
market.

In 1996, we refocused our business strategy on the development of our Fusion
HF product, which is primarily targeted towards addressing the needs of the SOC
market. If the SOC market fails to grow as we expect, our ability to sell our
Fusion HF product will be hampered.

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 principal
competitors in the market for semiconductor test equipment are Agilent
Technologies, Credence Systems, Schlumberger Limited, and Teradyne. Most 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.

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 on our ability to attract and retain highly qualified
managers and technical personnel. Competition for such specialized personnel is
intense, and it may become more difficult for us to hire or retain them. Our
volatile business cycles only aggravate this problem. Any significant layoffs
in an industry downturn could make it more difficult for us to hire or retain
qualified personnel.

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 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 a 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 process of qualifying
subcontractors and suppliers is a lengthy process. We are dependent on two
semiconductor device manufacturers, Vitesse Semiconductor and Maxtech
Components. Each is a sole source supplier of components manufactured in
accordance with our proprietary design and specifications. We have no written
supply agreements with these sole source suppliers and purchase our custom
components through individual purchase orders. Vitesse Semiconductor is also a
Fusion customer.

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

We have selected Jabil Circuit, Inc. to manufacture our Fusion HF test
systems. We are in the process of negotiating the definitive terms and
conditions of this arrangement and upon reaching a final binding agreement, we
will transfer all of our assembly, system integration and testing operations to
Jabil. If we are unable to finalize the terms of this arrangement, or if, after
the execution of a final agreement, Jabil cannot provide us with these products
and services in a timely fashion, or at all, whether due to labor shortage,
slow down or stoppage, deteriorating financial or business conditions or any
other reason, we would not be able, at least temporarily, to sell or ship our
Fusion family of products to our customers. 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.

We have begun the transition of our assembly, system integration and testing
operations of the Fusion products to Jabil. We may encounter unforeseen
expenses as well as difficulties in transferring these responsibilities to
Jabil due to technology and personnel compatibility. We cannot assure you that
this relationship with Jabil will result in a reduction of our fixed expenses
while allowing us to provide our customers with seamless service and customer
support.

Economic conditions in Asia may hurt our sales.

Asia is an important region for our customers in the semiconductor industry,
and many of them have operations there. In recent years, Asian economies have
been highly volatile and recessionary, resulting in significant fluctuations in
local currencies and other instabilities. These instabilities may continue or
worsen, which could have a material adverse impact on our financial position
and results of operations, as approximately 36.9% and 48.3% of our sales for
fiscal years 2001 and 2000, respectively, were derived from this region. In
light of the historical economic downturns in Asia, we may not be able to
obtain additional orders and may experience cancellations of orders.

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 July 31, 2001, our stock price ranged
from a low of $10.19 to a high of $31.82. 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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Financial instruments that potentially subject us to concentrations of
credit-risk consist principally of investments in cash equivalents, short-term
investments and trade receivables. We place our investments with high-quality
financial institutions, limit the amount of credit exposure to any one
institution and have established investment guidelines relative to
diversification and maturities designed to maintain safety and liquidity.

Our primary exposures to market risks include fluctuations in interest rates
on our short-term and long-term debt of approximately $24.2 million as of July
31, 2001 and in foreign currency exchange rates. We do not use derivative
financial instruments. We are subject to interest rate risk on our short-term
borrowings under our credit facilities. Our short term bank debt bears interest
at prime. Long term debt interest rates are fixed for the term of the notes.

Foreign Exchange Risk

Operating in international markets involves exposure to movements in currency
exchange rates. Currency exchange rate movements typically also reflect
economic growth, inflation, interest rates, government actions and other
factors. We transact business in various foreign currencies and, accordingly,
we are subject to exposure from adverse movements in foreign currency exchange
rates. As currency exchange rates fluctuate, translation of the statements of
operations of our international businesses into U.S. dollars may affect year-
over-year comparability and could cause us to adjust our financing and
operating strategies. To date, the effect of changes in foreign currency
exchange rates on revenues and operating expenses have not been material.
Substantially all of our revenues are invoiced and collected in U.S. dollars.
Our trade receivables result primarily from sales to semiconductor
manufacturers located in North America, Japan, the Pacific Rim and Europe. In
fiscal 2001, our revenues derived from sales outside the United States
constituted 48% of our total revenues. Accounts receivable in currencies other
than U.S. dollars comprise 21% of the outstanding accounts receivable balance
at July 31, 2001. Receivables are from major corporations or are supported by
letters of credit. We maintain reserves for potential credit losses and such
losses have been immaterial.

Based on a hypothetical ten percent adverse movement in interest rates and
foreign currency exchange rates, the potential losses in future earnings, fair
value of risk-sensitive financial instruments, and cash flows are immaterial,
although the actual effects may differ materially from the hypothetical
analysis.

We do not use derivative financial instruments for speculative trading
purposes, nor do we currently hedge our foreign currency exposure to offset the
effects of changes in foreign exchange rates. We intend to assess the need to
utilize financial instruments to hedge currency exposures on an ongoing basis.

Interest Rate Risk

Historically, we have had no material interest rate risk associated with debt
used to finance our operations due to limited borrowings. We manage our
interest rate exposure using a mix of fixed and floating interest rate debt
and, if appropriate, financial derivative instruments.

During the quarter ended April 30, 2001, the Company renegotiated its
domestic credit facility with our existing lender. The facility of $15.0
million is secured by all assets and bears interest at the bank's prime rate.
Borrowing availability under this facility is based on a formula of eligible
domestic and foreign accounts receivable. Outstanding borrowings at July 31,
2001 were $12.9 million under this credit facility and the interest rate was
6.75%. Based on this balance, an immediate change of 1% in the interest rate
would cause a change in interest expense of approximately $129,000 on an annual
basis. A second credit facility with another lender was established on April
30, 2001 as a revolving credit line for $30.0 million. This facility is secured
by cash and bears interest (at our option) at either: (i) the greater of the
federal funds rate plus 0.5% or the bank's prime rate, in each case, minus 1.0%
or (ii) LIBOR plus 0.4%. On August 8, 2001, the Company received $145.5 million
in net proceeds from a convertible debenture offering. Our objective in
maintaining these variable rate borrowings is the flexibility obtained
regarding early repayment without penalties and lower overall cost as compared
with fixed-rate borrowings. The Company anticipates the cash flow from
operations combined with available cash balance and credit facility
enhancements will be adequate to fund currently proposed operating activities
for the next twelve months.

Item 8. Financial Statements and Supplementary Data

LTX CORPORATION

CONSOLIDATED BALANCE SHEET
(In thousands, except share and per share data)

July 31,
------------------
2000 2001
-------- --------

ASSETS
Current assets:
Cash and equivalents..................................... $206,973 $180,109
Accounts receivable, net of allowances of $3,648 and
$3,659.................................................. 74,940 25,649
Accounts receivable--other; net of allowances of $0 and
$2,500.................................................. 6,875 6,938
Inventories.............................................. 75,671 96,695
Deferred tax asset....................................... 38,795 33,896
Prepaid expense.......................................... 10,222 58,975
-------- --------
Total current assets................................... 413,476 402,262
Property and equipment, net................................ 38,125 66,739
Other assets............................................... 4,903 14,038
-------- --------
Total assets........................................... $456,504 $483,039
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................ $ 9,725 $ 12,900
Current portion of long-term debt........................ 5,144 5,293
Accounts payable......................................... 43,042 16,577
Deferred revenues and customer advances.................. 14,620 37,840
Deferred gain on leased equipment........................ 8,476 13,906
Accrued restructuring charges............................ 2,263 1,713
Other accrued expenses................................... 22,319 19,557
-------- --------
Total current liabilities.............................. 105,589 107,786
Long-term debt, less current portion....................... 11,239 5,984
Stockholders' equity:
Common stock, $0.05 par value:
100,000,000 shares authorized; 50,131,240 and 50,903,326
shares issued; 47,583,740 and 48,355,826 shares
outstanding............................................. 2,518 2,557
Additional paid-in capital................................. 401,209 409,065
Other comprehensive income................................. -- 553
Accumulated deficit........................................ (52,290) (31,145)
Less--Treasury stock (2,547,500 shares), at cost........... (11,761) (11,761)
-------- --------
Total stockholders' equity............................. 339,676 369,269
-------- --------
Total liabilities and stockholders' equity............. $456,504 483,039
======== ========

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

LTX CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except share and per share data)

Year ended July 31,
----------------------------
1999 2000 2001
-------- -------- --------

Net sales....................................... $157,326 $305,535 $330,030
Cost of sales................................... 93,451 161,078 177,034
Inventory related provision..................... -- -- 12,800
-------- -------- --------
Gross profit.................................... 63,875 144,457 140,196
Engineering and product development expenses.... 34,828 50,582 65,987
Selling, general and administrative expenses.... 31,517 38,477 37,029
Reorganization costs............................ -- -- 1,200
-------- -------- --------
Income (loss) from operations .................. (2,470) 55,398 35,980
Other income (expense):
Interest expense.............................. (1,526) (2,065) (1,250)
Interest income............................... 585 5,188 9,144
Gain on liquidation/sale of business units.... 3,786 -- --
-------- -------- --------
Income before income taxes and cumulative effect
of change in accounting principle ............. 375 58,521 43,874
Provision (benefit) for income taxes............ -- (20,214) 13,163
-------- -------- --------
Income before cumulative effect of change in
accounting principle........................... 375 78,735 30,711
Cumulative effect of change in accounting
principle, net of $4,099 tax................... -- -- 9,566
Net income...................................... $ 375 $ 78,735 $ 21,145
-------- -------- --------
Net income before cumulative effect of change in
accounting principle, per share:
Basic......................................... $ 0.01 $ 1.84 $ 0.64
Diluted....................................... $ 0.01 $ 1.70 $ 0.62
Cumulative effect of change in accounting
principle, net of $4,099 tax, per share:
Basic......................................... -- -- $ (0.20)
Diluted....................................... -- -- $ (0.19)
Net income per share:
Basic......................................... $ 0.01 $ 1.84 $ 0.44
======== ======== ========
Diluted....................................... $ 0.01 $ 1.70 $ 0.43
======== ======== ========
Weighted-average common shares used in computing
net income per share:
Basic......................................... 35,696 42,897 47,782
======== ======== ========
Diluted....................................... 36,958 46,201 49,634
======== ======== ========
Comprehensive income:
Net income...................................... $ 375 $ 78,735 $ 21,145
Unrealized gain on marketable securities........ -- -- 553
-------- -------- --------
Comprehensive income............................ $ 375 $ 78,735 $ 21,698
======== ======== ========

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

LTX CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)

For the Three Years Ended July 31, 2001
----------------------------------------------------------------------------
Unrealized
Common Stock Additional Gain on Total
------------------ Paid-In Marketable Accumulated Treasury Stockholders'
Shares Amount Capital Securities Deficit Stock Equity
---------- ------- ---------- ---------- ----------- -------- -------------

Balance at July 31,
1998................... 35,476,940 1,902 197,209 -- (131,400) (11,761) 55,950
Exercise of stock
options................ 411,854 20 975 -- -- -- 995
Issuance of shares under
employees' stock
purchase plan.......... 296,246 14 969 -- -- -- 983
Amortization of deferred
compensation........... -- -- 625 -- -- -- 625
Net income.............. -- -- -- -- 375 -- 375
---------- ------- -------- ----- -------- -------- --------
Balance at July 31,
1999................... 36,185,040 1,936 199,778 -- (131,025) (11,761) 58,928
Common stock offerings.. 9,173,270 459 179,091 -- -- -- 179,550
Exercise of stock
options................ 1,701,796 85 5,268 -- -- -- 5,353
Tax benefit from the
exercise of stock
options................ -- -- 8,211 -- -- -- 8,211
Conversion of
subordinated debentures
to common stock........ 405,984 20 7,178 -- -- -- 7,198
Issuance of shares under
employees' stock
purchase plan.......... 117,650 18 1,683 -- -- -- 1,701
Net Income.............. -- -- -- -- 78,735 -- 78,735
---------- ------- -------- ----- -------- -------- --------
Balance at July 31,
2000................... 47,583,740 2,518 401,209 -- (52,290) (11,761) 339,676
Exercise of stock
options................ 632,667 32 3,346 -- -- -- 3,378
Issuance of shares under
employees' stock
purchase plan.......... 139,419 7 2,120 -- -- -- 2,127
Tax benefit from the
exercise of stock
options................ -- -- 2,390 -- -- -- 2,390
Other comprehensive
income................. -- -- -- 553 -- -- 553
Net income.............. -- -- -- -- 21,145 -- 21,145
---------- ------- -------- ----- -------- -------- --------
Balance at July 31,
2001................... 48,355,826 $ 2,557 $409,065 $ 553 $(31,145) $(11,761) $369,269
========== ======= ======== ===== ======== ======== ========

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

LTX CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands except share data)

Year ended July 31,
----------------------------
1999 2000 2001
-------- -------- --------

Cash Flows from Operating Activities:
Net income...................................... $ 375 $ 78,735 $ 21,145
Add (deduct) non-cash items:
Cumulative effect of a change in account
principle, net of $4,099 tax................. -- -- 9,566
Depreciation and amortization................. 11,291 10,613 14,139
Deferred tax benefit.......................... -- (21,200) (567)
Gain on liquidation/sale of business units.... (3,786) -- --
Charge for inventory related provision........ -- -- 12,800
Translation loss (gain)....................... 737 (239) 777
(Increase) decrease in:
Accounts receivable............................ (2,983) (36,876) 61,743
Inventories.................................... (11,204) (37,079) (41,629)
Prepaid expenses............................... (2,154) (4,418) (48,789)
Other assets................................... (51) (1,268) 743
Increase (decrease) in:
Accounts payable............................... 11,560 5,526 (25,994)
Accrued expenses and restructuring charges..... (8,322) 2,371 (2,134)
Deferred revenues and customer advances........ (9,449) 5,446 12,606
-------- -------- --------
Net cash (used in) or provided by operating
activities.................................... (13,986) 1,611 14,406
-------- -------- --------
Cash Flows from Investing Activities:
Proceeds from sale of business unit............. 2,000 -- --
Minority investment............................. -- -- (9,326)
Expenditures for property and equipment......... (9,636) (17,850) (47,333)
-------- -------- --------
Net cash used in investing activities........... (7,636) (17,850) (56,659)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from stock plans:
Employees' stock purchase plan................. 983 1,701 2,127
Exercise of stock options...................... 995 5,353 3,378
Proceeds of equity offerings.................... -- 179,550 --
Advances of short-term notes payable............ 33,204 50,010 51,900
Payment of short-term notes payable............. (28,499) (46,093) (48,725)
Proceeds from lease financing................... 10,615 12,744 12,496
Payments of long-term debt...................... (1,174) (141) (5,111)
-------- -------- --------
Net cash provided by financing activities....... 16,124 203,124 16,065
-------- -------- --------
Effect of exchange rate changes on cash.......... 325 152 (676)
-------- -------- --------
Net (decrease) increase in cash and
equivalents.................................... (5,173) 187,037 (26,864)
Cash and equivalents at beginning of year........ 25,109 19,936 206,973
-------- -------- --------
Cash and equivalents at end of year.............. $ 19,936 $206,973 $180,109
======== ======== ========
Supplemental Disclosures of Cash Flow
Information:
Cash paid (received) during the year for:
Interest....................................... $ 678 $ (2,790) $ (7,616)
Income taxes................................... $ 757 $ 1,536 $ 1,938

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

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY

LTX Corporation ("LTX" or the "Company") designs, manufactures, and markets
automatic test equipment for the semiconductor industry that is used to test
system-on-a-chip, digital, analog, and mixed signal (a combination of digital
and analog) integrated circuits ("ICs"). The Company's newly introduced Fusion
product is a single test platform that can be configured to test system-on-a-
chip devices, digital VLSI devices including microprocessors and
microcontrollers, and analog/mixed signal devices. The Company also sells
hardware and software support and maintenance services for its test systems.
The semiconductors tested by the Company's systems are widely used in the
computer, communications, automotive and consumer electronics industries. The
Company markets its products worldwide to manufacturers of system-on-a-chip,
digital, analog and mixed signal ICs. The Company is headquartered, and has
development and manufacturing facilities, in Westwood, Massachusetts, a
development facility in San Jose, California, and worldwide sales and service
facilities to support its customer base.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Company and
its wholly owned domestic subsidiaries and wholly owned and majority-owned
foreign subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.

Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of income and expenses
during the reporting periods. Actual results could differ from these estimates.

Foreign Currency Translation

The financial statements of the Company's foreign subsidiaries are translated
in accordance with Statement of Financial Accounting Standards No. 52, Foreign
Currency Translation. The Company's functional currency is the U.S. dollar.
Accordingly, the Company's foreign subsidiaries translate monetary assets and
liabilities at year-end exchange rates while non-monetary items are translated
at historical rates. Income and expense accounts are translated at the average
rates in effect during the year, except for sales, cost of sales and
depreciation, which are primarily translated at historical rates. Net realized
and unrealized gains and losses resulting from foreign currency remeasurement
and transaction gains and losses were a loss of $777,000, a gain of $239,000,
and a loss of $737,000 in fiscal 2001, 2000 and 1999 respectively. The loss of
$777,000 in fiscal 2001 was principally due to transaction losses relating to
fluctuations in the Japanese yen. Transaction gains and losses are included in
the consolidated results of operations.

Revenue Recognition

The Company changed its revenue recognition policy effective August 1, 2000,
based on guidance provided in SEC Staff Accounting Bulletin No. 101 (SAB 101),
"Revenue Recognition in Financial Statements." 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.

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Acceptance: For equipment sales to a new customer, existing products with new
specifications and/or a new product, revenue is recognized upon customer
acceptance.

Shipment and acceptance: Equipment sales to existing customers, who have
purchased the same equipment with the same customer-specified provisions in the
past, are accounted for as multiple-element arrangement sales. If a portion of
the payment is linked to product acceptance and 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.

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. Service revenue totaled $37.3 million or 11.3% of net sales, in
fiscal 2001, $32.0 million, or 10.5% of net sales, in fiscal 2000, and $28.9
million, or 18.4% of net sales, in fiscal 1999. Revenue from engineering
contracts are recognized over the contract period on a percentage of completion
basis.

Prior to fiscal 2001, the revenue recognition policy was to recognize revenue
at the time the customer takes title to the product, generally at the time of
shipment. The Company has no proforma data for fiscal years 2000 and 1999 as
the amounts are not readily determinable based on the nature of the revenue
adjustments required by SAB 101. The Company's quarterly fiscal 2001 results
have been restated in Note 12. Revenue related to maintenance and service
contracts was recognized ratably over the duration of the contracts.

During April 1998, Ando Electric Co., Ltd. (Ando) paid the Company $17.4
million in cash and LTX Common Stock for the rights to manufacture, market and
develop LTX's Fusion product for Japanese customers. The Company recognized
$7.4 million of revenue during fiscal 1998 for the sale of its marketing and
development rights. The Company deferred $10.0 million of revenue related to
the manufacturing rights and transfer of technology knowledge. The $10.0
million was being recognized on a percentage of completion basis over the
period in which the Company completed the transfer of the manufacturing and
technology rights. The Company recognized $8.5 million of the deferred revenue
in fiscal 1999 and recognized the remaining $1.5 million in the first quarter
of fiscal 2000. In addition, the Company may receive future royalty payments
which will be recognized as revenue in the period earned.

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 No. 86, Accounting for the Costs of Computer
Software To Be Sold, Leased or Otherwise Marketed, relating to certain software
development costs, were insignificant.

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Income Taxes

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

Net Income Per Share

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

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

Fiscal Year Ended July
31,
-----------------------
1999 2000 2001
------- ------- -------
(in thousands, except
per share data)

Net income.......................................... $ 375 $78,735 $21,145
Basic EPS
Basic common shares............................... 35,696 42,897 47,782
Basic EPS......................................... $ 0.01 $ 1.84 $ 0.44
Diluted EPS
Basic common shares............................... 35,696 42,897 47,782
Plus: impact of stock options and warrants........ 1,262 3,304 1,852
------- ------- -------
Diluted common shares............................... 36,958 46,201 49,634
Diluted EPS....................................... $ .01 $ .70 $ 0.43

Options to purchase 498,125 shares of common stock in 2001, 30,125 shares of
common stock in 2000, and 15,000 shares in 1999 were outstanding during the
years then ended, but were not included in the year to date calculation of
diluted net income per share because either the options' exercise price was
greater than the average market price of the common shares during those
periods, or the effect of including the options would have been anti-dilutive.

Financial Instruments

Cash and Equivalents

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 equivalents consist primarily of repurchase
agreements, commercial paper and available for sale investments. In accordance
with the Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities, investments in debt
securities are classified as trading, available-for-sale or held-to-maturity.
Investments are classified as held-to- maturity when the Company has the
positive intent and ability to hold those securities to maturity. Held-to-
maturity securities are stated at amortized cost with premiums and discounts
amortized to interest income over the life of the investment. The Company has
no investments that are classified as held-to-maturity.

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The fair market value of cash equivalents and short-term investments is
substantially equal to the amortized cost, due to the short period of time to
maturity, which is less than one year. The Company did recognize other
comprehensive income of $553,000 for the year ended July 31, 2001 for
unrealized gain from available for sale securities.

Fair Value

Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments, requires that disclosure be made of estimates
of the fair value of financial instruments. The fair value of the Company's
notes payable and long-term liabilities is estimated based on quoted market
prices for the same or similar issues or on current rates offered to the
Company for debt of the same remaining maturities. At July 31, 2001 and 2000,
the carrying value of $12,900,000 and $9,725,000, respectively, for short-term
bank debt and $11,277,000 and $16,383,000, respectively, for long-term debt,
including current portion, approximates fair value. During fiscal year 2000,
the Company called the $7,308,000 of its 7 1/4% Convertible Subordinated
Debentures due 2011 for redemption. These debentures had a conversion price of
$18.00 and all of these outstanding debentures were converted into 405,984
shares of common stock of the Company. For all other balance sheet financial
instruments, the carrying amount approximates fair value.

Inventories

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

As of July 31,
---------------
2000 2001
------- -------
(in thousands)

Raw materials................................................ $31,085 $48,602
Work-in-process.............................................. 30,194 33,986
Finished goods............................................... 14,392 14,107
------- -------
$75,671 $96,695
======= =======

Prepaid Expense

Certain amounts in the prepaid expense balance relate to inventory capacity
purchases and payments for projects not completed. The completion of these
projects along with the receipt of inventory is expected to occur during fiscal
2002. As of July 31, 2001, no work has begun on these projects and all amounts
are refundable.

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Property and Equipment

Property and equipment is recorded at cost. The Company provides for
depreciation and amortization on the straight-line method. Charges are made to
operating expenses in amounts that are sufficient to amortize the cost of the
assets over their estimated useful lives. Property and equipment are summarized
as follows:

As of July 31,
------------------ Depreciable
2000 2001 Life in Years
-------- -------- -------------------
(in thousands)

Machinery and equipment............... $111,308 $138,278 3-7
Office furniture and equipment........ 8,388 16,036 3-7
Leasehold improvements................ 9,760 13,861 shorter of
-------- --------
129,456 168,175 10 or term of lease
Less: Accumulated depreciation and
amortization......................... (91,331) (101,436)
-------- --------
$ 38,125 $ 66,739
======== ========

Deferred Gain on Leased Equipment

The deferred gain from the sale and lease back of equipment is recognized
ratably over the term of the lease.

Reclassifications

Prior year financial statements have been reclassified to conform to the
fiscal 2001 presentation. The reclassification had no impact on earnings for
the prior period.

Recent Accounting Pronouncements

In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--An interpretation of APB Opinion No. 25 ("FIN 44")". FIN 44
clarifies the application of APB Opinion No. 25 and among other issues
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for
an exchange of stock compensation awards in a business combination. FIN 44 was
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN44 did not have a material impact on our financial position
or results of operations.

The Securities and Exchange Commission ("SEC") released Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," on
December 3, 1999. On June 26, 2000 the SEC staff announced that they were
delaying the required implementation date for SAB No. 101 with the issuance of
SAB No. 101B. The SAB provides additional guidance on the accounting for
revenue recognition, including both broad conceptual discussions as well as
certain industry-specific guidance. The new guidance concerns the timing of
revenue recognition for sales that involve contractual customer acceptance
provisions and installation of the product if these events occur after shipment
and transfer of title. The Company's previous revenue recognition policy was to
recognize revenue at the time the customer takes title to the product,
generally at the time of shipment.

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

As a result of SAB 101, the Company changed its method of accounting for
revenue recognition. The Company reported this change in accounting principle
in accordance with APB Opinion No. 20, "Accounting Changes", by a cumulative
effect adjustment. This change was adopted in the fourth quarter. No cumulative
effect of the change is included in net income in the fourth quarter. Instead,
APB 20 requires that the change be made as of the beginning of the fiscal year
(August 1, 2000) and that financial information for interim periods reported
prior to the change, in this case the first three quarters of fiscal 2001, be
restated by applying SAB 101 to those periods. No restatement of 2000
information is necessary.

In accordance with guidance provided in SAB 101, the Company recorded a non-
cash charge of $9.6 million (after reduction for income taxes of $4.1 million),
or ($0.19) per diluted share, to reflect the cumulative effect of the
accounting change as of the beginning of the fiscal year.

In July 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 141 "Business Combinations"
("SFAS 141") and Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated and
completed after June 30, 2001. SFAS 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually.

3. NOTES PAYABLE

During the quarter ended April 30, 2001, we renegotiated our domestic credit
facility with our existing lender. The facility of $15.0 million is secured by
all assets and bears interest at the bank's prime rate. Borrowing availability
under this facility is based on a formula of eligible domestic and foreign
accounts receivable. Outstanding borrowings at July 31, 2001 were $12.9 million
under this credit facility and the interest rate was 6.75%. A second credit
facility with another lender was established on April 30, 2001 as a revolving
credit line for $30.0 million. This facility is secured by cash and bears
interest (at our option) at either: (I) the greater of the federal funds rate
plus 0.5% or the bank's prime rate, in each case, minus 1.0% or (ii) LIBOR plus
0.4%. On August 8, 2001, the Company received $145.5 million from a convertible
debenture offering (see Note 13).

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4. LONG-TERM DEBT

Long-term debt consist of the following:

As of July 31,
----------------
2000 2001
------- -------
(in thousands)

Subordinated note payable................................ $12,000 $ 8,000
Lease purchase obligations at various interest rates, net
of deferred interest.................................... 4,383 3,277
------- -------
16,383 11,277
Less: current portion.................................... (5,144) (5,293)
------- -------
$11,239 $ 5,984
======= =======

The subordinated note payable bears interest at 5.5% at July 31, 2001 and at
July 31, 2000, which is payable semi-annually and has semi-annual principal
payments of $2,000,000, which began in January 1997. The Company renegotiated
the terms of the note in fiscal 1999 and principal payments were deferred until
January 2001 at which time semi-annual installments in the amount of $2,000,000
began and will continue until the note's maturity date of July 2003. The note
is unsecured and is subordinated in right of payment to senior indebtedness of
the Company. Lease purchase obligations of $3,277,000 and $4,383,000 at July
31, 2001 and July 31, 2000 represent capital leases on equipment.

5. CONVERTIBLE SUBORDINATED DEBENTURES

On April 25, 1986, the Company issued and sold at par $35,000,000 of 7 1/4%
Convertible Subordinated Debentures due 2011. As of March 24, 2000 the Company
called the remaining $7,308,000 of the original issue of $35,000,000
Convertible Subordinated Debentures. These debentures had a conversion price of
$18.00 and all of these outstanding debentures were converted into 405,984
shares of common stock of the Company. Interest was payable semi-annually on
April 15 and October 15. Since the debentures were called in March, 2000 only
one interest payment was paid in fiscal year 2000.

On August 8, 2001, the Company issued and sold at par $150,000,000 of 4 1/4%
Convertible Subordinated Debentures due 2006. These debentures have a
conversion price of $29.04. Interest is payable semi-annually on February 15
and August 15.

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

6. INCOME TAXES

The components of the provision (benefit) for income taxes consist of the
following:

Year ended July 31,
------------------------
1999 2000 2001
----- -------- --------
(in thousands)

Currently payable:
Federal.......................................... -- $ 986 $ 6,727
State............................................ -- -- 176
Foreign.......................................... -- -- 1,361
----- -------- --------
Total current...................................... -- $ 986 $ 8,264
----- -------- --------
Deferred:
Federal.......................................... -- $(18,853) $ 4,400
State............................................ -- (2,347) 499
Foreign.......................................... -- -- --
----- -------- --------
Total deferred..................................... -- $(21,200) $ 4,899
----- -------- --------
Total tax provision (benefit)...................... $ -- $(20,214) $ 13,163
===== ======== ========

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

Year ended July 31,
----------------------
1999 2000 2001
-------- ------ ----

U.S. Federal statutory rate........................ 35.0% 35.0% 35.0%
State income taxes, net of Federal income tax
effect............................................ 6.0 5.0 3.3
Foreign income taxes............................... 1.3 0.0 0.0
Change in valuation allowance...................... 2,490.0 (65.4) (2.3)
Net foreign gains not provided..................... (2,532.3) 0.0 0.0

Tax credits........................................ -- (5.1) (4.0)
Extraterritorial income exclusion.................. 0.0 0.0 (2.0)
Other, net......................................... 0.0 (4.0) 0.0
-------- ------ ----
Effective tax rate................................. 0.0% (34.5)% 30.0%

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The temporary differences and carryforwards that created the deferred tax
assets and liabilities as of July 31, 2001, and 2000 are as follows:

As of July 31,
----------------
2000 2001
------- -------
(in thousands)

Deferred tax assets:
Net operating loss carryforward.......................... $17,025 $ 6,816
Tax credits.............................................. 12,248 13,287
Inventory valuation reserves............................. 3,286 4,475
Restructuring charges.................................... 884 5,805
Spares amortization...................................... 1,598 240
State tax credits and loss carryforwards................. 7,835 6,994
Deferred revenue......................................... 8,940 8,620
Other.................................................... 3,917 3,556
------- -------
Total deferred tax assets.............................. 55,733 49,793
Valuation allowance...................................... (16,938) (15,897)
------- -------
Net deferred tax assets.................................... $38,795 $33,896
======= =======

The Company has not provided additional federal income taxes on the
cumulative undistributed earnings of its foreign subsidiaries, since such
earnings are considered to be permanently invested abroad. In fiscal year 2001,
a tax benefit of $20.2 million for certain deferred tax assets was recorded.
The Company maintains a valuation allowance against a portion of their deferred
tax assets because the realization of those future tax benefits is uncertain.
The valuation allowance in 2000 and 2001 relates primarily to certain foreign
losses and various state tax attributes.

7. STOCKHOLDERS' EQUITY

Rights Agreement

The Board of Directors of the Company adopted a Rights Agreement, dated as of
April 30, 1999, between the Company and Bank Boston, N.A., as rights agent, to
replace its 1989 rights plan. In connection therewith, the Board distributed
one common share purchase right for each share of common stock then or
thereafter outstanding. The rights will become exercisable only if a person or
group acquires 15% or more of the Company's common stock or announces a tender
offer that would result in ownership of 15% or more of the common stock.
Initially, each right will entitle a stockholder to buy one share of common
stock of the Company at a purchase price of $45.00 per share, subject to
significant adjustment depending on the occurrence thereafter of certain
events. Before any person or group has acquired 15% or more of the common stock
of the Company, the rights are redeemable by the Board of Directors at $0.001
per right. The rights expire on April 30, 2009 unless redeemed by the Company
prior to that date.

8. EMPLOYEE BENEFIT PLANS

Stock Option Plans

The Company has two stock option plans: the 1999 Stock Plan (1999 Plan) and
the 1995 LTX (Europe) Ltd. Approved Stock Option Plan (U.K. Plan). The 1999
Plan and the U.K. Plan provide for the granting of options to employees to
purchase shares of common stock at not less than 100% of the fair market value
of the

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

date of grant. The 1999 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.
Compensation expense relating to shares granted under this plan at less than
fair market value has been charged to operations over the applicable vesting
period. Options under the plans are exercisable over vesting periods, which
typically have been three years. Options granted during fiscal 2001 are
exercisable over 4 year vesting periods. At July 31, 2001, 1,023,100 shares
were subject to future grant under the 1999 Plan and 7,826 shares were subject
to future grant under the U.K. Plan.

On December 14, 1998, the Company repriced stock options representing
1,580,510 shares with an average exercise price of $4.57 to $2.81, the market
price at December 14. A total of 1,051,857 options of common stock granted to
the directors and executive officers of the Company were not repriced. On
December 5, 2000, stockholders approved the addition of 2,325,000 shares of
common stock reserved for issuance under the 1999 Plan.

Compensation Expense

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation (SFAS
123)," which requires employee stock-based compensation to be either recorded
or disclosed at its fair value. As permitted by SFAS 123, the Company has
elected to continue to account for employee stock-based compensation under
Accounting Principles Board Opinion No. 25. Had compensation costs for awards
in fiscal 2001, 2000, and 1999 to the Company's stock-based compensation plans
been determined based on the fair value at the grant dates consistent with the
method set forth under SFAS 123, the effect on the Company's net income (loss)
and net income (loss) per share would have been as follows:

Year ended July 31,
-----------------------
1999 2000 2001
------ ------- -------
(in thousands except
per share)

Net income (loss):
As reported........................................ $ 375 $78,735 $21,145
Pro forma.......................................... (8,735) 73,915 11,482
Net income (loss) per share:
Basic
As reported....................................... 0.01 1.84 0.44
Pro forma......................................... (0.25) 1.72 0.24
Diluted
As reported....................................... 0.01 1.70 0.43
Pro forma......................................... (0.24) 1.60 0.23

Since the method prescribed by SFAS 123 has not been applied to options
granted prior to August 1, 1997, the resulting pro forma compensation expense
may not be representative of the amount to be expected in future years. Pro
forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

Year ended July 31,
----------------------------------
1999 2000 2001
---------- ---------- ----------

Volatility............................... 80% 86% 91%
Dividend yield........................... 0% 0% 0%
Risk-free interest rate.................. 6.18% 6.15% 4.65%
Expected life of options................. 7.36 years 4.82 years 5.77 years

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

Stock Option Activity

1999 2000 2001
-------------------- -------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- --------- --------

Options outstanding,
beginning of year...... 4,186,793 $ 4.26 5,295,555 $ 4.74 3,825,080 $ 7.01
Granted/repriced........ 3,683,967 4.88 300,900 24.58 2,681,000 14.69
Exercised............... (411,854) 2.49 (1,701,796) 3.16 (632,667) 5.35
Forfeited/repriced...... (2,163,351) 4.51 (69,579) 4.93 (165,278) 11.75
Options outstanding, end
of year................ 5,295,555 4.74 3,825,080 7.01 5,708,135 11.01
Options exercisable..... 1,492,123 3.38 1,455,023 4.90 1,697,382 6.48
Options available for
grant.................. 720,262 1,338,087 1,030,926
Weighted average fair
value of options
granted during year.... $ 3.81 $17.33 $11.20

As of July 31, 2001, the status of the Company's outstanding and exercisable
options is as follows:

Options Outstanding Options Exercisable
------------------------------- -----------------------
Weighted Weighted
Average Average
Range of Weighted Average Exercise Exercise
Exercise Number Remaining Price Number Price
Price ($) Outstanding Contractual Life ($) Exercisable ($)
--------- ----------- ---------------- -------- ----------- --------

0.00-4.63 1,252,614 6.3 3.07 616,311 3.00
4.64-9.25 1,435,421 7.0 7.65 960,471 7.07
9.26-13.88 1,655,250 9.1 13.51 68,500 11.63
13.89-18.50 1,039,350 9.0 15.36 23,900 18.08
18.51-23.13 166,000 9.1 21.19 -- --
23.14-32.38 18,500 9.8 28.34 -- --
32.39-37.00 43,000 8.8 33.63 8,600 33.63
37.01-41.63 37,500 8.6 37.75 7,500 37.75
41.64-46.25 60,500 8.6 46.25 12,100 46.25
--------- --- ----- --------- -----
5,708,135 7.9 11.01 1,697,382 6.48
========= === ===== ========= =====

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Employees' Stock Purchase Plan

In December 1993, the stockholders of the Company approved the adoption of
the 1993 Employees' Stock Purchase Plan, which replaced the 1983 Employees'
Stock Purchase Plan, which expired in December 1993. Under this plan, eligible
employees may contribute up to 15% of their annual compensation for the
purchase of common stock of the Company up to $25,000 of fair market value of
the stock per calendar year. The plan limited the number of shares which can be
issued for any semi-annual plan period to 150,000 shares. In 1999, the
shareholders of the Company increased the number of shares which can be issued
over the term of the plan to 3,000,000 shares. At July 31, 2001, 1,031,901
shares were available for future issuance under this plan.

Other Compensation Plans

In fiscal 1996, the Company established a Profit Sharing Bonus Plan, wherein
a percentage of pretax profits are distributed semi-annually to all employees.
The Company based on this Profit Sharing Bonus Plan distributed to all eligible
employees approximately $3,019,000, $3,227,000, and $0, for fiscal years 2001,
2000, and 1999, respectively.

In addition, the Company has a 401(k) Growth and Investment Program. Eligible
employees may make voluntary contributions to this plan through a salary
reduction contract up to the statutory limit or 15% of their annual
compensation. In fiscal 1996, the Company began matching employees' voluntary
contributions to the plan, up to certain prescribed limits. These Company
contributions vest at a rate of 20% per year. The Company resumed matching
contributions in October of fiscal 2000 after suspending the matching of
contributions in October of fiscal 1999. The Company suspended the match as of
June of fiscal year 2001. The total charge to expense under this plan was
approximately $2,057,000, $1,780,000, and $152,000 for fiscal 2001, 2000, and
1999, respectively.

9. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION

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

In fiscal year 2001, sales to three customers accounted for 26%, 22% and 12%
of net sales, respectively. In fiscal year 2000, sales to three customers
accounted for 19%, 13% and 11% of net sales, respectively. No single customer
accounted for greater than 10% of total sales revenue in fiscal 1999. Sales to
the top ten customers were 87%, 74%, and 60%, of net sales in fiscal 2001,
2000, and 1999, respectively.

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company's operations by geographic segment for the three years ended July
31, 2001 are summarized as follows:

Year ended July 31,
--------------------------
1999 2000 2001
-------- -------- --------
(in thousands)

Sales to unaffiliated customers:
United States..................................... $ 61,603 $116,375 $172,285
Taiwan............................................ 27,799 55,620 33,438
Japan............................................. 11,645 8,030 12,964
Singapore......................................... 18,156 67,545 65,927
All other countries............................... 38,123 57,965 45,416
-------- -------- --------
Total sales to unaffiliated customers............... $157,326 $305,535 $330,030
======== ======== ========
Long-lived assets:
United States..................................... 24,965 30,847 51,131
Taiwan............................................ 1,175 915 2,878
Japan............................................. 59 53 53
Singapore......................................... 3,695 3,290 6,968
All other countries............................... 2,048 3,020 5,709
-------- -------- --------
Total long-lived assets............................. $ 31,942 $ 38,125 $ 66,739
======== ======== ========

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

10. COMMITMENTS

The Company has operating lease commitments for certain facilities and
equipment and capital lease commitments for certain equipment. Minimum lease
payments net of sublease proceeds under noncancelable leases at July 31, 2001,
are as follows:

Total Total
Operating Capital
Year ended July 31, Real Estate Equipment Leases Leases
------------------- ----------- --------- --------- -------
(in thousands)

2002................................ $ 4,469 $10,006 $14,475 $ 1,541
2003................................ 4,140 8,946 13,086 1,541
2004................................ 3,901 5,860 9,761 644
2005................................ 2,707 2,648 5,355 --
2006................................ 2,538 2,556 5,094 --
2007 and thereafter................... 1,426 19 1,445 --
------- ------- ------- -------
Total minimum lease payments.......... $19,181 $30,035 $49,216 $ 3,726
Less: amount representing interest.... $ 449
-------
Present value of total capital
leases............................... $ 3,277

Total rental expense for fiscal 2001, 2000, and 1999 was $12,666,722,
$8,879,000, and $6,832,000, respectively.

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

11. RESTRUCTURING AND INVENTORY CHARGES

In fiscal 2001, the Company selected Jabil Circuit, Inc to build its Fusion
test systems. The manufacturing transition plan will be implemented over the
next 12 months and will result in approximately a 15 percent reduction in
permanent LTX employee headcount. In connection with this transition plan the
Company recorded a $12.8 million inventory related provision and $1.2 million
of reorganization costs in the fourth quarter of fiscal 2001.

A $12.8 million inventory related provision consisted of two categories. The
first category was a $9.4 million inventory charge to cost of sales relating to
non-Fusion components and subassemblies. Included in the $9.4 million write
down was a provision for $2.5 million that related to Delta/STE inventory that
was transferred to the Company's third party reseller of Delta/STE products.
The provision was established due to lack of demand for Delta/STE legacy
products. The $6.9 million of the $9.4 million inventory charge was a write
down of non-Fusion components included in LTX inventory that will have no usage
over the next twelve to twenty-four months. As a result of the transition of
the Company's manufacturing operations to Jabil Circuit, the Company will have
limited capacity over the next twelve to twenty-four months to convert non-
Fusion inventory into finished product for resale. In addition, due to the
current industry wide slowdown in the semiconductor industry, the Company
anticipates a significant reduction in demand for non-Fusion products which may
become technological obsolete by the Company's next generation Fusion products.

The second category was a $3.4 million charge, which represented a write down
of Fusion product printed circuit boards. These boards will require a
substantial reworking to make them useable in active production with Jabil
Circuit. We will have limited internal operations and capability to rework
these boards during this transition.

The $1.2 million of reorganization costs represented employee separation
costs. The workforce reduction impacted 123 employees, of which 117 were in
Production & Engineering and 6 in Administration.

Fiscal 1997 Restructuring

The Company's charge for excess inventory of $9.3 million in the first
quarter of fiscal 1997 was a result of management's new strategy for its
Digital product line. During the first quarter of fiscal 1997, the Company
restructured its Digital Products Division management team and initiated a new
marketing and product development strategy that produced an anticipated
reduction in the realizable value of existing inventories relating to non-
strategic products.

The bulk of this charge for excess inventory of $9.3 million related to
product obsolescence in the Company's Delta 50 and Delta 100 Test Systems,
which were replaced with the Delta /STE line.

In fiscal 1997, the Company redirected its product strategy to focus
primarily on functionally complex devices known as "systems-on-a chip". As a
result, the Company restructured its Digital Products Division and began
emphasizing sales of its Delta/STE mixed technology test systems. In fiscal
1997, the Company recorded a restructuring charge of $6.8 million consisting of
$4.0 million for cancelled non-strategic development projects and technology
upgrades to the customers, $1.7 million in severance costs relating to
workforce reductions, $.6 million of asset impairments and $.3 million in
equipment lease cancellations. The workforce reduction totaled 180 employees,
of which 166 were in production and engineering, 10 in administration and 4 in
sales and marketing.

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

There is no remaining accrued liability balance to be paid that related to
the fiscal 1997 restructuring plan as of July 31, 2001. In the first quarter of
fiscal 2001, the remaining accrued balance of $1.7 million was used in order to
replace certain board modules.

Restructuring Cost
(in thousands)

Charges: (See Note)

From the From the From the
Pre-Fiscal 1996 Plan Fiscal 1997 Plan Fiscal 2001 Plan
-------------------- ---------------- ----------------

Employee separation
cost................... $ 1,900 $ 1,750 $ 1,200
Cancelled engineering
projects............... -- 1,250 --
New system board
modules................ -- 2,850 --
Fixed asset write-
downs.................. -- 600 --
Termination of leases
and other contractual
obligations............ 12,500 300 --
------- ------- -------
Total................. $14,400 $ 6,750 $ 1,200
======= ======= =======
Incurred through July
31, 2001............... 13,887 6,750 --
Ending accrual at July
31, 2001............... 513 -- 1,200
Actual cash payments in
fiscal 2001............ -- 1,750 --

--------
Note: Charges represent cash items except for the fixed asset write-downs which
is a non-cash item.

Headcount Reduction

From the From the
Fiscal 1997 Plan Fiscal 2001 Plan
---------------- ----------------

Sales and marketing........................ 4 --
Administration............................. 10 6
Production and engineering................. 166 117
--- ---
Total reduction.......................... 180 123

12. QUARTERLY RESULTS OF OPERATIONS (unaudited)

On December 3, 1999, the SEC staff issued Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition in Financial Statements." The SEC Staff addresses
several issues in SAB No. 101, including the timing for recognizing revenue
derived from selling arrangements involve contractual customer acceptance
provisions and installation of the product if these events occur after shipment
and transfer of title. The Company's previous revenue recognition policy was to
recognize revenue at the time the customer takes title to the product,
generally at the time of shipment, because the Company has always met its
installation obligations and obtained customer acceptance. On October 9, 2000,
the SEC issued Staff Accounting Bulletin No. 101: Revenue Recognition in
Financial Statements--Frequently Asked Questions and Answers ("SAB 101 FAQ").
The SAB 101 FAQ was issued to clarify many of the implementation questions
surrounding SAB No. 101. As a result of this guidance, the Company recorded a
non-cash charge of $9.6 million (after reduction for income taxes of $4.1
million), or $0.19 per diluted share, to reflect the cumulative effect of the
accounting change as of the beginning of the fiscal year. The Company's revenue
recognition policies are disclosed in Note 2.

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company has included the following information below to demonstrate the
effect on Q1 through Q3, 2001 as if the provisions of SAB 101 has been applied
as of the beginning of fiscal year 2001.

QUARTERLY RESULTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)

Year Ended July 31, 2001
---------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- ----------

Net sales
As previously reported................ $101,647 $104,662 $ 65,596 $ 65,551
Effect of change in accounting
principle............................. (3,677) (4,774) 1,025 --
-------- -------- -------- --------
As restated in first three quarters and
reported in fourth quarter............ $ 97,970 $ 99,888 $ 66,621 $ 65,551
Gross profit
As previously reported................ $ 49,090 $ 50,520 $ 28,072 $ 16,435
Effect of change in accounting
principle............................. (2,188) (2,591) 858 --
-------- -------- -------- --------
As restated in first three quarters and
reported in fourth quarter............ $ 46,902 $ 47,929 $ 28,930 $ 16,435
Net income/(loss)
As previously reported................ $ 17,360 $ 17,861 $ 3,191 $ (4,958)
Effect of change in accounting
principle............................. (1,530) (1,814) 601 --
Cumulative effect of change in
accounting principle.................. (9,566) -- -- --
-------- -------- -------- --------
As restated in first three quarters
and reported in fourth quarter....... $ 6,264 $ 16,047 $ 3,792 $ (4,958)
Net income/(loss) per basic share
Earnings per share before cumulative
effect of change in accounting
principle
As previously reported................ $ 0.36 $ 0.38 $ 0.07 $ (0.10)
Effect of change in accounting
principle............................ (0.03) (0.04) 0.01 --
As restated in first three quarters
and reported in fourth quarter....... 0.33 0.34 0.08 (0.10)
Cumulative effect of change in
accounting principle.................. (0.20) -- -- --
-------- -------- -------- --------
Earnings after cumulative effect of
change in accounting principle........ $ 0.13 $ 0.34 $ 0.08 $ (0.10)
Net income/(loss) per diluted share
Earnings per share before cumulative
effect of change in accounting
principle
As previously reported................ $ 0.35 $ 0.36 $ 0.06 $ (0.10)
Effect of change in accounting
principle............................ (0.04) (0.04) 0.01 --
As restated in first three quarters
and reported in fourth quarter....... 0.31 0.32 0.07 (0.10)
Cumulative effect of change in
accounting principle.................. (0.19) -- -- --
-------- -------- -------- --------
Earnings after cumulative effect of
change in accounting principle........ $ 0.12 $ 0.32 $ 0.07 $ (0.10)

Year Ended July 31, 2000
---------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter(1)
-------- -------- -------- ----------

Net sales.............................. $ 60,005 $ 70,210 $ 82,117 $ 93,203
Gross profit........................... 26,936 33,228 39,398 44,895
Net income............................. 6,874 12,036 17,529 42,296
Net income per share:
Basic................................. 0.19 0.28 0.39 0.89
Diluted............................... 0.17 0.26 0.37 0.84

--------
(1) The Company recorded a benefit of $20.3 million for certain deferred tax
assets in its fourth quarter results of operations for fiscal 2000.

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

13. Subsequent Event

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To LTX Corporation:

We have audited the accompanying consolidated balance sheets of LTX
Corporation and subsidiaries as of July 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended July 31, 2001. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of LTX Corporation
and subsidiaries as of July 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
July 31, 2001, in conformity with accounting principles generally accepted in
the United States.

Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14 (a) (2)
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

As explained in Notes 2 and 12 to the consolidated financial statements,
effective August 1, 2000, the Company changed its method of accounting for
revenue recognition on certain product shipments through the adoption of Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements".

Arthur Andersen LLP

Boston, Massachusetts
August 27, 2001

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report, included in this Form 10-K, into LTX Corporation's previously filed
registration statements on Form S-8 (File No. 2-77475, File No. 2-90698, File
No. 33-7018, File No. 33-14179, File No. 33-32140, File No. 33-32141, File No.
33-33614, File No. 33-38675, File No. 33-51683, File No. 33-51685, File No. 33-
57457, File No. 33-57459, File No. 33-65245, File No. 33-65247, File No. 333-
48363, File No. 333-4834, File No. 333-71455, File No. 333-30972 and File No.
333-54230).

Arthur Andersen LLP

Boston, Massachusetts
October 23, 2001

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

Not applicable.

PART III

Items 10-13. Directors and Executive Officers of the Registrant, Executive
Compensation, Security Ownership of Certain Beneficial Owners and
Management and Certain Relationships and Related Transactions

Information required under these Items is included in the Proxy Statement for
the Annual Meeting of Stockholders to be held on December 3, 2001, under the
headings "Certain Stockholders", "Election of Directors," and "Compensation of
Executives," which information is incorporated herein by reference. Such Proxy
Statement shall be filed with the Securities and Exchange Commission not later
than 120 days after the end of the Company's fiscal year, July 31, 2001.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(A) 1. Financial Statements

The following consolidated financial statements of the Company included in
the Company's Annual Report to Stockholders for the fiscal year ended July 31,
2001, are included in Item 8, herein.

Report of Independent Public Accountants

Consolidated Balance Sheet--July 31, 2001 and 2000

Consolidated Statement of Operations and Comprehensive Income for the years
ended July 31, 2001, 2000 and 1999

Consolidated Statement of Stockholders' Equity for the years ended July 31,
2001, 2000 and 1999

Consolidated Statement of Cash Flows for the years ended July 31, 2001, 2000
and 1999

Notes to the Consolidated Financial Statements

(A) 2. Schedules

SCHEDULE II

LTX CORPORATION

VALUATION AND QUALIFYING ACCOUNTS
For Years Ended July 31, 2001, 2000 and 1999
(in thousands)

Balance at Balance
beginning Charged to Amounts at end
Description of period expense Written off of period
----------- ---------- ---------- ----------- ---------

Reserve for sales returns and
doubtful accounts
July 31, 2001................... $3,648 $2,857 $(2,846) $3,659
July 31, 2000................... $2,027 $2,490 $ (869) $3,648
July 31, 1999................... $2,200 $ 856 $(1,029) $2,027
Reserve for other accounts
receivable
July 31, 2001................... $ 0 $2,500 $ 0 $2,500
July 31, 2000................... $ 0 $ 0 $ 0 $ 0
July 31, 1999................... $ 0 $ 0 $ 0 $ 0
Accrued restructuring charges
July 31, 2001................... $2,263 $1,200 $(1,750) $1,713
July 31, 2000................... $2,263 $ 0 $ 0 $2,263
July 31, 1998................... $5,786 $ 0 $(3,523) $2,263

A) 3. Exhibits

Certain of the exhibits listed hereunder have previously been filed with the
Commission as exhibits to the Company's Registration Statement No. 2-75470 on
Form S-1 filed December 23, 1981, as amended (the 1981 Registration Statement);
to the Company's Registration Statement No. 2-94218 on Form S-1 filed November
8, 1984, as amended (the 1984 Registration Statement); to the Company's
Registration Statement No. 33-35401 on Form S-4 filed June 26, 1990, as amended
(the 1990 Registration Statement No. 1); to the Company's Registration
Statement No. 33-39610 on Form S-3 filed June 10, 1991, as amended (the 1991
Registration Statement No. 1); to the Company's Amendment No. 1 to Registration
Statement No. 33-62125 on Form S-3 filed September 11, 1995 (the 1995
Registration Statement No. 1); to the Company's Form 8A/A filed September 30,
1993 amending the Company's Registration Statement on Form 8-A filed November
24, 1982 (the 1993 8A/A); to the Company's Current Report on Form 8-K, filed
May 11, 1989; the Company's Annual Reports on Form 10-K for one of the years
ended July 31, 1998, 1997, 1996, 1995, 1994, 1993, 1992, 1991, 1990, 1989,
1988, 1987, 1986, 1985, 1984 and 1983; or the Company's Quarterly Reports on
10- Q for one of the quarters ended October 31, 1997, January 31, 1998, April
30, 1998, January 31, 1999, October 31, 1999, January 31, 2000 and April 30,
2001 and are hereby incorporated by reference. The location of each document so
incorporated by reference is noted parenthetically.

(A) Listing of Exhibits

(3)(A) --Articles of Organization, as amended. (Exhibit 3.1 to the 1995
Registration Statement No. 1)
(3)(B) --By-laws, as amended. (Exhibit 3(B) to the Quarterly Report on
Form 10-Q for the quarter ended October 31, 1997)
(4)(C) --Rights Agreement. (Exhibit I of the Registrant's Current Report
on Form 8-K, filed May 3, 1999)
(4)(D) --Indenture dated as of August 8, 2001 between LTX Corporation and
State Street Bank & Trust Company as Trustee
(4)(E) --Registration Rights Agreement dated as of August 8, 2001 among
LTX Corporation, Morgan Stanley & Co., Incorporated, Deutsche Banc
Alex Brown and Needham & Company, Inc.
(10)(B)+ --1990 Stock Option Plan. (Exhibit 10(B) to the Quarterly Report on
Form 10-Q for the quarter ended January 31, 1998)
(10)(D)+ --1993 Employees' Stock Purchase Plan. (Exhibit 10(D) to the
Quarterly Report on Form 10-Q for the quarter ended January 31,
1999)
(10)(E)+ --1983 Non-Qualified Stock Option Plan. (Exhibit 10(E) to the 1983
Annual Report on Form 10-K)
(10)(F) --LTX Corporation Growth and Investment Program, as restated.
(Exhibit 10(F) to the 1993 Annual Report on Form 10-K)
(10)(I) --Lease dated as of March 8, 1984 relating to land and building at
McCandless Park, San Jose, California. (Exhibit 10(I) to the 1984
Registration statement)
(10)(J) --Lease dated as of July 16, 1984 relating to Company's
administration facility on Rosemont Avenue, Westwood,
Massachusetts. (Exhibit 10(J) to the 1984 Registration Statement)
(10)(K) --Lease dated as of February 27, 1985 relating to land and building
at McCandless Park, San Jose, California. (Exhibit 10(K) to the
1985 Annual Report on Form 10-K)
(10)(M) --Lease dated as of November 26, 1980 relating to Company's
facility at 5 Rosemont Avenue, Westwood, Massachusetts, and
Amendment dated as of April 29, 1982, and Third Amendment and
Restatement of Lease dated April 29, 1982. (Exhibit 10(M) to the
1993 Annual Report on Form 10-K)
(10)(M)(i) --Fourth Amendment to Lease dated as of September 1, 1999 (Exhibit
10(M)(i) to the Quarterly Report on Form 10-Q for the quarter
ended January 31, 2000)
(10)(R)* --License and Development Agreement dated as of January 28, 1993
between LTX Corporation and Ando Electric Co., Ltd. (Exhibit 10(R)
to the 1993 Annual Report on Form 10-K)

(10)(S)* --Distribution and Supply Agreement dated as of January 28, 1993 between LTX Corporation and Ando
Electric Co., Ltd. (Exhibit 10(S) to the 1993 Annual Report on Form 10-K)
(10)(T)* --Letter Agreement dated as of January 29, 1993 between LTX Corporation and Ando Electric Co., Ltd.
(Exhibit 10(T) to the 1993 Annual Report on Form 10-K)
(10)(U) --Loan and Security Agreement and Export-Import Loan and Security Agreement, both dated as of
October 1, 1999 between LTX Corporation and Silicon Valley Bank (Exhibit 10(U) to the Quarterly
Report on Form 10-Q for the Quarter ended October 31, 1999)
(10)(V) --Loan Agreement dated as of July 20, 1994 between LTX Corporation and Ando Electric Co., Ltd.
(Exhibit 10(V) to the 1994 Annual Report on Form 10-K)
(10)(W)* --Amendment No. 1 to License and Development Agreement dated as of July 20, 1994 between LTX
Corporation and Ando Electric Co., Ltd. (Exhibit 10(W) to the 1994 Annual Report on Form 10-K)
(10)(X) --Employment Agreement dated as of January 1, 1997 between LTX Corporation and Kenneth E. Daub.
(Exhibit 10(X) to the 1997 Annual Report on Form 10-K)
(10)(Y) --Form of Change of Control Agreement entered into with certain executive officers as of March 2,
1998 (Exhibit 10(Y) to the Quarterly Report on Form 10-Q for the quarter ended January 31, 1998)
(10)(AA)* --Fusion Agreement dated as of April 24, 1998 between LTX Corporation and Ando Electric Co., Ltd.
(Exhibit 10(AA) to the Quarterly Report on Form 10-Q for the quarter ended April 30, 1998)
(10)(BB) --Second Amendment to Loan Agreement between LTX Corporation and Ando Electric Co., Ltd. (Exhibit
10(BB) to the Quarterly Report on Form 10-Q for the quarter ended January 31, 1999)
(10)(CC) --1999 Stock Plan (Exhibit 10(CC) to the Quarterly Report on Form 10-Q for the quarter ended October
31, 1999)
(10)(DD) --Third Modification Agreement dated as of April 21, 2001 between LTX Corporation and Silicon Valley
Bank (Exhibit 10(DD) to the Quarterly Report on From 10-Q for the quarter ended April 30, 2001)
(10)(EE) --Credit Agreement dated as of April 30, 2001 between LTX Corporation and Citizens Bank of
Massachusetts (Exhibit (EE) to the Quarterly Report on Form 10-Q for the quarter ended April 30,
2001)
(22) --Subsidiaries of Registrant

--------
+ This exhibit is a compensatory plan or arrangement in which executive
officers or directors of the Company participate.

* Confidential treatment requested as to certain portions thereof. The
confidential portion has been omitted and filed separately with the
Commission.

Item 14(b). Reports on Form 8-K

The Company did not file any reports on Form 8-K during the fourth quarter of
fiscal 2001.

Item 14(c). Exhibits

Exhibit 22--Subsidiaries of Registrant

Company
LTX (Europe) Limited..................................... United Kingdom 100%
LTX International Inc., Domestic International Sales
Corporation (DISC)...................................... Delaware 100%
LTX (Deutschland) GmBH................................... West Germany 100%
LTX France S.A........................................... France 100%
LTX Test Systems Corporation............................. Delaware 100%
LTX (Italia) S.r......................................... Italy 100%
LTX (Foreign Sales Corporation) B.V. .................... The Netherlands 100%
LTX Asia International, Inc. ............................ Delaware 100%
LTX Israel Limited....................................... Israel 100%
LTX (Malaysia) SDN.BHD. ................................. Malaysia 100%

The subsidiaries listed are all included in the consolidated financial
statements of the Company.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

LTX Corporation

/s/ Roger W. Blethen
By __________________________________
Roger W. Blethen
Chief Executive Officer, President
and Director

October 23, 2001

Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

/s/ Samuel Rubinovitz Chairman of the Board October 23, 2001
______________________________________
Samuel Rubinovitz

/s/ Roger W. Blethen Chief Executive Officer, October 23, 2001
______________________________________ President and Director
Roger W. Blethen (Principal Executive
Officer)

/s/ Mark J. Gallenberger Chief Financial Officer October 23, 2001
______________________________________ and Vice President
Mark J. Gallenberger (Principal Financial and
Accounting Officer)

Director October 23, 2001
______________________________________
Mark S. Ain

/s/ Robert J. Boehlke Director October 23, 2001
______________________________________
Robert J. Boehlke

/s/ Jacques Bouyer Director October 23, 2001
______________________________________
Jacques Bouyer

/s/ Stephen M. Jennings Director October 23, 2001
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Stephen M. Jennings

/s/ Roger J. Maggs Director October 23, 2001
______________________________________
Roger J. Maggs

/s/ Robert E. Moore Director October 23, 2001
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Robert E. Moore