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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended April 30, 2003

OR

For the transition period from              to             

Commission File Number 000-10761

LTX CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.

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

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LTX CORPORATION

Index

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LTX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)

See accompanying Notes to Consolidated Financial Statements

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LTX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share data)

See accompanying Notes to Consolidated Financial Statements

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LTX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

See accompanying Notes to Consolidated Financial Statements

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LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 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 accompanying financial statements have been prepared by the Company, without audit, and reflect all adjustments, which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. In addition to normal recurring adjustments, the financial statements for fiscal 2003 include an accrual of reorganization costs (see Note 4). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Certain information and footnote disclosures normally included in the annual financial statements, which are prepared in accordance with generally accepted accounting principles have been condensed or omitted. Accordingly, although the Company believes that the disclosures are adequate to make the information presented not misleading, the financial statements should be read in conjunction with the footnotes contained in the Company’s Annual Report on Form 10-K.

Revenue Recognition

The Company recognizes revenue 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.

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 significant 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 $7.0 million, or 24.3% of net sales and $8.9 million, or 31.7% of net sales for the three months ended April 30, 2003 and 2002, respectively, and $24.1 million, or 28.1% of net sales and $25.7 million, or 29.0% of net sales for the nine months ended April 30, 2003 and 2002, respectively. Revenue from engineering contracts are recognized over the contract period on a percentage of completion bases.

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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 bases and the tax bases of assets and liabilities, calculated using enacted tax rates for the year in which the differences are expected to be reflected in the tax return. Valuation allowances are established when necessary to reduce deferred taxes to the amount expected to be realized.

Product Warranty Costs

The Company provides standard warranty coverage on its systems for up to 12 months, providing labor and parts necessary to repair the systems during the warranty period. The Company accounts for the estimated warranty cost as a charge to cost of sales when the revenue is recognized. The estimated warranty cost is based on historical product performance and field expenses. The Company uses actual service hours and parts expense per system and applies the actual labor and overhead rates to estimate the warranty charge. The actual product performance and/or field expense profiles may differ, and in those cases the Company adjusts warranty accruals accordingly. The following table shows the details of the product warranty accrual, as required by FASB Interpretation No. (FIN) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” for the nine months ended April 30, 2003:

Stock Based Compensation

The Company has three stock option plans: the 2001 Stock Plan (“2001 Plan”), the 1999 Stock Plan (“1999 Plan”) and the 1995 LTX (Europe) Ltd. Approved Stock Option Plan (“U.K. Plan”). The 2001 Plan, 1999 Plan, and the U.K. Plan provide for the granting of options to employees to purchase shares of common stock at not less than 100% of the fair market value at the date of grant. The 2001 Plan and 1999 Plan also provide for the granting of options to an employee, director or consultant of the Company or its subsidiaries to purchase shares of common stock at prices to be determined by the Board of Directors. 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 to four years from the date of grant. The Company has reserved 9,300,000 shares of common stock for issuance under the stock option plans. At April 30, 2003, 2,480,850 shares were subject to future grant under the 2001 Plan, 445,975 shares were subject to future grant under the 1999 Plan and 14,557 shares were subject to future grant under the U.K. Plan. As of April 30, 2003, there were a total of 7,684,231 options outstanding under all stock option plans with an average exercise price of $10.77 per share.

Under the Company’s Employee Stock Purchase Plan (“Purchase 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 Purchase Plan limits the number of shares that can be issued over the term of the plan to 3,000,000 shares. At April 30, 2003, 678,973 shares were available for future issuance under this Purchase Plan.

The Company accounts for its stock based compensation plans under the provisions of Accounting Principles Board (APB) Opinion No. 25 “Accounting For Stock Issued to Employees” and makes pro forma footnote disclosures as though the fair value method under Statement of Financial Accounting Standard (SFAS) No. 123, “Accounting For Stock-Based Compensation”, as amended by SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” was followed. Had compensation costs for awards for the three and nine months ended April 30, 2003 and April 30, 2002 under 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 the guidance, the effect on the Company’s net loss and net loss per share would have been as follows:

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

Comprehensive Income

Comprehensive income is comprised of two components, net income and other comprehensive income. Other comprehensive income consists of unrealized gains and losses on the Company’s short-term investments.

Net Income (Loss) per Share

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

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

Options to purchase 6,225,691 shares and 203,600 shares of common stock on April 30, 2003 and 2002, respectively, were outstanding but not included in the quarter end 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 the period ended, or the effect of including the options would have been anti-dilutive.

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Cash Equivalents and Short Term Investments

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 money market funds. Short-term investments consist primarily of debt securities that are classified as available-for-sale in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”.

At April 30, 2003, certain short term investment balances of approximately $9.4 million were restricted from withdrawal. These funds primarily served as collateral supporting certain operating leases for equipment.

Inventories

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

The Company is dependent on two semiconductor device manufacturers who are the sole suppliers of certain custom components for the Company’s products.

Reclassifications

Prior year financial statements have been reclassified to conform to the fiscal 2002 presentation. The reclassification had no impact on earnings for the prior period.

Recent Accounting Pronouncements

In February 2003, the Financial Accounting Standard Board (FASB) reached a consensus on Emerging Issues Task Force (EITF) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” This issue addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting. EITF Issue No. 00-21 will be effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003, or the Company may elect to report the change in accounting as a cumulative-effect adjustment. The Company does not expect that the adoption of EITF Issue No. 00-21 will have a material impact on its financial position and results of operations.

In December 2002, FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition Disclosure, An Amendment of FASB Statement No. 123”. This Statement amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosure in financial statements regarding the effects of stock-based compensation. The provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002 and the interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company will continue to apply Accounting Principles Board Opinion No. 25 as the method used to account for stock-based employee compensation arrangements, where applicable, and has adopted the disclosure requirement of SFAS 148 beginning with the financial statements for the Company’s quarter ended April 30, 2003.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities”, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003.

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The Company believes that the adoption of this standard will not have a material impact on the consolidated financial statements.

3. SEGMENT REPORTING

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.

The Company’s net sales for the nine months ended April 30, 2003 and 2002, along with the long-lived assets at April 30, 2003 and July 31, 2002, are summarized as follows:

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

4. REORGANIZATION COSTS

The following chart outlines the restructuring cost activity for the nine months ended April 30, 2003 for the restructuring charge of $3.6 million as the result of employee separation cost, which was accrued in the three months ended January 31, 2003 (the “November 2002 Plan”), the restructuring charge of $2.0 million as the result of employee separation cost, which was accrued in the three months ended October 31, 2002 (the “August 2002 Plan”) and the restructuring charge related to the consolidation of the Company’s two facilities in Westwood, Massachusetts recorded in 1994, the remaining amount of which consists of future payments related to termination of the Company’s lease on the facility that the Company subleased:

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The workforce reduction impact for each plan is as follows:

5. SUBSEQUENT EVENT

On May 22, 2003, the Company announced that it entered into a definitive agreement to acquire StepTech, Inc., a privately held semiconductor test-technology company specializing in the development of ATE instrumentation for wireless, automotive, power and consumer integrated circuits. This acquisition follows the Company’s October 2000 18% equity investment in and agreement with the Company relating to the Fusion CX. Under the terms of the acquisition agreement, LTX acquired all remaining shares of StepTech for approximately $7.5 million and up to approximately 2.3 million shares of LTX common stock. In addition, LTX assumed outstanding StepTech options which following the transaction are exercisable for approximately 263,000 shares of LTX common stock. The acquisition was completed and closed in June 2003. The Company will account for the transaction using the purchase method and is evaluating appropriate charges, including charges for in process research and development.

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

Industry Conditions and Outlook

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

Our recent operating results have been negatively impacted by a severe industry-wide slowdown in the semiconductor industry, which began to affect the semiconductor test industry in fiscal 2001 and to impact us in the latter half of the second quarter of fiscal 2001. Management believes that the Company’s financial results will continue to reflect the slow semiconductor equipment industry conditions for the near term. Until there is a substantial improvement in industry conditions, the sluggish

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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 pricing pressure. At the current low levels of business, there is a higher likelihood that these types of changes in our customers’ requirements would adversely effect our results of operations because in any particular quarter a limited number of transactions account for an even greater portion of sales for the quarter.

We are also exposed to the risks associated with the current slowdown in the U.S. and global economies. World health concerns, geopolitical uncertainties, current and predicted decreases in consumer confidence, corporate profits and capital expenditures, and the lack of visibility regarding whether or when there will be a sustained recovery in the sale of electronic goods and information technology equipment underscores the need for caution in predicting growth in the semiconductor test equipment industry in general and in our revenues and profits specifically. Slow or negative growth in the domestic economy may continue to materially and adversely affect our business, financial conditions and results of operations for the foreseeable future.

Critical Accounting Policies and the Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical experience, and evaluate them on an on-going basis to ensure they remain reasonable under current conditions. Actual results could differ from those estimates. The items in our financial statements requiring significant estimates and judgments include: revenue recognition, inventory reserve, warranty, allowances for doubtful accounts and taxes.

From time to time we may use certain non-GAAP financial measures in our earnings releases. We believe the non-GAAP financial measures that we use assist investors in evaluating and comparing our financial results to other financial periods by providing comparisons of operating results without the effect of non-recurring items and taxes.

Revenue Recognition

The Company’s revenue recognition policy is described in Note 2 of the summary of significant accounting policies. In the future, if acceptance provisions significantly change, the timing of the revenue recognition could be affected.

Inventory Reserve

We sell capital equipment to companies that design, manufacture, assemble, and test semiconductor devices. We are exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. These factors include, but are not limited to, changes in our customers’ capital expenditures, technological changes in our markets, our ability to meet changing customer requirements, competitive pressures in products and prices, and the availability of key components from our suppliers. Our policy is to establish inventory reserves when conditions exist that suggest that our inventory may be in excess of anticipated demand or is obsolete based upon our assumptions about future demand for our products or market conditions. We regularly evaluate the ability to realize the value of our inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, product end of life dates, estimated current and future market values and new product introductions. Purchasing and alternative usage options are also explored to mitigate inventory exposure. When recorded, our reserves are intended to reduce the carrying value of our inventory to its net realizable value. As of April 30, 2003, our inventory of $120.4 million is stated net of inventory reserves of $43.8 million. If actual demand for our products deteriorates or market conditions are less favorable than those that we project, additional inventory reserves may be required. The recent introduction of our Fusion HFi next generation test system combined with the prolonged slowdown in the industry increase the likelihood that additional inventory reserves could be required.

Warranty

Our products are sold with warranty provisions that require us to remedy deficiencies in quality or performance of our products over a specified period of time at no cost to our customers. Our policy is to establish warranty reserves at levels that represent our estimate of the costs that will be incurred to fulfill those warranty requirements at the time that revenue is recognized. We believe that our recorded liability at April 30, 2003 is adequate to cover our future cost of materials, labor and overhead for the servicing of our products sold through that date. If actual product failures, or material or service delivery costs differ from our estimates, our warranty liability would need to be revised accordingly.

Allowance for Doubtful Accounts

A majority of our trade receivables are derived from sales to large multinational semiconductor manufacturers throughout the

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world. In order to monitor potential credit losses, we perform ongoing credit evaluations of our customers’ financial conditions. An allowance for doubtful accounts is maintained for potential credit losses based upon our assessment of the expected collectibility of all accounts receivable. The allowance for doubtful accounts is reviewed periodically to assess the adequacy of the allowances. We take into consideration any circumstances in which we are aware of a customer’s inability to meet its financial obligations, a certain percentage of the accounts receivable balance, which is based on the age of the receivables and our historical experience. If circumstances change, and the financial condition of our customers were adversely effected resulting in their inability to meet their financial obligations to us, we may need to provide additional allowances.

Taxes

The Company has deferred tax assets resulting from tax credit carry forwards, net operating losses and other deductible temporary differences, which will reduce taxable income in future periods. SFAS No. 109 “Accounting for Income Taxes” requires that a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which the Company operates, length of carry back and carry forward periods, existing sales backlog and future sales projections. Where there are cumulative losses in recent years, SFAS No. 109 creates a strong presumption that a valuation allowance is needed. This presumption can be overcome in very limited circumstances. As a result of our cumulative loss position at April 30, 2003 and the increased uncertainty relative to the timing of profitability in future periods, we concluded that it was appropriate and conservative to have a full valuation allowance for our entire net deferred tax assets. As a result, the valuation allowance for deferred tax assets was approximately $126.6 million at April 30, 2003. We expect to record a full valuation allowance on future tax benefits until we can sustain an appropriate level of profitability and until such time, we would not expect to recognize any significant tax benefits in our future results of operations.

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

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

Results of Operations

Three Months and Nine Months Ended April 30, 2003 Compared to the Three Months and Nine Months Ended April 30, 2002.

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Net Sales. Net sales for the three months ended April 30, 2003 increased 2.5% to $28.8 million as compared to $28.1 million in the same quarter of the prior year. The increase in net sales is attributed primarily to a change in the mix of products shipped. For the nine months ended April 30, 2003, net sales were $85.8 million as compared to $88.6 million for the same period of the prior year, a decrease of 3.2%. The net sales during this period were relatively flat and continued to reflect reduced demand for semiconductor test equipment. Service revenue accounted for $7.0 million, or 24.3% of net sales, and $8.9 million, or 31.7% of net sales, for the three months ended April 30, 2003 and 2002, respectively, and $24.1 million, or 28.1% of net sales and $25.7 million, or 29.0% of net sales for the nine months ended April 30, 2003 and 2002, respectively. Geographically, sales to customers outside of the United States were 52.1% and 61.0% of net sales in the three months ended April 30, 2003 and 2002, respectively, and 49.4% and 47.2% for the nine months ended April 30, 2003 and 2002, respectively.

Inventory Related Provision. There were no inventory related provisions recorded during the three and nine months ended April 30, 2003. During the nine months ended April 30, 2002, we recorded a $42.2 million inventory related provision. Of the $42.2 million, $38.7 million of the provision related to excess inventory principally due to the sharp decline in semiconductor test system orders during the industry down cycle. The remaining $3.5 million related to Delta/STE inventory that was previously transferred to our third party reseller of Delta/STE products.

Gross Profit. The gross profit was $5.3 million, or 18.4% of net sales in the three months ended April 30, 2003, as compared to $4.8 million, or 17.0% of net sales, in the same quarter of the prior year. The increase was the result of slightly higher sales revenue and a lower level of manufacturing costs resulting from the outsourcing of our manufacturing to Jabil Circuit. For the nine months ended April 30, 2003, the gross profit was $15.2 million, or 17.7% of net sales, as compared to $(23.4) million, or (26.4)% for the same period in the prior year. Gross profit as a percentage of net sales for the nine months ended April 30, 2002 was negatively impacted by a $42 million, or 47.6% of net sales, inventory related provision. After the consideration of the inventory related provision, the decrease in gross profit for the nine months ended April 30, 2003 and for the nine months ended April 30, 2002 was primarily the result of product mix differences.

Engineering and Product Development Expenses. Engineering and product development expenses were $15.4 million, or 53.5% of net sales, in the three months ended April 30, 2003, as compared to $18.2 million, or 64.8% of net sales, in the same quarter of the prior year. For the nine months ended April 30, 2003, engineering and product development expenses were $50.4 million, or 58.7% of net sales, as compared to $52.8 million, or 59.6% of net sales for the same period in the prior year. The decrease in expenditures for both the three months and nine months ended April 30, 2003 is principally a result of lower non-recurring engineering charges and the impact of cost reduction measures.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $7.2 million, or 25.0% of net sales, in the three months ended April 30, 2003, as compared to $6.8 million, or 24.2% of net sales, in the same quarter of the prior year. For the nine months ended April 30, 2003, selling, general and administrative expenses were $21.0 million, or 24.5% of net sales, as compared to $21.3 million, or 24.1% of net sales, for the same period in the prior year. Selling, general and administrative expenses are relatively consistent for the three and nine month periods as the impact of cost reduction measures were offset by royalty payments.

Reorganization Costs. Reorganization costs were $5.6 million, or 6.5% of net sales, in the nine months ended April 30, 2003. In August 2002, we reduced our workforce by 94 employees due to adverse business conditions. In November 2002, we further reduced our workforce by 195 employees and contractors. These workforce reductions are expected to reduce annual selling, general and administrative expenses and engineering and product development expenses by approximately $5.0 million and $16.0 million, respectively. In addition, non-payroll expense reductions are expected to be approximately $3.0 million annually due to reduced operating and non-recurring engineering expenses. These consist primarily of lower operating expenses associated with reduced headcount and further cost reductions in non-recurring engineering expenditures. In addition, we have instituted several other cost reduction measures, such as the suspension of 401(k) matching payments, a freeze in salary and wage increases and the strict oversight and reduction in discretionary travel and other overhead expenses. We believe that these reductions in operating costs have reduced our fixed costs while preserving our ability to fund critical product research and development efforts and continue to provide our customers with the levels of responsiveness and service they require. The majority of the severance costs of the August 2002 and November 2002 workforce reductions were paid by April 30, 2003, although some costs will be paid through August 2003. Approximately $14.5 million of the $16.0 million is payroll-related with the balance representing reduced operating expenses for travel, non-recurring engineering and operating supplies.

Interest Expense. Interest expense was $1.7 million and $1.5 million for the three months ended April 30, 2003 and 2002, respectively. For the nine months ended April 30, 2003, interest expense was $5.0 million as compared to $5.1 million for the same period of the prior year. Approximately $1.6 million for each the three months ended April 30, 2003 and April 30, 2002 and approximately $4.8 million for each of the nine months ended April 30, 2003 and April 30, 2002 relates to the convertible subordinated notes bearing interest at the rate of 4.25%.

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Interest Income. Interest income was $1.0 million and $1.2 million for the three months ended April 30, 2003 and 2002, respectively. For the nine months ended April 30, 2003, interest income was $3.3 million as compared to $5.6 million for the same period of the prior year. Interest income was lower in the three and nine months ended April 30, 2003 than the same periods of the prior year as a result of lower cash balances and declining interest rates.

Income Tax. For the three and nine months ended April 30, 2003, the Company provided a full valuation allowance against its tax benefits. As a result of a review undertaken at April 30, 2003 and our cumulative loss position at that date, management concluded that it was appropriate to maintain a full valuation allowance for its net deferred tax assets. The Company recorded a tax benefit of $8.2 million and $37.5 million for the three and nine months ended April 30, 2002, respectively.

Liquidity and Capital Resources

At April 30, 2003, the Company had $147.0 million in cash equivalents and short-term investments and working capital of $223.1 million, as compared to $217.2 million of cash equivalents and short-term investments and $285.4 million of working capital at July 31, 2002. The decrease in the cash equivalents and short-term investments was due primarily to cash used in operations of $67.9 million and cash used in investing activities of $18.5 million, which was partially offset by cash provided by financing activities of $13.6 million.

Accounts receivable from trade customers was $22.4 million at April 30, 2003, as compared to $19.3 million at July 31, 2002. The primary reason for the $3.1 million increase in accounts receivable was that a higher proportion of shipments were made just prior to April 30, 2003. The allowance for doubtful accounts was $3.3 million, or 12.8% of gross trade accounts receivable, on April 30, 2003 and $3.6 million, or 15.7% of gross trade accounts receivable on July 31, 2002. The Company has an agreement with its commercial lender that allows the Company to sell certain of its accounts receivable to the lender without recourse. Sales under this agreement totaled $6.1 million for the three months ended April 30, 2003. Accounts receivable from other sources decreased $6.8 million to $3.5 million at April 30, 2003, as compared to $10.3 million at July 31, 2002. The decrease was attributed to the payments from our vendors for their purchase of our inventory at cost.

Inventories increased by $25.2 million to $120.4 million at April 30, 2003 as compared to $95.2 million at July 31, 2002. The increase is directly attributable to the conversion of prepaid expenses to inventory and to additions to inventory to support current and next generation production.

Prepaid expense decreased by $20.4 million to $10.3 million at April 30, 2003 as compared to $30.7 million at July 31, 2002. The decrease was attributed to the receipt of inventory against prepayments. Inventory related deposits were $2.6 million at April 30, 2003 and $23.1 million as of July 31, 2002.

Capital expenditures totaled $15.7 million for the nine months ended April 30, 2003 as compared to $20.0 million for the nine months ended April 30, 2002. The principal reason for the decrease is a slowed capital expenditure rate that reflects both the current adverse business conditions and reduced need for product introduction investment for the nine months ended April 30, 2003 as compared with the nine months ended April 30, 2002.

Other assets decreased by $0.7 million to $14.5 million at April 30, 2003 as compared to $15.2 million at July 31, 2002. The decrease is related to the reclassification of certain deposits that will be due in the next twelve months.

We have separate credit facilities with two domestic banks. One of our domestic credit facilities is comprised of a working capital line of $20.0 million and an equipment financing facility of $5.0 million, which is secured by all assets and bears interest at the bank’s prime rate. The working capital line will be used to support working capital obligations, issuance of standby letters of credit, and foreign exchange transactions. The equipment financing facility may be used to support the purchase of fixed assets. The facility imposes certain financial and other covenants. Outstanding borrowings at April 30, 2003 were $19.9 million under the working capital credit facility and the interest rate was 4.25%. The Company maintains a second revolving credit line for $30.0 million with another lender. 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%. No amounts were outstanding under this line at April 30, 2003. However, approximately $9.4 million in collateral guarantees and standby letters of credit have been issued under this line, primarily to support certain operating leases for equipment.

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

The Company may from time to time seek to retire certain amounts, which may be material, of its outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors.

The Company has operating lease commitments for certain facilities and equipment and capital lease commitments for certain equipment. The approximate future minimum lease payments under operating leases for real estate, equipment, operating leases and capital leases at April 30, 2003 are as follows:

We anticipate available cash balances and credit facilities will be adequate to fund our currently proposed operating activities for the next twelve months.

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,” which 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.

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Downturns in the semiconductor test equipment industry have been characterized by diminished product demand, excess production capacity, inventory obsolescence 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. Our market is also characterized by rapid technological change and changes in customer demand. We have significant investments in on hand inventory and prepaid inventory at suppliers. We cannot assure you that obsolete or excess inventories or other asset impairment, which may result from changes in our market, will not materially and adversely affect us. 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 and materials purchases from our suppliers.

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

The semiconductor industry is highly concentrated, 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 83.9% of revenues for the nine months ended in April 30, 2003 and 84.1% in the same nine months for the prior year. 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.

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:

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.

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Because of this difficulty in predicting future performance, our operating results may fall below expectations of securities analysts or investors in some future quarter or quarters. Our failure to meet these expectations would likely adversely affect the market price of our common stock. A substantial amount of the shipments of our test systems for a particular quarter occur late in the quarter. Our shipment pattern exposes us to significant risks in the event of problems during the complex process of final integration, test and acceptance prior to shipment. If we were to experience problems of this type late in our quarter, shipments could be delayed and our operating results could fall below expectations.

We 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. If for any reason Jabil cannot provide us with these products and services in a timely fashion, or at all, whether due to labor shortage, slow down or stoppage, deteriorating financial or business conditions or any other reason, we would not be able to sell or ship our Fusion family of products to our customers. We have no written supply agreement with Jabil. We also may be unable to engage alternative production and testing services on a timely basis or upon terms favorable to us, if at all. We cannot assure you that this relationship with Jabil will result in a reduction of our fixed expenses.

If we are required for any reason to seek a new manufacturer of our test systems, a new manufacturer of our test systems may not be available and in any event, switching to a new manufacturer would require six months or more and would involve significant expense and disruption of our business. Our test systems are highly sophisticated and complex capital equipment, with many custom components, and require specific technical know-how and expertise. These factors could make it more difficult for us to find a new manufacturer of our test systems if our relationship with Jabil is terminated for any reason.

Our acquisition of StepTech, and future acquisitions, may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention.

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

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

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

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

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We rely on subcontractors to manufacture Fusion and many of the components and subassemblies for our products, and we rely on sole source suppliers for certain components. We may be required to qualify new or additional subcontractors and suppliers due to capacity constraints, competitive or quality concerns or other risks that may arise, including a result of a change in control of, or deterioration in the financial condition of, a supplier or subcontractor. The process of qualifying subcontractors and suppliers is a lengthy process. Our reliance on subcontractors gives us less control over the manufacturing process and exposes us to significant risks, especially inadequate capacity, late delivery, substandard quality, and high costs. In addition, the manufacture of certain of these components and subassemblies is an extremely complex process. If a supplier became unable to provide parts in the volumes needed or at an acceptable price, we would have to identify and qualify acceptable replacements from alternative sources of supply, or manufacture such components internally. The 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 may not be able to deliver custom hardware options and software applications to satisfy specific customer needs in a timely manner.

We must develop and deliver 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 49.4% of our revenues for the nine months ended April 30, 2003 and 47.2% of our revenues for the nine months ended April 30, 2002. 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:

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.

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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 (NPTest Division), 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 substantially upon the continued service of our executive officers and key personnel, none of whom are bound by an employment or non-competition agreement. Our success will depend on our ability to attract and retain highly qualified managers and technical, engineering, marketing, sales and support personnel. Competition for such specialized personnel is intense, and it may become more difficult for us to hire or retain them. Our volatile business cycles only aggravate this problem. Our layoff in the last industry downturn could make it more difficult for us to hire or retain qualified personnel. Our business, financial condition and results of operations could be materially adversely affected by the loss of any of our key employees, by the failure of any key employee to perform in his or her current positions, or by our inability to attract and retain skilled employees.

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

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

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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 April 30, 2003, our stock price has ranged from a low of $3.12 to a high of $22.73. 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:

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.

Changes to financial accounting standards may affect our reported results of operations.

We prepare our financial statements to conform to generally accepted accounting principles. Generally accepted accounting principles are subject to interpretations by the American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced. Accounting rules affecting many aspects of our business, including rules relating to revenue recognition, restructuring charges, employee stock purchase plans, stock option grants, product warranty disclosure and variable interest entities have recently been revised or are currently under review. Changes to those rules or current interpretation of those rules may have a material adverse effect on our reported financial results or on the way we conduct business. In addition, the preparation of our financial statements in accordance with generally accepted accounting principles requires that we make estimates and assumptions that affect the recorded amounts of assets and liabilities, disclosure of those assets and liabilities at the date of the financial statements and the recorded amounts of expenses during the reporting period. A change in the facts and circumstances surrounding those estimates could result in a change to our estimates and could impact our future operating results.

Terrorist attacks and threats, and government responses thereto, may negatively impact all aspects of our operations,

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revenues, costs and stock price.

The terrorist attacks in 2001 in the United States and the U.S. retaliation for these attacks and the resulting decline in consumer confidence has had a substantial adverse impact on the economy. If consumer confidence does not recover, our revenues and profitability may be adversely impacted.

In addition, any similar future events may disrupt our operations or those of our customers and suppliers. In addition, these events have had and may continue to have an adverse impact on the U.S. and world economy in general and consumer confidence and spending in particular, which could harm our sales. Any of these events could increase volatility in the U.S. and world financial markets, which could harm our stock price and may limit the capital resources available to us and our customers or suppliers. This could have a significant impact on our operating results, revenues and costs and may result in increased volatility in the market price of our common stock.

We have substantial indebtedness.

We have $150 million principal amount of 4.25% Convertible Subordinated Notes (the “Notes”) due 2006. We may incur substantial additional indebtedness in the future. The level of indebtedness, among other things, could

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

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

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

LTX may not be able to pay its debt and other obligations.

If our cash flow is inadequate to meet our obligations, we could face substantial liquidity problems. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on the Notes, or certain of our other obligations, we would be in default under the terms thereof, which could permit the holders of those obligations to accelerate their maturity and also could cause defaults under future indebtedness we may incur. Any such default could have a material adverse effect on our business, prospects, financial position and operating results. In addition, we cannot assure you that we would be able to repay amounts due in respect of the Notes if payment of those obligations were to be accelerated following the occurrence of any other event of default as defined in the instruments creating those obligations. Moreover, we cannot assure that we will have sufficient funds or will be able to arrange for financing to pay the principal amount of the Notes at the maturity.

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

We expect that our existing cash and marketable securities and the proceeds from the bank financings, will be sufficient to meet our cash requirements to fund operations and expected capital expenditures for the foreseeable future. In the event that we may need to raise additional funds, we cannot be certain that we will be able to obtain such additional financing on favorable terms if at all. Further, if we issue additional equity securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. Future financings may place restrictions on how we operate our business. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products and services, take advantage of future opportunities, grow our business or respond to

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competitive pressures, which could seriously harm our business.

Quantitative and Qualitative Disclosures About Market Risk

Financial instruments that potentially subject us to concentrations of credit-risk consist principally of cash equivalents, short-term investments and trade receivables. We place our cash equivalents and 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 $171.7 million as of April 30, 2003 and in foreign currency exchange rates. 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 the nine months ended April 30, 2003, our revenues derived from shipments outside the United States constituted 49.4% of our total revenues. Accounts receivable in currencies other than U.S. dollars comprise 2.7% of the outstanding accounts receivable balance at April 30, 2003. 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. Accounts payable in currencies other than U.S. dollars comprise 8.3% of the outstanding accounts payable balance at April 30, 2003.

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.

Interest Rate Risk

The Company’s Notes, of approximately $150.0 million, bear interest at a fixed rate of 4.25%, and therefore changes in interest rates do not impact the Company’s interest expense on this debt. The Company from time to time has outstanding short-term borrowings with variable interest rates. The total average amount of these borrowings outstanding annually has been insignificant. Therefore, the Company expects that a 1% change in interest rate will not have any material effect on the Company’s interest expense.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

A discussion of the Company’s exposure to and management of market risk appears under the heading “Business Risks”.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. During the 90 days before the filing date of this report, our Chief Executive Officer and Chief Financial Officer reviewed our disclosure controls and procedures (as defined in the SEC rules promulgated under the Securities Exchange Act of 1934, as amended), which are designed to ensure that information required to be disclosed in our SEC reports is properly recorded, processed, summarized and reported. The officers concluded that these controls and procedures are operating in an effective manner.

Changes in Internal Controls. There were no significant changes in our internal controls or in other factors that could significantly affect these controls since the date of the last evaluation of the controls.

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PART II—OTHER INFORMATION

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.