Industry Conditions and Outlook

Formed by the August 2008 merger of LTX Corporation and Credence Systems Corporation, LTX-Credence Corporation ("LTX-Credence" or the "Company"), provides focused, cost-optimized automated test equipment (ATE) solutions. We design, manufacture, market and service ATE solutions that address the broad, divergent test requirements of the wireless, computing, automotive and entertainment market segments. Semiconductor designers and manufacturers worldwide use our equipment to test their devices during the manufacturing process. After testing, these devices are then incorporated in a wide range of products, including computers, mobile internet equipment such as wireless access points and interfaces, broadband access products such as cable modems and DSL modems, personal communication products such as cell phones and personal digital assistants, consumer products such as televisions, videogame systems, digital cameras and automobile electronics, and for power management in portable and automotive electronics.

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

LTX-Credence Corporation was incorporated in Massachusetts in 1976. Our executive offices are located at 1421 California Circle, Milpitas, California 95035 and our telephone number is 408-635-4300. The terms "LTX-Credence" and the "Company" refer to LTX-Credence Corporation and its wholly owned subsidiaries unless the context otherwise indicates. The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports available, free of charge, in the Investor Relations section of the Company's website at www.ltx-credence.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.

Industry Overview

Today, most electronic products contain a combination of integrated circuits
(ICs). Each of these ICs has electrical circuitry that requires validation or testing during and after the manufacturing process. The final usability of the IC is determined by ATE. The testing of devices is a critical step during the semiconductor production process. Typically, semiconductor companies test each device at two different stages during the manufacturing process to ensure its functional and electrical performance prior to shipment to the device user. These companies use semiconductor testing equipment to first test a device after it has been fabricated but before it has been packaged to eliminate non-functioning parts. Then, after

the functioning devices are packaged, they are tested again to determine if they fully meet performance specifications. Testing is an important step in the manufacturing process because it allows devices to be fabricated at both maximum density and performance-a key to the competitiveness of semiconductor manufacturers.

Three primary factors ultimately drive demand for semiconductor test equipment:

• increases in unit production of semiconductor devices;

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

• the emergence of next generation device technologies.

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

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

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

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

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

We are also exposed to the risks associated with the volatility of the U.S. and global economies. The lack of visibility regarding whether or when there will be sustained growth periods for the sale of electronic goods and information technology equipment, and uncertainty regarding the amount of sales, underscores the need for caution in predicting growth in the semiconductor test equipment industry in general and in our revenues and profits specifically. Slow or negative growth in the domestic economy may continue to materially and adversely affect our business, financial condition and results of operations for the foreseeable future. Our results of operations would be further adversely affected if we were to experience lower than anticipated order levels, cancellations of orders in backlog, extended customer delivery requirements or pricing pressure as a result of a slowdown. At lower levels of revenue, there is a higher likelihood that these types of changes in our customers' requirements would adversely affect our results of operations because in any particular quarter a limited number of transactions accounts for an even greater portion of sales for the quarter.

Critical Accounting Policies and the Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical experience, and evaluate them on an on-going basis to ensure they remain reasonable under current conditions. Actual results could differ

from those estimates. We discuss the development and selection of the critical accounting estimates with the audit committee of our board of directors on a quarterly basis, and the audit committee has reviewed the Company's critical accounting estimates as described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2008. For the first quarter of fiscal 2009, we believe the following critical accounting estimates significantly affected our estimates and judgments, in the preparation of our consolidated financial statements.

Inventory Valuation

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

For the three months ended October 31, 2008, we recorded an inventory-related provision of $13.7 million which consisted of excess and obsolete inventory as a result of the determination of our current combined company product roadmap, as well as declining customer demand in the current industry environment.

Valuation of Goodwill

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

We follow the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), which requires that goodwill and intangible assets with indefinite useful lives are not amortized. Intangible assets with a definitive useful life are amortized over their estimated useful life. Assets recorded in these categories are tested for impairment at least annually or when a change in circumstances may result in future impairment. Management uses a discounted cash flow analysis to test goodwill, at least annually or when indicators of impairment exist, which requires that certain assumptions and estimates be made regarding industry economic factors and future profitability of the acquired business to assess the need for an impairment charge. The provisions of SFAS 142 require that a two-step impairment test be performed for goodwill. In the first step, we will compare the fair value of the reporting unit to which goodwill has been allocated to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test and determine the implied fair value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.

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

As discussed in Note 2 to the consolidated financial statements, during the quarter we conducted analyses of the potential impairment of goodwill and concluded that this asset was not impaired at October 31, 2008. We will continue to perform these analyses on a quarterly basis for the foreseeable future.

Valuation of Identifiable Intangible Assets

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

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

In estimating the useful life of the acquired assets, we considered paragraph 11 of SFAS No. 142, which lists the pertinent factors to be considered when estimating the useful life of an intangible asset.

These factors included a review of the expected use by the combined company of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets, legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset or may enable the extension of the useful life of an acquired asset without substantial cost, the effects of obsolescence, demand, competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset. We expect to amortize these intangible assets over their estimated useful lives using a method that is based on estimated future cash flows as we believe this will approximate the pattern in which the economic benefits of the assets will be derived.

Impairment of Long-Lived Assets

In connection with the recent merger with Credence, during the quarter ended October 31, 2008, we developed a product roadmap for the combined company which led to the phase out of approximately $3.7 million of certain consignment testers and property and equipment related to the ASL 3RF, Diamond D40, and Sapphire product lines. In light of the current economic conditions, we also wrote down $1.3 million of certain consignment testers for which we do not believe we will recover the cost.

Due to the decline in our stock price and lower than expected revenues for the three months ended October 31, 2008, we conducted recoverability tests in accordance with SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") based on probability-weighted, undiscounted cash flows of our long-lived assets. As a result of these tests, we determined there were no additional impairment losses on long-lived assets for the three months ended October 31, 2008. However, actual performance in the near-term and longer-term could be materially different from these forecasts, which could impact future estimates of undiscounted cash flows and may result in the impairment of the carrying amount of long-lived assets. This could be caused by events such as strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, or a material negative change in its relationships with significant customers. Accordingly, we will continue to perform this analysis on a quarterly basis for the foreseeable future.

Accordingly, we recorded an impairment loss for the three months ended October 31, 2008 for $5.0 million. There were no significant impairment losses for the three months ended October 31, 2007.

Valuation of Acquired In-Process Research and Development

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

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

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

In accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"), we recorded a charge in the quarter ended October 31, 2008 for the full amount of the acquired in-process research and development.

Results of Operations

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



                                                             Three Months
                                                                Ended
                                                             October 31,
                                                           2008       2007
        Net sales                                          100.0 %    100.0 %
        Cost of sales                                       55.9       51.2
        Inventory-related provision                         29.0         -

        Gross profit                                        15.1       48.8
        Engineering and product development expenses        39.3       39.3
        Selling, general and administrative expenses        34.6       22.0
        Impairment charges                                  10.7         -
        Amortization of purchased intangible assets          6.3         -
        Acquired in-process research and development        13.2         -
        Restructuring                                        8.2         -

        Loss from operations                               (97.2 )    (12.5 )
        Other income (expense):
        Interest expense                                    (2.2 )     (1.6 )
        Investment income                                    2.0        2.3
        Other income                                         1.8         -
        Gain on extinguishment of debt, net                  0.6         -

        Loss before provision (benefit) for income taxes   (95.0 )    (11.8 )
        Provision (benefit) from income taxes                1.2      (11.0 )

        Net loss                                           (96.2 )%    (0.8 )%

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

Our results of operations for the three months ended October 31, 2008 include the results of Credence's operations from August 29, 2008 to October 31, 2008. Credence's results of operations are not included in our comparative three months of fiscal 2007.

Three Months Ended October 31, 2008 Compared to the Three Months Ended October 31, 2007

Net sales. Net sales consist of both semiconductor test equipment and related hardware and system support and maintenance services, net of returns and allowances. Net sales for the three months ended October 31, 2008 increased 59.0% to $47.1 million as compared to $29.6 million in the same quarter of the prior year. Net sales increased quarter over quarter, by 31.5% or $11.3 million from fourth quarter of fiscal year 2008 sales of $35.8 million. The increase in net sales from fourth quarter fiscal 2008 and the $17.5 million or 59.0% increase in net sales for the three months ended October 31, 2008 compared to the three months ended October 31, 2007, is due to the inclusion of two months of Credence sales of ASL, Sapphire and Diamond products as a result of the merger with Credence. The incremental benefit from Credence operations was partially offset by reduced shipment volume during the quarter ended October 31, 2009 due to prolonged unfavorable industry and market conditions that limit meaningful capital spending.

Service revenue, included in net sales, accounted for $15.9 million, or 33.7% of net sales, and $6.8 million, or 22.8% of net sales, for the three months ended October 31, 2008 and 2007, respectively. The increase in service revenue is primarily a result of the inclusion of two months of Credence-generated service revenue.

Geographically, sales to customers outside of the United States were 47.7% and 45.0% of net sales for the three months ended October 31, 2008 and October 31, 2007, respectively. The increase in sales to customers outside the United States was a result of a change in sales mix.

Inventory-related provision. We recorded an inventory-related provision of $13.7 million or 29.0% of net sales in the three months ended October 31, 2008. The provision consisted of excess and obsolete inventory as a result of the determination of the current combined company product roadmap, as well as declining customer demand due to the current industry environment. Product roadmap decisions to eliminate the ASL 3K RF and the Diamond D-40 products accounted for $5.9 million of the total inventory related provision. In addition, $6.6 million of the inventory related provision was a result of a significant reduction in the demand for the Sapphire products which have been negatively impacted by the current business conditions. The balance of the inventory related provision of approximately $1.2 million was related to our Fusion CX product line which is being phased out in favor of our Fusion MXc product line.

Gross profit margin. The gross profit margin was $7.1 million or 15.1% of net sales in the three months ended October 31, 2008, as compared to $14.5 million or 48.8% of net sales in the same quarter of the prior year. The decrease in the gross profit margin for the three months ended October 31, 2008 as compared to October 31, 2007 was primarily a result of the inventory-related provision of $13.7 million. Excluding the inventory-related provision, gross profit margin was $20.8 million or 44.1% of net sales for the quarter ended October 31, 2008. The decrease in adjusted gross profit margin from the quarter ended October 31, 2008 to the quarter ended October 31, 2007 is due to a higher percentage of field service revenue as compared to total revenue, which generates a lower profit margin.

Engineering and product development expenses. Engineering and product development expenses were $18.6 million, or 39.3% of net sales, in the three months ended October 31, 2008, as compared to $11.6 million, or 39.3% of net sales, in the same quarter of the prior year. The increase in engineering and product development expenses for the three months ended October 31, 2008 as compared to the three months ended October 31, 2007 is principally a result of increased engineering and product development expense associated with the inclusion of Credence operations for the two months ending October 31, 2008.

Selling, general and administrative expenses. Selling, general and administrative expenses were $16.3 million, or 34.6% of net sales, in the three months ended October 31, 2008, as compared to $6.5 million, or 22.0% of net sales, in the same quarter of the prior year. The increase is primarily driven by the inclusion of two months of Credence-related selling, general and administrative expense for the period ending October 31, 2008.

Impairment charges. Impairment charges were $5.0 million or 10.7% of net sales in the three months ended October 31, 2008, primarily related to write-offs of certain consigned inventory and internal capital equipment acquired from Credence. The charge was based on our determination of the current combined company product roadmap, as well as declining customer demand due to the current industry environment. We have initiated a phase out of the Diamond D40 and ASL 3RF product lines and as such determined that the demonstration equipment and other equipment to support development of these product are no longer needed or useable in other products.

Amortization of purchased intangible assets. Amortization associated with intangible assets acquired from Credence was $3.0 million or 6.3% of net sales for the two months ended October 31, 2008. The underlying intangible assets relate to acquired technology, customer and distributor relationships. These intangible assets acquired in the Credence merger, are being amortized over their estimated useful lives of between one and nine years.

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