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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended July 31, 2003

OR

For the transition period from                 to                

Commission File No. 000-10761

LTX Corporation

(Exact name of registrant as specified in its charter)

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:

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.    x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes x    No ¨

The aggregate market value of the Common Stock held by non-affiliates of the registrant on January 31, 2003 was $261,889,310.

Number of shares outstanding of each of the issuer’s classes of Common Stock as of September 2, 2003:

Common Stock, Par Value $0.05 Per Share, 52,044,531 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement in connection with its 2003 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

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PART I

Item 1.     Business

Introduction

LTX Corporation (“LTX” or the “Company”) designs, manufactures, markets and services semiconductor test solutions. Semiconductor designers and manufacturers worldwide, such as Analog Devices, Infineon Technologies, National Semiconductor, Philips Semiconductor, STMicroelectronics and Texas Instruments, use semiconductor test equipment to test devices at two different stages during the manufacturing process. These devices are incorporated in a wide range of products, including mobile internet equipment such as wireless access points and interfaces, broadband access products such as cable modems and DSL modems, personal communication products such as cell phones and personal digital assistants, consumer products such as televisions, videogame systems, digital cameras and automobile electronics, and for power management in portable and automotive electronics. We provide test systems, global applications consulting, repair services and operational support to over 100 customers in more than 15 countries. For additional information relating to foreign revenues, refer to Note 9 to the Company’s Consolidated Financial Statements.

We offer our customers the LTX Fusion^® platform, which combines our enVision++ software with our Fusion HFi, Fusion HF or Fusion CX configurations. Fusion was the first of a new class of test systems designed to test system-on-a-chip, or SOC, devices in a single test step. With Fusion, we believe we have the leading 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.

LTX focuses its marketing and sales on integrated device manufacturers (IDMs), subcontractors, which perform manufacturing services for the semiconductor industry, foundries, which provide wafer manufacturing capability, and fabless companies, which design integrated circuits but have no manufacturing capability.

LTX Corporation was incorporated in Massachusetts in 1976. Our executive offices are located at University Avenue, Westwood, Massachusetts 02090 and our telephone number is 781-461-1000. The terms “LTX” and the “Company” refer to LTX Corporation and its wholly owned subsidiaries unless the context otherwise specified. The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports available, free of charge, in the Investor Relations section of the Company’s website at www.ltx.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.

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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.

Three primary factors ultimately drive demand for semiconductor test equipment:

In recent years, increases in unit production resulted primarily from the proliferation of the personal computer and growth of the telecommunications industry. We expect that future unit production growth will be augmented by the mobile internet, broadband network access, the increased use of digital signal processing (DSP) devices, and power management applications. These increases in unit production in turn lead to a corresponding increase in the need for test equipment.

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

Finally, the introduction and adoption of a new generation of end-user products requires the development of next generation device technologies. For example, access to information is migrating from the stand-alone desktop computer, which might be physically linked to a local network, to the seamless, virtual network of the internet, which is accessible from anywhere by a variety of new portable electronic communication products. A critical enabling technology for this network and multimedia convergence is 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.

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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 increases their costs of ownership due to increased training requirements, greater floor space, decreased utilization and slower throughput. Furthermore, manufacturers cannot fully test new SOC designs because their current testing equipment does not include 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 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 higher 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 increasing the throughput 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 spend significant amounts of time writing specific software programs to run tests in parallel. Our enVision++ software allows test

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engineers to expand single-site testing programs into multi-site testing programs with ease. Fusion’s hardware can be configured with a sufficient number of instruments to perform multi-site testing even on highly complex SOC devices. These features allow our customers to take advantage of the increased throughput offered by multi-site testing without sacrificing their ability to introduce new products to market quickly.

A full range of mixed signal instrumentation.    Testing different types of SOC input/output interfaces requires radio frequency (RF), digital signal processing (DSP), power management, 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 VLSI testers, whereas consumer-oriented digital and mixed signal devices typically have less stringent digital test requirements. The Fusion single platform offers different levels of test capability 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 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. 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 believe that a single test platform solution offers our customers the greatest flexibility in managing the utilization of their test assets, thereby decreasing the cost of test. We intend to continue to focus our resources on a single integrated hardware and software test platform solution by developing options and configurations that will extend Fusion’s reach to address cost-effectively the testing of semiconductor devices across a wider spectrum of performance and complexity. 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 advanced digital, mixed signal, and SOC 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. Because SOC technology comprises digital, analog and mixed signal technologies, the ability to test all of these elements enables a test system to be used across a wide range 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 recognize that large, diversified semiconductor device manufacturers, commonly referred to as IDMs, large offshore test and assembly companies and certain fabless semiconductor device designers 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 key semiconductor

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companies is the most efficient way to maximize revenue. Therefore, we have organized our selling, field service, and field applications organizations around these key companies, and located these resources close to their facilities. This has helped us to increase our responsiveness to customers’ needs and develop collaborative relationships that help guide us in developing future applications and system options.

Further improve the flexibility of our business model.    In order to focus our resources on the development of Fusion, 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 completion of the transition of our assembly, system integration and testing operations to Jabil Circuit, substantially all of our manufacturing functions have been outsourced to third parties. We augment our focused internal development resources through our Open Platform Program and through strategic alliances with third party test technology providers. We engage contract employees to address periods of peak demand. Through our strategic alliances, we have implemented additional international distribution and sub-contracted repair and support functions. We intend to continue to identify and implement programs which enhance our ability to meet customers’ needs while reducing fixed costs.

Fusion Overview

Fusion offers a unique solution for testing the full spectrum of non-memory devices, consisting 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 and is available in Fusion HFi, Fusion HF, and Fusion CX configurations. These configurations depend primarily on the digital complexity of the device to be tested.

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 inserting them into the program flow.

Fusion HF and HFi

Our Fusion HF is one of the most advanced testers available. The Fusion HF and HFi (described below) feature up to 1,024 digital pins, mixed signal and RF test instruments, and power management test technology. Before the advent of Fusion HF, semiconductor manufacturers required several narrowly focused testers, designed to test only digital, with or without embedded 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 management, 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, open 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. Our Open Platform Program encourages third party development of instrumentation for Fusion to augment our internal development, thereby increasing flexibility and scalability.

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Our Fusion HFi provides higher performance digital channels in a smaller footprint than the Fusion HF. Custom IC development has significantly reduced the component count required to implement the digital subsystem. This, coupled with state-of-the-art packaging and a new, modular integrated thermal management system, provides a reduction in board and interconnect count thereby reducing the overall footprint of the tester. The complete range of instruments developed for the Fusion HF are also available for the Fusion HFi. The Fusion HFi preserves our customers’ investments in test programs and intellectual property, loadboards, design links, factory integration, and training through compatibility with current Fusion HF configurations while providing greater digital test capabilities.

Fusion CX

The Fusion CX is a high-performance, lower cost Fusion system targeted primarily towards the testing of high-volume mixed signal devices. The mixed signal device technologies tested by Fusion CX are often the precursor to mixed signal technologies that will be incorporated into next generation SOC designs. Because Fusion CX uses the same enVision++ development software as Fusion HF, customers are able to upgrade their test capability to Fusion HF and HFi as the complexity of their next generation SOC devices require. The Fusion CX features up to 128 digital pins, mixed signal and RF test instruments, and power management test technology. Typical device types tested on Fusion CX include radio frequency/wireless such as 802.11b, power management and automotive devices.

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 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 $32.1 million, or 26.8% of net sales, in fiscal 2003, $34.4 million, or 28.3% of net sales, in fiscal 2002, and $37.3 million, or 11.3% of net sales, in fiscal 2001.

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. 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, both directly and through strategic alliance partners who are located in Singapore, Japan, Korea and California.

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 the Fusion platform 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 development and production needs. Our expenditures for engineering and product development were $66.1 million, $71.1 million, and $66.0 million, during fiscal 2003, 2002, and 2001, 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. Together with our strategic alliances and our Open Platform Program (as described below) this approach preserves our

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customers’ substantial investments in our pre-existing test systems and programs, and, in general, helps us maintain market acceptance for our test systems. We work closely with our customers to define new product features and to identify emerging applications for our products.

Sales and Distribution

We sell our products primarily through a worldwide direct sales organization. Our sales organization is structured around key accounts, with a sales force of 25 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 43%, 52%, and 48%, of total sales in fiscal 2003, 2002, and 2001, respectively.

Strategic Alliances

In the first quarter of fiscal 2002, we launched our Open Platform Program, which offers third-party test technology companies standardized hardware and open software interfaces to our Fusion hardware and enVision++ operating system. The Open Platform Program was designed to facilitate third party development of instrumentation for our Fusion platform, thereby increasing the flexibility and scalability of Fusion for our customers. Open Platform also furthers our strategic goal of a flexible business model by enabling LTX’s internal Engineering and Product Development team to focus on core enhancements and instrumentation for Fusion without sacrificing the availability of a wide variety of instrumentation demanded by our customers.

We have also established additional alliances that we believe will allow us to achieve our strategic goals of maintaining flexibility in our business model and expanding our ability to provide our customers throughout the world with local support. For example, DI Corporation, located in Korea, provides local sales and support to the Korean market resulting in improved communications for our customers and better market access for us. A subsidiary of Flextech Holdings, based in Singapore, provides board repair services for our customers, enabling quick repair turnarounds for our Asian customers and allowing us to focus on new product development. We have a minority equity investment in the Flextech subsidiary. Our relationships with DI Corporation and the Flextech subsidiary allow us to maintain flexibility in our business model through regional outsourcing of sales and support and board repair services.

Customers

Our customers include many of the world’s leading semiconductor device manufacturers. In fiscal year 2003, 2002 and 2001, Texas Instruments accounted for 58%, 45% and 26% of net sales, respectively. In fiscal year 2002 and 2001, Vitesse Semiconductor Corporation accounted for 11%, and 22% of net sales, respectively. In fiscal year 2001, Philips Semiconductor accounted for 12% of net sales and Infineon Technologies accounted for 11% of net sales. Customers that have ordered Fusion products include the following:

Because a relatively small number of semiconductor companies purchase most of the world’s semiconductor test equipment and we have concentrated our sales and support efforts on such key customers, 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.

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Manufacturing and Supply

We have completed the transition of our final assembly, system integration and testing operations of our Fusion HF to Jabil Circuit. We are also in the process of outsourcing the manufacturing of our Fusion HFi and CX. We outsource certain components and subassemblies to contract manufacturers, such as Sanmina-SCI Corporation. We use standard components and prefabricated parts manufactured to our specifications. These components and subassemblies are used 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. We have no written supply agreements with these sole source suppliers and purchase our custom components through individual purchase orders. We continuously evaluate sources for our custom components. We cannot assure you that such alternative sources will be qualified or available to us.

Our facilities in Westwood, Massachusetts and San Jose, California perform final customer acceptance testing on certain shipments and research and development activities, which include assembly, system integration and testing for prototypes.

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, Credence Systems, NPTest Inc., and Teradyne. Teradyne and Agilent have a substantially larger share of our addressable market than we do, and Teradyne and Agilent, and most of our other major competitors, have greater financial and other resources than we do. Certain of these competitors have a larger installed base of equipment than we do. Each of our major competitors are suppliers of other types of automatic test equipment and also supply products to other markets. We expect our competitors to enhance their current products and they could 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, 2003, our backlog of unfilled orders for all products and services was $79 million, compared with $80 million at July 31, 2002. Historically, test systems generally ship within twelve months of receipt of a customer’s purchase order. While backlog is calculated on the basis of firm orders, orders may be 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.

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 for a sustained period of time. We review our backlog on a quarterly basis in order to determine if current or anticipated business conditions will have an impact on the delivery dates for items remaining in our backlog. On July 31, 2002, we adjusted our backlog downward by $69 million. Although none of the $69 million reduction in backlog was due to customer cancellations, we believe that the limited visibility in the semiconductor capital equipment industry as we entered our fiscal 2003 warranted this adjustment. There were no significant customer cancellations in fiscal 2003. In the fourth quarter of fiscal 2003, we adjusted our backlog downward by $6 million as customers further delayed delivery dates.

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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. The earliest expiration date of any of our patents is March 2, 2010. Our other patents have later expiration dates and relate to various technologies, including technology relating to the Fusion system and pin electronics. 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 applications, 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, 2003, we employed 576 employees and 35 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.

Business Combinations

In October 2000, we purchased 19% of the outstanding common stock of Step Tech, Inc., an outsource technology provider to a broad range of semiconductor test equipment suppliers. We also entered into a development agreement at that time to provide us with test technology to broaden the reach of Fusion’s single platform, scalable architecture into the high volume, commodity semiconductor market. StepTech was a privately-held company that specialized in the design and manufacture of cost–effective test instrument solutions and software for key growth areas such as wireless and mixed signal semiconductor testing. On June 10, 2003, we acquired the remaining 81% of the outstanding shares of StepTech for a net cash payment of $6.5 million and 2,283,750 shares of LTX common stock of which 288,125 shares are contingent upon certain milestones being met. In addition, all outstanding StepTech stock options were converted into options to purchase 263,112 shares of LTX common stock and options to purchase 300,000 shares of LTX stock with an exercise price equal to the fair market value of LTX stock on the date of grant were also issued. For a further discussion, see Note 3 to the Consolidated Financial Statements.

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 our capital expenditures, earnings or competitive position.

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Item 2.    Properties

All of our facilities are leased. We have achieved worldwide ISO 9001:2000 certification at our facilities. We maintain our headquarters in Westwood, Massachusetts, where corporate administration, sales and customer support, engineering research and development and manufacturing 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 for a ten year term a 208,000 square foot facility in Westwood, Massachusetts, which we had leased until 2010. In fiscal year 2002, the Company and its landlord agreed to terminate this lease. 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 2007. We also lease sales and customer support offices at various locations in the United States totaling approximately 31,000 square feet. We have a total of eight leased properties in the United States, four in Asia and six in Europe.

As part of the acquisition of StepTech, Inc., we assumed the lease on an 18,000 square foot manufacturing and development facility in Hopkinton, Massachusetts. The manufacturing operation at the Hopkinton facility is being transitioned to our outsource manufacturer, Jabil Circuit, Inc.

Our European headquarters is located in Woking, United Kingdom and our Asian headquarters is located in Singapore. We also maintain sales and support offices at other 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 no material pending legal proceedings.

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 2003.

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PART II

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:

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 that prohibit us from paying cash dividends.

As of September 2, 2003, we had approximately 1,037 stockholders of record of our common stock.

Compensation Plans

The following table shows information relating to the Company’s compensation plans as of July 31, 2003:

*Includes 529,116 shares available for issuance under an employee stock purchase plan which is intended to qualify as such under Section 423 of the Internal Revenue Code.

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Item 6.    Selected 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, 2003 are derived from our audited consolidated financial statements.

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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”.

Overview

We design, manufacture, market and service semiconductor test solutions worldwide to leading companies in the semiconductor industry. Our Fusion semiconductor test equipment can test a broad range of analog, digital, mixed signal (a combination of analog and digital) and system-on-a-chip, or SOC, semiconductor devices, all on a single test platform.

LTX focuses its marketing and sales on integrated device manufacturers (IDMs), subcontractors, which perform manufacturing services for the semiconductor industry, foundries, which provide wafer manufacturing capability, and fabless companies, which design integrated circuits but have no manufacturing capability.

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:

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Our 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 has continued through our fiscal year ended July 31, 2003. The following graph shows the sharp decline in the three-month moving average semiconductor test equipment orders and shipments from fiscal 1997 through fiscal 2003, as calculated by SEMI, an industry trade organization:

Despite this sharp decline in business activity for the semiconductor test market, we have continued to invest in the further development and enhancement of our Fusion platform. We believe that our competitive advantage in this industry is primarily driven by the ability of our Fusion platform to meet or exceed the highest technical specifications required for the testing of the most advanced semiconductor devices in a cost-efficient manner. Therefore, we have continued to invest significant amounts in engineering and product development in an effort to further differentiate the Fusion platform from the product offerings of our competitors. In fiscal 2003, engineering and product development expenses were $66.1 million, or 55.3% of net sales, as compared to $71.1 million, or 58.6% of net sales in fiscal 2002. The $5.0 million decrease in engineering and product development expenses in fiscal years 2003 from 2002 was a result of the completion of next generation Fusion development projects. We believe that our single-platform product strategy is a more cost-efficient means of focusing product research and development efforts, since we are able to avoid dilution of our development efforts across multiple product platforms.

Additionally, because in the past a high proportion of our manufacturing costs included in cost of sales have been fixed, we have been limited in our ability to reduce manufacturing expenses and inventory purchases quickly in response to decreases in orders and revenues during cyclical downturns in the semiconductor industry. In order to continue our strategy of investing in product research and development during a downturn while mitigating the adverse effect on profitability, we have taken steps to transform certain historically fixed manufacturing overhead costs into variable costs. Over the past several years, we have increasingly transitioned the manufacture of certain components and subassemblies to contract manufacturers, thereby reducing our fixed manufacturing costs associated with direct labor and overhead. In fiscal 2002, we completed the transition of our final assembly, system integration and testing operations to Jabil Circuit, which will further reduce our fixed manufacturing costs. We believe that transforming product manufacturing costs into variable costs will in the future allow us to improve our performance during cyclical downturns while preserving our historic gross margins during cyclical upturns.

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Finally, we have also undertaken several additional cost reduction measures during this downturn to further mitigate the adverse effect of this cyclical downturn on our profitability. Our total worldwide headcount has been reduced from 776 employees and 56 temporary workers at the end of fiscal 2002 to 576 employees and 35 temporary workers at the end of fiscal 2003. In addition, we have continued to maintain 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.

Management believes that recent improvements in business activity, together with other industry indicators at the end of fiscal 2003, may be the first signs of an emerging recovery leading to the next growth cycle. The Company has seen revenue and orders improvement over the past two quarters. Although the sluggish industry conditions of the last downturn will continue to adversely affect the Company’s results of operations in the near term, we believe our investments and actions taken during the downturn provide us with a good opportunity to increase revenues, generate profits and produce strong positive cash flow as business conditions improve. However, 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, or if the emerging recovery is not sustained. At the current low levels of business, there is a higher likelihood that these types of changes in our customers’ requirements would adversely affect our results of operations because in any particular quarter a limited number of transactions accounts for an even greater portion of sales for the quarter.

We are also exposed to the risks associated with the current emerging recovery in the U.S. and global economies. The lack of visibility regarding whether or when there will be a sustained recovery in the sale of electronic goods and information technology equipment, and uncertainty regarding the magnitude of the recovery, underscores the need for caution in predicting growth in the semiconductor test equipment industry in general and in our revenues and profits specifically. Slow or negative growth in the domestic economy may continue to materially and adversely affect our business, financial condition and results of operations for the foreseeable future.

Critical Accounting Policies and the Use of Estimates

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, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We based 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 are as follows: revenue recognition, inventory reserve, income taxes, warranty, goodwill and other intangibles, in process research and development, impairment of long-lived assets and allowances for doubtful accounts.

Revenue Recognition

The Company’s revenue recognition policy is described in Note 2, Summary of Significant Accounting Policies, contained in the Notes to Consolidated Financial Statements included in this report. We monitor the credit worthiness of our key customers and do not record revenue on sales if collection is not reasonably assured. Most of these conditions are subjective and actual results could vary from the estimated outcome, requiring future revisions to income from operations. In the future, if acceptance provisions significantly change, the timing of the revenue recognition could be affected.

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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 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, estimated 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. Pursuant to SAB Topic 5-BB, inventory reserves establish a new cost basis for inventory. Such reserves are not reversed until the related inventory is sold or otherwise disposed of. During fiscal 2003, the Company had no reversals of reserves related to the sale of previously written down items. As of July 31, 2003, our inventory of $66.9 million is stated net of inventory reserves of $93.3 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.

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.

The Company has deferred tax assets resulting from tax credit carryforwards, net operating losses and other deductible temporary differences, which will reduce taxable income in future periods. Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (“SFAS No. 109”) 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 carryback and carryforward periods, existing sales backlog and future sales projections. We had previously provided valuation allowances only for future tax benefits resulting from certain foreign losses and various state tax attributes. However, 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 July 31, 2002 and the increased uncertainty relative to the timing of profitability in future periods, we concluded that it was appropriate to establish a valuation allowance for our entire net deferred tax assets. The Company established a full valuation allowance for our remaining deferred tax assets and recognized a $78.8 million non-cash charge during fiscal year 2002. As a result, the valuation allowance for deferred tax assets increased from $101.6 million at July 31, 2002, to $164.0 million at July 31, 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. We will continue to monitor the recoverability of our deferred tax asset on a periodic basis.

Warranty

The Company provides standard warranty coverage on its systems, 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

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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.

Goodwill and Other Intangibles

The Company has adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”, which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized. Intangible assets with a definite useful life are amortized over their estimated useful life. Assets recorded in these categories are tested for impairment at least annually or when a change in circumstances may result in future impairment. Intangible assets are recorded at historical cost. Intangible assets acquired in an acquisition, including research and development, are recorded using the purchase method of accounting. Assets acquired in an acquisition are recorded at their estimated fair values at the date of acquisition as determined by an independent appraiser using information and assumptions provided by management. If the carrying value of the asset is in excess of the present value of the expected future cash flows, the carrying value is written down to fair value in the period identified.

In-Process Research and Development

The purchase price recorded for acquisitions is allocated to the assets acquired and the liabilities assumed based on fair values at the date of acquisition. The estimated excess of purchase price over the fair value of the net tangible assets is allocated to identifiable intangible assets as valued by an independent appraiser using information provided by management. The income approach is used to determine the fair value of In-Process Research and Development (IPR&D).

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

Impairment of Long-Lived Assets

On an ongoing basis, we review the value and period of amortization or depreciation of long-lived assets. Included in long-lived assets is machinery, equipment, spare parts used for service, office furniture, office equipment and leasehold improvements. During the review, we reevaluate the significant assumptions used in determining the original cost of long-lived assets. Although the assumptions may vary from transaction to transaction, they generally include revenue growth, operating results, cash flows and other indicators of value. We then determine whether there has been a permanent impairment of the value of long-lived assets based upon events or circumstances that have occurred since acquisition. The extent of the impairment amount recognized is based upon a determination of the fair value of the impaired asset.

Allowance for Doubtful Accounts

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

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Results of Operations

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

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

Fiscal 2003 Compared to Fiscal 2002.

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 $119.4 million in 2003 and $121.3 million in 2002. The decrease in sales in 2003 from 2002 was the result of the continuing sluggish demand for semiconductors, resulting in reduced demand for semiconductor test equipment. Sales revenue began to decline in the second half of fiscal year 2001 and has continued to remain at low levels throughout fiscal years 2002 and 2003. Despite the negative factors and depressed global economy, we continued to invest in Fusion with significant investment in engineering and development expenses in fiscal years 2003, 2002 and 2001. Sales from new products, Fusion CX and Fusion HFi totaled $14.2 million in fiscal year 2003 and $1.2 million in fiscal year 2002. Fusion CX was introduced in fiscal 2002 and Fusion HFi was introduced in late fiscal 2003. Our service revenue, which is included in net sales, is less impacted by significant swings in product demand as most of the revenue is derived from an installed base of existing products. Service revenue, consisting of sales of replacement and spare parts and labor charges, totaled $32.1 million, or 26.8% of net sales, in fiscal 2003 and $34.4 million, or 28.3% of net sales, in fiscal 2002. Geographically, sales to customers outside the United States were $51.6 million, or 43% of net sales, in fiscal 2003 and $63.5 million, or 52% of net sales, in fiscal 2002.

Cost of Sales.    Cost of sales consists of material, outsource manufacturing costs, labor, depreciation and associated overhead. Cost of sales increased by $1.4 million to $97.4 million in fiscal 2003 from $96.0 million in fiscal 2002. As a percentage of net sales, cost of sales was 81.5% of net sales in fiscal 2003 as compared to 79.2% in fiscal 2002. Cost of sales as a percentage of net sales increased slightly year-over-year in fiscal 2003 primarily due to changes in product mix.

Inventory Related Provision.    In calendar 2001, we were faced with a sudden drop in demand as a result of the beginning phases of an industry-wide slowdown, which has continued through and into our fiscal year 2003.

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During fiscal year 2002, we recorded a $42.2 million excess inventory related provision, principally due to the sharp decline in semiconductor test system orders and overall industry wide conditions. The reserve established in fiscal 2002 considered industry forecasts, and a modest but temporary improved order environment in the second half of fiscal 2002. This led to an expectation of some recovery during fiscal 2003, which in fact did not materialize. Continued sluggish worldwide macro-economic conditions, combined with world events such as the war in Iraq and the SARS epidemic, led to depressed conditions for a longer period than past industry cycles and earlier projections. In fact, the semiconductor capital equipment industry is in the third year of the most significant industry wide slowdown on record.

The major variables impacting inventory usage are the demand for current products, overall industry conditions, key sales initiatives and the impact that our new product introductions (Fusion HFi and Fusion CX) have on current product demand, which we evaluate on a quarterly basis. The longer the duration of the depressed industry conditions, the greater the chance for impairment of our current products due to market and product transitions. Fusion HFi was formally introduced in the third quarter of fiscal year 2003. The HFi is a higher performance machine with significant added capability and reduced maintenance cost. As part of our normal quarterly excess and obsolescence inventory review, we evaluated the impact on our reserve calculation should the current overall industry conditions continue, along with the new variable of introducing Fusion HFi. With the growing acceptance for Fusion HFi, we determined that it was appropriate to take a $48.5 million inventory provision related primarily to excess Fusion HF raw materials and component parts in the fourth quarter of fiscal 2003.

When recorded, our reserves are intended to reduce the carrying value of our inventory to its net realizable value. Pursuant to SAB Topic 5-BB, inventory reserves establish a new cost basis for inventory. Such reserves are not reversed until the related inventory is sold or otherwise disposed of. During fiscal 2003 and fiscal 2002, we disposed of $11.1 million and $9.5 million respectively, against inventory reserves established in fiscal 2002. There was no impact on reported profit margins in either period. The Company reviews and disposes of reserved inventory on an ongoing basis, as appropriate. Excess inventory that has been reserved is held for potential future use which is dependent on overall market conditions and product demand.

Engineering and Product Development Expenses.    Engineering and product development expenses were $66.1 million, or 55.3% of net sales, in fiscal 2003 as compared to $71.1 million, or 58.6% of net sales, in fiscal 2002. The $5.0 million decrease in engineering and product development expenses in 2003 from 2002 was a result of the completion of next generation Fusion development projects. We continue to maintain a significant investment in product development expenses to support new product features and emerging applications. This is consistent with the Company’s strategy of extending our technological lead in single platform testing during industry downturns. Sales from new products, Fusion HFi and Fusion CX, totaled $14.2 million in fiscal year 2003 and $1.2 million in fiscal year 2002. Fusion HFi was introduced in late fiscal 2003 and Fusion CX was introduced in fiscal 2002.

Selling, General and Administrative Expenses.    Selling, general and administrative expenses were $27.3 million, or 22.9% of net sales, in fiscal 2003 as compared to $28.3 million, or 23.4% of net sales, in fiscal 2002. The significant decreases from fiscal 2001 levels in fiscal 2003 and fiscal 2002 were primarily a result of cost cutting measures such as headcount reductions, elimination of profit bonuses, lower commission expenses due to lower sales volume and elimination of our 401(k) match.

In-Process Research and Development.    In October 2000, we acquired 19% of the outstanding common stock of StepTech, Inc. On June 10, 2003, we acquired the remaining 81% of the outstanding shares of StepTech for a net cash payment of $6.5 million and 2,283,750 shares of LTX common stock, of which 288,125 shares are contingent upon certain milestones being met. In addition, all outstanding stock options to purchase shares of StepTech stock were converted into options to purchase 263,112 shares of LTX stock and options to purchase 300,000 shares of LTX stock with an exercise price equal to the fair market value of LTX stock on the date of grant were also issued. The acquisition was accounted for using the purchase method of accounting. The

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Company’s Consolidated Financial Statements include the operating results of StepTech from the date of acquisition. Proforma results have not been presented as the results have not been material prior to the date of acquisition. The purchase price recorded for the StepTech acquisition has been allocated to the assets acquired and the liabilities assumed based on their fair value at the date of acquisition. The estimated excess of purchase price over the fair value of the net tangible assets was allocated to identifiable intangible assets as valued by an independent appraiser using information provided by management. Based on the independent appraisal, we recorded an in-process research and development (IPR&D) charge of $16.1 million in the fourth quarter of fiscal 2003.

Prior to this acquisition, StepTech had been developing three new products that would address new end markets. These products under development were designed to test higher performance, higher pin count devices beyond the range of the current product offerings and to provide solutions in the module test segment market.

In arriving at the valuation of the purchased IPR&D, the Company considered several factors including, the projects stage of completion, the technological complexity of the work completed, the costs incurred, the expected costs to complete, the contribution of core technologies and other acquired assets, the expected completion date and the estimated economic life of the project. The after-tax cash flows attributable to each project were discounted back to a present value using discount rates considered typical venture capital rates of return for a product/service prototype with some proven capabilities, further development required and positive net cash flows projected to be within a few years. The three projects had no alternative future use and ranged from 35% to 60% complete as of the acquisition date. The expected completion dates are within two years and the Company will absorb the remaining cost to complete each project within the Company’s current cost structure. The Company believes that the estimated amounts recorded as purchased IPR&D represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for these projects.

Reorganization Costs.    Reorganization costs were $6.7 million, or 5.6% of net sales, in fiscal 2003. In August 2002, we reduced our workforce by 94 employees due to adverse business conditions. In November 2002, we further reduced our workforce by 195 employees and contractors. The combination of these two actions represent $5.6 million of the $6.7 million charge for the fiscal year ended July 31, 2003. These workforce reductions have reduced annual selling, general and administrative expenses and engineering and product development expenses by approximately $5.0 million and $16.0 million, respectively. Most of the future savings is from reduced payroll costs. Non-payroll expense reductions are expected to be approximately $3.0 million per year due to reduced future 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 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 continuing 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 were paid through August 2003.

In July 2003, we reduced our headcount by 7 employees and recorded a $0.3 million reorganization cost charge in our fourth quarter of fiscal 2003. The majority of the severance cost from this workforce reduction will be paid during the first and second quarters of fiscal year 2004. In July 2003, we also recorded a $0.8 million asset impairment charge for write-off of certain manufacturing related leasehold improvements in our Westwood facility. These assets were deemed to be impaired as a result of outsourcing the remaining test and integration process to Jabil Circuit.

Interest Expense.    Interest expense for fiscal year 2003 was $6.7 million as compared to $6.8 million for fiscal year 2002 and consists primarily of accruing interest expense for the 4.25% Convertible Subordinated Notes.

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Investment Income.    Investment income was $4.3 million for fiscal 2003 as compared to $7.0 million for fiscal 2002. The decrease in investment income is due to a lower cash and marketable securities balances in fiscal 2003 as compared to fiscal 2002.

Income Tax.    The Company had no net tax provision in fiscal 2003 as compared to a tax provision of $33.7 million, or 27.8% of net sales, in fiscal year 2002. The provision in fiscal 2002 was the result of providing a full valuation allowance for our deferred tax assets by recognizing a tax provision charge. Prior to fiscal 2002, the Company had previously provided valuation allowances only for certain foreign losses and various state taxes. As a result of a review undertaken at July 31, 2002 and our cumulative loss position at that date, management concluded that it was appropriate to establish a full valuation allowance for its net deferred tax assets. The Company will continue to record a 100% valuation allowance until it is more likely than not we will utilize the deferred tax asset. The gross deferred tax asset is valued at $164 million as of July 31, 2003 with a 100% valuation allowance resulting in no net deferred tax assets recorded on the balance sheet.

Fiscal 2002 Compared to Fiscal 2001.

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 $121.3 million in 2002 and $330.0 million in 2001. The net sales of $330.0 million in 2001 reflected the Company’s adoption of SAB 101, which was recorded as a cumulative effect adjustment in fiscal 2001. For more information, see Note 2 to the Consolidated Financial Statements. The decrease in sales of $208.7 million was the result of the continuing decline in demand for semiconductors, resulting in substantially reduced demand for semiconductor test equipment. Service revenue, consisting of sales of replacement and spare parts and labor charges, totaled $34.4 million, or 28.3% of net sales, in fiscal 2002 and $37.3 million, or 11.3% of net sales, in fiscal 2001. Geographically, sales to customers outside the United States were $63.5 million, or 52% of net sales, in fiscal 2002 and $157.7 million, or 48% of net sales, in fiscal 2001.

Cost of Sales.    Cost of sales consists of material, labor, depreciation and associated overhead. Cost of sales decreased by $81.0 million to $96.0 million in fiscal 2002 from $177.0 million in fiscal 2001. As a percentage of net sales, cost of sales was 79.2% of net sales in fiscal 2002 as compared to 53.6% in fiscal 2001. Cost of sales as a percentage of net sales increased year-over-year in fiscal 2002 primarily due to the sharp decline in revenue, as the fixed cost components of our cost of sales did not decrease commensurate with our decease in net sales.

Inventory Related Provision.    During fiscal year 2002, we recorded a $42.2 million inventory related provision. Of the $42.2 million, $38.7 million of the provision relates to excess inventory principally due to the sharp decline in semiconductor test system orders during the current industry downcycle. The remaining $3.5 million relates to excess Delta/STE legacy product inventory that was previously transferred to our third party reseller of Delta/STE products, for which payment was contingent upon the third party’s ability to sell the inventory. A $12.8 million inventory related provision was charged to operations in fiscal 2001. This provision represented the inventory charge for non-Fusion components and subassemblies, and Delta/STE legacy products.

Engineering and Product Development Expenses.    Engineering and product development expenses were $71.1 million, or 58.6% of net sales, in fiscal 2002 as compared to $66.0 million, or 20.0% of net sales in fiscal 2001. The increase in expenditures is principally a result of a higher level of development expenses to support new product features and emerging applications and is consistent with the Company’s strategy of extending our technological lead in single platform testing during the industry downturn.

Selling, General and Administrative Expenses.    Selling, general and administrative expenses were $28.3 million or 23.4% of net sales in fiscal 2002 as compared to $37.0 million, or 11.2% of net sales in fiscal 2001. The decrease in selling, general and administrative expenses of $8.7 million for fiscal 2002 was primarily the result of cost cutting measures, including reductions in personnel, lower commission expense as a result of lower sales and elimination of profit bonuses.

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Interest Expense.    Interest expense for fiscal year 2002 was $6.8 million as compared to $1.3 million for fiscal year 2001. The increase in expense is a result of accruing interest expense for the Convertible Subordinated Notes.

Investment Income.    Investment income was $7.0 million for fiscal 2002 as compared to $9.1 million for fiscal 2001. Although the Company’s cash balance was higher for the year ended 2002 than for the year ended 2001, interest rates declined sharply during fiscal 2002.

Income Tax.    The Company had a tax provision of $33.7 million or 27.8% of net sales in fiscal year 2002. This provision was the result of providing a full valuation allowance for our deferred tax assets by recognizing a tax provision charge of $78.8 million in fiscal 2002. The Company had previously provided valuation allowances only for certain foreign losses and various state tax attributes. As a result of a review undertaken at July 31, 2002 and our cumulative loss position at that date, management concluded that it was appropriate to establish a full valuation allowance for its net deferred tax assets. The Company recorded a tax provision of $13.1 million in fiscal 2001 in accordance with SFAS No. 109 discussed in “Critical Accounting Policies and the Use of Estimates—Taxes”.

Cumulative Effect of an Accounting Change, Net of Applicable Tax.    In fiscal year 2001, $9.6 million, or 2.9% of net sales, was recognized relating to the cumulative effect of an accounting change as related to SAB 101. As a result of SAB 101 guidance, the Company changed its method of accounting for revenue recognition, specifically in the area of customer payment holdbacks for acceptance or installation. The Company reported this change in accordance with APB No. 20, “Accounting Changes” and SAB 101, by a cumulative effect adjustment.

Liquidity and Capital Resources

At July 31, 2003, we had $136.6 million in cash and cash equivalents and marketable securities and working capital of $155.9 million as compared to $217.2 million in cash and cash equivalents and marketable securities and working capital of $285.4 million at July 31, 2002. The decrease in the cash equivalents and marketable securities was due primarily to cash used in operations of $69.8 million and cash used in investing activities of $14.8 million, which was partially offset by cash provided by financing activities of $13.4 million. The total decrease in cash and cash equivalents and marketable securities for the year was $80.7 million consisting of a $64 million decrease for the first six months and $16.7 million decrease in the second half of fiscal 2003. The major reasons for the improvement in the second half of fiscal 2003 were our cost reduction actions and working capital reductions. We believe the Company will not experience the high cash consumption rate that we experienced in fiscal year 2002 and the first six months of fiscal year 2003 as our working capital has stabilized and our operating expenses have been reduced.

Accounts receivable from trade customers were $12.0 million at July 31, 2003, as compared to $19.3 million at July 31, 2002. The decrease in accounts receivable was the result of cash collecting activities along with more balanced shipment schedules in the later months of fiscal 2003 as compared to fiscal 2002 when we experienced a high concentration of shipments in the last month of our quarter. In the second half of fiscal 2003, our major customers delivery schedules were balanced throughout each quarter which resulted in a lower quarter end accounts receivable balance on July 31, 2003. We have no assurance that this trend will continue and it is likely that we will revert back to historical shipment patterns which were heavily weighted to shipments in the last month of the quarter. The reserve for sales returns and doubtful accounts was $3.5 million, or 22.6% of gross accounts receivable, on July 31, 2003 and $3.6 million, or 15.7% of gross 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 fiscal year ended July 31, 2003 and $8.1 million for the fiscal year ended July 31, 2002. Accounts receivable that would be considered for sale to the Company’s commercial lender generally are for test systems shipped to a customer during the last few days of the quarter and which have collection terms of net 30 days.

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Accounts receivable from other sources decreased $5.1 million to $5.2 million at July 31, 2003, as compared to $10.3 million at July 31, 2002. The decrease was attributed to the reduction in the sale of component inventory at cost to our outsource suppliers. The Company sells raw materials and component inventory at cost to its outsource contract manufacturers. LTX has changed its manufacturing model, transitioning from an internal manufacturing model to a completely outsourced one. During this transition, we are selling our in-stock inventory to our outsource manufacturers on an as-needed basis to build finished product for us. We will continue to sell our in-stock components to our outsource suppliers until we liquidate our inventories. At that point, the outsource suppliers will buy the raw materials and components from third parties and not from LTX. Terms of sale are typically net 30 days and there are no recourse provisions associated with these sales. The Company does not recognize revenue from these sales.

Net inventory decreased by $28.3 million to $66.9 million at July 31, 2003 as compared to $95.2 million at July 31, 2002. The decrease was primarily as a result of an excess inventory related provision of $48.5 million recorded in our fourth quarter ending July 31, 2003. Offsetting the reduction of $48.5 million from the additional excess reserve was an increase in inventories transferred from the prepaid expense account totaling $20 million. During fiscal 2001 and fiscal 2002, the Company had made deposits to suppliers of critical components to insure delivery. LTX took delivery of the prepaid inventory in fiscal 2003 which resulted in an increase to inventory.

In calendar 2001, we were faced with a sudden drop in demand as a result of the beginning phases of an industry-wide slowdown, which has continued through and into our fiscal year 2003. During the downturn, we continued to reduce our inventory purchases but the demand for our products dropped at a more rapid rate. Further complicating this situation was our transition from our board assembly manufacturer to a new contract manufacturer. During this process, we dual sourced our production requirements to ensure continued deliveries to our customers. This placed a burden on the rate at which we could reduce inventory. Another factor impacting our inventory investment has been our investment in new Fusion products. In addition, industry forecasts, and a modest but temporary improved order environment in the second half of fiscal 2002, led to an expectation of some recovery during fiscal 2003, which in fact did not materialize. Continued sluggish worldwide macro-economic conditions, combined with world events such as the war in Iraq and the SARS epidemic, led to depressed conditions for a longer period than past industry cycles and earlier projections. In fact, the semiconductor capital equipment industry is in the third year of the most significant industry wide slowdown on record. We believe we have stabilized our incoming inventory and working capital requirements. The only incoming materials moving forward will relate to new products or components to balance production on existing products. Before the excess inventory provision, operationally, inventory decreased in the third and fourth quarters of fiscal year 2003.

With respect to inventory impairment, our inventory reserve is calculated utilizing a 24-month outlook. The major variables impacting inventory usage are the demand for current products, (Fusion HF), overall industry conditions, key sales initiatives underway and the impact that our new product introductions (Fusion HFi) have on current product demand. The longer the duration of the depressed industry conditions, the greater the chance for impairment of our Fusion HF products due to market and product transitions. Fusion HFi was formally introduced in the third quarter of fiscal year 2003. The HFi is a higher performance machine with significant added capability and reduced maintenance cost. As part of our normal quarterly excess and obsolescence inventory review, we evaluated the impact on our reserve calculation should the current overall industry conditions continue, along with the new variable of introducing Fusion HFi. Accordingly, we recorded a $48.5 million excess reserve in our fourth quarter ending July 31, 2003.

Prepaid expense decreased by $19.7 million to $11.0 million at July 31, 2003, as compared to $30.7 million July 31, 2002. The decrease was attributed to the receipt of inventory against prepayments as noted in the inventory comments above.

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Capital expenditures totaled $17.5 million in fiscal 2003 as compared to $26.5 million for fiscal year 2002. The principal reason for the $9.0 million decrease in expenditures relates to tight cost controls over capital spending due to the Company’s current revenue levels.

For fiscal year 2003, we had no new capital lease financing. In fiscal 2002, we received proceeds from capital lease financing of $1.7 million. For fiscal year 2003, we had one new operating lease financing transaction that generated $9.2 of cash proceeds in fiscal 2003. The Company entered into certain equipment sale/leaseback transactions to finance the cost of new test equipment. The cash proceeds from these leases were based on the fair market value of the equipment and these leases qualify as operating leases in accordance with SFAS No. 13. Cash proceeds received in excess of the cost of the equipment are recorded as a deferred gain in accordance with SFAS No. 28, paragraph 2 and SFAS No. 13, paragraph 33 and amortized over the life of the lease.

Other assets decreased by $10.2 million to $5.0 million at July 31, 2003 as compared to $15.2 million at July 31, 2002. The decrease is attributed to the acquisition of StepTech, Inc. Prior to June 10, 2003, the minority investment we had in StepTech was recorded in other assets for $9.4 million. Upon acquisition of the remaining stock of StepTech, the minority investment was eliminated and Consolidated Financial Statements of LTX include the results of StepTech from the acquisition date of June 10, 2003.

During the quarter ended July 31, 2002, we renegotiated our domestic credit facility with our existing lender. This facility 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 4.0% at July 31, 2003. The working capital line will be used to support working capital obligations, issuance of standby letters of credit, and foreign exchange transactions. The facility imposes certain financial and other covenants. Outstanding borrowings at July 31, 2003 were $19.4 million under the working capital credit facility. A second credit facility with another lender was established on April 30, 2001 as a revolving credit line for $30.0 million. This line was reduced to $20.0 million in fiscal 2003. 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 July 31, 2003.

In August 2001, we received 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 of depreciation, 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.

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

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The following summarizes LTX’s contractual obligations, net of sub-lease revenues, at July 31, 2003 and the effect such obligations are expected to have on its liquidity and cash flow in the future periods:

Recent Accounting Pronouncements

In May 2003, the Financial Accounting Standard Board (FASB) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new statement requires that those instruments be classified as liabilities in statements of financial position. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 30, 2003. We do not expect the adoption of this statement to have a material impact on our consolidated financial position or results of operations

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. This statement will be effective in fiscal 2004 for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. We do not expect the adoption of this statement to have a material impact on our consolidated financial position or results of operations.

In February 2003, 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 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 fiscal year or interim period beginning after December 31, 2003. The Company believes that the adoption of this standard will not have a material impact on its financial position or results of operations.

In December 2002, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”. This statement, which is effective for

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fiscal years ending after December 15, 2002, amends Statement No. 123, Accounting for Stock-Based Compensation, and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, Statement No. 148 amends the disclosure requirements of Statement No. 123 regardless of the accounting method used to account for stock-based compensation. We have chosen to continue to account for stock-based compensation of employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. However, the enhanced disclosure provisions as defined by Statement No. 148 have been included in Note 2 of the Notes to Consolidated Financial Statements.

In November 2002, the FASB issued FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN 45 clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. For guarantees that fall within the scope of FIN 45, the Interpretation requires that guarantors recognize a liability equal to the fair value of the guarantee upon its issuance. The disclosure provisions of the Interpretation are effective for financial statements of interim or annual periods that end after December 15, 2002. However, the provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor’s year-end. The adoption of FIN 45 did not have a material effect on LTX’s results of operations and financial position.

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.

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

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

The semiconductor industry is highly concentrated, 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 83.4% of revenues in fiscal year 2003 and 85.6% in fiscal year 2002. 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. Because of this difficulty in predicting future performance, our operating results

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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 completed 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 continue to materially adversely affect our business, financial condition and results of operations.

Mergers and acquisitions of high-technology companies are inherently risky, and no assurance can be given that 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:

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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.

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

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

International sales have constituted a significant portion of our revenues in recent years, and we expect that this composition will continue. International sales accounted for 43% of our revenues for fiscal year 2003 and 52% for fiscal year 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:

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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 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, NPTest Inc., 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 layoffs in any industry downturn could make it more difficult for us to hire or retain qualified personnel. Our business, financial condition and results of operations could be materially adversely affected by the loss of any of our key

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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:

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, 2003, our stock price ranged from a low of $3.12 to a high of $11.45. The price of our common stock has been and likely will continue to be subject to wide fluctuations in response to a number of events and factors, such as:

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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, revenues, costs and stock price.

The terrorist attacks 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

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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, the proceeds of the Notes offering in August 2001, 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, we may need to raise additional funds, we cannot be certain that we will be able to obtain such additional financing on favorable terms if at all. Further, if we issue additional equity securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. Future financings may place restrictions on how we operate our business. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products and services, take advantage of future opportunities, grow our business or respond to competitive pressures, which could seriously harm our business.

Item 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 $170.8 million as of July 31, 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

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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 2003, our revenues derived from sales outside the United States constituted 43% of our total revenues. Accounts receivable in currencies other than U.S. dollars comprise 6.6% of the outstanding accounts receivable trade balance at July 31, 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 10.3% of the outstanding accounts payable balance at July 31, 2003.

Based on a hypothetical 10% adverse movement in 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 Convertible Subordinated Notes 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.

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Item 8.    Financial Statements and Supplementary Data

LTX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

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

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LTX CORPORATION CONSOLIDATED

STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share data)