LTX CORP, 424B1, 1999-10-14

LTX CORP
424B1, 1999-10-14
INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS

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<PAGE>

Filed pursuant to Rule 424(b)(1)
Registration No. 333-86769

PROSPECTUS

5,400,000 Shares

[LTX Corporation Logo Appears Here]
COMMON STOCK

----------------

LTX Corporation is offering 5,400,000 shares of common stock.

----------------

Our shares are traded on the Nasdaq National Market under the
symbol "LTXX." On October 13, 1999, the reported last sale price
of our common stock on the Nasdaq National Market was $13.75 per
share.

----------------

Investing in our common stock involves risks. See "Risk Factors"
beginning on page 5.

----------------

PRICE $13.625 A SHARE

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<TABLE>
<CAPTION>
Underwriting
Discounts
Price to and Proceeds to
Public Commissions LTX Corporation
----------- ------------ ---------------
<S> <C> <C> <C>
Per Share.............................. $13.625 $.75 $12.875
Total.................................. $73,575,000 $4,050,000 $69,525,000
</TABLE>

The Securities and Exchange Commission and state securities regulators have not
approved or disapproved of these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.

LTX Corporation has granted the underwriters the right to purchase up to an
additional 810,000 shares of common stock to cover over-allotments. Morgan
Stanley & Co. Incorporated expects to deliver the shares of common stock to
purchasers on October 19, 1999.

----------------

MORGAN STANLEY DEAN WITTER
NEEDHAM & COMPANY, INC.
GRUNTAL & CO., L.L.C.

October 14, 1999
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 5
Special Note Regarding Forward-
Looking Statements................. 10
Use of Proceeds..................... 11
Price Range of Common Stock......... 11
Dividend Policy..................... 11
Capitalization...................... 12
Selected Consolidated Financial
Data............................... 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 14
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business........................... 26
Management......................... 35
Principal Stockholders............. 38
Description of Common Stock........ 39
Underwriting....................... 40
Legal Matters...................... 42
Experts............................ 42
Where You Can Find More
Information....................... 42
Incorporation of Certain Documents
by Reference...................... 43
Index to Consolidated Financial
Statements........................ F-1
</TABLE>

----------------

You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock
and seeking offers to buy shares of common stock only in jurisdictions where
the offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or any sale of the common stock. In
this prospectus, the "Company", "we", "us", "our", ""or "LTX" refer to LTX
Corporation.

<PAGE>

Foldout, Page One
[The following is the textual description
of the front cover foldout]

The following caption appears on the upper left corner of page one of the
foldout: "Testing the 21st Century Semiconductor." A close-up photograph of a
semiconductor chip on a circuit board appears to the right of this caption.

A row of six photographs appears across the page under the caption: "End-User
Markets." From left to right, the first photograph depicts a world map above the
caption "high speed data communications"; the second photograph depicts an
automobile above the caption "automotive electronics"; the third photograph
depicts a personal digital assistant above the caption "personal digital
assistants"; the fourth photograph depicts a telephone and cables above the
caption "telecommunications"; the fifth photograph depicts a satellite dish on
top of a television above the caption "broadband communications"; and the sixth
photograph depicts a laptop computer, cellular telephone and pager above the
caption "wireless communications".

As semiconductor device companies seek to create new semiconductor devices, they
are differentiating themselves from commodity and microprocessor manufacturers
by continually raising the level of chip integration. In many cases, yesterday's
device technologies are being integrated into today's system-on-a-chip (SOC).
These new generation devices are being designed to power consumer electronic
products, networking equipment and wireless communications that require higher
performance in smaller packages.

Foldout, Page Two

The following caption appears on the upper right corner of page two of the
foldout: "Fusion can meet the test challenge."

A photograph of the Fusion HF tester, including a test head and computer running
enVision++.

Semiconductor device testing today requires mastery of several test
technologies: analog, digital, mixed signal, and embedded memory. The LTX Fusion
platform integrates these test technologies to deliver a broad scope of
capabilities in a single test platform.

A box diagram shows seven multiple test platforms (low-end digital, mid-range
digital, high-end digital, SOC, high-end mixed signal, mid-range mixed signal
and low-end mixed signal) utilized in the wafer fabrication and chip assembly
process under the traditional test model.

A box diagram shows a single test platform utilized in the wafer fabrication and
chip assembly process under the Fusion test model.

By allowing our customers to use a single, integrated hardware and software
system to test all their devices, Fusion allows our customers to optimize asset
utilization, thereby increasing their manufacturing flexibility and lowering the
overall cost of their testing process.

[end to textual description of foldout]

<PAGE>

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and notes thereto appearing
elsewhere or incorporated by reference in this prospectus.

LTX CORPORATION

LTX designs, manufactures, markets and services semiconductor test equipment.
We sell our test systems worldwide to designers and manufacturers of
semiconductor devices, such as Texas Instruments, STMicroelectronics, Philips
Semiconductor, National Semiconductor, Motorola, Lucent Technologies, Infineon
Technologies, and Hitachi. These devices are incorporated in a wide range of
products, including network equipment such as switches and servers, personal
communication devices such as cell phones and personal digital assistants,
Internet access products such as modems, cable modems and Ethernet accessories,
consumer products such as televisions, videogame systems, digital cameras, and
automobile electronics, and personal computer accessory products such as disk
drives and 3D graphics accelerators.

Today, our products are focused on testing semiconductor devices that
incorporate multiple device technologies and functions into a single
semiconductor device, referred to as system-on-a-chip, or SOC. SOC provides the
benefits of lower cost, smaller size, and higher performance by combining
advanced digital, mixed signal (a combination of digital and analog) and
embedded memory technologies on a single device. These distinct technologies
were, until recently, available only on several separate semiconductor devices,
each performing a specific function. SOC enables the development of smaller,
cheaper, and more advanced electronic products such as cellular phones, laptop
computers, and mobile Internet terminals, as well as sophisticated consumer and
automobile electronics. 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. We believe the
inability to fully and efficiently test SOC devices has slowed advancements in
the design and development of more sophisticated electronic products.

With the introduction of the LTX Fusion(R) test platform, we now offer a test
system capable of testing SOC devices, as well as more traditional analog,
digital, and mixed signal semiconductor devices, on a single, integrated
platform. Fusion allows our customers to use a single, integrated hardware and
software system to test all of these devices, rather than resorting to 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 provides:

. a single test platform;

. multi-site test capability;

. a full range of mixed signal instrumentation;

. state of the art digital test capability; and

. easy-to-use software for test program development.

We intend to capture a significant share of the semiconductor test equipment
market by:

. extending our technological lead in single platform testing;

. maintaining our focus on the SOC test market;

. concentrating our sales and service efforts on key accounts;

. further improving the flexibility of our business model; and

. building on our strategic alliance in Japan.

Our principal executive offices and manufacturing operations are located at
LTX Park, University Avenue, Westwood, Massachusetts 02090. Our telephone
number is (781) 461-1000. We also have sales and service facilities throughout
North America, Europe, and Asia. Our corporate web site is www.ltx.com. The
information in our web site is not incorporated by reference in this
prospectus.

3
<PAGE>

The Offering

<TABLE>
<S> <C>
Common stock offered.................... 5,400,000 shares
Common stock to be outstanding after 41,585,040 shares
this offering..........................
Over-allotment option................... 810,000 shares
Use of proceeds......................... For general corporate purposes,
including working capital, capital
expenditures, potential acquisitions,
and possible repayment of outstanding
debt.
Nasdaq National Market Symbol........... LTXX
</TABLE>

The above information is based on 36,185,040 shares outstanding as of July
31, 1999. This information does not include 5,295,555 shares of common stock
exercisable pursuant to outstanding options at a weighted average exercise
price of $4.74 per share, under our 1999 Stock Plan, 1990 Stock Option Plan and
1995 LTX (Europe) Ltd. Approved Stock Option Plan as of July 31, 1999.

Summary Consolidated Financial Data
(In thousands, except per share data)

Consolidated Statement of Operations Data:

<TABLE>
<CAPTION>
Fiscal Years ended July 31,
---------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales................ $ 210,319 $ 266,476 $ 194,343 $ 196,227 $ 157,326
Income (loss) from opera-
tions................... 14,840 31,368 (15,926) (77,129) (2,470)
--------- --------- --------- --------- ---------
Net income (loss)........ $ 10,694 $ 30,270 $ (15,909) $ (78,280) $ 375
========= ========= ========= ========= =========
Net income (loss) per
share:
Basic.................. $ .37 $ .89 $ (.45) $ (2.15) $ .01
Diluted................ $ .36 $ .82 $ (.45) $ (2.15) $ .01
Weighted-average common
shares used in
computing net income
(loss) per share:
Basic.................. 28,805 34,011 35,476 36,401 35,696
Diluted................ 29,787 36,755 35,476 36,401 36,958
</TABLE>

The "as adjusted" column in the summary consolidated balance sheet data below
gives effect to the sale of the 5,400,000 shares of common stock in this
offering, after deducting underwriting discounts and commissions and estimated
offering expenses payable by us.

Consolidated Balance Sheet Data:

<TABLE>
<CAPTION>
As of July 31, 1999
--------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Working capital............................................ $ 47,915 $117,143
Property and equipment, net................................ 31,942 31,942
Total assets............................................... 147,993 217,221
Long-term debt, less current portion....................... 14,023 14,023
Convertible subordinated debentures........................ 7,308 7,308
Total stockholders' equity................................. 58,928 128,156
</TABLE>

Except as set forth in the Consolidated Financial Statements and Notes
thereto, or as otherwise indicated, all information in this prospectus assumes
no exercise of the underwriters' over-allotment option. LTX(R) and Fusion(R)
are our registered trademarks, and enVision(TM), enVision++(TM) and the LTX
logo are our trademarks. This prospectus also contains the trademarks and trade
names of other companies.

4
<PAGE>

RISK FACTORS

You should consider carefully the risks described below before you decide to
buy our common stock. The risks and uncertainties described below are not the
only ones facing us. If any of the following risks actually occur, our
business, financial condition or results of operations would likely suffer. In
such case the trading price of our common stock could fall, and you may lose
all or part of the money you paid to buy our common stock.

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. 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.

Most recently, our revenue and operating results declined in fiscal 1998 as a
result of a sudden and severe downturn in the semiconductor industry
precipitated by the recession in several Asian countries. 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 SOC,
will also experience similar characteristics. In the past, we have experienced
delays in commitments, delays in collecting accounts receivable and significant
declines in demand for our products during these downturns, and we cannot be
certain that we will be able to maintain or exceed our current level of sales.
Additionally, as a capital equipment provider, our revenue is driven by the
capital expenditure budgets and spending patterns of our customers who often
delay or accelerate purchases in reaction to variations in their businesses.
Because a high proportion of our costs are fixed, we are limited in our ability
to reduce expenses quickly in response to revenue short-falls. In a
contraction, we may not be able to reduce our significant fixed costs, such as
continued investment in research and development and capital equipment
requirements.

Our Sales and Operating Results Have Fluctuated Significantly From Period to
Period, Including From One Quarter to Another, and They May Continue to Do So.

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

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

. order cancellations by customers;

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

-- our product mix,

-- the configurations of test systems sold, or

-- the customers to whom we sell these systems;

. the high selling prices of our test systems (which typically result in a
long selling process); and

. changes in the timing of product orders due to:

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

-- shorter than expected lifecycles of our customers' semiconductor
devices, or

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

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

5
<PAGE>

Our Future Rate of Growth is Highly Dependent on the Growth of the SOC
Market.

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

Our Market Is Highly Competitive, and We Have Limited Resources to Compete.

The test equipment industry is highly competitive in all areas of the world.
Many other domestic and foreign companies participate in the markets for each
of our products, and the industry is highly competitive. Our principal
competitors in the market for semiconductor test equipment are Agilent
Technologies (formerly a division of Hewlett-Packard), Credence Systems,
Schlumberger Limited, and Teradyne. Most of these major competitors have
substantially greater financial resources and more extensive engineering,
manufacturing, marketing, and customer support capabilities.

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

Development of Our Products Requires Significant Lead-Time, and We May Fail
to Correctly Anticipate the Technical Needs of Our Customers.

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

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.

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

6
<PAGE>

equipment generally, including our test equipment. Sales to our ten largest
customers accounted for 59.7% of revenues in fiscal year 1999, 55.2% of
revenues in fiscal year 1998, and 43.5% of revenues in fiscal year 1997. 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 Success Depends on Attracting and Retaining Key Personnel.

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

Our Dependence on Subcontractors and Sole Source Suppliers May Prevent Us
From Delivering an Acceptable Product on a Timely Basis.

We rely on subcontractors to manufacture many of the components and
subassemblies for our products, and we rely on sole source suppliers for
certain components. 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.

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 61% of our revenues in fiscal year 1999, 60%
of our revenues in fiscal year 1998, and 67% of our revenues in fiscal year
1997. In addition, we rely on non-U.S. suppliers for several components of the
equipment we sell. As a result, a major part of our revenues and the ability
to manufacture our products are subject to the risks associated with
international commerce. A reduction in revenues or a disruption or increase in
the cost of our manufacturing materials could hurt our operating results.
These international relationships make us particularly sensitive to changes in
the countries from which we derive sales and obtain supplies. International
sales and our relationships with suppliers may be hurt by many factors,
including:

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

. political and economic instability in our target international markets;

. longer payment cycles common in foreign markets;

. difficulties of staffing and managing our international operations;

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

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

7
<PAGE>

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.

Economic Conditions in Asia May Hurt Our Sales.

Asia is an important region for our customers in the semiconductor industry,
and many of them have operations there. In recent years, Asian economies have
been highly volatile and recessionary, resulting in significant fluctuations in
local currencies and other instabilities. These conditions may continue or
worsen, which could have a material adverse impact on our financial position
and results of operations, as approximately 45% of our sales in fiscal 1999
were derived from this region. In light of the recent economic downturn in
Asia, we may not be able to obtain additional orders and may experience
cancellations of orders. If conditions do not continue to improve, our future
financial condition, revenues, and operating results could be hurt.

We May Not Be Able to Protect Our Intellectual Property Rights.

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

. patents will issue from currently pending or future applications;

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

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

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

If we do not successfully enforce our intellectual property rights, our
competitive position could suffer, which could harm our operating results.

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

Third Parties May Claim We Are Infringing Their Intellectual Property, and We
Could Suffer Significant Litigation Costs, Licensing Expenses or Be Prevented
from Selling Our Products.

Intellectual property rights are uncertain and involve complex legal and
factual questions. We may be unknowingly infringing on the intellectual
property rights of others and may be liable for that infringement, which could
result in significant liability for us. If we do infringe the intellectual
property rights of others, we could be forced to either seek a license to
intellectual property rights of others or alter our products so that they

8
<PAGE>

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 past twelve months, our stock price has ranged from a low of $1.00 to
a high of $14.69. The price of our common stock has been and likely will
continue to be subject to wide fluctuations in response to a number of events
and factors, such as:

. quarterly variations in operating results;

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

. changes in financial estimates and recommendations by securities
analysts;

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

. news reports relating to trends in our markets.

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

Year 2000 Problems May Hurt Our Business.

We have established a program to address Year 2000 software failure issues,
which is overseen by a senior manager who updates our officers and directors
regularly. We are currently assessing the Year 2000 compliance of the products
we manufacture, our internal business systems, and the products and internal
business systems of our suppliers. We expect to incur costs of approximately
$400,000 to make our products Year 2000 compliant, most of which is represented
by current engineering staff who have been assigned to the project, and
approximately $300,000 in ensuring compliance of our internal business systems
and those of our suppliers, most of which is represented by current
administrative personnel assigned to the project. Costs related to Year 2000
compliance have been immaterial as of July 31, 1999.

Three product-based teams, employing our engineering product development
process, are in the process of identifying and contacting affected customers to
advise them of non-compliant products. We cannot assure you that our products
do not contain undetected Year 2000 problems. Another team is assessing the
Year 2000 compliance of our internal business systems, including facilities,
and the products and internal business systems of our suppliers. This team has
identified all mission-critical systems and third parties and has formulated
remediation plans. We are also developing comprehensive contingency plans if
our remediation plans do not work, which we expect to complete by October 31,
1999. These contingency plans primarily involve identifying alternative vendors
and suppliers. They may not adequately address our potential Year 2000
problems, and alternative sources may not in fact be available. Although
responses to a survey of our critical suppliers, vendors and facilities owners
indicate that many of them are Year 2000 compliant, we have not received
sufficient information from all parties about their Year 2000 readiness to
assess the effectiveness of their efforts. We cannot be sure that these
entities will adequately address Year 2000 issues.

9
<PAGE>

If we fail to detect errors or defects in our systems or those of our
suppliers, or if third parties with whom we interact experience Year 2000
problems, reasonable descriptions of most likely worst case scenarios include
the following:

. power, communication and other utility outages at our facilities, in
particular, our Westwood, Massachusetts facility; and

. product component shortages as a result of Year 2000 problems at our
critical suppliers and vendors.

If any of these were to occur, our business and operations would be hurt.

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

This prospectus 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 "Risk Factors," 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.

10
<PAGE>

USE OF PROCEEDS

The net proceeds to us from the sale of the 5,400,000 shares of common stock
offered with this prospectus are estimated to be approximately $69,228,375,
after deduction of the estimated underwriting discounts and commissions and
estimated offering expenses we must pay. See "Underwriting."

We expect to use the net proceeds for general corporate purposes, including
working capital and capital expenditures. Although we may use a portion of the
net proceeds to repay outstanding debt or to acquire businesses, products or
technologies that are complementary to our business, we have no plans to make
any such repayment, nor do we have any specific acquisitions planned. Prior to
using the proceeds in the manner described above, we plan to invest the net
proceeds of this offering in short-term, interest-bearing investment-grade
securities.

PRICE RANGE OF COMMON STOCK

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

<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
Fiscal Year Ended July 31, 1997:
First Quarter...................................... $ 5 3/4 $ 3 15/16
Second Quarter..................................... 7 3/8 3 15/16
Third Quarter...................................... 7 4 1/8
Fourth Quarter..................................... 7 3/4 4 7/8
Fiscal Year Ended July 31, 1998:
First Quarter...................................... $ 8 1/4 $ 5 1/4
Second Quarter..................................... 6 3/4 4 3/16
Third Quarter...................................... 5 1/2 4 1/4
Fourth Quarter..................................... 5 1/2 3 1/2
Fiscal Year Ended July 31, 1999:
First Quarter...................................... $ 3 7/8 $ 1
Second Quarter..................................... 4 7/16 2
Third Quarter...................................... 6 29/32 3 7/16
Fourth Quarter..................................... 14 1/2 6 1/8
Fiscal Year Ending July 31, 2000:
First Quarter (through October 13, 1999)........... $14 11/16 $10 3/8
</TABLE>

On October 13, 1999, the reported last sale price of the common stock on the
Nasdaq National Market was $13.75 per share. As of August 24, 1999, we had
approximately 1,217 stockholders of record of our common stock.

DIVIDEND POLICY

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

11
<PAGE>

CAPITALIZATION

The following table shows our capitalization as of July 31, 1999, and as
adjusted to give effect to the sale of the 5,400,000 shares of common stock
offered in this offering and after deducting the underwriting discount and
estimated offering expenses payable by us. The outstanding share information
excludes 5,295,555 shares of common stock issuable on exercise of outstanding
options as of July 31, 1999 with a weighted average exercise price of $4.74 per
share.

<TABLE>
<CAPTION>
As of July 31, 1999
----------------------
Actual As Adjusted
--------- -----------
(Unaudited)
(in thousands, except
share amounts)
<S> <C> <C>
Short-term debt:
Notes payable to banks................................ $ 5,472 $ 5,472
Current portion of long-term debt..................... 674 674
--------- ---------
Total short-term debt............................... $ 6,146 $ 6,146
========= =========
Long-term debt:
Lease purchase obligations............................ $ 2,697 $ 2,697
Subordinated note payable............................. 12,000 12,000
7 1/4% Convertible Subordinated Debentures Due 2011... 7,308 7,308
--------- ---------
Total long-term debt................................ 22,005 22,005
Less current portion................................ (674) (674)
--------- ---------
Total............................................. 21,331 21,331
--------- ---------
Stockholder's equity:
Common stock, $0.05 par value:
100,000,000 shares authorized; 36,185,040 shares is-
sued and outstanding; 41,585,040 shares issued and
outstanding as adjusted.............................. 1,936 2,206
Additional paid-in capital.......................... 199,778 268,736
Accumulated deficit................................. (131,025) (131,025)
Treasury stock...................................... (11,761) (11,761)
--------- ---------
Total stockholder's equity........................ 58,928 128,156
--------- ---------
Total capitalization............................ $ 80,259 $ 149,487
========= =========
</TABLE>

12
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following table contains our selected consolidated financial data and is
qualified by the more detailed consolidated financial statements and notes
thereto included elsewhere in this prospectus. The selected consolidated
financial data for and as of the end of each of the five fiscal years in the
period ended July 31, 1999 are derived from our consolidated financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants.

<TABLE>
<CAPTION>
Fiscal Years ended July 31
-----------------------------------------------------------
1995 1996 1997 1998 1999
---------- ----------- ---------- ---------- ----------
(in thousands, except per share data and statistics)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Sales................... $ 210,319 $266,476 $ 194,343 $ 196,227 $ 157,326
Cost of sales........... 136,748 161,794 131,870 141,274 103,105
Inventory provisions.... -- 3,600 9,250 40,718 --
Engineering and product
development expenses... 19,778 22,927 23,350 34,320 25,174
Selling, general and ad-
ministrative expenses.. 38,953 46,787 39,049 50,772 31,517
Restructuring charges... -- -- 6,750 6,272 --
---------- ----------- ---------- ---------- ----------
Income (loss) from oper-
ations................. 14,840 31,368 (15,926) (77,129) (2,470)
Net interest (expense)
income................. (3,774) 297 433 (21) (941)
Gain on liquidation/sale
of business units...... -- -- -- -- 3,786
Provision for income
taxes.................. (372) (1,395) (416) (1,130) --
---------- ----------- ---------- ---------- ----------
Net income (loss)....... $ 10,694 $ 30,270 $ (15,909) $ (78,280) $ 375
========== =========== ========== ========== ==========
Net income (loss) per
share:
Basic................. $ 0.37 $ 0.89 $ (0.45) $ (2.15) $ 0.01
Diluted............... $ 0.36 $ 0.82 $ (0.45) $ (2.15) $ 0.01
Weighted-average common
shares used in comput-
ing net income (loss)
per shares:
Basic................. 28,805 34,011 35,476 36,401 35,696
Diluted............... 29,787 36,755 35,476 36,401 36,958
Consolidated Balance
Sheet Data:
Working capital......... $ 62,182 $ 137,619 $ 115,118 $ 33,958 $ 47,915
Property and equipment,
net.................... 28,407 37,880 42,958 35,427 31,942
Total assets............ 145,917 235,319 213,546 141,019 147,993
Total debt.............. 37,083 36,348 32,372 25,476 27,477
Stockholders' equity.... 65,407 155,039 140,198 55,950 58,928
Other Information (unau-
dited):
Current ratio........... 2.20 3.44 3.19 1.49 1.71
Asset turnover.......... 1.44 1.13 0.91 1.39 1.06
Debt as a percentage of
total capitalization... 36.2% 19.0% 18.8% 31.3% 31.8%
Additions to property
and equipment (net).... $ 10,222 $ 20,006 $ 16,116 $ 8,795 $ 9,636
Depreciation and amorti-
zation................. 9,701 10,533 11,038 12,510 11,291
</TABLE>

13
<PAGE>

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 prospectus.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in
such forward-looking statements.

Overview

We design, manufacture, market and service semiconductor test equipment. We
sell our test systems worldwide to customers in the semiconductor industry. Our
test systems range in price from $500,000 to over $3,800,000, depending on
customer ordered configurations. Our most recently introduced product, Fusion
HF, can test a broad range of analog, digital, mixed signal (a combination of
analog and digital) and system-on-a-chip, or SOC, devices, all on a single test
platform. We design and assemble our test systems in Westwood, Massachusetts
and San Jose, California and operate globally with sales, service and support
centers in North America, Europe, and Asia.

The demand for our equipment is dependent upon growth in the semiconductor
industry. Three primary factors ultimately drive this demand:

. increases in unit production of semiconductor devices;

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

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

Strategic Realignment. In September 1996, we changed our strategic focus to
develop a solution for the testing needs of the then emerging SOC market. At
that time, we realigned our separate digital and mixed signal research and
development organizations to work together to develop a single test platform
incorporating our mixed signal test expertise with our extensive digital test
technology and embedded memory test capability. We restructured our operations
and reorganized our management consistent with our new strategic focus on the
SOC market. For the remainder of fiscal 1997 and into fiscal 1998, we
implemented the transition to Fusion, our SOC test platform, to meet the
requirements of the SOC market.

During the second half of fiscal 1998, the semiconductor and semiconductor
test equipment industries experienced a significant decline in demand. This was
due to overcapacity and also to the Asia currency revaluations and the economic
slowdown in Asia. As a result of this steep decline and our product transition
to Fusion, we had lower than expected revenues and consequently experienced
losses from operations.

In fiscal 1999, we completed a number of initiatives to maximize benefits
from our strategic realignment. During the year, we consolidated our test
equipment assembly functions from our San Jose, California facility into our
Westwood, Massachusetts facility, liquidated our majority-owned Japanese
subsidiary, completed the restructuring of our sales channels in Japan and
other parts of Asia, developed strategic service and repair alliances with
business partners and initiated several key outsourcing programs. In fiscal
1999, we accomplished three major objectives:

. completed our restructuring plan centered around our Fusion product
strategy;

. reduced operating costs and implemented a more flexible business model;
and

. focused our Fusion sales efforts on key accounts.

Restructuring. Semiconductor test equipment manufacturing operations are
capital intensive. Because a high proportion of a semiconductor test equipment
manufacturer's operating costs are fixed and remain relatively constant,
operating profit increases or decreases, as sales volume increases or
decreases. In each of fiscal 1997 and 1998, we restructured our operations to
better align them with our business strategy and to minimize the impact of
downturns in the test equipment market.

14
<PAGE>

We recorded charges totaling $16.0 million in the first quarter of fiscal
1997 related to our efforts to enhance our manufacturing efficiency with
respect to existing products, and to the overall downturn in the test equipment
market that began in the third quarter of fiscal 1996. These charges included
$6.7 million of restructuring charges and $9.3 million of inventory provisions.
We also reorganized our management team and initiated a new marketing and
product development strategy that produced a reduction in the realizable value
of inventories relating to non-strategic products. The bulk of our inventory
provisions of $9.3 million in the first quarter of fiscal 1997 was a direct
result of product obsolescence in our Delta 50 and Delta 100 products.

In fiscal 1998, the Asian financial crisis, which had begun in January 1998,
created a major impact on the global economy, precipitating a further drop in
demand for semiconductor test equipment. At the same time, we were developing
Fusion to meet the requirements of the SOC market. We implemented a
restructuring plan in the fourth quarter of fiscal 1998 to align our sales,
marketing and support operations with our Fusion product strategy, to lower our
fixed costs to adjust to the downturn in the semiconductor industry and to
position us for stronger financial performance when the industry recovered. We
recorded restructuring and other charges totaling $47.0 million during fiscal
1998. These charges included $6.3 million for restructuring charges, including
$3.1 million of severance and $2.9 million related to the impairment of fixed
assets, and inventory provisions of $40.7 million. The $6.3 million
restructuring charge included the costs of consolidating our San Jose,
California, manufacturing operations with our Westwood, Massachusetts
operations, restructuring our sales channels in Japan and other parts of Asia
and the estimated costs of our planned divestiture of our iPTest division in
the U.K. These actions reduced our workforce by approximately 30%, which
affected all functions of our business. The inventory provisions of $40.7
million were due to significant excess and obsolete inventory related to the
drop in demand for our products and the introduction of our Fusion product
line. In anticipation of a higher level of demand for our existing products,
inventory purchases in the second and third quarters of fiscal 1998 included a
large amount of custom and semi-custom inventory that became obsolete or
difficult to sell due to the declining business conditions within the industry
in the third and fourth quarter of fiscal 1998. The inventory provisions of
$40.7 million taken in the fourth quarter of 1998 consisted of a write-down of
the Delta Series product line for $25.3 million, the Synchro and 77/90 product
lines for $11.8 million, and $3.6 million for service parts deemed excess or
obsolete.

Ando Alliance. We have had a strategic alliance with Ando Electric Co., Ltd.,
a subsidiary of NEC Corporation, for over six years. In 1993, we entered into
commercial agreements with Ando relating to our prior generation of digital
test products. In 1994, Ando loaned us $20.0 million, and in connection with
this loan, we issued Ando a common stock purchase warrant for 2.0 million
shares of our common stock. We expanded our alliance with Ando in 1998 with a
new six year agreement, providing Ando with rights to manufacture, market and
develop our Fusion products for Japanese customers. In exchange for these
rights, Ando paid us $10.0 million and assigned back to us 1.6 million of the
2.0 million shares of our common stock that had been issued to Ando upon the
exercise of the warrant. These shares were valued at $7.4 million, the market
value of our stock at the time the agreement was executed. Relying on a
percentage of completion method based on the development of the Fusion product
line, we recognized as revenue in fiscal 1998 $7.4 million of the $17.4 million
in aggregate consideration relating to this transaction and deferred the
remaining $10.0 million of revenue. This $10.0 million in revenue will be
recognized ratably over the period in which we complete the transfer of the
manufacturing and technology rights. We recognized $8.5 million of the deferred
revenue in fiscal 1999 and expect the remaining $1.5 million to be recognized
in the first quarter of fiscal 2000. Ando has also agreed to pay royalties to
us on future sales of Fusion in Japan and reduced the interest rate from 8.0%
to 5.5% on the outstanding balance of the loan, effective March 30, 1998. At
July 31, 1999, the outstanding balance on the Ando debt was $12.0 million.

15
<PAGE>

Results of Operations

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

<TABLE>
<CAPTION>
Percentage of Net Sales
Year Ended July 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net Sales:........................................... 100.0% 100.0% 100.0%
Cost of sales:..................................... 67.9 72.0 65.5
Inventory provisions............................. 4.8 20.8 0.0
Gross profit..................................... 27.4 7.3 34.5

Engineering and product development expenses......... 12.0 17.5 16.0
Selling, general and administrative expenses......... 20.1 25.9 20.0
Restructuring charges................................ 3.5 3.2 0.0
Income (loss) from operations........................ NM NM NM

Interest expense..................................... NM NM NM
Interest income...................................... 1.5 1.0 0.4
Gain on liquidation/sale of business units........... 0.0 0.0 2.4
Income (loss) before income taxes.................... NM NM 0.2
Provision for income taxes........................... 0.2 0.6 0.0
Net income (loss).................................... NM NM 0.2
</TABLE>

Fiscal 1999 Compared to Fiscal 1998.

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 decreased $38.9 million to $157.3 million in fiscal 1999
from $196.2 million in fiscal 1998. The decrease in net sales was principally
due to the industry-wide slowdown in the semiconductor industry which began in
the latter half of fiscal 1998 and carried over to the first half of fiscal
1999. Net sales increased each quarter in fiscal 1999, as conditions in the
semiconductor industry began to improve and as we began shipping Fusion
products in increasing volumes to customers. Net sales in the four quarters of
fiscal 1999 were $27.0 million, $33.7 million, $43.2 million, and $53.4
million. The last two quarters of fiscal 1999 reflected an industry-wide
increase in demand for test equipment in general and an increase in demand for
Fusion in particular. Net sales from our strategic alliance with Ando were $8.5
million of revenue in fiscal 1999 and $7.4 million in fiscal 1998, relating to
the transfer of technology. Service revenue, consisting of sales of replacement
and spare parts and labor charges, totaled $28.9 million, or 18.4% of net
sales, in fiscal 1999 and $32.2 million, or 16.4% of net sales, in fiscal 1998.
Geographically, sales to customers outside the United States were $95.7
million, or 61% of net sales, in fiscal 1999 and $118.3 million, or 60% of net
sales, in fiscal 1998.

Cost of Sales. Cost of sales consists of material, labor, depreciation and
associated overhead. Cost of sales decreased by $78.9 million to $103.1 million
in fiscal 1999 from $182.0 million in fiscal 1998. As a percentage of net
sales, cost of sales was 65.5% of net sales in fiscal 1999 as compared to 92.7%
in fiscal 1998. The major reason for the year-to-year improvement in margin
percentage on lower sales volume relates to consolidations of operations and
workforce reductions, which resulted in a reduction in fixed overhead expenses
and improved product margins as we began to ship Fusion products in increasing
volumes starting in the second quarter of fiscal 1999. Excluding inventory
provisions of $40.7 million in fiscal 1998, cost of sales as a percentage of
net sales for fiscal 1998 was 72.0% of net sales, compared to 65.5% of net
sales in fiscal 1999.

Engineering and Product Development Expenses. Engineering and product
development expenses decreased by $9.1 million to $25.2 million, or 16.0% of
net sales, in fiscal 1999 from $34.3 million, or 17.5%

16
<PAGE>

of net sales, in fiscal 1998. During fiscal 1998, we invested resources in the
development of our Fusion single test platform for testing SOC devices. The
level of development expenditures decreased year to year as important Fusion-
related projects were completed. We intend to maintain and enhance our SOC test
position by continuing to concentrate our future engineering and product
development expenses on advanced functions and options for Fusion.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $19.3 million to $31.5 million, or 20.0%
of net sales, in fiscal 1999 from $50.8 million, or 25.9% of net sales, in
fiscal 1998. In fiscal 1999, we continued our focus on reducing expense levels,
which included reduction of 48 employees in our sales and administration
organization, elimination of major trade show expenditures, and decreased
travel expenses and sales commissions. During fiscal 1998, there was also a
higher level of expenses, such as travel, promotional activities, and trade
show expenditures, related to the marketing of Fusion.

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

Income Tax. We did not record a tax provision in fiscal 1999. The fiscal 1998
provision related to the write-off of a deferred asset previously recorded by
us, net of certain tax adjustments.

Fiscal 1998 Compared to Fiscal 1997

Net Sales. Our net sales increased by $1.9 million to $196.2 million in
fiscal 1998, from $194.3 million in fiscal 1997. This increase included $7.4
million of revenue relating to our alliance with Ando. Excluding this $7.4
million, revenues for fiscal 1998 decreased by $5.5 million, or 2.8%. The
decrease in revenue occurred during the latter half of fiscal 1998 as the test
equipment and semiconductor industries experienced significant decline in
activity due to overcapacity and currency revaluations and economic slowdowns
in Asia. Geographically, sales to customers outside of the United States were
$118.3 million, or 60% of total net sales, in fiscal 1998, and $130.2 million,
or 67% of total net sales, in fiscal 1997.

Cost of Sales. Cost of sales increased by $40.9 million to $182.0 million, or
92.7% of net sales in fiscal 1998 from $141.1 million, or 72.6% of net sales,
in fiscal 1997. The increase in cost of sales as a percentage of net sales is a
result of the change in our product mix combined with lower sales prices due to
the slowdown in the semiconductor test equipment industry and costs associated
with our transition to our Fusion product line. This increase also results from
a lower level of sales relative to fixed manufacturing costs.

In fiscal 1998, the Asian financial crisis (which began in January 1998),
created a major impact on the global economy, precipitating a further drop in
demand than LTX and the industry had been previously experiencing. As a result,
our net sales dropped to $33 million in the fourth quarter of fiscal 1998,
compared to $54 million in the third quarter of fiscal 1998. Simultaneously,
our development and introduction of the Fusion product line was occurring. The
sudden drop in demand for our products, combined with the introduction of the
Fusion product line, resulted in significant excess and obsolete inventory.
Management determined to restructure our operations during the fourth quarter
of fiscal 1998, in line with our strategy of focusing on the Fusion product
line. As a result of the combined rapid and sudden decline in global demand for
semiconducter testing equipment and the transition to the Fusion product line,
we recorded a $40.7 million inventory charge in the fourth quarter of fiscal
1998. Inventory purchases in the second and third quarters of fiscal 1998 in
anticipation of a higher level of demand for our existing products consisted of
a large amount of custom and semi-custom inventory that would become obsolete
or difficult to sell due to the declining business conditions within the
industry in the third and fourth quarter of that same fiscal year.

17
<PAGE>

The $40.7 million inventory charge taken in fiscal 1998 consisted of a write-
down of the Delta Series product line for $25.3 million, the Synchro and 77/90
product lines for $11.8 million, and $3.6 million for service parts deemed
excess or obsolete.

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

The bulk of this inventory charge of $9.3 million related to product
obsolescence in our Delta 50 and Delta 100 test systems, which were replaced
with the Delta STE line.

Excluding inventory provisions of $40.7 million and $9.3 million in fiscal
1998 and fiscal 1997, respectively, and the $7.4 million of revenue relating to
our alliance with Ando in fiscal 1998, cost of sales increased by $9.4 million
to $141.3 million, or 74.8% of net sales, in fiscal 1998 from $131.8 million,
or 67.8% of net sales, in fiscal 1997.

Engineering and Product Development Expenses. Engineering and product
development expenses increased by $10.9 million to $34.3 million, or 17.5% of
net sales, in fiscal 1998 from $23.4 million, or 12.0% of net sales, in fiscal
1997. During fiscal 1998, we invested resources in the development of our
Fusion SOC testing platform.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $11.8 million, or 25.9% of net sales, to
$50.8 million in fiscal 1998, from $39.0 million, or 20.1% of net sales, in
fiscal 1997. This increase relates primarily to the expansion of our sales
organization, increased advertising and promotion costs and the consolidation
of our operations. The majority of these costs are associated with the product
introduction of Fusion and the downturn in the semiconductor test equipment and
semiconductor industries.

Restructuring Charge. The $6.3 million restructuring charge recorded in the
fourth quarter of fiscal 1998 included $3.2 million in employee separation
costs, $2.9 million in asset impairment write-offs and $200,000 in lease
terminations and other contractual obligations. The workforce reduction
impacted 259 employees, of which 211 were in production and engineering, 33 in
sales and marketing and 15 in administration. Asset impairment write-offs of
$2.9 million related to the write off of capitalized Master and Delta Series
testers and test equipment at our San Jose and Korean facilities. We no longer
manufacture the Master Series line, and this equipment was written down to zero
value and depreciation expense permanently ceased. These assets were disposed
of or sold in fiscal 1999. The remaining balance of $3.3 million at July 31,
1998 includes $3.2 million related to employee separation costs, which were all
paid by February 1999.

In fiscal 1997, we redirected our product strategy to focus primarily on SOC.
As a result, we restructured our Digital Products Division and began
emphasizing sales of our Delta/STE mixed technology test systems. In fiscal
1997, we recorded a restructuring charge of $6.8 million, consisting of $4.0
million for cancelled non-strategic development projects and technology
upgrades to customers, $1.8 million in severance costs relating to workforce
reductions, $600,000 of asset impairments and $300,000 in equipment lease
cancellations. The workforce reduction totaled 180 employees, of which 166 were
in production and engineering, 10 in administration and 4 in sales.

The remaining accrued balance as of July 31, 1998 of $2.0 million relates to
the estimated cost to replace certain board modules. In fiscal 1999,
approximately $500,000 of cash expenditures were made on this project.

Income Tax. Our tax provision in fiscal 1998 was $1.1 million as compared to
$416,000 in fiscal 1997. The 1998 provision relates to the write-off of a
deferred tax asset we previously recorded, net of certain tax adjustments.

18
<PAGE>

Fiscal 1997 Compared to Fiscal 1996

Net Sales. Our net sales decreased by $72.2 million to $194.3 million in
fiscal 1997 from $266.5 million in fiscal 1996. The decline in sales in fiscal
1997 reflected a significant decline in demand for semiconductor test
equipment, which began in the third quarter of fiscal 1996 and was the result
of over-capacity of test equipment in the semiconductor device industry. Net
sales of both our mixed signal and digital test systems were down
significantly, while remaining at approximately the same proportion of total
sales year-to-year. Geographically, net sales to customers outside North
America were $130.2 million, or 67% of total net sales, in fiscal 1997, as
compared to $170.6 million, or 64% of net sales, in fiscal 1996. While net
sales in all geographic regions were lower year-to-year, we experienced a
substantial improvement in orders from Japan in the fourth quarter of fiscal
1997.

Cost of Sales. Cost of sales decreased by $24.3 million to $141.1 million, or
72.6% of net sales, in fiscal 1997 from $165.4 million, or 62.1% of net sales,
in fiscal 1996. In fiscal 1997, the increase in cost of sales as a percentage
of net sales was primarily due to the lower level of sales relative to fixed
manufacturing costs and relative to the cost of our software applications
assistance and customer support organizations.

Our charge for excess inventory of $3.6 million in fiscal 1996 was the direct
result of our new strategy for our digital product line, which produced an
anticipated reduction in the realizable value of existing inventories relating
to non-strategic products. Excluding inventory provisions of $9.3 million in
fiscal 1997 and $3.6 million in fiscal 1996, cost of sales decreased by $30.0
million to $131.9 million, or 67.8% of net sales, in fiscal 1997, from $161.8
million, or 60.7% of net sales, in fiscal 1996.

Engineering and Product Development Expenses. Engineering and product
development expenses increased by approximately $500,000 to $23.4 million, or
12.0% of net sales, in fiscal 1997, from $22.9 million, or 8.6% of net sales,
in fiscal 1996. Engineering expenditures remained at essentially the same level
year-to-year, which reflected our commitment to maintaining our investment in
developing products required to fully test SOC devices.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $7.7 million to $39.0 million, or 20.1% of
net sales, in fiscal 1997 as compared to $46.8 million, or 17.5% of net sales,
in fiscal 1996. The lower level of expenses is a result of a combination of
lower variable selling costs and variable compensation, and reduced
discretionary spending, as well as a workforce reduction and the required use
of vacation during a holiday shutdown, which occurred in the first half of
fiscal 1997.

Restructuring Charge. In fiscal 1997, we redirected our product strategy to
focus primarily on SOC. As a result, we restructured our Digital Products
Division and began emphasizing sales of our Delta/STE mixed technology test
systems. In fiscal 1997, we recorded a restructuring charge of $6.8 million,
consisting of $4.0 million for cancelled non-strategic development projects and
technology upgrades to customers, $1.8 million in severance costs relating to
workforce reductions, $600,000 of asset impairments and $300,000 in equipment
lease cancellations. The workforce reduction totaled 180 employees, of which
166 were in production and engineering, 10 in administration and 4 in sales.

The remaining accrued balance as of July 31, 1998 of $2.0 million relates to
the estimated cost to replace certain board modules.

19
<PAGE>

Income Tax. Our tax provision in fiscal 1997 was $400,000, as compared to
$1.4 million in fiscal 1996. The fiscal 1997 provision primarily reflects only
certain state and foreign provisions.

Net Income (Loss). Including the provision for excess inventory of $9.3
million and product line restructuring charges of $6.7 million in the first
quarter of fiscal 1997, we had a net loss of $15.9 million, or $0.45 per share.
On a quarterly basis, we improved our financial performance each subsequent
quarter in fiscal 1997, beginning with net income of $400,000, or $0.01 per
share, in the second quarter and ending with net income of $1.8 million, or
$0.05 per share, in the fourth quarter.

Quarterly Results

The following table presents our unaudited quarterly operating results for
each of the eight quarters ended July 31, 1999 both in absolute dollars and as
a percentage of our total revenue for each quarter. This information has been
derived from our unaudited consolidated financial statements. The unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements contained in this prospectus and
include all adjustments, consisting only of normal recurring adjustments, that
we consider necessary for a fair presentation of such information. You should
read this information in conjunction with our Consolidated Financial Statements
and Notes thereto appearing elsewhere in this prospectus. You should not draw
any conclusions about our future results from the results of operations for any
quarter.

20
<PAGE>

<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------
Oct. 31, Jan. 31, Apr. 30, Jul. 31, Oct. 31, Jan. 31, Apr. 30, Jul. 31,
1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net sales............... $54,206 $55,132 $54,130 $ 32,759 $27,018 $33,691 $43,210 $53,407
Cost of sales........... 35,200 35,154 39,766 31,154 19,847 23,228 27,154 32,876
Charge for excess
inventory.............. -- -- -- 40,718 -- -- -- --
------- ------- ------- -------- ------- ------- ------- -------
Gross profit............ 19,006 19,978 14,364 (39,113) 7,171 10,463 16,056 20,531
Engineering and product
development expenses... 6,716 7,928 8,350 11,326 5,996 5,797 6,308 7,073
Selling, general and
administrative
expenses............... 10,909 11,046 12,812 16,005 7,869 7,255 7,781 8,612
Restructuring charges... -- -- -- 6,272 -- -- -- --
------- ------- ------- -------- ------- ------- ------- -------
Income (loss) from
operations............. 1,381 1,004 (6,798) (72,716) (6,694) (2,589) 1,967 4,846
Interest (income)
expense, net........... (80) (4) 132 (27) 198 58 173 512
Gain on liquidation/sale
of business units...... -- -- -- -- -- (3,786) -- --
------- ------- ------- -------- ------- ------- ------- -------
Income (loss) before
income taxes........... 1,461 1,008 (6,930) (72,689) (6,892) 1,139 1,794 4,334
Provision (Benefit) for
income taxes........... 353 243 (596) 1,130 -- -- -- --
------- ------- ------- -------- ------- ------- ------- -------
Net income (loss)....... $ 1,108 $ 765 $(6,334) $(73,819) $(6,892) $ 1,139 $ 1,794 $ 4,334
======= ======= ======= ======== ======= ======= ======= =======
Earnings (loss) per
share:
Basic.................. $ 0.03 $ 0.02 $ (0.17) $ (2.09) $ (0.19) $ 0.03 $ 0.05 $ 0.12
Diluted................ $ 0.03 $ 0.02 $ (0.17) $ (2.09) $ (0.19) $ 0.03 $ 0.05 $ 0.11
Weighted average shares:
Basic.................. 36,758 36,758 36,797 35,334 35,477 35,477 35,643 36,185
Diluted................ 38,265 37,665 36,797 35,334 35,477 36,131 37,195 39,029
As a Percentage of Total Revenue:
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........... 64.9 63.9 73.6 94.8 73.3 68.8 62.7 61.8
Charge for excess
inventory.............. -- -- -- 124.1 -- -- -- --
------- ------- ------- -------- ------- ------- ------- -------
Gross profit............ 35.1 36.1 26.6 (118.9) 26.7 31.2 37.3 38.2
Engineering and product
development expenses... 12.4 14.3 15.5 34.8 22.2 17.2 14.6 13.3
Selling, general and
administrative
expenses............... 20.1 20.0 23.7 49.1 29.3 21.7 18.1 15.9
Restructuring charges... -- -- -- 18.9 -- -- -- --
------- ------- ------- -------- ------- ------- ------- -------
Income (loss) from
operations............. 2.6 1.8 (12.8) (221.6) (24.8) (7.7) 4.6 9.0
Interest (income)
expense, net........... (0.2) -- 0.2 -- 0.7 -- 0.5 0.9
Gain on liquidation/sale
of business units...... -- -- -- -- -- (11.3) -- --
------- ------- ------- -------- ------- ------- ------- -------
Income (loss) before
income taxes........... 2.8 1.8 (12.8) (221.6) (25.6) 3.6 4.2 8.1
Provision for income
taxes.................. 0.7 0.4 (1.1) 3.4 -- -- -- --
------- ------- ------- -------- ------- ------- ------- -------
Net income (loss)....... 2.0% 1.5% (11.6)% (225.0)% (25.6)% 3.6% 4.2% 8.1%
======= ======= ======= ======== ======= ======= ======= =======
</TABLE>

21
<PAGE>

Net sales dropped significantly in the quarter ended July 31, 1998 to $32.8
million from $54.1 million in the prior quarter ended April 30, 1998. The
decrease in net sales reflected a significant decline in demand for
semiconductor devices and semiconductor test equipment that began during the
second half of fiscal 1998. This was due to industry-wide overcapacity and also
to the currency revaluations and economic slowdowns in Asia.

During the same periods, we were in the early production phase of our new
Fusion test systems. Net sales increased sequentially each quarter in fiscal
1999 as industry conditions improved and we began recording new orders for our
Fusion test platforms. Sales in the quarter ended July 31, 1999 were $53.4
million, as compared to $32.8 million for the quarter ended July 31, 1998. The
increase in quarterly net sales from one year ago is principally due to
increased revenue from sales of our new Fusion HF testers to SOC manufacturers
and greater demand for our Fusion HT test platforms from the telecommunications
and computer peripherals sectors of the semiconductor industry.

Cost of sales before inventory provisions increased from 64.9% of net sales
in the quarter ended October 31, 1997 to a peak of 94.8% in the quarter ended
July 31, 1998. The increase over this period was primarily attributable to the
lower levels of net sales relative to our fixed manufacturing costs. Cost of
sales as a percentage of net sales began to decrease in fiscal 1999 as a result
of the consolidation and restructuring of operations and increasing sales
volume in each quarter of fiscal 1999. Cost of sales as a percentage of net
sales decreased each quarter in fiscal 1999 from 73.3% in the quarter ended
October 31, 1998 to 61.8% in the quarter ended July 31, 1999.

Engineering and product development expenses increased in every quarter
during fiscal 1998 and reached a high of $11.4 million, or 34.8 % of net sales,
in the quarter ended July 31, 1998. The absolute dollar amounts of research and
development spending in fiscal 1998 were greater than in fiscal 1999 as we were
at an earlier stage of development of our Fusion test platform. The spending
levels decreased in fiscal 1999 as compared to fiscal 1998 as we began the
production phase of the Fusion line during late fiscal 1998 and early fiscal
1999.

Selling, general and administrative expenses peaked at $16.1 million, or
49.1% of net sales, in the quarter ended July 31, 1998, from $10.9 million, or
20.1% of net sales, in the quarter ended October 31, 1997, before decreasing to
lower levels in fiscal 1999. Spending for travel, trade shows, marketing
development and promotion relating to the Fusion product line were higher in
fiscal 1998 than in fiscal 1999. A higher level of Fusion related expenses,
combined with lower operating expenses resulting from our restructuring
strategy, were the major reasons for the decrease in selling, general and
administrative expense throughout fiscal 1999 from the levels of the prior
year.

Net income decreased in each quarter of fiscal 1998, as we suffered the full
effect of the semiconductor industry slowdown, while developing the Fusion
product platform. In fiscal 1999, we continued our strategic realignment to
Fusion. Our net income decreased in fiscal 1998, primarily due to inventory
provisions of $40.7 million. Net income increased in each quarter of fiscal
1999, as industry conditions improved and as we began selling Fusion in higher
volume.

Liquidity and Capital Resources

At July 31, 1999, we had $19.9 million in cash and equivalents as compared to
$25.1 million at July 31, 1998. The $5.2 million decrease in the year-to-year
cash balance reflects our use of $14.0 million to fund increases in inventory
and accounts receivable and payments of accrued charges, including $3.5 million
in cash payments for restructuring charges. This was partially offset by an
increase in trade accounts payable.

Working capital increased by $13.9 million, or 41%, to $47.9 million at July
31, 1999, from $34.0 million at July 31, 1998. This increase resulted from the
increase in sales volume in the fourth quarter of fiscal 1999. Sales in the
fourth quarter of fiscal 1999 were $53.4 million as compared to $32.8 million
in the fourth quarter of fiscal 1998, an increase of $20.6 million, or 62.8%.
Inventory and accounts receivable increased $15.7 million on a year-to-year
basis, evidencing our growth in sales volume in the second half of fiscal 1999.
The

22
<PAGE>

increase in working capital is also due to a negotiated extension of $4.0
million of principal payments due on our loan to Ando until 2001, which
payments would otherwise have been due in fiscal 1999.

Capital expenditures were $9.6 million in fiscal 1999, $8.8 million in fiscal
1998, and $16.1 million in fiscal 1997. In fiscal 1998 and 1999, we limited
capital expenditures to those projects essential to the development of the
Fusion product line and critical replacement assets needed to sustain ongoing
business activities. Expenditures in fiscal 1999 were mostly Fusion related and
included new and upgraded Fusion test systems for use by us for research and
development purposes. In fiscal 1998 and fiscal 1997 capital expenditures
relating to Fusion products were $4.8 million and $2.4 million, respectively.
The present budget allowance for capital expenditures over the twelve months of
fiscal 2000 is $12.1 million, primarily for equipment used to manufacture and
develop the Fusion product line, and may increase or decrease over the course
of the year.

Our Japanese subsidiary, which was liquidated in the second quarter of fiscal
1999, had no outstanding borrowings at July 31, 1999. It had $4.8 million of
outstanding borrowings at July 31, 1998 under demand lines of credit.
Borrowings of $4.5 million, at the local prime rate plus 0.25% were guaranteed
by our minority partner in Japan, and borrowings of $300,000, at the local
prime rate of prime plus 0.75%, under a $1.4 million demand bank line, were
guaranteed by LTX. The outstanding bank debt that was guaranteed by the
minority partner was paid in full by our minority partner as part of the
liquidation process. The $300,000 guaranteed by LTX was paid in full and there
are no outstanding borrowings as of July 31, 1999.

On October 26, 1998, we obtained a $10 million domestic credit facility from
a bank. The facility is secured by all of our assets and bears interest at the
bank's prime rate plus 1.0% as of July 31, 1999. The borrowing base of the
facility is based on a formula of eligible accounts receivable. The agreement
requires us to maintain a certain minimum net worth. On August 19, 1999, we
signed a letter of intent that will extend our $10.0 million credit facility by
one year at a reduced interest rate of prime plus 0.5%. Borrowings under this
line were $5.5 million at July 31, 1999 and there were no outstanding
borrowings at July 31, 1998. Additionally, the bank has agreed to a $5.0
million foreign accounts receivable credit line backed by foreign accounts
receivable at an interest rate of prime plus 0.5%.

In fiscal 1999, we paid off certain operating and capital leases totaling
$2.6 million and entered into six new operating leases and one new capital
lease with a combined total of $10.6 million in new debt. These leases are
secured by specific LTX test equipment.

We renegotiated the terms of our $12.0 million subordinated note payable to
Ando in December 1998. Principal payments that were originally due in semi-
annual installments of $2.0 million were deferred until January 2001. This debt
has been reclassified to long term debt and the next principal payment of $2.0
million is due in January 2001.

We believe that our net proceeds from the sale of the common stock in this
offering, together with our working capital and existing credit facilities,
will be adequate to fund our currently proposed operating activities for the
next twelve months. However, a significant shortfall from plan as a result of
deterioration in the industry or delayed acceptance or delivery of our new
Fusion products would unfavorably impact our cash flow. In that event, we would
need to seek additional debt or equity financing. We cannot assure you that we
could obtain the necessary financing on acceptable terms or at all.

Year 2000

Many computer systems will experience problems handling dates beyond the year
1999 because the systems are coded to accept only two-digit entries in the date
code field. We have established a program to address Year 2000 issues, which is
overseen by a senior manager who updates our officers and directors regularly.
We are currently assessing the Year 2000 compliance of the products we
manufacture, our internal business systems, and the products and internal
business systems of our suppliers. We expect to incur costs of

23
<PAGE>

approximately $400,000 to make our products Year 2000 compliant, most of which
is represented by current engineering staff who have been assigned to the
project, and approximately $300,000 in ensuring compliance of our internal
business systems and those of our suppliers, most of which is represented by
current administrative personnel assigned to the project. Costs related to Year
2000 compliance have been immaterial as of July 31, 1999.

Three product-based teams, employing our engineering product development
process, are in the process of identifying and contacting affected customers to
advise them of non-compliant products. Because our products are not
functionally "date-dependent," we do not believe that making them Year 2000
compliant will create significant problems for which we would be responsible.
Although we believe we have taken adequate measures to prepare for the Year
2000, there can be no assurances that our products do not contain undetected
Year 2000 problems.

Another team is assessing the Year 2000 compliance of our internal business
systems, including facilities, and the products and internal business systems
of our suppliers. This team has identified all mission-critical systems and
third parties and has formulated remediation plans. We are also developing
comprehensive contingency plans if our remediation plans do not work, which we
expect to complete by October 31, 1999. These contingency plans primarily
involve identifying alternative vendors and suppliers. They may not adequately
address our potential Year 2000 problems, and alternative sources may not in
fact be available. Although responses to a survey of our critical suppliers,
vendors and facilities owners indicate that many of them are Year 2000
compliant, we have not received sufficient information from all parties about
their Year 2000 readiness to assess the effectiveness of their efforts. We
cannot be sure that these entities will adequately address Year 2000 issues.

. power, communication and other utility outages at our facilities, in
particular, our Westwood, Massachusetts facility; and

. product component shortages as a result of Year 2000 problems at our
critical suppliers and vendors.

If any of these were to occur, our business and operations would be hurt.

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 $27.5 million as of July
31, 1999 and in foreign currency exchange rates. We do not use derivative
financial instruments. We are subject to interest rate risk on our short-term
borrowings under our credit facilities. Our short term bank debt bears interest
at a variable rate of prime plus 1%. 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,

24
<PAGE>

translation of the statements of operations of our international businesses
into U.S. dollars may affect year-over-year comparability and could cause us to
adjust our financing and operating strategies. To date, the effect of changes
in foreign currency exchange rates on revenues and operating expenses have not
been material. Substantially all of our revenues are invoiced and collected in
U.S. dollars. Our trade receivables result primarily from sales to
semiconductor manufacturers located in North America, Japan, the Pacific Rim
and Europe. In fiscal 1999, our revenues derived from sales outside the United
States constituted 60.8% of our total revenues. Revenues invoiced and collected
in currencies other than U.S. dollars comprises 17.5% of our fiscal 1999
revenues. Receivables are from major corporations or are supported by letters
of credit. We maintain reserves for potential credit losses and such losses
have been immaterial.

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

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

Interest Rate Risk

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

Our $10.0 million domestic credit facility bears an interest rate of prime
plus 1%. As of July 31, 1999, $5.5 million was outstanding under this facility
and the interest rate was 9.0%. Based on this balance, an immediate change of
1% in the interest rate would cause a change in interest expense of
approximately $55,000 on an annual basis. Our objective in maintaining these
variable rate borrowings is the flexibility obtained regarding early repayment
without penalties and lower overall cost as compared with fixed-rate
borrowings.

25
<PAGE>

BUSINESS

Introduction

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

We offer our customers the LTX Fusion platform, which combines our
enVision++ software with either our Fusion HF or Fusion HT/AC products. We
believe that Fusion HF is the first of a new class of test systems that can
test system-on-a-chip, or SOC, devices in a single test step. Our test systems
range in price from $500,000 to over $3,800,000, depending on customer-ordered
configurations. With Fusion HF, we believe we have the only test system
capable of testing a broad range of analog, digital, and mixed signal (a
combination of digital and analog) devices, and most importantly, SOC devices,
on a single platform. We have over 100 customers in more than 15 countries, to
which we provide test systems, global applications consulting, repair services
and operational support. We design and assemble our test systems in Westwood,
Massachusetts and in San Jose, California.

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

Industry Overview

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

[Textual description of graphic depicting test process]

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

26
<PAGE>

Three primary factors ultimately drive demand for semiconductor test
equipment:

. increases in unit production of semiconductor devices;

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

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

In recent years, increases in unit production resulted primarily from the
proliferation of the personal computer and the continued growth of the
telecommunications industry. We expect that future unit production growth will
be led by a series of Internet hardware and software applications, Internet
infrastructure performance increases, and Internet access device simplification
and miniaturization. We also expect the continued proliferation of, and new
applications in, communication products and consumer electronics. These
increases in unit production in turn lead to a corresponding increase in the
need for test equipment. According to Prime Research Group, in 1997 device
manufacturers spent over $3 billion on test equipment. Prime Research Group
expects such spending to grow to over $5 billion in 2001.

Furthermore, demand is increasing worldwide for smaller, more sophisticated
electronic products, such as cellular phones, laptop computers, camcorders,
wireless networking equipment and mobile Internet terminals. This has led to
ever higher performance and more complex semiconductor devices, which, in turn,
results in a corresponding increase in the demand for equally sophisticated
test equipment.

Finally, the introduction and adoption of a new generation of end-user
products requires the development of next generation device technologies. For
example, access to information is migrating from the standalone 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.

According to Gartner Group's DataQuest, SOC market size was $9.1 billion in
1998 and is expected to grow to $32.0 billion by 2003 (August, 1999). The
demand for SOC test equipment is projected to experience comparable growth
rates. In 1997, SOC test equipment accounted for approximately 30% of the
greater than $3 billion semiconductor test equipment market, according to Prime
Research Group. In 2001, SOC test equipment is expected to account for greater
than 40% of this market, which Prime Research Group forecasts to be greater
than $5 billion.

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.

27
<PAGE>

This increases their costs of ownership due to increased working hours, greater
floor space, decreased utilization and slower throughput. Furthermore,
manufacturers cannot fully test new SOC designs because their current testing
equipment cannot test 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(R), the LTX Solution

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

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

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

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

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

State of the art digital test capability. SOC devices require the
advanced digital testing performance, including embedded memory testing,
found in traditional high-end, standalone digital testers. Fusion delivers
this capability in an integrated platform.

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

28
<PAGE>

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

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

Concentrate our sales, applications consulting, and service efforts on
key accounts. We have recently organized our selling, field service, and
field applications organizations around key customers, and located these
resources close to their facilities. We recognize that large, diversified
semiconductor device manufacturers and certain offshore test-and-assembly
companies purchase most of the world's test equipment, and that the level
of support we are able to provide to them has a direct impact on future
business. We believe that focusing our sales and support resources on these
customers is the most efficient way to maximize revenues. We have also
developed collaborative relationships with key customers and vendors that
help guide us in developing future applications and system options.

Further improve the flexibility of our business model. To improve our
responsiveness to customer needs, reduce fixed costs and working capital
requirements, and manage the cyclicality of our industry more effectively,
we have implemented a more flexible business model. In the past year, we
consolidated our manufacturing operations to our Westwood, Massachusetts
facility and transformed it into an assembly, system integration, and test
operation, with most other manufacturing functions outsourced to third
parties. We engage contract employees to address periods of peak demand. We
have implemented additional international distribution and sub-contracted
repair and support functions. We intend to continue to identify and
implement programs which improve our customer responsiveness and reduce
costs.

Build on our strategic alliance in Japan. Ando Electric Company, Ltd., a
subsidiary of NEC Corporation, Japan's largest semiconductor manufacturer,
is a leading test equipment manufacturer in Japan. We entered into a
strategic alliance with Ando in April 1998 to expand the market in Japan
for the Fusion testing platform, increase our research and development
capacity, and obtain the benefits of their research and development
activities. With Ando, Fusion became, we believe, the first and only test
platform that will be produced by two suppliers, reducing the risk to our
customers that their production requirements would not be met.

Product Overview

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

29
<PAGE>

Fusion Test Platform

Fusion offers a unique solution for testing the full spectrum of SOC, mixed
signal, and digital devices. The Fusion test platform provides customers with
the highly reliable test performance and cost-efficiency in their efforts to
accelerate their time-to-market for SOC, mixed signal, and digital devices.

The Fusion test platform combines our test station hardware with our
enVision++ software. The Fusion platform is available in the Fusion HF and
Fusion HT/AC configurations. These configurations range in price from
approximately $500,000 to over $3,800,000 each, depending primarily on the
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 dragging them with
a mouse into the program flow.

Fusion HF

Introduced in July 1998, our Fusion HF is one of the most advanced testers
available. Before the advent of Fusion HF, semiconductor manufacturers required
several narrowly focused testers, designed to test only digital, only memory,
or only mixed signal devices, but not all three. Since the Fusion HF single
platform can efficiently test complex devices ranging from mixed signal to
digital to SOC, it eliminates the need for mutually exclusive testers.

The Fusion HF test system offers the broadest range of leading-edge test
capability in a single platform, including advanced mixed signal, high-speed
digital, digital signal processing, RF wireless, embedded memory, power, and
time measurement. This range of instrumentation on a single platform allows
semiconductor manufacturers to optimize their asset utilization, thereby
increasing their manufacturing flexibility and lowering the overall cost of
their testing processes.

Fusion's modular architecture has been designed so that it can keep pace with
today's rapid changes in test technology. As new generations of devices require
more advanced test capabilities, customers can easily upgrade their Fusion
testers to accommodate these requirements.

Fusion HT/AC

The Fusion HT/AC test systems are used for high throughput testing of mixed
signal devices primarily to satisfy capacity needs of customers using our prior
generation Synchro HT and Synchro AC products. These manufacturers are
producing the advanced mixed signal devices that are the precursors to, and the
foundations of, the next generation of SOC devices. As with Fusion HF, Fusion
HT and Fusion AC use the enVision++ development software, allowing customers to
easily upgrade to Fusion HF.

The Fusion HT features up to 48 digital pins, RF test instruments, and power
management test technology. Typical device types tested on the Fusion HT
include radio frequency/wireless, power management and consumer video and
audio. The Fusion HT, powered by enVision++, is fully compatible with our
previous generation mixed signal product, the Synchro HT.

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

30
<PAGE>

Other Products

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

iPTest Division

Our iPTest division manufactures systems that are used to test specialized
semiconductor components, such as power transistors. The percentage of net
sales contributed by iPTest, compared to our total net sales, was 3.0%, or $5.1
million, for the fiscal year ended July 31, 1999, 2.9%, or $5.6 million, for
the fiscal year ended July 31, 1998 and 3.1%, or $6.1 million, for the fiscal
year ended July 31, 1997. Consistent with our business strategy to focus on the
Fusion product family, we are exploring the possible disposition of the iPTest
product line.

Service

We consider service to be an important aspect of our business. Our worldwide
service organization is capable of performing installations and all necessary
maintenance of test systems sold by us, including routine servicing of
components manufactured by third parties. We provide various parts and labor
warranties on test systems or options designed and manufactured by us, and
labor warranties on components that have been purchased from other
manufacturers and incorporated into our test systems. We also provide training
on the maintenance and operation of test systems we sell. Service revenue
totaled $28.9 million, or 18.4% of net sales, in fiscal 1999, $32.2 million, or
16.4% of net sales, in fiscal 1998, and $27.4 million, or 14.1% of net sales,
in fiscal 1997.

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

Engineering and Product Development

The test equipment market is characterized by rapid technological change and
new product introductions, as well as advancing industry standards. Our
competitive position will depend upon our ability to successfully enhance
Fusion and develop new instrumentation, and to introduce these new products on
a timely and cost-effective basis. We devote a significant portion of personnel
and financial resources to the continued development of our single platform SOC
capabilities, including embedded memory, digital and mixed signal core
competencies. We also seek to maintain close relationships with our customers
in order to be responsive to their product needs. Our expenditures for
engineering and product development were $25.2 million, $34.3 million, and
$23.4 million during fiscal 1999, 1998, and 1997, respectively. In addition,
through our alliance with Ando, we benefit from the engineering and product
development resources that Ando is applying to the development of new options
for Fusion at no incremental expense to us.

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

31
<PAGE>

Sales and Distribution

We sell our products primarily through a worldwide sales organization. Our
sales organization is structured around key accounts, with a sales force of 35
people. In Japan, we sell, service and support Fusion and digital products
through our alliance with Ando. 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 61%, 60%, and 67% of
total sales in fiscal 1999, 1998, and 1997, respectively.

Ando Alliance

We entered into a development, manufacturing and marketing agreement with
Ando, a Japanese test equipment manufacturer and subsidiary of NEC Corporation,
in April 1998. The agreement has an initial term of six years. We granted Ando
exclusive rights to manufacture and sell Fusion in Japan but retained exclusive
rights to manufacture and sell Fusion to certain customers in Japan and to
manufacture and sell Fusion outside of Japan. We also granted Ando a license to
develop Fusion improvements for certain specific purposes, and, subject to
certain conditions, a license to use, manufacture, and sell these improvements
in Japan. We were granted rights to use, improve or modify these Ando
improvements outside Japan. Under the terms of the agreement, Ando paid us $10
million, delivered 1,600,000 shares of LTX common stock owned by Ando and
reduced the interest rate on our loan from 8.0% to 5.5%. Ando is also required
to pay quarterly royalties on sales of Fusion in Japan.

Ando has established a new SOC division, charged with marketing, sales,
applications, engineering and customer support for the Fusion product line in
Japan. The division employs over 45 people who are developing digital test
options for Fusion HF and software enhancements for enVision++, without
additional expense to us. Other benefits of the alliance include a united
research and development effort to develop jointly new options and capabilities
for Fusion and a joint marketing plan for Fusion in Japan. In addition, we each
represent a second supply source for the other's customers.

Customers

Our customers include many of the world's leading semiconductor device
manufacturers. No single customer accounted for 10% or more of net sales in
fiscal 1999 or 1998. In fiscal 1997, Intel accounted for 13% and National
Semiconductor accounted for 12% of net sales. Customers that have ordered
Fusion products include the following:

<TABLE>
<S> <C>
Acer Labs Amkor
AMS International ASE
Hitachi Hyundai
Infineon Technologies Lucent Technologies
Motorola Multitech
National Semiconductor Philips Semiconductor
Qlogic Siliconware
STATS STMicroelectronics
Texas Instruments
</TABLE>

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

32
<PAGE>

Manufacturing and Supply

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

Competition

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

Backlog

At July 31, 1999, our backlog of unfilled orders for all products and
services was $116.6 million, compared with $62.9 million at July 31, 1998. In
current business conditions, test systems generally ship within six months of
receipt of a customer's purchase order. Accordingly, we expect to deliver
nearly all of our July 31, 1999 backlog in fiscal 2000. Included in the 1999
backlog is $1.5 million, and in the 1998 backlog is $10 million, of deferred
revenue relating to the transaction with Ando. While backlog is calculated on
the basis of firm orders, all orders are subject to cancellation or delay by
the customer with limited or no penalty. Our backlog at any particular date,
therefore, is not necessarily indicative of actual sales for any succeeding
period.

Proprietary Rights

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

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

33
<PAGE>

The use of patents to protect hardware and software has increased in the test
equipment market 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, 1999, we employed 686 employees. 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
have not experienced any work stoppages and consider relations with our
employees to be good.

Facilities

All of our facilities are leased. We have achieved worldwide ISO 9001
certification at our facilities. We maintain our headquarters in Westwood,
Massachusetts, where corporate administration, sales and customer support and
manufacturing and engineering are located in a 167,500 square foot facility
under a lease which expires in 2007. In May 1995, we subleased to a third party
a 208,000 square foot facility in Westwood, Massachusetts for a ten year term.
Our lease of this facility expires in 2010. We also maintain an additional
development facility in a 71,000 square foot building in San Jose, California.
Our lease of this facility expires in 2004. We also lease sales and customer
support offices at various locations in the United States totaling
approximately 40,000 square feet.

Our European headquarters is located in Woking, United Kingdom. We also
maintain sales and support offices at other locations in Europe. The
manufacturing and engineering facilities for our iPTest systems are located in
Guildford, United Kingdom. We also maintain sales and support offices in
locations 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.

34
<PAGE>

MANAGEMENT

The following table lists our executive officers, directors and key employees
(who are not executive officers) as of August 31, 1999.

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Roger W. Blethen........ 48 President, Chief Executive Officer and Director
David G. Tacelli........ 40 Vice President, Chief Financial Officer and Treasurer
Edward J. Terrenzi...... 50 Vice President, Fusion Products Division
Tommie Berry............ 47 Vice President, San Jose Engineering
Richard L. Bove......... 46 Vice President, Human Resources
Kenneth E. Daub......... 63 Senior Vice President, Business Development
Joseph A. Hedal......... 41 General Counsel
Mukesh Mowji............ 41 Vice President, North America Sales and Support
Thomas J. Young......... 43 Vice President of Operations
Neil Kelly.............. 41 Vice President of Marketing
Samuel Rubinovitz....... 69 Chairman of the Board
Robert J. Boehlke....... 58 Director
Jacques Bouyer.......... 71 Director
Stephen M. Jennings..... 38 Director
Roger J. Maggs.......... 53 Director
Robert E. Moore......... 61 Director
</TABLE>

Roger W. Blethen was appointed our Chief Executive Officer in September 1996.
Mr. Blethen was a President of LTX from 1994 to 1996. Mr. Blethen has been a
Director since 1980 and was a Senior Vice President from 1985 until February
1994. Mr. Blethen was a founder of LTX and has served in a number of senior
management positions since its formation in 1976.

David G. Tacelli was appointed Chief Financial Officer and Treasurer of LTX
in December 1998. Prior to that, Mr. Tacelli was Vice President, Operations
from October 1996 to December 1998. Mr. Tacelli's previous responsibilities at
LTX included Director of Manufacturing of the Mixed Signal Division, a position
he held from 1994 to 1996. From 1992 to 1994, he was Director of Customer
Service. He served as Controller and Business Manager for Operations from 1990
to 1992 and was Controller for Sales and Support from 1989 to 1990. Prior to
joining LTX, Mr. Tacelli was employed by Texas Instruments for seven years in
various management positions.

Edward J. Terrenzi was appointed Vice President, Fusion Products Division in
June 1998. Mr. Terrenzi joined LTX in 1984, and has held a variety of
management positions in Marketing, Engineering and Applications. In 1994 he was
promoted to General Manager of the Mixed Signal Division and became Vice
President of that Division in 1996. Before joining LTX, he spent five years at
Digital Equipment Corporation as a Senior Engineering Manager in the LSI Group,
and eight years at Raytheon Company Equipment Division in various engineering
positions.

Tommie Berry was appointed Vice President for our San Jose Engineering
activities in June 1998. Mr. Berry joined LTX in 1991 as Technical Director of
North America Strategic Sales in Texas. In November 1994, he relocated to
California to assume the position of Director of Systems Development
Engineering. Mr. Berry has been a General Manager and Director of Engineering
of the Digital Products Division since 1996. Previously, he worked for twelve
years for Schlumberger Limited's automatic test equipment business.

Richard L. Bove was appointed Vice President of Human Resources in September
1997. Mr. Bove joined LTX in 1988 as the Director of Compensation and Benefits
and became the Director of Human Resources in 1990. Before joining LTX, he
spent five years with Data General and five years with M/A Com in a variety of
Human Resources positions.

35
<PAGE>

Kenneth E. Daub was appointed a Senior Vice President of LTX in 1997 and is
responsible for our business in Japan, our agreements with Ando and other
business development opportunities. From 1991 until 1997, Mr. Daub was
responsible for North America and Pacific Rim sales. From the time he joined
LTX in 1987 until 1991, Mr. Daub served as Vice President responsible for North
American sales. Prior to joining LTX, Mr. Daub held various senior positions
with Schlumberger Limited.

Joseph A. Hedal has been General Counsel of LTX since 1996. He served as
Assistant General Counsel of LTX from 1991 through 1996. Prior to joining LTX,
Mr. Hedal was an associate with Foley, Hoag & Eliot, LLP from 1990 to 1991 and
an associate with Bingham Dana LLP from 1986 through 1990.

Mukesh Mowji was appointed Vice President of North America and Asia/Pacific
Sales and Support in February 1999. In addition to North America and
Asia/Pacific sales activities, Mr. Mowji is responsible for field applications
and service resources in those regions. He joined LTX in 1988 as a Sales
Engineer and has held a variety of sales and marketing management positions
since that time. Prior to joining LTX, he worked for seven years in
Schlumberger Limited's automatic test equipment business.

Thomas J. Young was appointed Vice President of Operations in February 1999.
He has also been Vice President and General Manager for the Asia/Pacific
Region, responsible for all sales and operations activities in that area. Mr.
Young has held a variety of field service and technical support management
positions in our Westwood, Massachusetts facility since 1981. Mr. Young joined
LTX in February 1979 as our first Customer Training Manager in San Jose,
California. Prior to joining LTX, Mr. Young was employed by the Fairchild Test
Systems Group.

Neil Kelly is Vice President of Marketing, responsible for marketing our
Fusion product, long-term planning of test platform strategy and tracking
technology trends in the semiconductor industry, particularly as they relate to
testing and SOC development. Previously, Mr. Kelly led LTX's introduction of
the Synchro mixed signal platform. He has also served as Worldwide Telecom
Product Manager, leading a group of application engineers in developing
innovative test solutions for advanced new telecom devices. Mr. Kelly joined
LTX in 1980 as an applications engineer. Prior to joining LTX, Mr. Kelly worked
for SAFT (UK) Ltd., where he designed standby power systems and emergency
lighting units.

Samuel Rubinovitz has been Chairman of the Board of LTX since December 1997.
He was elected a Director of LTX in 1994. He was Executive Vice President of
EG&G, responsible for the aerospace, optoelectronics and instrument product
groups from 1989 until his retirement in 1994. He is a director of Richardson
Electronics, KLA-Tencor and Kronos.

Robert J. Boehlke was elected a Director of LTX in June 1997. Mr. Boehlke is
currently Executive Vice President and Chief Financial Officer of KLA-Tencor
Corporation, a position he has held since 1990. Between 1983 and 1990, he held
a variety of management positions with that company. Prior to his employment by
KLA-Tencor, Mr. Boehlke was a partner at the investment banking firm of Kidder,
Peabody & Company from 1971 until 1983.

Jacques Bouyer was elected a Director of LTX in 1991. Mr. Bouyer has been a
management consultant since 1990. Mr. Bouyer was Chairman of the Board and
Chief Executive Officer of Philips Composants S.A., an electronics company
which is a wholly-owned subsidiary of Philips Electronics from 1986 until his
retirement from that company in 1990. He is also a director of Richardson
Electronics.

Stephen M. Jennings was elected a Director of LTX in September 1997. Mr.
Jennings has been a Director of Monitor Company, a strategy consulting firm,
since 1996. From 1992 to 1996, he was a consultant to that company.

Roger J. Maggs was elected a Director of LTX in June 1994. Mr. Maggs is
currently President of Celtic House Investment Partners, a private investment
firm. Mr. Maggs was a Vice President of Alcan Aluminum from 1986 until June
1994.

36
<PAGE>

Robert E. Moore has been a Director of LTX since 1989. Mr. Moore is currently
President and Chairman of the Board of Reliable Power Meters, a company he
founded in 1992, which manufactures and sells power measurement instruments. He
also was a founder of Basic Measuring Instruments, Inc., which manufactures and
sells power measurement instruments, and served as a director of that company
from 1982 until 1990 and as a Senior Vice President responsible for marketing
and sales from 1985 until 1990.

37
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table shows information known to LTX about the beneficial
ownership of its common stock as of July 31, 1999, and as adjusted to reflect
the sale of common stock offered hereby by each stockholder known by LTX to own
beneficially more than 5% of the common stock, each named executive officer of
LTX, each director of LTX and all directors and executive officers as a group.
As of July 31, 1999, there were 36,185,040 shares of common stock outstanding.

The following table assumes that the underwriters do not exercise their
option to purchase additional shares in the offering. Beneficial ownership is
determined by the rules of the SEC. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after July
31, 1999 are considered outstanding, while these shares are not considered
outstanding for purposes of computing percentage ownership of any other person.
Unless otherwise indicated in the footnotes below, the persons and entities
named in the table have sole voting and investment power as to all shares
beneficially owned, subject to community property laws where applicable.

<TABLE>
<CAPTION>
Percentage
Beneficially Owned
-----------------------
Shares
Beneficially
Owned Before After
Name and Address (1) Number Offering Offering
-------------------- ------------ --------- ---------
<S> <C> <C> <C>
5% Stockholders
Merrill Lynch & Co., Inc.............. 3,310,000 9.1% 8.1%
(on behalf of Merrill Lynch Asset Man-
agement Group)
State of Wisconsin Investment Board... 2,997,000 8.3 7.3
Greenway Partners L.P................. 1,984,800 5.5 4.9
Mellon Bank Corporation............... 1,882,216 5.2 4.6
Directors and Executive Officers
Roger W. Blethen...................... 402,893 1.1 *
Samuel Rubinovitz..................... 69,200 * *
Robert J. Boehlke..................... 39,850 * *
Jacques Bouyer........................ 40,000 * *
Stephen M. Jennings................... 14,512 * *
Roger J. Maggs........................ 56,000 * *
Robert E. Moore....................... 76,500 * *
David G. Tacelli...................... 56,350 * *
Edward J. Terrenzi.................... 76,471 * *
All directors and executive officers
as a group (9 persons)............... 831,776 2.3 2.0
</TABLE>
- --------
* Represents beneficial ownership of less than one person of the outstanding
common stock.
(1) The address of Merrill Lynch & Co. is World Financial Center, North Tower,
250 Vesey Street, New York, New York 10301. The address of State of
Wisconsin Investment Board is P.O. Box 7842, Madison, Wisconsin 53707. The
address of Greenway Partners L.P. is 277 Park Avenue, New York, New York
10172. The address of Mellon Bank Corporation is One Mellon Bank Center,
Pittsburgh, Pennsylvania 15258.
(2) Shares owned by Messrs. Blethen, Rubinovitz, Boehlke, Bouyer, Jennings,
Maggs, Moore, Tacelli, Terrenzi and by all executive officers and directors
as a group include 310,075 shares, 47,200 shares, 15,350 shares, 34,000
shares, 13,512 shares, 56,000 shares, 69,000 shares, 48,850 shares, 50,750
shares and 644,737 shares, respectively, under stock options which are
presently exercisable or become so within sixty days.

38
<PAGE>

DESCRIPTION OF COMMON STOCK

Our By-laws provide that holders of common stock are entitled to one vote per
share on all matters to be voted upon by the stockholders. Stockholders are not
entitled to cumulative voting in the election of directors. Holders of common
stock are entitled to receive any dividends as may be declared from time to
time by the Board of Directors out of legally available funds. In the event of
the liquidation, dissolution or winding up of LTX, the holders of common stock
are entitled to share ratably in all assets remaining after payment of
liabilities. The common stock has no preemptive or conversion rights and is not
subject to further calls or assessments by LTX. There are no redemption or
sinking fund provisions that apply to the common stock. The common stock
currently outstanding is, and the common stock to be issued upon closing of
this offering will be, validly issued, fully paid and non-assessable. Under our
By-laws, a special meeting of stockholders may be called by stockholders only
if called by one or more stockholders who hold at least 40% in interest of our
capital stock entitled to vote at such meeting. Our By-laws also require
approval of a super-majority of our stockholders for any transaction between us
and any stockholder who owns 10% or more of our outstanding common stock.

The transfer agent and registrar for the common stock is EquiServe.

We furnish to our stockholders annual reports containing financial statements
that have been examined and reported upon, with an opinion expressed, by our
independent public accountants and quarterly reports containing unaudited
financial information for the first three quarters of each fiscal year.

Rights Agreement

Our Board of Directors adopted a Rights Agreement on April 30, 1999 with
BankBoston, N.A. as rights agent. The Board issued one common share purchase
right for each share of common stock then or thereafter outstanding. The rights
will become exercisable only if a person or group acquires 15% or more of our
common stock or announces a tender offer that would result in ownership of 15%
or more of our common stock. Initially, each right will entitle a stockholder
to buy one share of our common stock at a purchase price of $45.00 per share,
subject to adjustment depending upon the occurrence of certain events.

Generally, in the event that a person or group becomes the beneficial owner
of 15% or more of our common stock, each right, other than rights owned by that
person or group, will thereafter entitle the holder to receive, upon exercise
of the right, shares of our common stock having a value equal to two times the
exercise price of the right. In the event that, at any time after the rights
become exercisable, we are (1) acquired in a merger or other business
combination transaction or (2) more than 50% of our assets or earning power is
sold or transferred, each right, other than rights owned by that person or
group, will thereafter entitle the holder to receive, upon the exercise of the
right, shares of common stock of the acquirer having a value equal to two times
the exercise price of the right.

Before any person or group has acquired 15% or more of our common stock, we
may redeem these rights at $0.001 per right. The rights will expire on April
30, 2009, unless we make such a redemption before that date.

Classified Board

Our Board of Directors is divided into three classes, with one class
consisting of three directors and two classes consisting of two directors. Each
class serves three years, with the terms of office of the respective classes
expiring in successive years.

Certain Effects

The above described provisions regarding our By-laws, the Rights Agreement
and the classified board may discourage potential takeover attempts. Our Rights
Agreement, in particular, may discourage a future acquisition of us not
approved by the Board of Directors in which our stockholders might otherwise
receive a higher value for their shares or which a substantial number, and
perhaps even a majority, of our stockholders believes to be in the best
interests of all stockholders. As a result, stockholders who might desire to
participate in such a transaction may not have the opportunity to do so. These
provisions could have an adverse effect on the market price of the common
stock.

39
<PAGE>

UNDERWRITING

Under the terms and subject to the conditions contained in the underwriting
agreement, the underwriters named below, for whom Morgan Stanley & Co.
Incorporated, Needham & Company, Inc. and Gruntal & Co., L.L.C. are acting as
representatives, have severally agreed to purchase, and LTX has agreed to sell
to the underwriters, the respective number of shares of common stock set forth
opposite the names of the underwriters below:

<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated........................... 2,450,000
Needham & Company, Inc. .................................... 1,960,000
Gruntal & Co., L.L.C........................................ 490,000
First Union Securities, Inc. ............................... 100,000
Gerard Klauer Mattison & Co., Inc........................... 100,000
Jefferies & Company, Inc.................................... 100,000
Edward D. Jones & Co., L.P.................................. 100,000
Lehman Brothers Inc......................................... 100,000
---------
Total..................................................... 5,400,000
=========
</TABLE>

The underwriters are offering the shares of common stock subject to their
acceptance of the shares from LTX and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered by this prospectus
are subject to the approval of certain legal matters by their counsel and to
certain other conditions. The underwriters are obligated to take and pay for
all of the shares of common stock offered in this offering, other than those
covered by the over-allotment option described below, if any such shares are
taken.

The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and part to dealers at a price that represents a
concession not in excess of $.49 a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in excess
of $.10 a share to other underwriters or to dealers. After the initial offering
of the shares of common stock, the offering price and other selling terms may
from time to time be varied by the representatives of the underwriters.

LTX has granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 705,000
additional shares of common stock at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions. The
underwriters may exercise this option solely for the purpose of covering
overallotments, if any, made in connection with the offering of the shares of
common stock offered in this offering. To the extent such option is exercised,
each underwriter will become obligated to purchase approximately the same
percentage of such additional shares of common stock as the number set forth
next to such underwriter's name in the preceding table bears to the total
number of shares of common stock set forth next to the names of all
underwriters in the preceding table. If the underwriters' option is exercised
in full, the total price to the public would be $84,611,250 the total
underwriters' discounts and commissions would be $4,657,500 and total proceeds
to us would be $79,953,750.

LTX and each of our directors and executive officers have agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated on
behalf of the underwriters, during the period ending 90 days after the date of
this prospectus he, she or it will not directly or indirectly:

. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or

40
<PAGE>

. enter into any swap, hedging or arrangement that transfers to another,
in whole or in part, any of the economic consequences of ownership of
the common stock,

whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.

The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.

In order to facilitate the offering of the common stock, the underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price
of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares
of common stock in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering, if the syndicate repurchases
previously distributed common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.

We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.

Pricing of the Offering

The public offering price will be determined by negotiations between us and
the representatives of the underwriters. Among the factors to be considered in
determining the public offering price will be:

. the market price of LTX's common stock;

. our future prospects and the semiconductor industry in general;

. sales, earnings and certain other financial operating information of LTX
in recent periods; and

. the price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of companies
engaged in activities similar to those of LTX.

The estimated public offering price set forth on the cover page of this
prospectus is subject to change as a result of market conditions and other
factors.

41
<PAGE>

LEGAL MATTERS

The validity of the shares of common stock we are offering will be passed
upon for us by Bingham Dana LLP. Attorneys at Bingham Dana LLP own
approximately 5,200 shares of our common stock. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.

EXPERTS

The financial statements and schedules of LTX as of July 31, 1999 and for
each of the years in the three-year period ended July 31, 1999 incorporated by
reference in this prospectus and in the registration statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report, and are incorporated by reference herein in reliance upon the
authority of that firm as experts in giving these reports.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-3 under the Securities Act with respect to the common stock
we propose to sell in this offering. This prospectus, which is a part of the
registration statement, does not contain all of the information set forth in
the registration statement. For further information about us and the common
stock we propose to sell in this offering, we refer you to the registration
statement and the exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus as to the contents of any
contract or other document filed as an exhibit to the registration statement
are not necessarily complete. If a contract or document has been filed as an
exhibit to the registration statement, we refer you to the copy of the contract
or document that has been filed. The registration statement, including
exhibits, may be inspected without charge at the principal office of the
Securities and Exchange Commission in Washington, D.C. and copies of all or any
part of which may be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Room 1024, Washington, D.C. 20549, and at the Commission's
regional offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material can also be obtained at
prescribed rates by mail from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on
the operation of the public reference room by calling the Commission at 1-800-
SEC-0330. In addition, the Securities and Exchange Commission maintains a
website at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Securities and Exchange Commission.

42
<PAGE>

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The SEC allows us to incorporate into this prospectus information we file
with the SEC in other documents. The information incorporated by reference is
considered to be part of this prospectus and information we later file with the
SEC will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of
1934 until all of the shares of common stock that are part of this offering
have been sold. The documents we have incorporated by reference are:

. our Annual Report on Form 10-K for the year ended July 31, 1999;

. our Quarterly Reports on Form 10-Q for the quarters ended October 31,
1998, January 31, 1999 and April 30, 1999;

. our Current Report on Form 8-K filed with the SEC on May 3, 1999;

. our Proxy Statement, dated November 10, 1998; and

. the description of our common stock contained in our Registration
Statement on Form 8-A filed on November 24, 1982 as amended on September
20, 1993.

You may request a copy of these filings at no cost by writing or telephoning
LTX Corporation, LTX Park, University Avenue, Westwood, Massachusetts 02090,
Attention: Investor Relations; Telephone: (781) 461-1000.

This prospectus is part of a registration statement that we filed with the
SEC. You should rely only on the information incorporated by reference in or
provided in this prospectus and the registration statement. We have authorized
no one to provide you with different information. We are not making an offer of
these securities in any state where the offer is not permitted. You should not
assume that the information in this prospectus is accurate as of any date other
than the date on the front of this document.

43
<PAGE>

LTX CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheet at July 31, 1998 and 1999..................... F-3
Consolidated Statements of Operations for the three years ended July 31,
1997, 1998 and 1999..................................................... F-4
Consolidated Statement of Stockholder's Equity........................... F-5
Consolidated Statement of Cash Flows for the three years ended July 31,
1997, 1998 and 1999..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of LTX Corporation:

We have audited the accompanying consolidated balance sheets of LTX
Corporation and subsidiaries as of July 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended July 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of LTX Corporation
and subsidiaries as of July 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
July 31, 1999, in conformity with generally accepted accounting principles.

Arthur Andersen LLP

Boston, Massachusetts
August 24, 1999

F-2
<PAGE>

LTX CORPORATION

CONSOLIDATED BALANCE SHEET
(In thousands, except share data)

<TABLE>
<CAPTION>
July 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents................................... $ 25,109 $ 19,936
Accounts receivable, net of allowances of $2,200 and
$2,027................................................ 33,871 37,043
Accounts receivable--other............................. 2,044 4,324
Inventories............................................ 38,264 48,551
Other current assets................................... 3,633 5,795
--------- ---------
Total current assets................................. 102,921 115,649
Property and equipment, net.............................. 35,427 31,942
Other assets............................................. 2,671 402
--------- ---------
Total assets......................................... $ 141,019 $ 147,993
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.......................................... $ 4,827 $ 5,472
Current portion of long-term debt...................... 5,106 674
Accounts payable....................................... 25,020 37,439
Deferred revenues and customer advances................ 15,045 11,391
Accrued restructuring charges.......................... 5,786 2,263
Other accrued expenses................................. 13,179 10,495
--------- ---------
Total current liabilities............................ 68,963 67,734
Long-term debt, less current portion..................... 8,235 14,023
Other long-term liabilities.............................. 563 --
Convertible subordinated debentures...................... 7,308 7,308
Stockholders' equity:
Common stock, $0.05 par value:
100,000,000 shares authorized; 38,024,440 and
38,732,540 shares issued; 35,476,940 and 36,185,040
shares outstanding.................................... 1,902 1,936
Additional paid-in capital............................... 197,209 199,778
Accumulated deficit...................................... (131,400) (131,025)
Less--Treasury stock (2,547,500 shares), at cost......... (11,761) (11,761)
--------- ---------
Total stockholders' equity........................... 55,950 58,928
--------- ---------
Total liabilities and stockholders' equity........... $ 141,019 $ 147,993
========= =========
</TABLE>

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

F-3
<PAGE>

LTX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

<TABLE>
<CAPTION>
Year ended July 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales....................................... $194,343 $196,227 $157,326
Cost of sales................................... 131,870 141,274 103,105
Inventory provisions............................ 9,250 40,718 --
-------- -------- --------
Gross profit.................................... 53,223 14,235 54,221
Engineering and product development expenses.... 23,350 34,320 25,174
Selling, general and administrative expenses.... 39,049 50,772 31,517
Restructuring charges........................... 6,750 6,272 --
-------- -------- --------
Income (loss) from operations................... (15,926) (77,129) (2,470)
Other income (expense):
Interest expense.............................. (2,443) (1,898) (1,526)
Interest income............................... 2,876 1,877 585
Gain on liquidation/sale of business units.... -- -- 3,786
-------- -------- --------
Income (loss) before income taxes............... (15,493) (77,150) 375
Provision for income taxes...................... 416 1,130 --
-------- -------- --------
Net income (loss)............................... $(15,909) $(78,280) $ 375
======== ======== ========
Net income (loss) per share:
Basic......................................... $ (0.45) $ (2.15) $ 0.01
======== ======== ========
Diluted....................................... $ (0.45) $ (2.15) $ 0.01
======== ======== ========
Weighted-average common shares used in computing
net income (loss) per share:
Basic......................................... 35,476 36,401 35,696
======== ======== ========
Diluted....................................... 35,476 36,401 36,958
======== ======== ========
</TABLE>

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

F-4
<PAGE>

LTX CORPORATION

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

<TABLE>
<CAPTION>
Common Stock Additional Total
------------------ Paid-In Accumulated Treasury Stockholders'
Shares Amount Capital Deficit Stock Equity
---------- ------ ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31,
1996................... 35,795,796 $1,800 $191,455 $ (37,211) $ (1,005) $155,039
---------- ------ -------- --------- -------- --------
Exercise of stock
options................ 333,955 16 764 -- -- 780
Exercise of stock
warrant................ 1,000,000 50 2,260 -- -- 2,310
Issuance of shares under
employees' stock
purchase plan.......... 294,917 15 1,319 -- -- 1,334
Purchase of treasury
stock.................. (747,500) -- -- -- (3,356) (3,356)
Net loss................ -- -- -- (15,909) -- (15,909)
---------- ------ -------- --------- -------- --------
Balance at July 31,
1997................... 36,677,168 1,881 195,798 (53,120) (4,361) 140,198
Exercise of stock
options................ 108,515 6 301 -- -- 307
Issuance of shares under
employees' stock
Purchase plan.......... 291,257 15 1,110 -- -- 1,125
Purchase of treasury
stock.................. (1,600,000) -- -- -- (7,400) (7,400)
Net loss................ -- -- -- (78,280) -- (78,280)
---------- ------ -------- --------- -------- --------
Balance at July 31,
1998................... 35,476,940 1,902 197,209 (131,400) (11,761) 55,950
Exercise of stock
options................ 411,854 20 975 -- -- 995
Issuance of shares under
employees' stock
Purchase plan.......... 296,246 14 969 -- -- 983
Amortization of deferred
compensation........... -- -- 625 -- -- 625
Net profit.............. -- -- -- 375 -- 375
---------- ------ -------- --------- -------- --------
Balance at July 31,
1999................... 36,185,040 $1,936 $199,778 $(131,025) $(11,761) $ 58,928
</TABLE>

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

F-5
<PAGE>

LTX CORPORATION

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

<TABLE>
<CAPTION>
Year ended July 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)............................... $(15,909) $(78,280) $ 375
Add (deduct) non-cash items:
Depreciation and amortization................. 11,038 12,510 11,291
Gain on liquidation/sale of business units.... -- -- (3,786)
Charge for excess inventory................... 9,250 40,718 --
Translation loss (gain)....................... (100) (47) 737
(Increase) decrease in:
Accounts receivable............................ 4,762 2,842 (2,983)
Inventories.................................... 2,299 (21,529) (11,204)
Other current assets........................... 1,191 383 (2,154)
Other assets................................... 530 313 (51)
Increase (decrease) in:
Accounts payable............................... (4,533) 1,753 11,560
Accrued expenses and restructuring charges..... 2,985 1,124 (8,322)
Deferred revenues and customer advances........ (1,273) 9,889 (9,449)
-------- -------- --------
Net cash (used in) provided by operating
activities.................................... 10,240 (30,324) (13,986)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from sale of business unit............. -- -- 2,000
Maturities of held-to-maturity securities, net.. 9,941 -- --
Expenditures for property and equipment......... (16,116) (8,795) (9,636)
-------- -------- --------
Net cash used in investing activities........... (6,175) (8,795) (7,636)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from stock plans:
Employees' stock purchase plan................. 1,334 1,124 983
Exercise of stock options...................... 780 308 995
Exercise of stock warrant....................... 2,310 -- --
Purchase of treasury stock...................... (3,356) -- --
Advances of short-term notes payable............ -- -- 33,204
Payment of short-term notes payable............. (993) (520) (28,499)
Proceeds from lease financing................... 2,975 1,451 10,615
Payments of long-term debt...................... (5,090) (5,253) (1,174)
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... (2,040) (2,890) 16,124
-------- -------- --------
Effect of exchange rate changes on cash.......... (294) (682) 325
-------- -------- --------
Net (decrease) increase in cash and
equivalents.................................... 1,731 (42,691) (5,173)
Cash and equivalents at beginning of year........ 66,069 67,800 25,109
-------- -------- --------
Cash and equivalents at end of year.............. $ 67,800 $ 25,109 $ 19,936
======== ======== ========
Supplemental Disclosures of Cash Flow
Information:
Cash paid (received) during the year for:
Interest....................................... $ 2,451 $ 2,062 $ 1,263
======== ======== ========
Income taxes................................... $ 725 $ 716 $ 757
======== ======== ========
Supplemental Disclosure of Non-Cash Financing
Activities:
1,600,000 shares of LTX Common Stock received by
LTX as consideration for certain marketing,
sales and manufacturing rights and held in
treasury....................................... $ -- $ 7,400 $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements

F-6
<PAGE>

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial statements
and the reported amounts of income and expenses during the reporting periods.
Operating results in the future could vary from the amounts derived from
management's estimates and assumptions.

Foreign Currency Translation

The financial statements of the Company's foreign subsidiaries are translated
in accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation". The Company's functional currency is the U.S. dollar.
Accordingly, the Company's foreign subsidiaries translate monetary assets and
liabilities at year-end exchange rates while non-monetary items are translated
at historical rates. Income and expense accounts are translated at the average
rates in effect during the year, except for sales, cost of sales and
depreciation, which are primarily translated at historical rates. Net realized
and unrealized gains and losses resulting from foreign currency remeasurement
and transaction gains and losses were a loss of $737,000 and gains of $47,000
and $100,000 in fiscal 1999, 1998, and 1997 respectively. The loss of $737,000
in fiscal 1999 was principally due to transaction losses relating to
fluctuations in the Japanese yen. Transaction gains and losses are included in
the consolidated results of operations.

Revenue Recognition

Revenue from product sales and related warranty costs are recognized at the
time of shipment. Service revenues are recognized over the applicable
contractual periods or as services are performed. Service revenue totaled $28.9
million, or 18.4% of net sales, in fiscal 1999, $32.2 million, or 16.4% of net
sales, in fiscal 1998, and $27.4 million, or 14.1% of net sales, in fiscal
1997. Revenue from engineering contracts are recognized over the contract
period on a percentage of completion basis.

During April 1998 Ando Electric Co., Ltd. (Ando) paid the Company $17.4
million in cash and LTX Common Stock for the rights to manufacture, market and
develop LTX's Fusion product for Japanese

F-7
<PAGE>

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

customers. The Company recognized $7.4 million of revenue during fiscal 1998
for the sale of its marketing and development rights. The Company deferred
$10.0 million of revenue related to the manufacturing rights and transfer of
technology knowledge. The $10.0 million is being recognized on a percentage of
completion basis over the period in which the Company completes the transfer of
the manufacturing and technology rights. The Company recognized $8.5 million of
the deferred revenue in fiscal 1999 and expects the remaining $1.5 million to
be recognized in the first quarter of fiscal 2000. In addition, the Company
will receive future royalty payments which will be recognized as revenue in the
period earned.

Engineering and Product Development Costs

The Company expenses all engineering, research and development costs as
incurred. Expenses subject to capitalization in accordance with the Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software To Be Sold, Leased or Otherwise Marketed," relating to certain
software development costs, were insignificant.

Income Taxes

Deferred income taxes are recorded for temporary differences between the
financial reporting and tax basis of assets and liabilities. Research and
development tax credits are recognized for financial reporting purposes to the
extent that they can be used to reduce the tax provision. The Company has not
provided for federal income taxes on the cumulative undistributed earnings of
its foreign subsidiaries, which were not significant, in the past since it
reinvested those earnings. At July 31, 1999, most of the Company's foreign
subsidiaries had accumulated deficits.

Net Income (Loss) per Share

In July 1998, the Company adopted Statement of Financial Accounting
Standards, "Earnings Per Share," (SFAS 128). All previously reported earnings
per share information presented has been restated to reflect the impact of
adopting SFAS 128. Under SFAS 128, basic net income (loss) per common share is
computed by dividing net income (loss) available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
income (loss) per common share reflects the maximum dilution that would have
resulted from the assumed exercise and share repurchase related to dilutive
stock options and is computed by dividing net income (loss) by the weighted
average number of common shares and all dilutive securities outstanding.

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

<TABLE>
<CAPTION>
Fiscal Year Ended July
31,
---------------------------
1997 1998 1999
-------- -------- -------
<S> <C> <C> <C>
Net income (loss)............................... $(15,909) $(78,280) $ 375
Basic EPS
Basic common shares........................... 35,476 36,401 35,696
Basic EPS..................................... $ (0.45) $ (2.15) $ .01
Diluted EPS
Basic common shares........................... 35,476 36,401 35,696
Plus: impact of stock options and warrants.... -- -- 1,262
-------- -------- -------
Diluted common shares........................... 35,476 36,401 36,958
Diluted EPS................................... $ (0.45) $ (2.15) $ .01
</TABLE>

Options to purchase 60,000 shares of common stock in 1999, 3,966,793 shares
in 1998, and 3,260,283 in 1997 were outstanding during the years then ended,
but were not included in the year to date calculation of

F-8
<PAGE>

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

diluted net income per share because either the options' exercise price was
greater than the average market price of the common shares during those
periods, or the effect of including the options would have been anti-dilutive
in effect.

Financial Instruments

Cash and Short-Term Investments

The Company considers all highly liquid investments that are readily
convertible to cash and that have original maturity dates of three months or
less to be cash equivalents. Cash equivalents consist primarily of repurchase
agreements and commercial paper. In accordance with the Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", investments in debt securities are classified as trading,
available-for-sale or held-to-maturity. Investments are classified as held-to-
maturity when the Company has the positive intent and ability to hold those
securities to maturity. Held-to-maturity securities are stated at amortized
cost with premiums and discounts amortized to interest income over the life of
the investment.

The Company has no short-term investments as of July 31, 1999 and July 31,
1998. The fair market value of cash equivalents and short-term investments is
substantially equal to the amortized cost, due to the short period of time to
maturity, which is less than one year.

Fair Value

Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires that disclosure be made of estimates
of the fair value of financial instruments. The fair value of the Company's
notes payable and long-term liabilities is estimated based on quoted market
prices for the same or similar issues or on current rates offered to the
Company for debt of the same remaining maturities. At July 31, 1999 and 1998,
the carrying value of $5,472,000 and $4,827,000, respectively, for short-term
bank debt and $14,697,000 and $13,904,000, respectively, for long-term
liabilities, including current portion, approximates fair value. At July 31,
1999, and 1998, the Company's 7 1/4% Convertible Subordinated Debentures due
2011 had a carrying value of $7,308,000 and the estimated fair value of
approximately $4,092,000. For all other balance sheet financial instruments,
the carrying amount approximates fair value.

Inventories

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

<TABLE>
<CAPTION>
As of July 31,
-----------------------
1998 1999
----------- -----------
<S> <C> <C>
Raw materials...................................... $14,400,000 $22,380,000
Work-in-process.................................... 19,419,000 18,107,000
Finished goods..................................... 4,445,000 8,064,000
----------- -----------
$38,264,000 $48,551,000
=========== ===========
</TABLE>

F-9
<PAGE>

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Property and Equipment

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

<TABLE>
<CAPTION>
As of July 31,
-------------------------- Depreciable
1998 1999 Life in Years
------------ ------------ -------------------
<S> <C> <C> <C>
Machinery and equipment....... $100,519,000 $ 97,670,000 3-5
Office furniture and
equipment.................... 9,219,000 11,395,000 3-7
Leasehold improvements........ 8,783,000 7,638,000 10 or term of lease
------------ ------------
118,521,000 116,703,000
Less: Accumulated depreciation
and amortization............. (83,094,000) (84,761,000)
------------ ------------
$ 35,427,000 $ 31,942,000
============ ============
</TABLE>

Reclassifications

Prior year financial statements have been reclassified to conform to the 1999
presentation. The reclassification had no impact on earnings for the prior
period.

Recent Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income". The
statement is effective for fiscal 1999 and requires comprehensive income to be
reported with the same prominence as other financial statements. Comprehensive
income would include any unrealized gains or losses on available-for-sale
securities, foreign currency translation adjustments and minimum pension
liability adjustments. The adoption of FASB 130 did not have a material effect
on the consolidated financial statements.

In June 1997, the Financial Accounting Standards Board also issued Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131). The statement is effective for
fiscal 1999. SFAS 131 changes the definition and reporting of segments and
requires disclosure by operating segment of information such as profit and
loss, assets and capital expenditures, major customers and types of products
from which revenues are derived, (see Note 9).

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. A company may also
implement the statement as of the beginning of any fiscal quarter after
issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter).
SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to
(a) derivative instruments and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired, or substantively modified after
December 31, 1997 (and, at the company's election, before January 1, 1998).
This statement could increase volatility in earnings and other comprehensive
income for companies with applicable contracts. LTX does not have any
derivative instruments at this time.

F-10
<PAGE>

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

3. NOTES PAYABLE

The Company's Japanese subsidiary had borrowings outstanding of $4.8 million
at July 31, 1998, under demand lines of credit. Borrowings of $4.5 million, at
the local prime rate plus 0.25%, were guaranteed by the Company's minority
partner in Japan, and borrowings of $0.3 million, at the local prime rate of
prime plus 0.75% under a $1.4 million demand bank line, were guaranteed by the
Company. The Company recorded two transactions as other income aggregating to
$3.8 million in the second quarter of fiscal 1999. The Japanese prime rate of
interest was 2.5% at July 31, 1998. These transactions consisted of the
liquidation of a joint venture with Sumitomo Metal Industries, Ltd. in Japan,
which resulted in a gain of $1.7 million and the sale of a portion of the
Company's legacy board repair business in Singapore, which resulted in a gain
of $2.1 million. The Company's Japanese subsidiary was liquidated during the
second quarter of fiscal 1999 and the outstanding bank debt that was guaranteed
by the minority partner was paid in full by the Company's minority partner as
part of the liquidation process. The $0.3 million guaranteed by the Company was
paid in full and there are no outstanding borrowings in Japan at July 31, 1999.

On October 26, 1998, the Company obtained a $10.0 million domestic credit
facility from a bank, which expires on October 26, 1999. The facility is
secured by all assets of the Company and bears interest at the bank's prime
rate plus 1% as of July 31, 1999. The borrowing base of the facility is based
on a formula of eligible accounts receivable. The agreement requires the
Company to maintain a certain minimum net worth. On August 19, 1999, the
Company has signed a letter of intent that will extend its $10.0 million credit
facility by one year at a reduced interest rate of prime plus 0.5%. Amounts
outstanding under this line of credit were $5.5 million at July 31, 1999.
Additionally, the Bank has agreed to open a $5.0 million foreign accounts
receivable credit line backed by foreign accounts receivables at an interest
rate of prime plus 0.5%. During fiscal 1998, the Company had a $20.0 million
domestic credit facility and a $5.0 million equipment lease line. The $20.0
million credit facility has no outstanding borrowings and expired in July 1998.
The effective rate of interest on the equipment lease facility was 8.3% at July
31, 1998. The facility was terminated on October 31, 1998. The $5.0 million
equipment lease line was repaid in full in November 1998.

4. LONG-TERM LIABILITIES

Long-term liabilities consist of the following:

<TABLE>
<CAPTION>
As of July 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Subordinated note payable........................ $12,000,000 $12,000,000
Lease purchase obligations at various interest
rates, net of deferred interest................. 1,341,000 2,697,000
----------- -----------
13,341,000 14,697,000
Less: current portion............................ (5,106,000) (674,000)
----------- -----------
$ 8,235,000 $14,023,000
=========== ===========
</TABLE>

The subordinated note payable bears interest at 5.5% at July 31, 1999 and at
July 31, 1998, which is payable semi-annually and has semi-annual principal
payments of $2,000,000, which began in January 1997. The Company renegotiated
the terms of the note in fiscal 1999 and principal payments were deferred until
January 2001 at which time semi-annual installments in the amount of $2.0
million will begin until the note's maturity date of July 2003. The note is
unsecured and is subordinated in right of payment to senior indebtedness of the
Company. In connection with this note, the Company issued a warrant to purchase
up to 2,000,000 shares of common stock during the term of the note (see Note
7). Lease purchase obligations of $2,697,000 and $1,341,000 at July 31, 1999
and July 31, 1998 represent capital leases on LTX equipment.

F-11
<PAGE>

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. CONVERTIBLE SUBORDINATED DEBENTURES

On April 25, 1986, the Company issued and sold at par $35,000,000 of 7 1/4%
Convertible Subordinated Debentures due 2011. A total of $7,308,000 of the
original issue of $35,000,000 remains outstanding at July 31, 1999 and 1998.
The debentures are subordinated in right of payment to senior indebtedness and
are convertible by the holders into common stock at $18.00 per share at any
time prior to redemption or maturity. The debentures are redeemable at the
Company's option at any time, in whole or in part, at 100% of the principal
amount. No sinking fund payments are required before the maturity date of the
debentures in 2011. Interest is payable semi-annually on April 15 and October
15.

6. INCOME TAXES

The components of the provision for income taxes consist of the following:

<TABLE>
<CAPTION>
Year ended July 31,
------------------------------
1997 1998 1999
----------- ----------- ----
<S> <C> <C> <C>
Currently payable:
Federal..................................... $ 1,000,000 $ (818,000) --
State....................................... 200,000 (526,000) --
Foreign..................................... 216,000 274,000 --
----------- ----------- ----
Total current................................. $ 1,416,000 $(1,070,000) --
----------- ----------- ----
Deferred:
Federal..................................... $(1,000,000) $ 2,200,000 --
State....................................... -- -- --
Foreign..................................... -- -- --
----------- ----------- ----
Total deferred................................ $(1,000,000) $ 2,200,000 --
----------- ----------- ----
Total tax provision........................... $ 416,000 $ 1,130,000 --
=========== =========== ====
</TABLE>

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

<TABLE>
<CAPTION>
Year ended July 31,
------------------------
1997 1998 1999
----- ----- --------
<S> <C> <C> <C>
U.S. Federal statutory rate...................... (35.0)% (35.0)% 35.0%
State income taxes, net of Federal income tax
effect.......................................... 0.8 (0.7) 6.0
Foreign income taxes............................. -- 0.4 1.3
Change in valuation allowance.................... 17.9 31.5 2,490.0
Net foreign losses not benefited/(gains) not
provided........................................ 17.4 4.5 (2,532.3)
Tax credits...................................... (2.1) -- --
Other, net....................................... 3.7 0.8 --
Effective tax rate............................... 2.7% 1.5% 0.0%
</TABLE>

F-12
<PAGE>

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The temporary differences and carryfowards that created the deferred tax
assets and liabilities as of July 31, 1999, and 1998 are as follows:

<TABLE>
<CAPTION>
As of July 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward................ $ 13,616,000 $ 24,655,000
Tax credits.................................... 2,388,000 2,400,000
Inventory valuation reserves................... 10,329,000 5,654,000
Restructuring charges.......................... 3,144,000 774,000
Spares amortization............................ 3,228,000 2,446,000
Net capital loss carryforward.................. -- 6,621,000
Unearned service revenues...................... 3,500,000 2,364,000
Other.......................................... 2,186,000 2,495,000
------------ ------------
Total deferred tax assets.................... 38,391,000 47,409,000
Valuation allowance............................ (37,997,000) (47,335,000)
------------ ------------
Net deferred tax assets.......................... 394,000 74,000
Deferred tax liabilities:
Depreciation................................... (394,000) (74,000)
Other.......................................... -- --
------------ ------------
Total deferred tax liabilities............... (394,000) (74,000)
------------ ------------
Net deferred taxes recorded...................... $ -- $ --
============ ============
</TABLE>

The valuation allowance relates to uncertainty surrounding the realization of
the deferred tax assets.

7. STOCKHOLDERS' EQUITY

Stock Repurchase Program

In June 1996, the Board of Directors authorized a stock repurchase program
under which the Company could acquire up to 3,500,000 shares of its common
stock over a 12-month period. Under this program, the Company purchased 747,500
shares during fiscal 1997 which are held in treasury at a cost of $3,356,000.
The stock repurchase program expired in June 1997.

In April 1998, the Company entered into an agreement with the subordinated
note holder to market and develop the Company's Fusion product line. As part of
this agreement, the subordinated note holder delivered to the Company 1,600,000
shares of the Company's common stock. The Company recorded this stock in
treasury at its then fair market value of $7,400,000.

Warrants

In July 1994, in connection with the issuance of a subordinated note, the
Company issued a warrant to purchase up to 2,000,000 shares of common stock at
the then fair market value of $2.31 per share during the term of the note (see
Note 4). In June 1996, 1,000,000 shares of common stock were exercised under
this warrant. In July 1997, the remaining 1,000,000 shares under this warrant
were exercised.

Rights Agreement

The Board of Directors of the Company adopted a Rights Agreement, dated as of
April 30, 1999, between the Company and Bank Boston, N.A., as rights agent, to
replace its 1989 rights plan. In connection therewith,

F-13
<PAGE>

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the Board distributed one common share purchase right for each share of common
stock then or thereafter outstanding. The rights will become exercisable only
if a person or group acquires 15% or more of the Company's common stock or
announces a tender offer that would result in ownership of 15% or more of the
common stock. Initially, each right will entitle a stockholder to buy one share
of common stock of the Company at a purchase price of $45.00 per share, subject
to significant adjustment depending on the occurrence thereafter of certain
events. Before any person or group has acquired 15% or more of the common stock
of the Company, the rights are redeemable by the Board of Directors at $0.001
per right. The rights expire on April 30, 2009 unless redeemed by the Company
prior to that date.

8. EMPLOYEE BENEFIT PLANS

Stock Option Plans

The Company has three stock option plans: the 1999 Stock Plan (1999 Plan),
the 1990 Stock Option Plan (1990 Plan) and the 1995 LTX (Europe) Ltd. Approved
Stock Option Plan (U.K. Plan).

The 1999 Plan, 1990 Plan and the U.K. Plan provide for the granting of
options to employees to purchase shares of common stock at not less than 100%
of the fair market value of the date of grant. The 1999 Plan and the 1990 Plan
also provide for the granting of options to an employee, director or consultant
of the Company or its subsidiaries to purchase shares of common stock at prices
to be determined by the Board of Directors. Compensation expense relating to
shares granted under this plan at less than fair market value has been charged
to operations over the applicable vesting period. Options under the plans are
exercisable over vesting periods, which are typically three years beginning one
year from the date of grant. In December 1997, the stockholders of the Company
approved an increase to the number of shares of common stock that may be
granted under the 1990 Plan, through October 2000, from 3,700,000 shares to
5,225,000 shares. At July 31, 1999, 445,500 shares were subject to future grant
under the 1999 Plan, 239,136 shares were subject to future grant under the 1990
Plan and 35,626 shares were subject to future grant under the U.K. Plan.

On December 14, 1998, the Company repriced stock options representing
1,580,510 shares with an average exercise price of $4.57 to $2.81, the market
price at December 14. A total of 1,051,857 options representing 1,051,857
shares of common stock granted to the directors and executive officers of the
Company were not repriced.

F-14
<PAGE>

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Compensation Expense

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), which requires employee stock-based compensation to be either recorded or
disclosed at its fair value. As permitted by SFAS 123, the Company has elected
to continue to account for employee stock-based compensation under Accounting
Principles Board Opinion No. 25. Had compensation costs for awards in fiscal
1999 and 1998 the Company's stock-based compensation plans been determined
based on the fair value at the grant dates consistent with the method set forth
under SFAS 123, the effect on the Company's net income (loss) and net income
(loss) per share would have been as follows:

<TABLE>
<CAPTION>
Year ended July 31,
---------------------------
1997 1998 1999
-------- -------- -------
<S> <C> <C> <C>
Net gain (loss):
As reported................................... $(15,909) $(78,280) $ 375
Pro forma..................................... (17,535) (81,154) (8,735)
Net gain (loss) per share:
Basic
As reported.................................. (0.45) (2.15) .01
Pro forma.................................... (0.49) (2.23) (.25)
Diluted
As reported.................................. (0.45) (2.15) .01
Pro forma.................................... $ (0.49) $ (2.23) $ (.24)
</TABLE>

Since the method prescribed by SFAS 123 has not been applied to options
granted prior to August 1, 1995, the resulting pro forma compensation expense
may not be representative of the amount to be expected in future years. Pro
forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.

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

<TABLE>
<CAPTION>
Year ended July 31,
--------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Volatility.................................. 83% 79% 80%
Dividend yield.............................. 0% 0% 0%
Risk-free interest rate..................... 5.88% 4.44% 6.18%
Expected life of options.................... 5.02 years 7.95 years 7.36 years
</TABLE>

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

F-15
<PAGE>

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stock Option Activity

<TABLE>
<CAPTION>
1997 1998 1999
------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year...... 2,025,227 $ 3.35 3,260,283 $ 3.94 4,186,793 $ 4.26
Granted/repriced........ 1,753,750 4.82 1,178,250 4.57 3,683,967 4.88
Exercised............... (333,955) 2.51 (108,515) 2.83 (411,854) 2.49
Forfeited/repriced...... (184,739) 7.15 (143,225) 4.96 (2,163,351) 4.51
Options outstanding, end
of year................ 3,260,283 3.94 4,186,793 4.26 5,295,555 4.74
Options exercisable..... 1,707,496 2.88 1,612,478 3.46 1,492,123 3.38
Options available for
grant.................. 636,846 1,105,626 720,262
Weighted average fair
value of options
granted during year.... $ 3.38 $ 3.55 $ 3.81
</TABLE>

As of July 31, 1999, the status of the Company's outstanding and exercisable
options is as follows:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Price ($) Outstanding Contractual Life Exercise Price ($) Exercisable Exercise Price ($)
------------------ ----------- ---------------- ------------------ ----------- ------------------
<S> <C> <C> <C> <C> <C>
0.00- 1.26 134,000 5.7 0.96 134,000 0.96
1.26- 2.53 373,998 3.2 1.94 371,998 1.94
2.53- 3.79 2,202,557 8.7 2.89 603,450 3.06
3.79- 5.05 984,500 8.0 4.58 149,000 4.43
5.05- 6.31 265,250 7.1 5.71 161,525 5.74
6.31- 7.58 20,750 8.1 7.38 4,150 7.38
7.58- 8.84 1,254,500 9.8 8.79 8,000 8.06
8.84-10.10 -- -- -- -- --
10.10-12.63 60,000 6.2 11.44 60,000 11.44
--------- --- ----- --------- -----
5,295,555 8.3 4.74 1,492,123 3.38
========= === ===== ========= =====
</TABLE>

Employees' Stock Purchase Plan

In December 1993, the stockholders of the Company approved the adoption of
the 1993 Employees' Stock Purchase Plan, which replaced the 1983 Employees'
Stock Purchase Plan, which expired in December 1993. Under this plan, eligible
employees may contribute up to 15% of their annual compensation for the
purchase of common stock of the Company up to $25,000 of fair market value of
the stock per calendar year. The plan limited the number of shares which can be
issued for any semi-annual plan period to 150,000 shares. In 1999, the
shareholders of the Company increased the number of shares which can be issued
over the term of the plan to 3,000,000 shares. At July 31, 1999, 1,288,972
shares were available for future issuance under this plan.

Other Compensation Plans

In fiscal 1996, the Company established a Profit Sharing Bonus Plan, wherein
a percentage of pretax profits are distributed semi-annually to all employees.
In addition, the Company has a 401(k) Growth and Investment Program. Eligible
employees may make voluntary contributions to this plan through a salary
reduction contract up to the statutory limit or 15% of their annual
compensation. In fiscal 1996, the Company began matching employees' voluntary
contributions to the plan, up to certain prescribed limits. These Company

F-16
<PAGE>

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

contributions vest at a rate of 20% per year. The Company ceased matching
contributions in October of fiscal 1999 and there was a charge to expense in
fiscal 1999 for $151,979 for August through September 1998. The total charge to
expense under these plans was $1,056,000 in fiscal 1998 and $1,035,000 in
fiscal 1997.

9. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION

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

No single customer accounted for greater than 10% of total sales revenue in
fiscal 1999 and fiscal 1998. In fiscal 1997, sales to two customers accounted
for 13% and 12% of net sales, respectively. Sales to the top ten customers were
60%, 55%, and 44% of net sales in fiscal 1999, fiscal 1998 and fiscal 1997,
respectively.

The Company's operations by geographic segment for the three years ended July
31, 1999 are summarized as follows:

<TABLE>
<CAPTION>
Year ended July 31,
--------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Sales to unaffiliated customers:
United States......................... $ 64,183,000 $ 77,905,000 $ 61,603,000
Taiwan................................ 46,008,000 37,070,000 27,799,000
Japan................................. 13,285,000 26,655,000 11,645,000
Singapore............................. 27,826,000 20,270,000 18,156,000
All other countries................... 43,041,000 34,327,000 38,123,000
------------ ------------ ------------
Total sales to unaffiliated customers... 194,343,000 196,227,000 157,326,000
------------ ------------ ------------
Long-lived assets:
United States......................... 31,905,000 24,342,000 24,965,000
Taiwan................................ 591,000 1,300,000 1,175,000
Japan................................. 2,465,000 2,116,000 59,000
Singapore............................. 4,540,000 4,702,000 3,695,000
All other countries................... 3,457,000 2,967,000 2,048,000
------------ ------------ ------------
Total long-lived assets................. $ 42,958,000 $ 35,427,000 $ 31,942,000
============ ============ ============
</TABLE>

Transfer prices on products sold to foreign subsidiaries are intended to
produce profit margins that correspond to the subsidiary's sale and support
efforts. Sales to customers in North America are 99% within the United States.

F-17
<PAGE>

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

10. COMMITMENTS

The Company has operating lease commitments for certain facilities and
equipment and capital lease commitments for certain equipment. Minimum lease
payments net of sublease proceeds under noncancelable leases at July 31, 1999,
are as follows:

<TABLE>
<CAPTION>
Total Total
Operating Capital
Year ended July 31, Real Estate Equipment Leases Leases
------------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
2000...................... $ 3,756,000 $ 5,042,000 $ 8,798,000 $ 897,000
2001...................... 2,836,000 3,938,000 6,774,000 897,000
2002...................... 2,617,000 1,564,000 4,181,000 897,000
2003...................... 2,501,000 429,000 2,930,000 897,000
2004...................... 2,175,000 417,000 2,592,000 --
2005 and thereafter......... 5,158,000 1,465,000 6,623,000 --
----------- ----------- ----------- ----------
Total minimum lease
payments................... $19,043,000 $12,855,000 $31,898,000 $3,588,000
Less: amount representing
interest................... $ 893,000
----------
Present value of total
capital leases............. $2,695,000
</TABLE>

Total rental expense for fiscal 1999, 1998 and 1997 was $6,832,000,
$6,713,000, and $7,257,000 respectively.

11. RESTRUCTURING AND INVENTORY CHARGES

Fiscal 1998 Restructuring

In fiscal 1998, the Asian financial crisis (which began in January 1998)
created a major impact on the global economy, precipitating a further drop in
demand than the Company and the industry had been previously experiencing. As a
result, the Company's sales dropped to $33 million in the fourth quarter of
fiscal 1998, compared to $54 million in the third quarter of fiscal 1998.
Simultaneously, the Company's development and introduction of the Fusion
product line was occurring. The sudden drop in demand for the Company's
products, combined with the introduction of the Fusion product line, resulted
in significant excess and obsolete inventory. Management determined to
restructure the Company's operations during the fourth quarter of fiscal 1998,
in line with its strategy of focusing on the Fusion product line. As a result
of the combined rapid and sudden decline in global demand for Semiconductor
Test Equipment and the transition to the Fusion product line, the Company
recorded a $40.7 million inventory charge in the fourth quarter of fiscal 1998.
Inventory purchases in the second and third quarters of fiscal 1998 in
anticipation of a higher level of demand for its existing products consisted of
a large amount of custom and semi-custom inventory that would become obsolete
or difficult to sell due to the declining business conditions within the
industry in the third and fourth quarter of that same fiscal year.

The $6.3 million restructuring charge recorded in the fourth quarter of
fiscal 1998 included: $3.2 million in employee separation costs, $2.9 million
in asset impairment write-offs and $.2 million in lease terminations and other
contractual obligations. The workforce reduction impacted 259 employees, of
which 211 were in Production & Engineering, 33 in Sales & Marketing and 15 in
Administration. Asset impairment write-offs of $2.9 million related to the
write off of capitalized Master and Delta Series testers and test equipment at
its facilities in San Jose and Korea. The Company no longer manufactures the
Master series line and this equipment was written down to zero value and
depreciation expense permanently ceased. The assets were disposed of or sold in
fiscal 1999. The company received $.3 million in cash and short term notes for
the sale of these assets. There is no remaining accrued liability balance to be
paid that relates to the fiscal 1998 restructuring plan as of July 31, 1999.

F-18
<PAGE>

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Fiscal 1997 Restructuring

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

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

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

The remaining accrued balance as of July 31, 1999 of $1.7 million relates to
the estimated cost to replace certain board modules. In fiscal 1999,
approximately $.2 million of cash expenditures were made on this project.

Restructuring Cost
($000's)

Charges: (See Note)

<TABLE>
<CAPTION>
From the From the From the
Pre-Fiscal 1996 Plan Fiscal 1997 Plan Fiscal 1998 Plan
-------------------- ---------------- ----------------
<S> <C> <C> <C>
Employee separation
cost................... $ 1,900 $1,750 $3,145
Cancelled engineering
projects............... -- 1,250 --
New system board
modules................ -- 2,850 --
Fixed asset write-
downs.................. -- 600 2,908
Termination of leases
and other contractual
obligations............ 12,500 300 219
------- ------ ------
Total................. 14,400 6,750 6,272
======= ====== ======
Incurred through July
31, 1999............... 13,887 5,000 6,272
Ending accrual at July
31, 1999............... 513 1,750 --
Actual cash payments in
fiscal 1999............ -- 228 3,295
</TABLE>
- --------
Note: Charges represent cash items except for the fixed asset write-downs which
is a non-cash item.

Headcount Reduction

<TABLE>
<CAPTION>
From the From the
Fiscal 1997 Plan Fiscal 1998 Plan
---------------- ----------------
<S> <C> <C>
Sales and marketing...................... 4 33
Administration........................... 10 15
Production and engineering............... 166 211
--- ---
Total reduction........................ 180 259
</TABLE>

F-19
<PAGE>

LTX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

12. QUARTERLY RESULTS OF OPERATIONS (unaudited)

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

<TABLE>
<CAPTION>
Year Ended July 31, 1999
------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- ----------
<S> <C> <C> <C> <C>
Net sales.................................. $27,018 $33,691 $43,210 $ 53,407
Gross profit............................... 7,171 10,463 16,056 20,531
Net income (loss).......................... (6,892) 1,139 1,794 4,334
Net income (loss) per share:
Basic.................................... (.19) .03 .05 .12
Diluted.................................. (.19) .03 .05 .11

<CAPTION>
Year Ended July 31, 1998
------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter(1)
------- ------- ------- ----------
<S> <C> <C> <C> <C>
Net sales.................................. $54,206 $55,132 $54,130 $ 32,759
Gross profit............................... 19,006 19,978 14,364 (39,113)
Net income (loss).......................... 1,108 765 (6,334) (73,819)
Net income (loss) per share:
Basic.................................... 0.03 0.02 (0.17) (2.09)
Diluted.................................. 0.03 0.02 (0.17) (2.09)
</TABLE>
- --------
(1) The Company recorded a charge for excess inventory of $40.7 million and a
restructuring charge of $6.3 million in its fourth quarter results of
operations.

F-20
<PAGE>

[textual description of the inside back cover]

Inside Back Cover

The following caption appears on the center of the inside back cover: "Our
customers build their semiconductors without compromises -- Fusion allows them
to test it that way."

The background reflects a magnified image of a semiconductor chip.

[end of textual description of the inside back cover]

<PAGE>

[LTX LOGO APPEARS HERE]