##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
  
 FORM 10-Q
 [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended August 26, 2006
 OR
 [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to  .
 Commission File Number 001-04837
 TEKTRONIX, INC.
  OREGON
    
    93-0343990(State or Other Jurisdiction ofIncorporation or Organization)
    
    (I.R.S. Employer Identification No.)14200 SW KARL BRAUN DRIVEBEAVERTON, OREGON
    
    97077(Address of Principal Executive Offices)
    
    (Zip Code)
 (503) 627-7111
 NOT APPLICABLE




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##### 



TEKTRONIX,
INC. AND SUBSIDIARIES
 INDEX
 PAGE NO.FORWARD-LOOKING STATEMENTS
    
    
    1PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements.Condensed Consolidated Statements of Operations (Unaudited) - for the Fiscal Quarter ended August 26, 2006 and the Fiscal Quarter ended August 27, 2005
    
    
    2Condensed Consolidated Balance Sheets (Unaudited) - at August 26, 2006 and May 27, 2006
    
    
    3Condensed Consolidated Statements of Cash Flows (Unaudited) - for the Fiscal Quarter ended August 26, 2006 and the Fiscal Quarter ended August 27, 2005
    
    
    4Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    5Item 2.
    

Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    21Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk.
    
    
    40Item 4.
    
    Controls and Procedures.
    
    
    40PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings.
    
    
    40Item 1A.
    
    Risk Factors.
    
    
    41Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    44Item 4.
    
    Submission of Matters to a Vote of Security Holders.
    
    
    45Item 6.
    
    Exhibits.
    
    
    45SIGNATURES
    
    
    
    
    46EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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Forward-Looking Statements
     1




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Part I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 
 Condensed Consolidated Statements of Operations (Unaudited)
 Fiscal quarter ended(In thousands, except per share amounts)
    
    Aug. 26, 2006
    
    
    Aug. 27, 2005Net sales
    
    $
    268,113
    
    
    $
    235,060Cost of sales
    
    
    104,763
    
    
    
    99,103Gross profit
    
    
    163,350
    
    
    
    135,957Research and development expenses
    
    
    50,869
    
    
    
    43,605Selling, general and administrative expenses
    
    
    79,873
    
    
    
    68,565Business realignment costs
    
    
    2,596
    
    
    
    2,481Acquisition related costs and amortization
    
    
    1,471
    
    
    
    3,436Loss on disposition of assets, net
    
    
    554
    
    
    
    4Operating income
    
    
    27,987
    
    
    
    17,866Interest income
    
    
    4,670
    
    
    
    3,092Interest expense
    
    
    (99
    )
    
    
    (97
    )Other non-operating expense, net
    
    
    (1,011
    )
    
    
    (986
    )Earnings before taxes
    
    
    31,547
    
    
    
    19,875Income tax expense
    
    
    11,434
    
    
    
    5,707Net earnings from continuing operations
    
    
    20,113
    
    
    
    14,168Gain (loss) from discontinued operations, net of income taxes
    
    
    7
    
    
    
    (82
    )Net earnings
    
    $
    20,120
    
    
    $
    14,086Earnings per share:Continuing operations  basic
    
    $
    0.25
    
    
    $
    0.17Continuing operations  diluted
    
    $
    0.24
    
    
    $
    0.17Discontinued operations  basic and diluted
    
    $
    -
    
    
    $
    -Net earnings  basic
    
    $
    0.25
    
    
    $
    0.17Net earnings  diluted
    
    $
    0.24
    
    
    $
    0.17Weighted average shares outstanding:Basic
    
    
    82,074
    
    
    
    84,603Diluted
    
    
    83,542
    
    
    
    85,297Cash dividends declared per share
    
    $
    0.06
    
    
    $
    0.06
  2




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Condensed Consolidated Balance Sheets (Unaudited)
 (In thousands)
    
    Aug. 26, 2006
    
    
    May 27, 2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    200,360
    
    
    $
    215,587Short-term marketable investments
    
    
    129,002
    
    
    
    121,346Trade accounts receivable, net of allowance for
doubtful accounts of $3,068 and $3,079, respectively
    
    
    170,434
    
    
    
    174,599Inventories
    
    
    165,438
    
    
    
    156,351Other current assets
    
    
    68,161
    
    
    
    69,002Total current assets
    
    
    733,395
    
    
    
    736,885Property, plant and equipment, net
    
    
    126,868
    
    
    
    127,510Long-term marketable investments
    
    
    105,351
    
    
    
    103,839Goodwill, net
    
    
    306,134
    
    
    
    307,189Pension asset
    
    
    236,539
    
    
    
    239,128Other long-term assets
    
    
    111,557
    
    
    
    119,539Total assets
    
    $
    1,619,844
    
    
    $
    1,634,090LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    143,134
    
    
    $
    133,323Accrued compensation
    
    
    65,174
    
    
    
    71,718Deferred revenue
    
    
    72,415
    
    
    
    66,677Total current liabilities
    
    
    280,723
    
    
    
    271,718Deferred income taxes
    
    
    62,766
    
    
    
    65,935Long-term liabilities
    
    
    106,743
    
    
    
    108,868Shareholders equity:Common stock, no par value (authorized 200,000 shares;
issued and outstanding 82,515 and 83,719 shares
at August 26, 2006 and May 27, 2006, respectively)
    
    
    540,899
    
    
    
    540,718Retained earnings
    
    
    605,075
    
    
    
    620,465Accumulated other comprehensive income
    
    
    23,638
    
    
    
    26,386Total shareholders equity
    
    
    1,169,612
    
    
    
    1,187,569Total liabilities and shareholders equity
    
    $
    1,619,844
    
    
    $
    1,634,090
  3




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Condensed Consolidated Statements of Cash Flows (Unaudited)
 Fiscal quarter ended(In thousands)
    
    Aug. 26, 2006
    
    
    Aug. 27, 2005CASH FLOWS FROM OPERATING ACTIVITIESNet earnings
    
    $
    20,120
    
    
    $
    14,086Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:Depreciation and amortization expense
    
    
    7,297
    
    
    
    7,006Amortization of acquisition related intangible assets
    
    
    5,947
    
    
    
    5,947Share-based compensation expense
    
    
    4,201
    
    
    
    -Net loss on the disposition of assets
    
    
    554
    
    
    
    4(Gain) loss from discontinued operations
    
    
    (7
    )
    
    
    82Write-off of in-process research and development
    
    
    -
    
    
    
    365Tax benefit of stock option exercises
    
    
    -
    
    
    
    204Deferred income tax expense
    
    
    (2,518
    )
    
    
    301Changes in operating assets and liabilities:Trade accounts receivable, net
    
    
    4,165
    
    
    
    (5,878
    )Inventories
    
    
    (8,587
    )
    
    
    552Other current assets
    
    
    861
    
    
    
    (4,009
    )Accounts payable and accrued liabilities
    
    
    9,189
    
    
    
    (6,489
    )Accrued compensation
    
    
    (6,544
    )
    
    
    (23,541
    )Deferred revenue
    
    
    5,738
    
    
    
    (2,945
    )Cash funding for defined benefit plans
    
    
    -
    
    
    
    (33,400
    )Other long-term assets and liabilities, net
    
    
    (1,790
    )
    
    
    3,117Net cash provided by (used in) continuing operating activities
    
    
    38,626
    
    
    
    (44,598
    )Net cash used in discontinued operating activities
    
    
    (9
    )
    
    
    (82
    )Net cash provided by (used in) operating activities
    
    
    38,617
    
    
    
    (44,680
    )CASH FLOWS FROM INVESTING ACTIVITIESAcquisition of property, plant and equipment
    
    
    (6,124
    )
    
    
    (8,744
    )Proceeds from the disposition of property and equipment
    
    
    30
    
    
    
    230Proceeds from maturities and sales of marketable investments
    
    
    40,477
    
    
    
    72,409Purchases of short-term and long-term marketable investments
    
    
    (48,343
    )
    
    
    -Acquisition of businesses, net of cash acquired
    
    
    -
    
    
    
    (2,122
    )Net cash (used in) provided by investing activities
    
    
    (13,960
    )
    
    
    61,773CASH FLOWS FROM FINANCING ACTIVITIESProceeds from employee stock plans
    
    
    4,501
    
    
    
    4,888Repurchase of common stock
    
    
    (39,722
    )
    
    
    (52,714
    )Dividends paid
    
    
    (4,980
    )
    
    
    (5,092
    )Repayment of long-term debt
    
    
    -
    
    
    
    (95
    )Tax benefit of stock option exercises
    
    
    91
    
    
    
    -Net cash used in financing activities
    
    
    (40,110
    )
    
    
    (53,013
    )Effect of exchange rate changes on cash
    
    
    226
    
    
    
    (718
    )Net decrease in cash and cash equivalents
    
    
    (15,227
    )
    
    
    (36,638
    )Cash and cash equivalents at beginning of period
    
    
    215,587
    
    
    
    131,640Cash and cash equivalents at end of period
    
    $
    200,360
    
    
    $
    95,002
  4




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Notes to Condensed Consolidated Financial Statements (Unaudited)
 1.
    
    The Company
    2.
    
    Financial Statement Presentation
    5




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3.
    
    Recent Accounting Pronouncements
      6




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7




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4.
    
    Earnings Per Share and Share-Based Compensation
 Earnings Per Share
   Fiscal quarter ended(In thousands, except per share amounts)
    
    Aug. 26, 2006
    
    
    Aug. 27, 2005Net earnings
    
    $
    20,120
    
    
    $
    14,086Weighted average shares used for
basic earnings per share
    
    
    82,074
    
    
    
    84,603Incremental dilutive shares
    
    
    1,468
    
    
    
    694Weighted average shares used for
diluted earnings per share
    
    
    83,542
    
    
    
    85,297Earnings per share:Net earnings  basic
    
    $
    0.25
    
    
    $
    0.17Net earnings  diluted
    
    $
    0.24
    
    
    $
    0.17
  Share-Based Compensation
   8




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Fiscal quarter ended(In thousands, except per share amounts)
    
    Aug. 27, 2005Net earnings as reported
    
    $
    14,086Stock compensation cost included in net
earnings as reported, net of tax expense of $224
    
    
    558Stock compensation cost using the fair
value alternative, net of tax benefit of $1,918
    
    
    (4,765
    )Pro forma net earnings
    
    $
    9,879Earnings per share:Basic and diluted  as reported
    
    $
    0.17Basic and diluted  pro forma
    
    $
    0.12
 Impact of the Adoption of SFAS No. 123R
  For fiscal quarter ended August 26, 2006Using
    
    
    Adjustments for
    
    
    As(In thousands, except per share amounts)
    
    APB No. 25
    
    
    SFAS No. 123R
    
    
    ReportedCost of sales
    
    $
    104,763
    
    
    $
    -
    
    
    $
    104,763Research and development expenses
    
    
    49,880
    
    
    
    989
    
    
    
    50,869Selling, general, and administrative expenses
    
    
    77,601
    
    
    
    2,272
    
    
    
    79,873Operating income
    
    
    31,248
    
    
    
    (3,261
    )
    
    
    27,987Earnings before taxes
    
    
    34,808
    
    
    
    (3,261
    )
    
    
    31,547Net earnings
    
    $
    22,246
    
    
    $
    (2,126
    )
    
    $
    20,120Earnings per share:Basic
    
    $
    0.27
    
    
    $
    (0.02
    )
    
    $
    0.25Diluted
    
    $
    0.27
    
    
    $
    (0.03
    )
    
    $
    0.24Cash flows from operating activities
    
    $
    38,708
    
    
    $
    (91
    )
    
    $
    38,617Cash flows from financing activities
    
    $
    (40,201
    )
    
    $
    91
    
    
    $
    (40,110
    )
  Valuation Assumptions
  9




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Aug. 26, 2006
    
    
    Aug. 27, 2005Expected life in years
    
    
    4.2
    
    
    
    5.1Risk-free interest rate
    
    
    5.03
    %
    
    
    3.94
    %Volatility
    
    
    32.01
    %
    
    
    32.18
    %Dividend yield
    
    
    0.83
    %
    
    
    0.98
    %
 Stock Plans
  Share-Based Payment Award Activity
  WeightedNumber of
    
    
    Weighted
    
    
    Average
    
    
    AggregateShares in
    
    
    Average
    
    
    Remaining
    
    
    Intrinsic ValueThousands
    
    
    Exercise Price
    
    
    Life (years)
    
    
    in ThousandsOutstanding at May 27, 2006
    
    
    11,934
    
    
    $
    29.06Granted
    
    
    20
    
    
    
    29.73Exercised
    
    
    (28
    )
    
    
    19.60Forfeited
    
    
    (157
    )
    
    
    33.44Expired
    
    
    -
    
    
    
    -Outstanding at August 26, 2006
    
    
    11,769
    
    
    $
    29.02
    
    
    
    6.52
    
    
    $
    34,072Exercisable at August 26, 2006
    
    
    7,438
    
    
    $
    29.45
    
    
    
    5.61
    
    
    $
    28,167
   WeightedNumber of
    
    
    AverageShares in
    
    
    Grant DateThousands
    
    
    Fair ValueNonvested shares at May 27, 2006
    
    
    948
    
    
    $
    29.62Granted
    
    
    8
    
    
    
    29.34Vested
    
    
    (1
    )
    
    
    25.02Forfeited
    
    
    (13
    )
    
    
    30.18Nonvested shares at August 26, 2006
    
    
    942
    
    
    $
    29.61
  10




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Employee Stock Purchase Plan
   5.
    
    Acquisition of Inet Technologies, Inc.
   (In years)WeightedAverage
    
    
    
    
    
    
    Accumulated(In thousands)
    
    Useful Life
    
    
    Cost
    
    
    Amortization
    
    
    NetDeveloped technology
    
    
    4.8
    
    
    $
    87,004
    
    
    $
    (35,448
    )
    
    $
    51,556Customer relationships
    
    
    4.8
    
    
    
    22,597
    
    
    
    (9,235
    )
    
    
    13,362Covenants not to compete
    
    
    4.0
    
    
    
    1,200
    
    
    
    (575
    )
    
    
    625Tradename
    
    Not amortized
    
    
    11,152
    
    
    
    -
    
    
    
    11,152Total intangible assets purchased
    
    
    
    
    
    $
    121,953
    
    
    $
    (45,258
    )
    
    $
    76,695
  Fiscal quarter ended(In thousands)
    
    Aug. 26, 2006
    
    
    Aug. 27, 2005Cost of sales
    
    $
    4,624
    
    
    $
    4,624Acquisition related costs and amortization
    
    
    1,279
    
    
    
    1,279Total
    
    $
    5,903
    
    
    $
    5,903
 11




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AcquisitionRelatedCost of
    
    
    Costs and(In thousands)
    
    Sales
    
    
    Amortization
    
    
    TotalFiscal Year2007
    
    $
    18,495
    
    
    $
    5,117
    
    
    $
    23,6122008
    
    
    16,670
    
    
    
    4,621
    
    
    
    21,2912009
    
    
    15,759
    
    
    
    4,174
    
    
    
    19,9332010
    
    
    5,256
    
    
    
    1,354
    
    
    
    6,610Total
    
    $
    56,180
    
    
    $
    15,266
    
    
    $
    71,446
 6. Discontinued Operations
  Fiscal quarter ended(In thousands)
    
    Aug. 26, 2006
    
    
    Aug. 27, 2005Loss on sale of VideoTele.com in fiscal year 2003

(less applicable income tax benefit of $0 and $1)
    
    $
    -
    
    
    $
    (1
    )Gain (loss) on sale of optical parametric test business
in fiscal year 2003 
(less applicable
income tax (expense) benefit of ($9) and $36)
    
    
    16
    
    
    
    (68
    )Loss on sale of Gage in fiscal year 2003

(less applicable income tax benefit of $0 and $6)
    
    
    -
    
    
    
    (11
    )Loss on sale of Color Printing and Imaging Division
in fiscal year 2000 
(less applicable
income tax benefit of $4 and $1)
    
    
    (9
    )
    
    
    (2
    )Gain (loss) from discontinued operations, net of income taxes
    
    $
    7
    
    
    $
    (82
    )
 12




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7. Business Realignment Costs
     13




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CostBalance
    
    
    Incurred
    
    
    
    
    
    
    
    
    
    
    BalanceMay 27,
    
    
    and Other
    
    
    Cash
    
    
    Non-cash
    
    
    August 26,(In thousands)
    
    2006
    
    
    Adjustments
    
    
    Payments
    
    
    Adjustments
    
    
    2006Fiscal Year 2007 Actions:Employee severance and
related benefits
    
    $
    -
    
    
    $
    2,072
    
    
    $
    (385
    )
    
    $
    26
    
    
    $
    1,713Contractual obligations
    
    
    -
    
    
    
    286
    
    
    
    (240
    )
    
    
    -
    
    
    
    46Accumulated currency
translation loss, net
    
    
    -
    
    
    
    8
    
    
    
    -
    
    
    
    (8
    )
    
    
    -Total
    
    
    -
    
    
    
    2,366
    
    
    
    (625
    )
    
    
    18
    
    
    
    1,759Fiscal Year 2006 Actions:Employee severance and
related benefits
    
    
    4,867
    
    
    
    187
    
    
    
    (2,396
    )
    
    
    -
    
    
    
    2,658Total
    
    
    4,867
    
    
    
    187
    
    
    
    (2,396
    )
    
    
    -
    
    
    
    2,658Fiscal Year 2005 Actions:Employee severance and
related benefits
    
    
    11
    
    
    
    -
    
    
    
    (11
    )
    
    
    -
    
    
    
    -Total
    
    
    11
    
    
    
    -
    
    
    
    (11
    )
    
    
    -
    
    
    
    -Fiscal Year 2004 Actions:Employee severance and
related benefits
    
    
    613
    
    
    
    46
    
    
    
    (88
    )
    
    
    -
    
    
    
    571Total
    
    
    613
    
    
    
    46
    
    
    
    (88
    )
    
    
    -
    
    
    
    571Fiscal Year 2003 Actions:Employee severance and
related benefits
    
    
    3
    
    
    
    (3
    )
    
    
    -
    
    
    
    -
    
    
    
    -Contractual obligations
    
    
    511
    
    
    
    -
    
    
    
    (145
    )
    
    
    -
    
    
    
    366Total
    
    
    514
    
    
    
    (3
    )
    
    
    (145
    )
    
    
    -
    
    
    
    366Total of all actions
    
    $
    6,005
    
    
    $
    2,596
    
    
    $
    (3,265
    )
    
    $
    18
    
    
    $
    5,354
 14




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8. Inventories
   (In thousands)
    
    Aug. 26, 2006
    
    
    May 27, 2006Materials
    
    $
    12,399
    
    
    $
    8,252Work in process
    
    
    71,191
    
    
    
    72,663Finished goods
    
    
    81,848
    
    
    
    75,436Inventories
    
    $
    165,438
    
    
    $
    156,351
 9. Other Current Assets
  (In thousands)
    
    Aug. 26, 2006
    
    
    May 27, 2006Current deferred tax asset
    
    $
    46,829
    
    
    $
    45,686Prepaid expenses
    
    
    12,636
    
    
    
    12,776Income taxes receivable
    
    
    1,104
    
    
    
    1,772Other receivables
    
    
    7,074
    
    
    
    8,343Notes receivable
    
    
    12
    
    
    
    12Other current assets
    
    
    506
    
    
    
    413Other current assets
    
    $
    68,161
    
    
    $
    69,002
 10. Property, Plant and Equipment, Net
  (In thousands)
    
    Aug. 26, 2006
    
    
    May 27, 2006Land
    
    $
    698
    
    
    $
    698Buildings
    
    
    137,330
    
    
    
    135,727Machinery and equipment
    
    
    259,403
    
    
    
    258,137Accumulated depreciation and amortization
    
    
    (270,563
    )
    
    
    (267,052
    )Property, plant and equipment, net
    
    $
    126,868
    
    
    $
    127,510
  11. Goodwill, Net
   Balance at May 27, 2006
    
    $
    307,189Currency translation
    
    
    (1,055
    )Balance at August 26, 2006
    
    $
    306,134
 15




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12. Other Long-Term Assets
  (In thousands)
    
    Aug. 26, 2006
    
    
    May 27, 2006Intangibles, net
    
    $
    80,806
    
    
    $
    86,805Notes, contracts and leases
    
    
    18,926
    
    
    
    18,476Corporate equity securities
    
    
    6,595
    
    
    
    8,923Other long-term assets
    
    
    5,230
    
    
    
    5,335Other long-term assets
    
    $
    111,557
    
    
    $
    119,539
   13. Accounts Payable and Accrued Liabilities
  (In thousands)
    
    Aug. 26, 2006
    
    
    May 27, 2006Trade accounts payable
    
    $
    46,543
    
    
    $
    50,910Other accounts payable
    
    
    46,440
    
    
    
    44,719Accounts payable
    
    
    92,983
    
    
    
    95,629Income taxes payable
    
    
    28,058
    
    
    
    16,181Contingent liabilities (Note 16)
    
    
    9,213
    
    
    
    8,785Product warranty accrual (Note 19)
    
    
    5,655
    
    
    
    5,798Accrued expenses and other liabilities
    
    
    7,225
    
    
    
    6,930Accrued liabilities
    
    
    50,151
    
    
    
    37,694Accounts payable and accrued liabilities
    
    $
    143,134
    
    
    $
    133,323
  14. Long-Term Liabilities
  (In thousands)
    
    Aug. 26, 2006
    
    
    May 27, 2006Pension liability
    
    $
    66,328
    
    
    $
    66,147Deferred compensation
    
    
    15,099
    
    
    
    14,584Postretirement benefits
    
    
    11,860
    
    
    
    12,106Other long-term liabilities
    
    
    13,456
    
    
    
    16,031Long-term liabilities
    
    $
    106,743
    
    
    $
    108,868
 16




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##### Table of Contents



15. Pension and Other Postretirement Benefits
  Pension Benefits
    
    
    Other Postretirement BenefitsFiscal quarter ended
    
    
    Fiscal quarter endedAug. 26,
    
    
    Aug. 27,
    
    
    Aug. 26,
    
    
    Aug. 27,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    1,936
    
    
    $
    1,840
    
    
    $
    20
    
    
    $
    24Interest cost
    
    
    10,045
    
    
    
    9,617
    
    
    
    224
    
    
    
    214Expected return on
plan assets
    
    
    (12,638
    )
    
    
    (12,718
    )
    
    
    -
    
    
    
    -Amortization of transition
asset
    
    
    40
    
    
    
    28
    
    
    
    -
    
    
    
    -Amortization of prior
service cost
    
    
    (546
    )
    
    
    (567
    )
    
    
    -
    
    
    
    -Amortization of net loss
    
    
    5,155
    
    
    
    5,446
    
    
    
    -
    
    
    
    -Net periodic benefit costs
    
    $
    3,992
    
    
    $
    3,646
    
    
    $
    244
    
    
    $
    238
 16. Contingencies
  Sale of Color Printing and Imaging
   Environmental and Other
  17




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##### Table of Contents



17. Shareholders Equity
  AccumulatedOtherCommon Stock
    
    
    Retained
    
    
    Comprehensive(In thousands)
    
    Shares
    
    
    Amount
    
    
    Earnings
    
    
    Income
    
    
    TotalBalance at May 27, 2006
    
    
    83,719
    
    
    $
    540,718
    
    
    $
    620,465
    
    
    $
    26,386
    
    
    $
    1,187,569Net earnings
    
    
    -
    
    
    
    -
    
    
    
    20,120
    
    
    
    -
    
    
    
    20,120Additional minimum pension liability,
net of income taxes
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (278
    )
    
    
    (278
    )Foreign currency translation
adjustment
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (1,536
    )
    
    
    (1,536
    )Unrealized holding loss on available-
for-sale securities, net of income
taxes
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (934
    )
    
    
    (934
    )Dividends paid
    
    
    -
    
    
    
    -
    
    
    
    (4,980
    )
    
    
    -
    
    
    
    (4,980
    )Shares issued to employees, net
of forfeitures
    
    
    193
    
    
    
    4,581
    
    
    
    -
    
    
    
    -
    
    
    
    4,581Tax benefit of stock option exercises
    
    

    -
   
    
    
    91
    
    
    
    -
    
    
    
    -
    
    
    
    91Amortization of unearned share-based
compensation
    
    
    -
    
    
    
    4,701
    
    
    
    -
    
    
    
    -
    
    
    
    4,701Shares repurchased in open
market
    
    
    (1,397
    )
    
    
    (9,192
    )
    
    
    (30,530
    )
    
    
    -
    
    
    
    (39,722
    )Balance at August 26, 2006
    
    
    82,515
    
    
    $
    540,899
    
    
    $
    605,075
    
    
    $
    23,638
    
    
    $
    1,169,612
   18




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##### Table of Contents



Fiscal quarter ended(In thousands)
    
    Aug. 26, 2006
    
    
    Aug. 27, 2005Net earnings
    
    $
    20,120
    
    
    $
    14,086Other comprehensive income (loss):Additional minimum pension liability, net of
income taxes of ($125) and $88, respectively
    
    
    (278
    )
    
    
    179Foreign currency translation adjustment
    
    
    (1,536
    )
    
    
    (1,677
    )Unrealized holding loss on available-for-
sale securities, net of income taxes of
($548) and ($217), respectively
    
    
    (934
    )
    
    
    (339
    )Total comprehensive income
    
    $
    17,372
    
    
    $
    12,249
  UnrealizedAdditional
    
    
    
    
    
    
    Holding Gain
    
    
    AccumulatedMinimum
    
    
    Foreign
    
    
    (Loss), Net on
    
    
    OtherPension
    
    
    Currency
    
    
    Available-for-
    
    
    Comprehensive(In thousands)
    
    Liability
    
    
    Translation
    
    
    Sales securities
    
    
    IncomeBalance as of May 27, 2006
    
    $
    (11,477
    )
    
    $
    37,604
    
    
    $
    259
    
    
    $
    26,386First quarter activity
    
    
    (278
    )
    
    
    (1,536
    )
    
    
    (934
    )
    
    
    (2,748
    )Balance as of August 26, 2006
    
    $
    (11,755
    )
    
    $
    36,068
    
    
    $
    (675
    )
    
    $
    23,638
 18. Business Segments
  Fiscal quarter ended(In thousands)
    
    Aug. 26, 2006
    
    
    Aug. 27, 2005Consolidated net sales to external customers by groups of similar products:Instruments Business
    
    $
    198,212
    
    
    $
    177,369Communications Business
    
    
    69,901
    
    
    
    57,691Net sales
    
    $
    268,113
    
    
    $
    235,060Consolidated net sales to external customers by region:The Americas:United States
    
    $
    97,979
    
    
    $
    84,403Other Americas
    
    
    6,430
    
    
    
    5,267Europe
    
    
    66,078
    
    
    
    62,747Pacific
    
    
    56,369
    
    
    
    44,422Japan
    
    
    41,257
    
    
    
    38,221Net sales
    
    $
    268,113
    
    
    $
    235,060
 19




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19. Product Warranty Accrual
   Fiscal quarter ended(In thousands)
    
    Aug. 26, 2006
    
    
    Aug. 27, 2005Balance at beginning of period
    
    $
    5,798
    
    
    $
    6,508Warranty parts and service provided
    
    
    (2,608
    )
    
    
    (2,429
    )Provision for warranty expense
    
    
    2,465
    
    
    
    1,765Balance at end of period
    
    $
    5,655
    
    
    $
    5,844
 20. Supplemental Cash Flow Information
 Fiscal quarter ended(In thousands)
    
    Aug. 26, 2006
    
    
    Aug. 27, 2005Supplemental disclosure of cash flows:Income taxes paid, net
    
    $
    2,175
    
    
    $
    8,558Interest paid
    
    
    83
    
    
    
    51Non-cash transactions from other acquisitions:Common stock issued
    
    $
    -
    
    
    $
    2,075
 20




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Introduction and Overview
  Business Overview
        21




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Acquisitions
    Inet Technologies, Inc.
   (In years)WeightedAverage
    
    
    
    
    
    
    Accumulated(In
thousands)
    
    Useful Life
    
    
    Cost
    
    
    Amortization
    
    
    NetDeveloped technology
    
    
    4.8
    
    
    $
    87,004
    
    
    $
    (35,448
    )
    
    $
    51,556Customer relationships
    
    
    4.8
    
    
    
    22,597
    
    
    
    (9,235
    )
    
    
    13,362Covenants not to compete
    
    
    4.0
    
    
    
    1,200
    
    
    
    (575
    )
    
    
    625Tradename
    
    Not amortized
    
    
    11,152
    
    
    
    
    
    
    
    11,152Total intangible assets purchased
    
    
    
    
    
    $
    121,953
    
    
    $
    (45,258
    )
    
    $
    76,695
  Fiscal quarter ended(In thousands)
    
    Aug. 26, 2006
    
    
    Aug. 27, 2005Cost of sales
    
    $
    4,624
    
    
    $
    4,624Acquisition related costs and amortization
    
    
    1,279
    
    
    
    1,279Total
    
    $
    5,903
    
    
    $
    5,903
 22




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AcquisitionRelatedCost of
    
    
    Costs and(In thousands)
    
    Sales
    
    
    Amortization
    
    
    
    TotalFiscal Year2007
    
    $
    18,495
    
    
    $
    5,117
    
    
    $
    23,6122008
    
    
    16,670
    
    
    
    4,621
    
    
    
    21,2912009
    
    
    15,759
    
    
    
    4,174
    
    
    
    19,9332010
    
    
    5,256
    
    
    
    1,354
    
    
    
    6,610Total
    
    $
    56,180
    
    
    $
    15,266
    
    
    $
    71,446
 Business Realignment Costs
     23




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##### Table of Contents



CostBalance
    
    
    Incurred
    
    
    
    
    
    
    
    
    
    
    BalanceMay 27,
    
    
    and Other
    
    
    Cash
    
    
    Non-cash
    
    
    August 26,(In thousands)
    
    2006
    
    
    Adjustments
    
    
    Payments
    
    
    Adjustments
    
    
    2006Fiscal Year 2007 Actions:Employee severance and
related benefits
    
    $
    -
    
    
    $
    2,072
    
    
    $
    (385
    )
    
    $
    26
    
    
    $
    1,713Contractual obligations
    
    
    -
    
    
    
    286
    
    
    
    (240
    )
    
    
    -
    
    
    
    46Accumulated currency
translation loss, net
    
    
    -
    
    
    
    8
    
    
    
    -
    
    
    
    (8
    )
    
    
    -Total
    
    
    -
    
    
    
    2,366
    
    
    
    (625
    )
    
    
    18
    
    
    
    1,759Fiscal Year 2006 Actions:Employee severance and
related benefits
    
    
    4,867
    
    
    
    187
    
    
    
    (2,396
    )
    
    
    -
    
    
    
    2,658Total
    
    
    4,867
    
    
    
    187
    
    
    
    (2,396
    )
    
    
    -
    
    
    
    2,658Fiscal Year 2005 Actions:Employee severance and
related benefits
    
    
    11
    
    
    
    -
    
    
    
    (11
    )
    
    
    -
    
    
    
    -Total
    
    
    11
    
    
    
    -
    
    
    
    (11
    )
    
    
    -
    
    
    
    -Fiscal Year 2004 Actions:Employee severance and
related benefits
    
    
    613
    
    
    
    46
    
    
    
    (88
    )
    
    
    -
    
    
    
    571Total
    
    
    613
    
    
    
    46
    
    
    
    (88
    )
    
    
    -
    
    
    
    571Fiscal Year 2003 Actions:Employee severance and
related benefits
    
    
    3
    
    
    
    (3
    )
    
    
    -
    
    
    
    -
    
    
    
    -Contractual obligations
    
    
    511
    
    
    
    -
    
    
    
    (145
    )
    
    
    -
    
    
    
    366Total
    
    
    514
    
    
    
    (3
    )
    
    
    (145
    )
    
    
    -
    
    
    
    366Total of all actions
    
    $
    6,005
    
    
    $
    2,596
    
    
    $
    (3,265
    )
    
    $
    18
    
    
    $
    5,354
 24




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Critical Accounting Estimates
  Share-based Compensation
  Revenue Recognition
    25




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Contingencies
        26




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Goodwill and Intangible Assets
       27




---



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Pension Plans
        28




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Income Taxes
     29




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30




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RESULTS OF OPERATIONS
 Fiscal quarter endedAug. 26,
    
    
    Aug. 27,
    
    
    
    %(In thousands, except per share amounts)
    
    2006
    
    
    2005
    
    
    
    ChangeOrders
    
    $
    255,399
    
    
    $
    245,515
    
    
    
    4
    %Net sales
    
    
    268,113
    
    
    
    235,060
    
    
    
    14
    %Cost of sales
    
    
    104,763
    
    
    
    99,103
    
    
    
    6
    %Gross profit
    
    
    163,350
    
    
    
    135,957
    
    
    
    20
    %Gross margin
    
    
    60.9
    %
    
    
    57.8
    %Research and development expenses
    
    
    50,869
    
    
    
    43,605
    
    
    
    17
    %Selling, general and administrative expenses
    
    
    79,873
    
    
    
    68,565
    
    
    
    16
    %Business realignment costs
    
    
    2,596
    
    
    
    2,481
    
    
    
    5
    %Acquisition related costs and amortization
    
    
    1,471
    
    
    
    3,436
    
    
    
    (57
    )%Loss on disposition of assets, net
    
    
    554
    
    
    
    4
    
    
    
    >100
    %Operating income
    
    
    27,987
    
    
    
    17,866
    
    
    
    57
    %Interest income
    
    
    4,670
    
    
    
    3,092
    
    
    
    51
    %Interest expense
    
    
    (99
    )
    
    
    (97
    )
    
    
    2
    %Other non-operating expense, net
    
    
    (1,011
    )
    
    
    (986
    )
    
    
    3
    %Earnings before taxes
    
    
    31,547
    
    
    
    19,875
    
    
    
    59
    %Income tax expense
    
    
    11,434
    
    
    
    5,707
    
    
    
    >100
    %Net earnings from continuing operations
    
    
    20,113
    
    
    
    14,168
    
    
    
    42
    %Gain (loss) from discontinued operations, net of income taxes
    
    
    7
    
    
    
    (82
    )
    
    
    *Net earnings
    
    $
    20,120
    
    
    $
    14,086
    
    
    
    43
    %Earnings per share:Continuing operations  basic
    
    $
    0.25
    
    
    $
    0.17
    
    
    
    47
    %Continuing operations  diluted
    
    $
    0.24
    
    
    $
    0.17
    
    
    
    41
    %Discontinued operations  basic and diluted
    
    $
    -
    
    
    $
    -
    
    
    
    -Net earnings  basic
    
    $
    0.25
    
    
    $
    0.17
    
    
    
    47
    %Net earnings  diluted
    
    $
    0.24
    
    
    $
    0.17
    
    
    
    41
    %
 
 *

    not meaningful 31




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##### Table of Contents



First Quarter of Fiscal Year 2007 Compared to the First Quarter of Fiscal Year 2006
 Executive Summary
  Orders
  Fiscal quarter endedAug. 26,
    
    
    Aug. 27,
    
    
    
    %(In thousands)
    
    2006
    
    
    2005
    
    
    
    ChangeInstruments Business
    
    $
    198,279
    
    
    $
    174,771
    
    
    
    13
    %Communications Business
    
    
    57,120
    
    
    
    70,744
    
    
    
    (19
    )%Total orders
    
    $
    255,399
    
    
    $
    245,515
    
    
    
    4
    %
    Instruments Business
   32




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##### Table of Contents



Communications Business
   Orders by Region
  Fiscal quarter endedAug. 26,
    
    
    Aug. 27,
    
    
    
    %(In thousands)
    
    2006
    
    
    2005
    
    
    
    ChangeUnited States
    
    $
    96,194
    
    
    $
    86,131
    
    
    
    12
    %International
    
    
    159,205
    
    
    
    159,384
    
    
    
    0
    %Total orders
    
    $
    255,399
    
    
    $
    245,515
    
    
    
    4
    %
  Net Sales
    33




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Gross Profit and Gross Margin
    Operating Expenses
      34




---



##### Table of Contents



Non-Operating Income / Expense
    Income Taxes
  Net Earnings
  Earnings Per Share
  35




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##### Table of Contents



Financial Condition, Liquidity and Capital Resources
 Sources and Uses of Cash
 Cash Flows.
 (In thousands)
    
    Aug. 26, 2006
    
    
    Aug. 27, 2005Cash provided by (used in):Operating activities
    
    $
    38,617
    
    
    $
    (44,680
    )Investing activities
    
    
    (13,960
    )
    
    
    61,773Financing activities
    
    
    (40,110
    )
    
    
    (53,013
    )
 Operating Activities.
    Investing Activities.
  Financing Activities
   36




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##### Table of Contents



Working Capital
  (In thousands)
    
    Aug. 26, 2006
    
    
    May 27, 2006Current assets:Cash and cash equivalents
    
    $
    200,360
    
    
    $
    215,587Short-term marketable investments
    
    
    129,002
    
    
    
    121,346Trade accounts receivable, net of allowance for
doubtful accounts of $3,068 and $3,079, respectively
    
    
    170,434
    
    
    
    174,599Inventories
    
    
    165,438
    
    
    
    156,351Other current assets
    
    
    68,161
    
    
    
    69,002Total current assets
    
    
    733,395
    
    
    
    736,885Current liabilities:Accounts payable and accrued liabilities
    
    
    143,134
    
    
    
    133,323Accrued compensation
    
    
    65,174
    
    
    
    71,718Deferred revenue
    
    
    72,415
    
    
    
    66,677Total current liabilities
    
    
    280,723
    
    
    
    271,718Working capital
    
    $
    452,672
    
    
    $
    465,167
    37




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##### Table of Contents



Recent Accounting Pronouncements
      38




---



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39




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 Financial Market Risk
    
 Item 4. Controls and Procedures.
   
 Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
   40




---



##### Table of Contents



Item 1A. Risk Factors.
  We compete in a cyclical market and a decrease in capital expenditures by our customers could
adversely impact demand for our products.
  Rapid changes in technology require timely competitive products and failure to anticipate the
changes and produce competitive products could adversely affect our operations and financial
condition.
  Competition is intense, may intensify and could result in increased downward pricing pressure,
reduced margins and the loss of market share.
  41




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##### Table of Contents



We obtain various key components, services and licenses from sole and limited source suppliers.
    Changes or delays in the implementation or customer acceptance of our products could harm our
financial results.
   Our network management business and reputation could suffer if we do not prevent security breaches.
  42




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##### Table of Contents



A significant portion of our revenues are from international customers, and, as a result, our
business may be harmed by political and economic conditions in foreign markets and the challenges
associated with operating internationally.
  Our success depends on our ability to maintain and protect our intellectual property and the
intellectual property licensed from others.
  We are subject to environmental regulations.
   Our defined benefit pension plans are subject to financial market risks.
  43




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##### Table of Contents



Our reported results of operations will be materially and adversely affected by our adoption of
SFAS No. 123R.
  We face other risk factors.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  CumulativeNumberof Shares
    
    
    Maximum DollarTotal
    
    
    Average
    
    
    
    
    
    
    Purchased as
    
    
    Value of SharesNumber
    
    
    Price
    
    
    Total
    
    
    Part of Publicly
    
    
    that Mayof Shares
    
    
    Paid Per
    
    
    Amount
    
    
    Announced Plans
    
    
    Yet BeFiscal Period
    
    Purchased
    
    
    Share
    
    
    Paid
    
    
    or Programs
    
    
    PurchasedMay 28, 2006 to
June 24, 2006
    
    
    372,100
    
    
    $
    30.68
    
    
    $
    11,415,841
    
    
    
    30,161,879
    
    
    $
    220,555,525June 25, 2006 to
July 22, 2006
    
    
    694,000
    
    
    
    27.86
    
    
    
    19,336,912
    
    
    
    30,855,879
    
    
    
    201,218,613July 23, 2006 to
August 26, 2006
    
    
    330,600
    
    
    
    27.13
    
    
    
    8,969,425
    
    
    
    31,186,479
    
    
    $
    192,249,188Total
    
    
    1,396,700
    
    
    $
    28.44
    
    
    $
    39,722,178
  44




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders.
   For
    
    WithheldPauline Lo Alker
    
    
    70,043,191
    
    
    
    5,262,971A. Gary Ames
    
    
    73,744,269
    
    
    
    1,561,893Gerry B. Cameron
    
    
    75,204,534
    
    
    
    101,628David N. Campbell
    
    
    75,077,904
    
    
    
    228,258Frank C. Gill
    
    
    70,064,404
    
    
    
    5,241,758Robin L. Washington
    
    
    75,224,066
    
    
    
    82,096Richard H. Wills
    
    
    73,674,768
    
    
    
    1,631,394Cyril J. Yansouni
    
    
    75,219,474
    
    
    
    86,688
  For
    
    Against
    
    Abstain75,158,942
    
    
    78,147
    
    
    
    69,073
 
 Item 6. Exhibits.
     45




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##### Table of Contents



SIGNATURES
  October 4, 2006
    
    TEKTRONIX, INC.By
    
    /s/ COLIN L. SLADE

Colin L. SladeSenior Vice President and
Chief Financial Officer
 46




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##### Table of Contents



EXHIBIT INDEX
 Exhibits No.
    
    Exhibit Description(31.1)
    
    302 Certification, Chief Executive Officer.(31.2)
    
    302 Certification, Chief Financial Officer.(32.1)
    
    906 Certification, Chief Executive Officer.(32.2)
    
    906 Certification, Chief Financial Officer.