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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





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 December 27, 2008

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission File Number: 0-26634





LeCROY CORPORATION

(Exact Name of Registrant as Specified in Its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 13-2507777                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|700 CHESTNUT RIDGE ROAD CHESTNUT RIDGE, NEW YORK               |  | 10977                               
|(Address of Principal Executive Office)                        |  | (Zip Code)                          

(845) 425-2000

(Registrants Telephone Number, Including Area Code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)





Indicate by check mark (X) whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months
(or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO   ̈

Indicate by check mark (X) whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  | x
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller Reporting Company |  |  ̈

Indicate by check mark (X) whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    YES   ̈    NO  x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                                   |  |                                
|---------------------------------- |  | -------------------------------
|CLASS                              |  | OUTSTANDING AT February 1, 2009
|Common stock, par value $.01 share |  | 12,405,136                     









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LeCROY CORPORATION

FORM 10-Q

INDEX



|          |  |                                                                                                                                   |  |         
|--------- |  | --------------------------------------------------------------------------------------------------------------------------------- |  | --------
|          |  |                                                                                                                                   |  | Page No.
|PART I    |  | FINANCIAL INFORMATION                                                                                                             |  |         
|          |  |                                                                                                                                  
|Item 1.   |  | Financial Statements:                                                                                                             |  | 1       
|          |  | Consolidated Balance Sheets (Unaudited) as of December 27, 2008 and June 28, 2008                                                 |  | 1       
|          |  | Consolidated Statements of Operations (Unaudited) for the Quarter and Two Quarters ended December 27, 2008 and December
 29, 2007 |  | 2       
|          |  | Consolidated Statements of Cash Flows (Unaudited) for the Two Quarters ended December 27, 2008 and December 29, 2007              |  | 3       
|          |  | Notes to Consolidated Financial Statements (Unaudited)                                                                            |  | 4       
|          |  |                                                                                                                                  
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                             |  | 19      
|          |  |                                                                                                                                  
|Item 3.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                                        |  | 25      
|          |  |                                                                                                                                  
|Item 4.   |  | Controls and Procedures                                                                                                           |  | 26      
|          |  |                                                                                                                                  
|PART II   |  | OTHER INFORMATION                                                                                                                 |  |         
|          |  |                                                                                                                                  
|Item 1.   |  | Legal Proceedings                                                                                                                 |  | 27      
|          |  |                                                                                                                                  
|Item 1A.  |  | Risk Factors                                                                                                                      |  | 27      
|          |  |                                                                                                                                  
|Item 2.   |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                       |  | 27      
|          |  |                                                                                                                                  
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                                               |  | 28      
|          |  |                                                                                                                                  
|Item 6.   |  | Exhibits                                                                                                                          |  | 28      
|          |  |                                                                                                                                  
|Signature |  |                                                                                                                                   |  | 29      

LeCroy®, Wavelink,
WaveMaster®, WavePro®, WaveJet®, WaveRunner®, WaveScan , WaveSurfer, WaveExpert, MAUI, CATC and WaveAce are our trademarks, among others not
referenced in this document. All other trademarks or servicemarks referred to in this Form 10-Q are the property of their respective owners.



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

LeCROY CORPORATION

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



|                                                                                                                                                         |  |                  |          |   |              |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ------------ | - | ------- | -
|In thousands, except par value and share data                                                                                                            |  | December 27,2008 |          |   | June 28,2008 |  
|ASSETS                                                                                                                                                   |  |                  |          |   |              |   |         |  
|Current assets:                                                                                                                                          |  |                  |          |   |              |   |         |  
|Cash and cash equivalents                                                                                                                                |  | $                | 9,190    |   |              | $ | 10,224  |  
|Accounts receivable, net of reserves of $673 and $742 at December 27, 2008 and June 28, 2008, respectively                                               |  |                  | 31,994   |   |              |   | 33,274  |  
|Inventories, net                                                                                                                                         |  |                  | 34,993   |   |              |   | 32,886  |  
|Other current assets                                                                                                                                     |  |                  | 11,826   |   |              |   | 10,214  |  
|                                                                                                                                                         |  |                  |          |   |              |   |         |  
|Total current assets                                                                                                                                     |  |                  | 88,003   |   |              |   | 86,598  |  
|                                                                                                                                                         |  |                 
|Property, plant and equipment, net                                                                                                                       |  |                  | 21,147   |   |              |   | 21,683  |  
|Goodwill                                                                                                                                                 |  |                  |         |   |              |   | 105,771 |  
|Other non-current assets                                                                                                                                 |  |                  | 12,755   |   |              |   | 12,934  |  
|                                                                                                                                                         |  |                  |          |   |              |   |         |  
|Total assets                                                                                                                                             |  | $                | 121,905  |   |              | $ | 226,986 |  
|                                                                                                                                                         |  |                  |          |   |              |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                     |  |                  |          |   |              |   |         |  
|Current liabilities:                                                                                                                                     |  |                  |          |   |              |   |         |  
|Accounts payable                                                                                                                                         |  | $                | 19,497   |   |              | $ | 22,280  |  
|Accrued expenses and other current liabilities                                                                                                           |  |                  | 13,523   |   |              |   | 19,201  |  
|Current portion of bank debt                                                                                                                             |  |                  | 6,000    |   |              |   |        |  
|                                                                                                                                                         |  |                  |          |   |              |   |         |  
|Total current liabilities                                                                                                                                |  |                  | 39,020   |   |              |   | 41,481  |  
|                                                                                                                                                         |  |                 
|Convertible notes                                                                                                                                        |  |                  | 64,850   |   |              |   | 62,000  |  
|Deferred revenue and other non-current liabilities                                                                                                       |  |                  | 4,568    |   |              |   | 4,545   |  
|                                                                                                                                                         |  |                  |          |   |              |   |         |  
|Total liabilities                                                                                                                                        |  |                  | 108,438  |   |              |   | 108,026 |  
|                                                                                                                                                         |  |                 
|Commitments and contingencies                                                                                                                            |  |                  |          |   |              |   |         |  
|                                                                                                                                                         |  |                 
|Stockholders equity:                                                                                                                                    |  |                  |          |   |              |   |         |  
|Preferred stock, $.01 par value (authorized 5,000,000 shares; none issued and outstanding as of December 27, 2008 and June 28, 2008)                     |  |                  |         |   |              |   |        |  
|Common stock, $.01 par value (authorized 45,000,000 shares; 12,814,540 shares issued at December 27, 2008 and 12,656,899 shares issued at
June 28, 2008) |  |                  | 128      |   |              |   | 127     |  
|Additional paid-in capital                                                                                                                               |  |                  | 115,554  |   |              |   | 113,693 |  
|Accumulated other comprehensive income                                                                                                                   |  |                  | 2,034    |   |              |   | 3,451   |  
|(Accumulated deficit) retained earnings                                                                                                                  |  |                  | (101,159 | ) |              |   | 4,102   |  
|Treasury stock, at cost (398,645 and 297,523 shares at December 27, 2008 and June 28, 2008, respectively)                                                |  |                  | (3,090   | ) |              |   | (2,413  | )
|                                                                                                                                                         |  |                  |          |   |              |   |         |  
|Total stockholders equity                                                                                                                               |  |                  | 13,467   |   |              |   | 118,960 |  
|                                                                                                                                                         |  |                  |          |   |              |   |         |  
|Total liabilities and stockholders equity                                                                                                               |  | $                | 121,905  |   |              | $ | 226,986 |  
|                                                                                                                                                         |  |                  |          |   |              |   |         |  

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



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LeCROY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



|                                                                        |                  |               |          |                  |                    |   |                  |   |  |                  |          |   |  |   |        |  
|----------------------------------------------------------------------- | ---------------- | ------------- | -------- | ---------------- | ------------------ | - | ---------------- | - |  | ---------------- | -------- | - |  | - | ------ | -
|In thousands, except per share data                                     |                  | Quarter Ended |          |                  | Two Quarters Ended |  
|                                                                        | December 27,2008 |               |          | December 29,2007 |                    |   | December 27,2008 |   |  | December 29,2007 |         
|Revenues:                                                               |                  |               |          |                  |                    |   |                  |   |  |                  |          |   |  |   |        |  
|Test and measurement products                                           |                  | $             | 37,005   |                  |                    | $ | 38,177           |   |  | $                | 75,451   |   |  | $ | 74,670 |  
|Service and other                                                       |                  |               | 2,102    |                  |                    |   | 2,396            |   |  |                  | 4,380    |   |  |   | 4,603  |  
|                                                                        |                  |               |          |                  |                    |   |                  |   |  |                  |          |   |  |   |        |  
|Total revenues                                                          |                  |               | 39,107   |                  |                    |   | 40,573           |   |  |                  | 79,831   |   |  |   | 79,273 |  
|                                                                        |                  |               |          |                 
|Cost of revenues                                                        |                  |               | 18,838   |                  |                    |   | 17,061           |   |  |                  | 36,528   |   |  |   | 33,502 |  
|                                                                        |                  |               |          |                  |                    |   |                  |   |  |                  |          |   |  |   |        |  
|Gross profit                                                            |                  |               | 20,269   |                  |                    |   | 23,512           |   |  |                  | 43,303   |   |  |   | 45,771 |  
|                                                                        |                  |               |          |                 
|Operating expenses:                                                     |                  |               |          |                  |                    |   |                  |   |  |                  |          |   |  |   |        |  
|Selling, general and administrative                                     |                  |               | 12,839   |                  |                    |   | 13,278           |   |  |                  | 25,422   |   |  |   | 25,648 |  
|Research and development                                                |                  |               | 8,809    |                  |                    |   | 7,914            |   |  |                  | 16,612   |   |  |   | 15,506 |  
|Impairment of goodwill                                                  |                  |               | 105,771  |                  |                    |   |                 |   |  |                  | 105,771  |   |  |   |       |  
|                                                                        |                  |               |          |                  |                    |   |                  |   |  |                  |          |   |  |   |        |  
|Total operating expenses                                                |                  |               | 127,419  |                  |                    |   | 21,192           |   |  |                  | 147,805  |   |  |   | 41,154 |  
|                                                                        |                  |               |          |                  |                    |   |                  |   |  |                  |          |   |  |   |        |  
|Operating (loss) income                                                 |                  |               | (107,150 | )                |                    |   | 2,320            |   |  |                  | (104,502 | ) |  |   | 4,617  |  
|                                                                        |                  |               |          |                 
|Other income (expense):                                                 |                  |               |          |                  |                    |   |                  |   |  |                  |          |   |  |   |        |  
|Gain on extinguishment of convertible debt, net of issue cost write-off |                  |               |         |                  |                    |   |                 |   |  |                  | 252      |   |  |   |       |  
|Interest income                                                         |                  |               | 26       |                  |                    |   | 82               |   |  |                  | 61       |   |  |   | 155    |  
|Interest expense                                                        |                  |               | (942     | )                |                    |   | (1,196           | ) |  |                  | (1,825   | ) |  |   | (2,339 | )
|Other, net                                                              |                  |               | 33       |                  |                    |   | (113             | ) |  |                  | 289      |   |  |   | (338   | )
|                                                                        |                  |               |          |                  |                    |   |                  |   |  |                  |          |   |  |   |        |  
|Other expense, net                                                      |                  |               | (883     | )                |                    |   | (1,227           | ) |  |                  | (1,223   | ) |  |   | (2,522 | )
|                                                                        |                  |               |          |                  |                    |   |                  |   |  |                  |          |   |  |   |        |  
|(Loss) income before income taxes                                       |                  |               | (108,033 | )                |                    |   | 1,093            |   |  |                  | (105,725 | ) |  |   | 2,095  |  
|(Benefit) provision for income taxes                                    |                  |               | (1,237   | )                |                    |   | (112             | ) |  |                  | (464     | ) |  |   | 226    |  
|                                                                        |                  |               |          |                  |                    |   |                  |   |  |                  |          |   |  |   |        |  
|Net (loss) income                                                       |                  | $             | (106,796 | )                |                    | $ | 1,205            |   |  | $                | (105,261 | ) |  | $ | 1,869  |  
|                                                                        |                  |               |          |                  |                    |   |                  |   |  |                  |          |   |  |   |        |  
|Net (loss) income per common share:                                     |                  |               |          |                  |                    |   |                  |   |  |                  |          |   |  |   |        |  
|Basic                                                                   |                  | $             | (8.93    | )                |                    | $ | 0.10             |   |  | $                | (8.83    | ) |  | $ | 0.16   |  
|Diluted                                                                 |                  | $             | (8.93    | )                |                    | $ | 0.10             |   |  | $                | (8.83    | ) |  | $ | 0.16   |  
|                                                                        |                  |               |          |                 
|Weighted average number of common shares:                               |                  |               |          |                  |                    |   |                  |   |  |                  |          |   |  |   |        |  
|Basic                                                                   |                  |               | 11,962   |                  |                    |   | 11,785           |   |  |                  | 11,922   |   |  |   | 11,757 |  
|Diluted                                                                 |                  |               | 11,962   |                  |                    |   | 12,056           |   |  |                  | 11,922   |   |  |   | 11,985 |  

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



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LeCROY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                                                                   |                  |                    |          |                  |  |   |        |  
|-------------------------------------------------------------------------------------------------- | ---------------- | ------------------ | -------- | ---------------- |  | - | ------ | -
|In thousands                                                                                       |                  | Two Quarters ended |         
|                                                                                                   | December 27,2008 |                    |          | December 29,2007 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |                  |                    |          |                  |  |   |        |  
|Net (loss) income                                                                                  |                  | $                  | (105,261 | )                |  | $ | 1,869  |  
|Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |                  |                    |          |                  |  |   |        |  
|Impairment of goodwill                                                                             |                  |                    | 105,771  |                  |  |   |       |  
|Depreciation and amortization                                                                      |                  |                    | 3,215    |                  |  |   | 3,754  |  
|Share-based compensation                                                                           |                  |                    | 1,032    |                  |  |   | 2,626  |  
|Amortization of debt issuance costs                                                                |                  |                    | 328      |                  |  |   | 358    |  
|Deferred income taxes                                                                              |                  |                    | (1,324   | )                |  |   | (586   | )
|Gain on extinguishment of convertible debt, net of issue cost write-off                            |                  |                    | (252     | )                |  |   |       |  
|Change in operating assets and liabilities:                                                        |                  |                    |          |                  |  |   |        |  
|Accounts receivable                                                                                |                  |                    | 444      |                  |  |   | (1,353 | )
|Inventories                                                                                        |                  |                    | (2,634   | )                |  |   | 2,854  |  
|Other current and non-current assets                                                               |                  |                    | (1,166   | )                |  |   | (204   | )
|Accounts payable, accrued expenses and other liabilities                                           |                  |                    | (1,400   | )                |  |   | (2,690 | )
|                                                                                                   |                  |                    |          |                  |  |   |        |  
|Net cash (used in) provided by operating activities                                                |                  |                    | (1,247   | )                |  |   | 6,628  |  
|                                                                                                   |                  |                    |          |                  |  |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |                  |                    |          |                  |  |   |        |  
|Purchase of property, plant and equipment                                                          |                  |                    | (2,067   | )                |  |   | (1,076 | )
|                                                                                                   |                  |                    |          |                  |  |   |        |  
|Net cash used in investing activities                                                              |                  |                    | (2,067   | )                |  |   | (1,076 | )
|                                                                                                   |                  |                    |          |                  |  |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |                  |                    |          |                  |  |   |        |  
|Borrowings under credit line                                                                       |                  |                    | 7,500    |                  |  |   |       |  
|Repurchase of convertible notes                                                                    |                  |                    | (2,774   | )                |  |   |       |  
|Payments made on capital leases                                                                    |                  |                    | (115     | )                |  |   | (172   | )
|Repayment of borrowings under credit line                                                          |                  |                    | (1,500   | )                |  |   | (3,410 | )
|Proceeds from employee stock purchase and option plans                                             |                  |                    | 397      |                  |  |   | 439    |  
|Purchase of treasury shares                                                                        |                  |                    | (677     | )                |  |   | (1,008 | )
|                                                                                                   |                  |                    |          |                  |  |   |        |  
|Net cash provided by (used in) financing activities                                                |                  |                    | 2,831    |                  |  |   | (4,151 | )
|                                                                                                   |                  |                    |          |                  |  |   |        |  
|Effect of exchange rate changes on cash and cash equivalents                                       |                  |                    | (551     | )                |  |   | 257    |  
|                                                                                                   |                  |                    |          |                  |  |   |        |  
|Net (decrease) increase in cash and cash equivalents                                               |                  |                    | (1,034   | )                |  |   | 1,658  |  
|Cash and cash equivalents at beginning of the period                                               |                  |                    | 10,224   |                  |  |   | 10,448 |  
|                                                                                                   |                  |                    |          |                  |  |   |        |  
|Cash and cash equivalents at end of the period                                                     |                  | $                  | 9,190    |                  |  | $ | 12,106 |  
|                                                                                                   |                  |                    |          |                  |  |   |        |  
|Supplemental Cash Flow Disclosure                                                                  |                  |                    |          |                  |  |   |        |  
|Cash paid during the period for:                                                                   |                  |                    |          |                  |  |   |        |  
|Interest                                                                                           |                  | $                  | 1,426    |                  |  | $ | 1,951  |  
|Income taxes                                                                                       |                  |                    | 361      |                  |  |   | 319    |  
|Non-cash transactions:                                                                             |                  |                    |          |                  |  |   |        |  
|Transfer of inventory into property, plant and equipment                                           |                  |                    | 458      |                  |  |   | 1,411  |  
|Treasury stock purchased but unpaid                                                                |                  |                    |         |                  |  |   | 17     |  
|Vendor supplied capital lease agreement                                                            |                  |                    |         |                  |  |   | 718    |  

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



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LeCROY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation

The accompanying interim
Consolidated Financial Statements include all the accounts of LeCroy Corporation (the Company or LeCroy) and its wholly-owned subsidiaries. These Consolidated Financial Statements are unaudited and should be read in
conjunction with the audited Consolidated Financial Statements included in the Companys Annual Report on Form 10-K for the fiscal year ended June 28, 2008. The accompanying Consolidated Balance Sheet as of June 28, 2008 has been
derived from those audited Consolidated Financial Statements. Inter-company transactions and balances have been eliminated in consolidation. The Companys fiscal years end on the Saturday closest to June 30, which resulted in reporting
periods ended on December 27, 2008, December 29, 2007 and June 28, 2008.

The Companys Consolidated Financial
Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (US GAAP), which require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the revenues and expenses reported during the period. The most significant of these estimates and assumptions relate to
revenue recognition, reserves for accounts receivable, allowance for excess and obsolete inventory, valuation of long-lived and intangible assets, goodwill, income taxes, share-based compensation expense and estimation of warranty liabilities. These
estimates and assumptions are based on managements judgment and available information and, consequently, actual results could differ from these estimates.

These unaudited Consolidated Financial Statements reflect all adjustments, of a normal recurring nature, that are, in the opinion of management, necessary for a fair presentation of the financial position and the
results of operations for the interim periods presented. Interim period operating results may not be indicative of the operating results for a full year. Certain reclassifications were made to prior year amounts to conform to the current year
presentation.

Change in Accounting Policy for Classification of Certain Shipping and Handling Costs

The Companys shipping and handling costs associated with transporting its products to customers were previously recorded as a component of Selling,
general and administrative expenses in the Consolidated Statements of Operations. In accordance with Emerging Issues Task Force Issue No. 00-10 Accounting for Shipping and Handling Fees and Costs, the Company disclosed the amount
of these shipping and handling costs that were included as Selling, general and administrative expenses (SG&A) in the notes to the Consolidated Financial Statements on Form 10-K.

Beginning in fiscal 2009, the Company changed its accounting policy to classify certain shipping and handling costs as Cost of revenues in the
Consolidated Statement of Operations. The amounts classified as Cost of revenues represent shipping and handling costs associated with the distribution of finished product from their point of manufacturing directly to customers, distributors and
wholly-owned international subsidiaries. Management believes that the classification of these shipping and handling costs as Cost of revenues better reflects the cost of producing and distributing its products and aligns external financial reporting
with the results used internally to evaluate the Companys operational performance. Shipping and handling costs associated with the transportation of demonstration units shipped to sales personnel and customers, as well as distribution costs
associated with servicing the Companys international customers through its foreign sales offices are recorded as SG&A, as they are considered direct selling expenses.

For purposes of comparability, approximately $0.5 and $0.9 million of shipping and handling costs previously classified as SG&A for the prior quarter
and prior two quarters ended December 29, 2007, respectively has been reclassified to Cost of revenues to apply the new policy. This change in accounting principle and reclassification had no impact on operating income, net income, or
earnings per share.

2. Share-Based Compensation

Total share-based compensation expense recorded in the Consolidated Statement of Operations for the quarter ended December 27, 2008 and December 29, 2007 is approximately $0.2 million and $1.4 million,
respectively. For the two quarters ended December 27, 2008 and December 29, 2007, total share-based compensation is approximately $1.0 million and $2.6 million, respectively.



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Stock Options and Assumptions

The fair value of options granted is estimated on the date of grant using a Black-Scholes option pricing model. Expected volatilities are calculated based
on the historical volatility of the Companys stock. Management monitors share option exercise and employee termination patterns to estimate forfeiture rates. Separate groups of employees that have similar historical exercise behavior are
considered separately for valuation purposes. If the Companys actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be
significantly different from what was recorded in the current period. The expected holding period of options represents the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on the interest rate
of a 5-year U.S. Treasury note in effect on the date of the grant or such other period that most closely equals the expected term of the option.

The table below presents the assumptions used to calculate the fair value of options granted during the quarter and two quarters ended December 27, 2008 and December 29, 2007:



|                                               |  |                                |                |   |                                     |   |                |                                |  |   |                                     |   |  |   |                |  
|---------------------------------------------- |  | ------------------------------ | -------------- | - | ----------------------------------- | - | -------------- | ------------------------------ |  | - | ----------------------------------- | - |  | - | -------------- | -
|                                               |  | Quarter EndedDecember 27, 2008 |                |   | Two Quarters EndedDecember 27, 2008 |   |                | Quarter EndedDecember 29, 2007 |  |   | Two Quarters EndedDecember 29, 2007 |  
|Expected holding period (years)                |  |                                | 5.0            |   |                                     |   | 5.0            |                                |  |   | 5.0                                 |   |  |   | 5.0            |  
|Risk-free interest rate                        |  |                                | 2.33% - 2.71   | % |                                     |   | 2.33% - 3.23   | %                              |  |   | 3.23% - 4.40                        | % |  |   | 3.23% - 4.57   | %
|Dividend yield                                 |  |                                | 0.0            | % |                                     |   | 0.0            | %                              |  |   | 0.0                                 | % |  |   | 0.0            | %
|Expected volatility                            |  |                                | 42.13% - 43.03 | % |                                     |   | 41.12% - 43.03 | %                              |  |   | 45.29% - 45.99                      | % |  |   | 45.29% - 48.64 | %
|Weighted average fair value of options granted |  | $                              | 1.61           |   |                                     | $ | 1.63           |                                |  | $ | 3.87                                |   |  | $ | 3.71           |  

Changes in the Companys stock options for the quarter and two quarters ended
December 27, 2008:



|                                                 |  |                 |   |  |                              |       |                                                  |      |                                |   |    
|------------------------------------------------ |  | --------------- | - |  | ---------------------------- | ----- | ------------------------------------------------ | ---- | ------------------------------ | - | ---
|                                                 |  | Number ofShares |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerms (Years) |      | AggregateIntrinsic Value($000)
|Outstanding at June 28, 2008                     |  | 1,498,070       |   |  | $                            | 13.46 |                                                  |      |                                |   |    
|Granted                                          |  | 2,500           |   |  | $                            | 8.55  |                                                  |      |                                |   |    
|Exercised                                        |  | (75             | ) |  | $                            | 2.24  |                                                  |      |                                |   |    
|Expired                                          |  | (1,689          | ) |  | $                            | 12.52 |                                                  |      |                                |   |    
|Forfeited                                        |  | (6,498          | ) |  | $                            | 11.88 |                                                  |      |                                |   |    
|                                                 |  |                 |   |  |                              |       |                                                  |      |                                |   |    
|Outstanding at September 27, 2008                |  | 1,492,308       |   |  | $                            | 13.46 |                                                  | 3.36 |                                | $ | 628
|Granted                                          |  | 298,860         |   |  | $                            | 3.98  |                                                  |      |                                |   |    
|Exercised                                        |  | (6,250          | ) |  | $                            | 1.69  |                                                  |      |                                |   |    
|Expired                                          |  | (156,023        | ) |  | $                            | 14.97 |                                                  |      |                                |   |    
|Forfeited                                        |  |                |   |  | $                            |      |                                                  |      |                                |   |    
|                                                 |  |                 |   |  |                              |       |                                                  |      |                                |   |    
|Outstanding at December 27, 2008                 |  | 1,628,895       |   |  | $                            | 11.62 |                                                  | 3.38 |                                | $ | 98 
|                                                 |  |                 |   |  |                              |       |                                                  |      |                                |   |    
|Vested and expected to vest at December 27, 2008 |  | 1,529,784       |   |  | $                            | 12.25 |                                                  | 2.93 |                                | $ | 98 
|                                                 |  |                 |   |  |                              |       |                                                  |      |                                |   |    
|Exercisable at December 27, 2008                 |  | 1,262,300       |   |  | $                            | 13.33 |                                                  | 2.63 |                                | $ | 93 
|                                                 |  |                 |   |  |                              |       |                                                  |      |                                |   |    

The total intrinsic value of stock options exercised during the quarter and two quarters ended
December 27, 2008 was approximately $18,000 as compared to approximately $8,000 and $0.2 million for the quarter and two quarters ended December 29, 2007. The options granted in the current quarter ended December 27, 2008 have a
vesting term of 4 years, except for approximately 32,000 immediately vested options representing an annual grant to the board of directors.

As of December 27, 2008, there was approximately $0.5 million of total unrecognized compensation cost (net of estimated forfeitures) related to stock options granted under the plans. That cost is expected to be recognized over a
remaining weighted-average period of approximately 2.4 years. Less than $0.1 million of compensation cost was capitalized in inventory or any other assets for the quarter and two quarters ended December 27, 2008 and December 29, 2007.

Non-Vested Stock and Assumptions

The fair value of new grants is determined based on the closing price on the date of grant. Related compensation expense is recognized ratably over the associated requisite service period, giving effect to estimated
forfeitures. If the Companys actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what was
recorded in the current period.



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The following table summarizes transactions related to non-vested stock for the quarter and two quarters
ended December 27, 2008:



|                                       |  |                 |   |  |                                      |      
|-------------------------------------- |  | --------------- | - |  | ------------------------------------ | -----
|                                       |  | Number ofShares |   |  | Weighted AverageGrant DateFair
Value
|Non-vested stock at June 28, 2008      |  | 496,504         |   |  | $                                    | 12.24
|Granted                                |  |                |   |  | $                                    |     
|Vested                                 |  | (39,976         | ) |  | $                                    | 12.19
|Forfeited                              |  | (2,976          | ) |  | $                                    | 8.89 
|                                       |  |                 |   |  |                                      |      
|Non-vested stock at September 27, 2008 |  | 453,552         |   |  | $                                    | 12.27
|Granted                                |  | 64,573          |   |  | $                                    | 4.84 
|Vested                                 |  | (134,871        | ) |  | $                                    | 10.94
|Forfeited                              |  | (2,665          | ) |  | $                                    | 9.37 
|                                       |  |                 |   |  |                                      |      
|Non-vested stock at December 27, 2008  |  | 380,589         |   |  | $                                    | 11.50
|                                       |  |                 |   |  |                                      |      

Non-vested stock is included in the issued numbers presented on the Consolidated Balance Sheets.
Non-vested stock is not included in the weighted average share calculation for basic earnings per share. However, the dilutive effect of the non-vested stock is included in the weighted average share calculation for diluted earnings per share.
Non-vested stock granted in the current quarter ended December 27, 2008 represents the annual grant of immediately vested awards for the board of directors, excluding approximately 8,000 shares granted to a new board member which vest over a 3
year period.

As of December 27, 2008, there was approximately $2.8 million of total unrecognized compensation cost (net of estimated
forfeitures) related to non-vested stock granted under the plans. That cost is expected to be recognized over a remaining weighted-average period of approximately 2.2 years.

Employee Stock Purchase Plan and Assumptions

The Company has an Employee Stock Purchase Plan (ESPP) with a look-back option that allows employees to purchase shares of common stock at 85% of the market value at the lower of either the date of enrollment or the date of
purchase. Payment for the ESPP is a fixed amount, set at the beginning of the period, made through payroll withholding over the enrollment period of six months. The number of shares the participant can acquire is variable based on the fixed amount
withheld and the applicable fair value. SFAS No. 123R requires an ESPP with a purchase price discount of greater than 5% and a look-back option to be compensatory. The Company accounts for the ESPP in accordance with FASB Technical Bulletin
No. 97-1, Accounting under Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back Option. The fair value of the put and call features of the estimated shares to be purchased are estimated at
the beginning of the purchase period using a Black-Scholes option pricing model. Expected volatilities are calculated based on the historical six-month volatility of the Companys stock. The expected holding period is equal to the six-month
enrollment period. The risk-free interest rate is based on the interest rate of a six-month U.S. Treasury note in effect on the first day of the enrollment period. The fair value of the shares is liability classified until the end of the six-month
period at which time the amount is then equity classified. As of December 27, 2008 and June 28, 2008, there was approximately $48,000 and $42,000 of liability classified share-based compensation expense for the ESPP included in Accrued
expenses and other current liabilities on the Consolidated Balance Sheets.

Stock Appreciation Rights and Assumptions

On August 20, 2007, the Board of Directors adopted and approved the 2007 Stock Appreciation Right Plan (the SAR Plan); as amended on
September 19, 2008. Under the SAR Plan, the Compensation Committee of the Board of Directors may award stock appreciation rights to eligible employees. Each stock appreciation right (a SAR) awarded represents the right to receive an
amount of cash equal to the excess of the fair market value of a share of the Companys common stock on the date that a participant exercises such right over the fair market value of a share of the Companys common stock on the date that
such SAR was awarded. Awards of SARs will vest in four successive annual installments of 25% of the SARs subject to such award on the anniversary of the date of the grant of such award. The employee has four years from the date of vesting of an
installment in which to exercise such installment. The Plan will terminate on August 20, 2017.



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The fair value of SARs granted is estimated on the date of grant and remeasured at each reporting period
using a Black-Scholes option pricing model. Expected volatilities are calculated based on the historical volatility of the Companys stock. Management monitors award exercise and employee termination patterns to estimate forfeiture rates. If
the Companys actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what was recorded in the
current period. The expected holding period of SARs represents the period of time that SARs granted are expected to be outstanding. The risk-free interest rate is based on the interest rate of a 5-year U.S. Treasury note in effect on the date of the
grant or other such period that is closest to the expected term of the SARs.

The Company records compensation expense ratably over the
service period and adjusts for changes in the fair value of SARs at each reporting period. At December 27, 2008, there was approximately $0.6 million of unrecognized compensation cost (net of estimated forfeitures) related to SARs, which is
expected to be recognized over a weighted average period of approximately 3.4 years.

The table below presents the assumptions used to
remeasure the value of the SAR liability at each reporting period:



|                                                            |  |                               |                |   |                               |   |       |  
|----------------------------------------------------------- |  | ----------------------------- | -------------- | - | ----------------------------- | - | ----- | -
|                                                            |  | Quarter EndedDecember 27,2008 |                |   | Quarter EndedDecember 29,2007 |  
|Expected holding period (years)                             |  |                               | 4.0 - 5.0      |   |                               |   | 5.0   |  
|Risk-free interest rate                                     |  |                               | 1.30% - 1.51   | % |                               |   | 3.52  | %
|Dividend yield                                              |  |                               | 0.0            | % |                               |   | 0.0   | %
|Expected volatility                                         |  |                               | 47.66% - 47.91 | % |                               |   | 44.20 | %
|Weighted average fair value of SARs granted and outstanding |  | $                             | 0.33           |   |                               | $ | 4.72  |  

The fair value of the SARs is liability classified because the awards are payable in cash. As of
December 27, 2008 and June 28, 2008, there was approximately $0.1 million and $0.6 million, respectively, of liability classified share-based compensation expense for the SARs included in Accrued expenses and other current liabilities on
the Consolidated Balance Sheets.



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Changes in the Companys SARs for the quarter and two quarters ended December 27, 2008 are as follows:



|                                                 |  |                 |  |                                |      |                                                  |      |                                |   |    
|------------------------------------------------ |  | --------------- |  | ------------------------------ | ---- | ------------------------------------------------ | ---- | ------------------------------ | - | ---
|                                                 |  | Number ofShares |  | Weighted AverageExercise Price |      | WeightedAverageRemainingContractualTerms (Years) |      | AggregateIntrinsic Value($000)
|Outstanding at June 28, 2008                     |  | 712,000         |  | $                              | 7.60 |                                                  |      |                                |   |    
|                                                 |  |                 |  |                               
|Granted                                          |  | 1,744,000       |  | $                              | 8.06 |                                                  |      |                                |   |    
|                                                 |  |                 |  |                                |      |                                                  |      |                                |   |    
|Outstanding at September 27, 2008                |  | 2,456,000       |  | $                              | 7.93 |                                                  | 6.08 |                                | $ | 164
|Granted                                          |  |                |  |                                |     |                                                  |      |                                |   |    
|                                                 |  |                 |  |                                |      |                                                  |      |                                |   |    
|Outstanding at December 27, 2008                 |  | 2,456,000       |  | $                              | 7.93 |                                                  | 5.63 |                                | $ |   
|                                                 |  |                 |  |                                |      |                                                  |      |                                |   |    
|Vested and expected to vest at December 27, 2008 |  | 2,300,721       |  | $                              | 7.92 |                                                  | 5.58 |                                | $ |   
|                                                 |  |                 |  |                                |      |                                                  |      |                                |   |    
|Exercisable at December 27, 2008                 |  | 178,000         |  | $                              | 7.60 |                                                  | 3.18 |                                | $ |   
|                                                 |  |                 |  |                                |      |                                                  |      |                                |   |    

3. Revenue Recognition

LeCroy recognizes product and service revenue, net of allowances for anticipated returns, provided that (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the selling price
is fixed or determinable and (4) collection is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer, or when services have been provided. The price is considered fixed or
determinable when it is not subject to refund or adjustments.

The Company maintains an allowance for doubtful accounts relating to
accounts receivable estimated to be non-collectible. The Company analyzes historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. In addition, the Company maintains an allowance for anticipated sales returns. The Company analyzes historical return trends as well as in-transit product returns to evaluate the adequacy of the allowance for
anticipated returns.

Test and measurement products revenue

The Company generates Test and measurement product revenue from the sales of oscilloscopes and application solutions, protocol analyzers, probes and
accessories. Provisions for warranty costs are recorded at the time products are shipped.

Application solutions, which provide
oscilloscopes with additional analysis capabilities, are either delivered via compact disc or are already loaded in the oscilloscopes and activated via a key code after the sale is made to the customer. No post-contract support is provided on the
application solutions. All sales of test and measurement products are based upon separately established prices for the items and are recorded as revenue according to the above revenue recognition criteria. Revenues from oscilloscope products are
included in revenues from Test and measurement products in the Consolidated Statements of Operations. Certain software is embedded in the Companys oscilloscopes, but the embedded software component is considered incidental.

In an effort to provide end-user customers an alternative to purchasing the Companys higher end products under its standard terms and conditions,
the Company offers customers an opportunity to enter into sales-type or direct financing leases for these products. The Company is accounting for these leases in accordance with SFAS Statement No. 13, Accounting for Leases. Lease
and rental revenues are reported within Test and measurement product revenue and were approximately $0.1 million and $0.2 million for the quarter and two quarters ended December 27, 2008 and December 29, 2007, respectively.

Due to the significant software content of its protocol analyzer products, the Company recognizes revenue on the sale of these products, in accordance
with American Institute of Certified Public Accountants Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), as amended by Statement of Position 98-9, Modifications of SOP 97-2 with
Respect to Certain Transactions (SOP 98-9), upon shipment, provided there is persuasive evidence of an arrangement, the product has been delivered, the price is fixed or determinable and collectibility is probable. Software
maintenance support revenue is deferred based on its vendor specific objective evidence of fair value (VSOE) and recognized ratably over the maintenance support periods. In limited circumstances where VSOE does not exist for software
maintenance support, the Company recognizes revenues and accrues costs, if applicable, under the appropriate provisions of SOP 97-2 determined by



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the facts and circumstances of each transaction. Provisions for warranty costs are recorded at the time products are recognized as revenue. Revenues from
protocol analyzer products are included in Test and measurement products in the Consolidated Statements of Operations.

Service and
other revenue

Service and other revenue includes extended warranty contracts, software maintenance agreements, repairs and calibrations
performed on instruments after the expiration of their normal warranty period and direct service accessories and packages. The Company records deferred revenue for extended warranty contracts, software maintenance agreements and calibration services
and recognizes such revenue on a straight-line basis over the related service period. When arrangements include multiple elements, the Company uses relative fair values in accordance with Emerging Issues Task Force (EITF) Issue No.
00-21, Revenue Arrangements with Multiple Deliverables, to allocate revenue to the elements and recognizes revenue when the criteria for revenue recognition have been met for each element.

Deferred license revenue

Revenue
from license fees under agreements that have exclusivity clauses and, from the licensees perspective, have ongoing requirements or expectations that are more than perfunctory, are recognized on a straight-line basis over the terms of the
related agreements. An ongoing requirement or expectation would be considered more than perfunctory if any party to the contract considers it to be essential to the functionality of the delivered product or service or failure to complete
the activities would result in the customer receiving a full or partial refund or rejecting the products delivered or services performed to date.

4.
Business Realignment Initiatives

Fiscal 2009

In the second quarter of fiscal 2009, in an effort to streamline expenses in response to the current economic environment, the Company recorded severance of approximately $1.5 million, of which approximately $0.1
million was expensed to Cost of revenues, $0.8 million was expensed to Selling, general and administrative and $0.6 million was expensed to Research and development. This resulted from headcount reductions of 10 employees or 2.2% of the workforce as
compared to June 28, 2008. As of December 27, 2008, approximately $0.1 million has been paid in cash and approximately $1.4 million remains in Accrued expenses and other current liabilities on the Consolidated Balance Sheet. Severance is
estimated to be paid by the end of the third quarter of fiscal 2010.

Fiscal 2008

In the third quarter of fiscal 2008, as a result of streamlining operational management processes and staffing requirements, the Company recorded
severance of approximately $0.3 million, which was expensed to Selling, general and administrative. This resulted from headcount reductions of three employees or 0.7% of the workforce as compared to June 30, 2007. As of December 27, 2008,
approximately $0.2 million has been paid in cash and approximately $0.1 million remains in Accrued expenses and other current liabilities on the Consolidated Balance Sheet. Severance is estimated to be paid by the end of the third quarter of fiscal
2009.

In the first quarter of fiscal 2008, primarily as the result of an effort to improve sales effectiveness and channel management, the
Company recorded severance of approximately $0.6 million, which was expensed to Selling, general and administrative. This resulted from headcount reductions of twelve employees or 2.7% of the workforce as compared to June 30, 2007. As of
December 27, 2008, approximately $0.6 million has been paid in cash and no accrual remains in Accrued expenses and other current liabilities on the Consolidated Balance Sheet.

Fiscal 2007

In the third quarter of fiscal 2007, prompted by the acquisition of Catalyst, the
Company evaluated certain business processes and staffing requirements. As a result, the Company recorded severance and related expense of approximately $1.6 million, of which approximately $0.3 million was expensed to Cost of revenues, $1.2 million
was expensed to Selling, general and administrative and $0.1 million was expensed to Research and development. The implementation of this plan resulted in headcount reductions of thirty-three employees or 7.2% of the workforce as compared to
July 1, 2006. As of December 27, 2008, approximately $1.6 million has been paid in cash and no accrual remains.



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5. Derivatives and Fair Value

Derivatives

The Company accounts for derivatives and hedging activities in accordance with SFAS
No. 133, Accounting for Derivative Investments and Hedging Activities, as amended (SFAS 133), which requires that all derivative instruments be recorded on the balance sheet at their respective fair values. The
Companys foreign exchange forward contracts are not accounted for as hedges in accordance with SFAS 133; therefore, any changes in fair value of these contracts are recorded in Other, net in the Consolidated Statements of Operations. The
Company does not use derivative financial instruments for trading or other speculative purposes.

The Company enters into short-term
forward exchange agreements to purchase foreign currencies at set rates in the future. These foreign currency forward exchange agreements are used to limit exposure to fluctuations in foreign currency exchange rates on assets and liabilities
denominated in currencies other than the Companys functional currencies. The Company records these short-term forward exchange agreements on the balance sheet at fair value in Other current assets and Accrued expenses and other current
liabilities. The changes in the fair value are recognized currently in Other, net in the Consolidated Statement of Operations.

The net
gains or losses resulting from changes in the fair value of these derivatives and on transactions denominated in other than their functional currencies were net gains of approximately zero and $0.3 million for the quarter and two quarters ended
December 27, 2008, respectively, as compared to net losses of approximately $0.1 million and $0.3 for the quarter and two quarters ended December 29, 2007, respectively. These amounts are included in Other, net in the Consolidated
Statements of Operations. At December 27, 2008 and June 28, 2008, the notional amounts of the Companys open foreign exchange forward contracts, all with maturities of less than six months, were approximately $18.7 million and $16.3
million, respectively.

Fair Value

In
February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB Statement
No. 115. This statement provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently measured at fair value. The provisions of SFAS 159
were effective beginning in fiscal 2009 and the Company has chosen not to elect the fair value option for any items that are not already required to be measured at fair value, in accordance with accounting principles generally accepted in the United
States.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. The provisions of SFAS 157 were effective beginning in fiscal 2009. However, the FASB deferred the effective date
of SFAS 157, until the beginning of the Companys 2010 fiscal year, as it relates to fair value measurement requirements for non-financial assets and liabilities that are not remeasured at fair value on a recurring basis. This includes fair
value calculated in impairment assessments of long-lived assets. The Company adopted the provisions of SFAS 157 at the beginning of its fiscal 2009 year for financial assets and liabilities and its adoption did not have a material impact on the
consolidated financial position or results of operations. Management is currently evaluating the effect that adoption of SFAS 157 for its non-financial assets and liabilities will have on the Companys consolidated financial position and
results of operations.

The fair value framework requires the categorization of assets and liabilities into three levels based upon the
assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:



| |  |  | Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for
identical assets or liabilities in inactive markets.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3: Unobservable inputs reflecting managements own assumptions about the inputs used in pricing the asset or liability.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------

As of December 27, 2008, the fair values of the Companys financial assets and liabilities are categorized as follows (in thousands):



|                         |  |       |    |         |   |         |   |         |  |  
|------------------------ |  | ----- | -- | ------- | - | ------- | - | ------- |  | -
|                         |  | Total |    | Level 1 |   | Level 2 |   | Level 3
|Assets:                  |  |       |    |         |   |         |   |         |  |  
|Foreign exchange futures |  | $     | 26 |         |  |         | $ | 26      |  | 
|                         |  |       |    |        
|Liabilities:             |  |       |    |         |   |         |   |         |  |  
|Foreign exchange futures |  | $     | 38 |         |  |         | $ | 38      |  | 



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The fair values above were based on observable market transactions of spot currency rates and forward currency prices.

6. Comprehensive (Loss) Income

The
following table presents the components of comprehensive (loss) income (in thousands):



|                                         |                  |               |          |                    |  |                  |       |  |                  |          |   |  |   |      
|---------------------------------------- | ---------------- | ------------- | -------- | ------------------ |  | ---------------- | ----- |  | ---------------- | -------- | - |  | - | -----
|                                         |                  | Quarter ended |          | Two Quarters ended
|                                         | December 27,2008 |               |          | December 29,2007   |  | December 27,2008 |       |  | December 29,2007
|Net (loss) income                        |                  | $             | (106,796 | )                  |  | $                | 1,205 |  | $                | (105,261 | ) |  | $ | 1,869
|Foreign currency translation (loss) gain |                  |               | (68      | )                  |  |                  | 388   |  |                  | (1,417   | ) |  |   | 1,011
|                                         |                  |               |          |                    |  |                  |       |  |                  |          |   |  |   |      
|Comprehensive (loss) income              |                  | $             | (106,864 | )                  |  | $                | 1,593 |  | $                | (106,678 | ) |  | $ | 2,880
|                                         |                  |               |          |                    |  |                  |       |  |                  |          |   |  |   |      

7. Accounts Receivable, net

The allowance for doubtful accounts and sales returns was approximately $0.7 million as of December 27, 2008 and June 28, 2008.

8. Inventories, net

Inventories are stated at the lower of cost (first-in, first-out method) or
market, with the exception of demonstration units. Demonstration units are stated at lower of cost (specific identification method) or market. Inventories consist of the following (in thousands):



|                |  |                  |        |              |   |       
|--------------- |  | ---------------- | ------ | ------------ | - | ------
|                |  | December 27,2008 |        | June 28,2008
|Raw materials   |  | $                | 7,386  |              | $ | 9,581 
|Work in process |  |                  | 9,065  |              |   | 6,008 
|Finished goods  |  |                  | 18,542 |              |   | 17,297
|                |  |                  |        |              |   |       
|                |  | $                | 34,993 |              | $ | 32,886
|                |  |                  |        |              |   |       

The value of demonstration units included in finished goods was approximately $12.0 million and
$10.3 million at December 27, 2008 and June 28, 2008, respectively. The Companys demonstration units are held for sale and are sold regularly in the ordinary course of business through its normal sales distribution channels and
existing customer base.The allowance for excess and obsolete inventory included above, amounted to approximately $6.1 million and $4.5 million at December 27, 2008 and June 28, 2008, respectively.

In the second quarter of fiscal 2009, the Company recorded an approximate $2.7 million inventory write-down as a result of its realignment initiatives
and change in product strategy, which was expensed to Cost of revenues in the Consolidated Statement of Operations.

9. Other Current Assets

Other current assets consist of the following (in thousands):



|                           |  |                  |        |              |   |       
|-------------------------- |  | ---------------- | ------ | ------------ | - | ------
|                           |  | December 27,2008 |        | June 28,2008
|Deferred tax assets, net   |  | $                | 6,240  |              | $ | 5,506 
|Prepaid taxes              |  |                  | 65     |              |   | 249   
|Other receivables          |  |                  | 1,637  |              |   | 1,695 
|Value-added tax receivable |  |                  | 804    |              |   | 664   
|Other                      |  |                  | 3,080  |              |   | 2,100 
|                           |  |                  |        |              |   |       
|                           |  | $                | 11,826 |              | $ | 10,214
|                           |  |                  |        |              |   |       



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10. Goodwill and Other Non-current Assets

Goodwill and other non-current assets consist of the following (in thousands):



|                                             |  |                  |        |              |   |        
|-------------------------------------------- |  | ---------------- | ------ | ------------ | - | -------
|                                             |  | December 27,2008 |        | June 28,2008
|Goodwill                                     |  | $                |       |              | $ | 105,771
|                                             |  |                  |        |              |   |        
|Intangibles, net                             |  | $                | 674    |              | $ | 972    
|Deferred tax assets, net                     |  |                  | 9,763  |              |   | 9,186  
|Deferred financing costs on convertible note |  |                  | 1,587  |              |   | 1,920  
|Other                                        |  |                  | 731    |              |   | 856    
|                                             |  |                  |        |              |   |        
|                                             |  | $                | 12,755 |              | $ | 12,934 
|                                             |  |                  |        |              |   |        

Goodwill

Under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), goodwill is tested for impairment annually, or more frequently, if events or changes in circumstances indicate that the
carrying amount of the asset might be impaired. The goodwill impairment test is a two-step process which requires the Company to make judgmental assumptions regarding fair value. Testing is required between annual tests if events occur or
circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value. Such an event may occur if, for an extended period of time, the market value of the Companys common stock plus a
control premium were less than the carrying value of the Company. The determination as to whether a write-down of goodwill is necessary and the amount of the impairment charge involves significant judgment around the assumptions used to determine
the impairment charge.

As a result of the current economic environment and sustained decline in the Companys stock price since
September 27, 2008, which affected the Companys market capitalization, the Company updated the first step of its goodwill impairment test as of December 27, 2008 and determined that its carrying value exceeded its fair value,
indicating that goodwill was impaired. As the Company consists of only one reporting unit, and is publicly traded, management estimated the fair value of its reporting unit utilizing the Companys market capitalization, multiplying the number
of actual shares outstanding by an average market price for a reasonable period of time considered to be reflective of fair value and applied a premium to give effect to managements best estimate of a control premium, as if the Company were to
be acquired by a single stockholder. The control premium seeks to give effect to the increased consideration a potential acquirer would be willing to pay in order to gain sufficient ownership to set policies, direct operations and make decisions
related to the Company. The control premium was based on analysis that considered appropriate industry, market, economic and other pertinent factors, including, indications of such premiums from data on recent acquisition transactions. The Company
performed the second step of the goodwill impairment test which calculated the implied fair value of the goodwill by allocating the fair value of the Company determined in the first step to all assets and liabilities other than goodwill, including
both recognized and unrecognized intangible assets, and compared it to the carrying amount of goodwill in order to determine the amount of the goodwill impairment.

In the second quarter, the Company recorded approximately $105.8 million of goodwill impairment, resulting in a carrying value of goodwill as of December 27, 2008 of zero.

Other Non-Current Assets

The following table
reflects the gross carrying amount and accumulated amortization of the Companys amortizable intangible assets included in Other non-current assets on the Consolidated Balance Sheets as of the dates indicated (in thousands):



|                                                  |  |                               |  |                  |        |   |              |   |        |  
|------------------------------------------------- |  | ----------------------------- |  | ---------------- | ------ | - | ------------ | - | ------ | -
|                                                  |  | OriginalWeightedAverage Lives |  | December 27,2008 |        |   | June 28,2008 |  
|Amortizable intangible assets:                    |  |                               |  |                  |        |   |              |   |        |  
|Technology, manufacturing and distribution rights |  | 2.9 years                     |  | $                | 8,296  |   |              | $ | 8,296  |  
|Accumulated amortization                          |  |                               |  |                  | (8,001 | ) |              |   | (7,729 | )
|                                                  |  |                               |  |                  |        |   |              |   |        |  
|Net carrying amount                               |  |                               |  | $                | 295    |   |              | $ | 567    |  
|                                                  |  |                               |  |                  |        |   |              |   |        |  
|Patents and other intangible assets               |  | 5.9 years                     |  | $                | 1,592  |   |              | $ | 1,592  |  
|Accumulated amortization                          |  |                               |  |                  | (1,213 | ) |              |   | (1,187 | )
|                                                  |  |                               |  |                  |        |   |              |   |        |  
|                                                  |  |                               |  | $                | 379    |   |              | $ | 405    |  
|                                                  |  |                               |  |                  |        |   |              |   |        |  
|Net carrying amount                               |  |                               |  | $                | 674    |   |              | $ | 972    |  
|                                                  |  |                               |  |                  |        |   |              |   |        |  



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Amortization expense for intangible assets, all with finite lives, was approximately $0.1 million and
$0.3 million for the quarter and two quarters ended December 27, 2008, respectively, compared to approximately $0.5 million and $1.0 million for the quarter and two quarters ended December 29, 2007, respectively. The cost of an amortizable
intangible asset is amortized on a straight-line basis over the estimated economic life of the asset.

11. Accrued Expenses and Other Current
Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):



|                                                  |  |                  |        |              |   |       
|------------------------------------------------- |  | ---------------- | ------ | ------------ | - | ------
|                                                  |  | December 27,2008 |        | June 28,2008
|Compensation and benefits, including severance    |  | $                | 7,360  |              | $ | 7,573 
|Income taxes                                      |  |                  | 211    |              |   | 114   
|Warranty                                          |  |                  | 1,230  |              |   | 1,313 
|Deferred revenue, current portion                 |  |                  | 1,419  |              |   | 1,421 
|Accrued interest on debt                          |  |                  | 575    |              |   | 598   
|Retained liabilities from discontinued operations |  |                  | 160    |              |   | 160   
|Convertible notes (a)                             |  |                  |       |              |   | 5,500 
|Capital leases                                    |  |                  | 244    |              |   | 234   
|Other current liabilities                         |  |                  | 2,324  |              |   | 2,288 
|                                                  |  |                  |        |              |   |       
|                                                  |  | $                | 13,523 |              | $ | 19,201
|                                                  |  |                  |        |              |   |       



|(a) | This represents an estimate of the amount of convertible notes that the Company intends to repurchase during the next twelve months based on several factors such as market
conditions, available cash and any other potential risks and opportunities the Company may encounter at the respective period end dates. As of December 27, 2008, due to a weak economic environment, available cash and other potential risks, the
Company reclassified $5.5 million from Accrued expenses and other current liabilities to Convertible notes, as currently, there is no intention to repurchase any of the convertible notes during the next twelve month period.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12. Warranties

The Company provides a warranty on
its products, generally extending between one and three years after delivery and accounted for in accordance with SFAS No. 5, Accounting for Contingencies. Estimated future warranty obligations related to products are provided by
charges to Cost of revenues in the period that the related revenue is recognized. These estimates are derived from historical data of product reliability and, for certain new products, published (by a third party) expected failure rates. The
expected failure rate is arrived at in terms of units, which are then converted into labor hours to which an average fully burdened cost per hour is applied to derive the amount of accrued warranty required. The Company studies trends of warranty
claims and performance of specific products and adjusts its warranty obligation through charges or credits to Cost of revenues.

The
following table is a reconciliation of the changes in the Companys aggregate product warranty liability during the quarter and two quarters ended December 27, 2008 and December 29, 2007 (in thousands):



|                                                       |                  |               |       |                  |                    |   |                  |   |  |                  |       |   |  |   |       |  
|------------------------------------------------------ | ---------------- | ------------- | ----- | ---------------- | ------------------ | - | ---------------- | - |  | ---------------- | ----- | - |  | - | ----- | -
|                                                       |                  | Quarter ended |       |                  | Two Quarters ended |  
|                                                       | December 27,2008 |               |       | December 29,2007 |                    |   | December 27,2008 |   |  | December 29,2007 |      
|Balance at beginning of period                         |                  | $             | 1,333 |                  |                    | $ | 1,185            |   |  | $                | 1,313 |   |  | $ | 1,190 |  
|Accruals for warranties entered into during the period |                  |               | 101   |                  |                    |   | 258              |   |  |                  | 336   |   |  |   | 430   |  
|Warranty costs incurred during the period              |                  |               | (204  | )                |                    |   | (220             | ) |  |                  | (419  | ) |  |   | (397  | )
|                                                       |                  |               |       |                  |                    |   |                  |   |  |                  |       |   |  |   |       |  
|Balance at end of period                               |                  | $             | 1,230 |                  |                    | $ | 1,223            |   |  | $                | 1,230 |   |  | $ | 1,223 |  
|                                                       |                  |               |       |                  |                    |   |                  |   |  |                  |       |   |  |   |       |  



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As is customary in the test and measurement industry, and as provided for by local law in the U.S. and
other jurisdictions, the Companys standard terms of sale provide remedies to customers, such as defense, settlement, or payment of a judgment for intellectual property claims related to the use of the Companys products. Such
indemnification provisions are accounted for in accordance with SFAS No. 5. To date, there have been no claims under such indemnification provisions.

13. Debt and Capital Leases

Credit Agreement

The Company has a $50.0 million senior, secured, four-year credit agreement which includes a $5.0 million swingline loan subfacility and a $5.0 million
letter of credit subfacility. The Credit Agreement will expire on July 15, 2011, unless, in the absence of any default it is extended by LeCroy to April 1, 2012, contingent on the waiver or extension of the first redemption date of the
Companys convertible notes. As of December 27, 2008, the Company has borrowed $6.0 million against the credit facility and nothing against the letter of credit subfacility or the swingline loan subfacility.

Borrowings under the credit facility bear interest at variable rates equal to, at LeCroys election, (1) the higher of (a) the prime rate
or (b) the federal funds rate plus 0.5% plus an applicable margin based on LeCroys leverage ratio or (2) LIBOR plus an applicable margin based on LeCroys leverage ratio. In addition, LeCroy must pay commitment fees during the
term of the Credit Agreement at rates dependent on LeCroys leverage ratio.

The Company is required to comply with certain financial
covenants, measured quarterly, including a minimum interest coverage ratio, minimum total net worth, maximum leverage ratio, minimum fixed charge coverage ratio and limitations on capital expenditures. As of December 27, 2008, the Company was
in compliance with its financial covenants.

Convertible Debt

On October 12, 2006, the Company sold and issued $72.0 million in convertible senior subordinated notes to qualified institutional buyers
pursuant to Rule 144A of the Securities Act of 1933, as amended (the Notes). The Notes bear interest at a rate of 4.00% per annum, payable in cash semi-annually in arrears on each April 15 and October 15. The Notes
are direct, unsecured, senior subordinated obligations of the Company and rank: (i) subordinate in right of payment to all of the Companys existing and future secured indebtedness; (ii) equal in right of payment with all of the
Companys existing and future senior unsecured indebtedness, and (iii) senior in right of payment to all of the Companys existing and future subordinated indebtedness. In connection with the issuance and sale of the Notes, the
Company entered into an indenture dated as of October 12, 2006, with U.S. Bank National Association as trustee. The terms of the Notes are governed by the indenture.

The Notes mature on October 15, 2026 unless earlier redeemed, repurchased or converted. Holders of the Notes will have the right to require the Company to repurchase for cash, all or a portion of their Notes on
each of October 15, 2011, October 15, 2016 and October 15, 2021, at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, if any, up to but not including, the
repurchase date. The Company may, from time to time, at its option repurchase the Notes in the open market. In addition, the Company may redeem the Notes for cash, either in whole or in part, anytime after October 20, 2011 at a redemption price
equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest, if any, up to but not including the redemption date. The Notes are convertible into Company common stock by the holders at an initial conversion rate
equal to 68.7285 shares per $1,000 principal amount of the Notes (equal to an initial conversion price of approximately $14.55 per share), subject to adjustment as described in the indenture. Upon conversion, the Company will deliver for each $1,000
principal amount of Notes, an amount consisting of cash equal to the lesser of $1,000 and the conversion value (as defined in the indenture) and, to the extent that the conversion value exceeds $1,000, at the Companys election, cash or shares
of Company common stock in respect of the remainder. Prior to September 15, 2026, holders may convert their notes into cash and shares of the Companys common stock, if any, at the applicable conversion rate, at their option, only under
limited circumstances described in the indenture. On or after September 15, 2026, holders may convert their notes into cash and shares of the Companys common stock, if any, at the applicable conversion price, at the Companys option,
at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion of each $1,000 principal amount of the notes, the holder will receive an amount in cash equal to the lesser of (i) $1,000 or
(ii) the conversion value, as described in the indenture; if the conversion value exceeds $1,000 on the conversion date, the Company will also deliver, at the Companys election, cash or common stock or combination of each with a value
equal to such excess.



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The Company incurred approximately $3.0 million of transaction fees in connection with issuing the Notes,
which have been deferred and are being amortized over the term of the Notes using the effective interest method. The term of the Notes for amortization purposes is considered to be five years in accordance with SAB Topic 3-C, Redeemable
Preferred Stock, as that is the first period in which the redemption feature of the Notes can be executed by either the Noteholders or LeCroy and therefore is considered the mandatory redemption date.

In the first quarter of fiscal 2009, the Company repurchased approximately $2.6 million of the outstanding convertible notes, leaving a balance of
approximately $64.9 million which is included in Convertible notes on the Consolidated Balance Sheet as of December 27, 2008. As of December 27, 2008, the market value of the convertible notes was approximately $36.4 million. The
difference between the amount paid to repurchase the debt and the net carrying amount and the write-off of unamortized fees resulted in an approximate $0.3 million gain on extinguishment of debt in the Consolidated Statement of Operations. As of
December 27, 2008, approximately $1.6 million of unamortized fees related to the Notes was included in Other non-current assets on the Consolidated Balance Sheet.

Other

During fiscal 2008, the Company acquired a software license under a capital lease agreement
for approximately $0.7 million. The lease bears interest at 7.75% with a three-year term. As of December 27, 2008, the Companys outstanding balance under this agreement was approximately $0.4 million, approximately $0.2 million was
included in Accrued expenses and other current liabilities and approximately $0.2 million was included in Deferred revenue and other non-current liabilities on the Consolidated Balance Sheet.

The Company also maintains certain short-term credit facilities. There is a Japanese facility totaling 50.0 million yen for which no amounts were
outstanding at December 27, 2008. Additionally, the Companys Swiss subsidiary has an overdraft facility totaling 1.0 million Swiss francs for which approximately 0.4 million Swiss francs are being held against supplier
obligations, leaving an available balance of 0.6 million Swiss francs under this facility at December 27, 2008. These balances remain unchanged from June 28, 2008.

14. Commitments and Contingencies

The Companys contractual obligations and commitments include
obligations associated with our employee severance agreements, supplier agreements, operating and capital leases and convertible note obligations, as set forth in the Contractual Obligations and Other Commitments table in the Managements
Discussion and Analysis of Financial Condition and Results of Operations (MD&A). The Company expensed approximately $0.7 million and $1.3 million related to operating leases for the quarter and two quarters ended December 27,
2008, respectively and approximately $0.6 million and $1.3 million for the quarter and two quarters ended December 29, 2007, respectively.

From time to time, the Company is involved in lawsuits, claims, investigations and proceedings, including patent and environmental matters, which arise in the ordinary course of business. There are no matters currently pending that the
Company expects to have a material adverse affect on its business, results of operations, financial condition or cash flows.

15. Treasury Stock

In May 2006, the Companys Board of Directors approved the adoption of a share repurchase plan authorizing the Company to purchase up
to 2.0 million shares, not to exceed $25.0 million, of its common stock for treasury. To date, the Company has purchased approximately 1.4 million shares under the plan for a total consideration of approximately $15.5 million. In the first
quarter of fiscal 2009, 28,164 shares were repurchased at a weighted average price of approximately $7.96 per share. In the second quarter of fiscal 2009, 72,958 shares were repurchased at a weighted average price of approximately $6.21 per share.

16. Net (Loss) Income Per Common Share (EPS)

The following is a presentation of the numerators and the denominators of the basic and diluted net income per common share computations for the quarter and two quarters ended December 27, 2008 and December 29, 2007:



|                                     |                  |               |          |                    |  |                  |        |  |                  |          |   |  |   |       
|------------------------------------ | ---------------- | ------------- | -------- | ------------------ |  | ---------------- | ------ |  | ---------------- | -------- | - |  | - | ------
|                                     |                  | Quarter ended |          | Two Quarters ended
|                                     | December 27,2008 |               |          | December 29,2007   |  | December 27,2008 |        |  | December 29,2007
|Numerator:                           |                  |               |          |                    |  |                  |        |  |                  |          |   |  |   |       
|Net (loss) income                    |                  | $             | (106,796 | )                  |  | $                | 1,205  |  | $                | (105,261 | ) |  | $ | 1,869 
|                                     |                  |               |          |                    |  |                  |        |  |                  |          |   |  |   |       
|Denominator:                         |                  |               |          |                    |  |                  |        |  |                  |          |   |  |   |       
|Weighted average shares outstanding: |                  |               |          |                    |  |                  |        |  |                  |          |   |  |   |       
|Basic                                |                  |               | 11,962   |                    |  |                  | 11,785 |  |                  | 11,922   |   |  |   | 11,757
|Employee stock options and other     |                  |               |         |                    |  |                  | 271    |  |                  |         |   |  |   | 228   
|                                     |                  |               |          |                    |  |                  |        |  |                  |          |   |  |   |       
|Diluted                              |                  |               | 11,962   |                    |  |                  | 12,056 |  |                  | 11,922   |   |  |   | 11,985
|                                     |                  |               |          |                    |  |                  |        |  |                  |          |   |  |   |       



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The computations of diluted EPS for the quarters ended December 27, 2008 and December 29, 2007
do not include approximately 1.9 million and 1.7 million, respectively, of stock options and non-vested stock, as the effect of their inclusion would have been anti-dilutive to EPS. The computations of diluted EPS for the two quarters
ended December 27, 2008 and December 29, 2007 do not include approximately 1.6 million and 1.8 million, respectively, of stock options and non-vested stock, as the effect of their inclusion would have been anti-dilutive to EPS.
Additionally, the convertible notes had no impact on diluted EPS for the quarter and two quarters ended December 27, 2008 and December 29, 2007 because the average share price during the periods was below $14.55 per share (the initial
conversion price), and accordingly, the Notes, if converted, would have required only cash at settlement.

17. Income Taxes

The effective income tax rate for the quarter and two quarters ended December 27, 2008 was 1.1% and 0.4%, respectively, compared to an effective
income tax rate of (10.2)% and 10.8% for the quarter and two quarters ended December 29, 2007, respectively. The effective income tax rate for the quarter and two quarters ended December 27, 2008 includes the effect of a non-deductible
goodwill impairment charge of $103.8 million, the write-off of a deferred tax asset related to equity-based compensation of $0.4 million, partially offset by a reduction of tax expense of $0.2 million related to a retroactive reinstatement of the
federal research and development tax credit as a result of the Emergency Economic Stabilization Act of 2008 (The Act), passed into law on October 3, 2008. The effective income tax rate for the quarter and two quarters ended
December 29, 2007 includes the effect of a reduction of tax expense of $0.5 million resulting from both the final true-up of the prior years tax accrual upon filing the actual tax returns and an election for certain R&D credits made
by the Company in the second quarter of fiscal 2008, slightly offset by a $15,000 increase to tax expense for interest related to income tax exposures.

The Company calculates income tax expense based upon an annual effective tax rate forecast, including estimates and assumptions that could change during the year. The differences between the effective tax rate and the
U.S. federal statutory rate of 35% principally result from the Companys geographical distribution of taxable income, and differences between the book and tax treatment of certain items.

Effective July 1, 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes, as amended by FASB Staff Position No. 48-1 (FSP-FIN 48-1), Definition of Settlement in FASB Interpretation 48. FIN 48 prescribes a comprehensive model for how a
company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. FIN 48 states that a tax benefit from an uncertain tax position may be
recognized only if it is more likely than not that the position is sustainable, based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit greater than 50% likely of being realized upon
settlement with a taxing authority having full knowledge of all relevant information. A tax benefit from an uncertain position was previously recognized if it was probable of being sustained. Under FIN 48, the liability for unrecognized tax benefits
is classified as non-current unless the liability is expected to be settled in cash within twelve months of the reporting date.

The
Company operates in multiple taxing jurisdictions, both within the United States and outside of the United States, and faces audits from various tax authorities regarding the deductibility of certain expenses, intercompany transactions, as well as
other matters. At December 27, 2008, the total amount of liability for unrecognized tax benefits related to federal, state and foreign taxes and accrued interest was approximately $10.7 million, approximately $2.8 million are reflected as a
non-current liability and approximately $7.9 million are reflected as a reduction of gross deferred tax assets, all of which would impact the effective tax rate, if recognized.



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The Company believes it is reasonably possible that approximately $1.1 million of net unrecognized tax
benefits will be recognized during the next twelve months and will impact the Companys effective tax rate.

The Company recognizes
interest and, if applicable, penalties which could be assessed related to unrecognized tax benefits in income tax expense. As of December 27, 2008, the total amount of accrued interest and penalties, before federal and, if applicable, state
effect, was approximately $0.1 million.

The Company files income tax returns in the U.S. federal jurisdiction and various states and
foreign jurisdictions. For federal income tax purposes, fiscal 2005 through 2008 tax years remain open for examination by the tax authorities under the normal three year statute of limitations. For state tax purposes, (principally California and New
York) fiscal 2004 through 2008 tax years remain open for examination by the tax authorities under a four year statute of limitations.

18. Segment and
Geographic Revenue

The Company operates in a single-reportable segment in the test and measurement market, in which it develops,
manufactures, sells and licenses high-performance oscilloscopes, serial data analyzers and global communication protocol test solutions. These products are used by design engineers and researchers to measure and analyze complex electronic signals in
order to develop high performance systems, to validate electronic designs and to improve time to market. Revenue from the sale of the Companys products, which are similar in nature, are reflected as Test and measurement product revenue in the
Consolidated Statements of Operations.

Revenues are attributed to countries based on customer ship-to addresses. Revenues by geographic
area are as follows (in thousands):



|                   |                  |               |                  |                    |                  |        |                      |   |        |  |   |       
|------------------ | ---------------- | ------------- | ---------------- | ------------------ | ---------------- | ------ | -------------------- | - | ------ |  | - | ------
|                   |                  | Quarter Ended |                  | Two Quarters Ended
|                   | December 27,2008 |               | December 29,2007 |                    | December 27,2008 |        | December 29,2007 (a)
|North America      |                  | $             | 11,469           |                    | $                | 13,035 |                      | $ | 22,970 |  | $ | 25,315
|Europe/Middle East |                  |               | 16,817           |                    |                  | 16,353 |                      |   | 32,268 |  |   | 29,188
|Japan              |                  |               | 3,803            |                    |                  | 3,292  |                      |   | 6,618  |  |   | 7,271 
|Asia/Pacific       |                  |               | 7,018            |                    |                  | 7,893  |                      |   | 17,975 |  |   | 17,499
|                   |                  |               |                  |                    |                  |        |                      |   |        |  |   |       
|Total revenues     |                  | $             | 39,107           |                    | $                | 40,573 |                      | $ | 79,831 |  | $ | 79,273
|                   |                  |               |                  |                    |                  |        |                      |   |        |  |   |       



|(a) | The two quarters ended December 29, 2007 reflects reclassifications of revenue between geographic areas.
|--- | --------------------------------------------------------------------------------------------------------

Total assets by geographic area are as follows:



|                   |  |                  |         |              |   |        
|------------------ |  | ---------------- | ------- | ------------ | - | -------
|                   |  | December 27,2008 |         | June 28,2008
|North America      |  | $                | 102,896 |              | $ | 207,572
|Europe/Middle East |  |                  | 14,111  |              |   | 13,430 
|Japan              |  |                  | 1,183   |              |   | 1,135  
|Asia/Pacific       |  |                  | 3,715   |              |   | 4,849  
|                   |  |                  |         |              |   |        
|Total assets       |  | $                | 121,905 |              | $ | 226,986
|                   |  |                  |         |              |   |        

Total Property, plant and equipment, net by geographic area are as follows:



|                        |  |                  |        |              |   |       
|----------------------- |  | ---------------- | ------ | ------------ | - | ------
|                        |  | December 27,2008 |        | June 28,2008
|North America           |  | $                | 20,005 |              | $ | 20,218
|Europe/Middle East      |  |                  | 695    |              |   | 892   
|Japan                   |  |                  | 286    |              |   | 232   
|Asia/Pacific            |  |                  | 161    |              |   | 341   
|                        |  |                  |        |              |   |       
|Total long-lived assets |  | $                | 21,147 |              | $ | 21,683
|                        |  |                  |        |              |   |       



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19. New Accounting Pronouncements

In June 2007, the Emerging Issues Task Force (EITF) issued EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development
Activities (EITF 07-3). EITF 07-3 addresses the diversity that exists with respect to the accounting for the non-refundable portion of a payment made by a research and development entity for future research and development
activities. The EITF concluded that an entity must defer and capitalize non-refundable advance payments made for research and development activities until the related goods are delivered or the related services are performed. EITF 07-3 was effective
for interim or annual reporting periods in fiscal years beginning after December 15, 2007 and its adoption did not have an impact on the Companys consolidated financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007) (SFAS 141R), Business Combinations. This statement establishes
the principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date fair value. Further, it requires that acquisition-related costs be expensed as incurred, restructuring costs be expensed in periods subsequent to the acquisition date and changes in accounting for deferred income tax asset valuation
allowances and acquired income tax uncertainties after the measurement period be included in income tax expense. SFAS 141R also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early
adoption is not permitted. Management is currently evaluating the effect that adoption of SFAS 141R will have on the Companys consolidated financial position and results of operations.

In March 2008, the FASB issued SFAS No. 161 (SFAS 161), Disclosures about Derivative Instruments and Hedging
Activities. This statement requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and
related hedged items are accounted for under FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities and how derivative instruments and related hedged items affect a companys financial position,
financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Management is currently evaluating the impact of the adoption of the
enhanced disclosures required by SFAS 161.

In April 2008, the FASB finalized Staff Position No. 142-3, Determination of
the Useful Life of Intangible Assets (FSP 142-3). This position amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under
SFAS No. 142 (SFAS 142), Goodwill and Other Intangible Assets. FSP 142-3 applies to intangible assets that are acquired individually or with a group of other assets and both intangible assets acquired in business
combinations and asset acquisitions. This position is effective for fiscal years beginning after December 15, 2008. Management is currently evaluating the effect that the adoption of FSP 142-3 will have on the Companys consolidated
financial position and results of operations.

In May 2008, the FASB issued FASB Staff Position Accounting Principles Board Opinion
No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1). This FSP requires cash settled convertible debt to be separated
into debt and equity components at issuance and a value to be assigned to each. The value assigned to the debt component will be the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference
between the bond cash proceeds and this estimated fair value will be recorded as a debt discount with an offset to equity and will be amortized to interest expense over the life of the bond. The FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008 and for interim periods within those years and requires retrospective application. Management is currently evaluating the effect that adoption of FSP APB 14-1 will have on the Companys
consolidated financial position and results of operations, which is expected to be material.

20. Subsequent Events

As a result of the economic downturn, the Company developed an extensive cost-reduction program that consisted of reductions in programs, work force,
compensation and certain employee benefits. Execution of this plan began in the second quarter as the Company began to reduce staff and eliminate certain product developments programs, resulting in the streamlining of related product lines. The
Company expects to further reduce headcount and record another business realignment charge, consisting of primarily severance in its third fiscal quarter. Additionally, the Company will reduce Board compensation along with management and employee
base salaries worldwide and will suspend its 401(k) matching contribution program.



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

This Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with
the audited Consolidated Financial Statements, Notes and MD&A included in our Annual Report filed on Form 10-K for the fiscal year ended June 28, 2008. Our discussion and analysis is an integral part of understanding our financial results.
Also refer to Basis of Presentation and Use of Estimates in the Notes to the Consolidated Financial Statements.

Our Critical Accounting
Policies and Estimates

The preparation of our Consolidated Financial Statements in conformity with U.S. Generally Accepted Accounting
Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the Consolidated Financial Statements
and accompanying notes. These estimates and assumptions are based on managements judgment and available information and, consequently, actual results could differ from these estimates.

The accounting policies that we believe are the most critical to understanding and evaluating our reported financial results include: revenue
recognition; reserves on accounts receivable; allowance for excess and obsolete inventory; uncertain tax positions; valuation of deferred tax assets; valuation of long-lived and intangible assets; valuation of goodwill; estimation of warranty
liabilities and share-based compensation expense.

Impairment of Goodwill

As a result of the current economic environment and sustained decline in our stock price since September 27, 2008, which affected our market
capitalization, we updated the first step of our goodwill impairment test as of December 27, 2008 and determined that the carrying value exceeded the fair value, indicating that goodwill was impaired. We then performed the second step of the
goodwill impairment test which calculated the implied fair value of the goodwill by allocating the fair value of the Company to all assets and liabilities other than goodwill, including both recognized and unrecognized intangible assets, and
compared it to the carrying amount of goodwill in order to determine the amount of the goodwill impairment. The determination as to whether a write-down of goodwill is necessary and the amount of the impairment charge involves significant judgment
around the assumptions used to determine the impairment charge.

In the second quarter, we recorded an approximate $105.8 million goodwill
impairment charge, resulting in a carrying value of goodwill as of December 27, 2008 of zero. We will not be required to make any current or future cash expenditures as a result of this impairment.

Business Realignment Initiatives

As a result of the
economic downturn, the Company developed an extensive cost-reduction program that consisted of reductions in programs, work force, compensation and certain employee benefits. Execution of this plan began in the second quarter as the Company began to
reduce staff and eliminate certain product developments programs, resulting in the streamlining of related product lines.

In the second
quarter of fiscal 2009, we recorded severance of approximately $1.5 million, of which approximately $0.1 million was expensed to Cost of revenues, $0.8 million was expensed to Selling, general and administrative and $0.6 million was expensed to
Research and development. This resulted from headcount reductions of 10 employees or 2.2% of the workforce as compared to June 28, 2008. As of December 27, 2008, approximately $0.1 million has been paid in cash and approximately $1.4
million remains in Accrued expenses and other current liabilities on the Consolidated Balance Sheet. Severance is estimated to be paid by the end of the third quarter of fiscal 2010. Additionally, we recorded an approximate $2.7 million inventory
write-down as a result of these realignment initiatives and change in product strategy, which was expensed to Cost of revenues in the Consolidated Statement of Operations.

Our Business Risks

Our results of operations and financial position are affected by a variety of
factors. We believe the most significant recurring factors are the economic strength of the technology markets into which we sell our products, our ability to identify market demands and develop competitive products to meet those demands, the
announcements and actions of our competitors and our ability to enter into new markets and broaden our presence in existing markets. Our sales are largely dependent on the health and growth of technology companies whose operations tend to be
cyclical. Consequently, demand for our products tends to coincide with the increase or decrease in capital spending in the technology industry.



19



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Recent Accounting Pronouncements

The following recent accounting pronouncements are not yet adopted:



| |  |  | Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (SFAS 141R).
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Financial Accounting Standards Board Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Financial Accounting Standards Board Staff Position Accounting Principles Board Opinion No. 14-1, Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (SFAS 157), as it relates to non-financial assets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------

See Note 19 New Accounting Pronouncements and Note 5Derivatives and Fair Value for additional information
on recent pronouncements adopted and not yet adopted as well as pronouncements related to fair value measures.



20



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##### Table of Contents

Consolidated Results of Operations

The following table indicates the percentage of total revenues represented by each item in the Companys Consolidated Statements of Operations for the quarter and two quarters ended December 27, 2008 and
December 29, 2007.



|                                                                        |                  |               |    |                  |                    |   |                  |        |    |                  |       |  
|----------------------------------------------------------------------- | ---------------- | ------------- | -- | ---------------- | ------------------ | - | ---------------- | ------ | -- | ---------------- | ----- | -
|(Unaudited)                                                             |                  | Quarter ended |    |                  | Two Quarters ended |  
|                                                                        | December 27,2008 |               |    | December 29,2007 |                    |   | December 27,2008 |        |    | December 29,2007 |      
|Revenues:                                                               |                  |               |    |                  |                    |   |                  |        |    |                  |       |  
|Test and measurement products                                           |                  | 94.6          | %  |                  | 94.1               | % |                  | 94.5   | %  |                  | 94.2  | %
|Service and other                                                       |                  | 5.4           |    |                  | 5.9                |   |                  | 5.5    |    |                  | 5.8   |  
|                                                                        |                  |               |    |                  |                    |   |                  |        |    |                  |       |  
|Total revenues                                                          |                  | 100.0         |    |                  | 100.0              |   |                  | 100.0  |    |                  | 100.0 |  
|Cost of revenues                                                        |                  | 48.2          |    |                  | 42.1               |   |                  | 45.8   |    |                  | 42.3  |  
|                                                                        |                  |               |    |                  |                    |   |                  |        |    |                  |       |  
|Gross profit                                                            |                  | 51.8          |    |                  | 57.9               |   |                  | 54.2   |    |                  | 57.7  |  
|                                                                        |                  |               |    |                 
|Operating expenses:                                                     |                  |               |    |                  |                    |   |                  |        |    |                  |       |  
|Selling, general and administrative                                     |                  | 32.8          |    |                  | 32.7               |   |                  | 31.8   |    |                  | 32.3  |  
|Research and development                                                |                  | 22.5          |    |                  | 19.5               |   |                  | 20.8   |    |                  | 19.6  |  
|Impairment of goodwill                                                  |                  | 270.5         |    |                  |                   |   |                  | 132.5  |    |                  |      |  
|                                                                        |                  |               |    |                  |                    |   |                  |        |    |                  |       |  
|Total operating expenses                                                |                  | 325.8         |    |                  | 52.2               |   |                  | 185.1  |    |                  | 51.9  |  
|                                                                        |                  |               |    |                 
|Operating (loss) income                                                 |                  | (274.0        | )  |                  | 5.7                |   |                  | (130.9 | )  |                  | 5.8   |  
|Other income (expense):                                                 |                  |               |    |                  |                    |   |                  |        |    |                  |       |  
|Gain on extinguishment of convertible debt, net of issue cost write-off |                  |              |    |                  |                   |   |                  | 0.3    |    |                  |      |  
|Interest income                                                         |                  | 0.1           |    |                  | 0.2                |   |                  | 0.1    |    |                  | 0.2   |  
|Interest expense                                                        |                  | (2.5          | )  |                  | (2.9               | ) |                  | (2.3   | )  |                  | (3.0  | )
|Other, net                                                              |                  | 0.1           |    |                  | (0.3               | ) |                  | 0.4    |    |                  | (0.4  | )
|                                                                        |                  |               |    |                  |                    |   |                  |        |    |                  |       |  
|Other expense, net                                                      |                  | (2.3          | )  |                  | (3.0               | ) |                  | (1.5   | )  |                  | (3.2  | )
|                                                                        |                  |               |    |                 
|(Loss) income before income taxes                                       |                  | (276.3        | )  |                  | 2.7                |   |                  | (132.4 | )  |                  | 2.6   |  
|(Benefit) provision for income taxes                                    |                  | (3.2          | )  |                  | (0.3               | ) |                  | (0.6   | )  |                  | 0.3   |  
|                                                                        |                  |               |    |                  |                    |   |                  |        |    |                  |       |  
|Net (loss) income                                                       |                  | (273.1        | )% |                  | 3.0                | % |                  | (131.8 | )% |                  | 2.3   | %
|                                                                        |                  |               |    |                  |                    |   |                  |        |    |                  |       |  

Comparison of the Quarter Ended December 27, 2008 and December 29, 2007

Total revenues were $39.1 million for the quarter ended December 27, 2008, compared to $40.6
million for the comparable prior year period, representing a decrease of 3.6%, or approximately $1.5 million, primarily as a result of the negative impact of foreign currency fluctuations of approximately $1.8 million, compared to the positive
impact of foreign currency fluctuation of approximately $1.4 million for the quarter ended December 29, 2007. The negative currency impact was partially offset by increased sales of Test and measurement products, driven by solid demand for the
new WaveAceTM, our first offering in the low-cost scope market, and strong market traction for our protocol storage products.

Service and other revenues consist primarily of service revenue and maintenance fees. Service and other revenues were approximately $2.1 million for the
quarter ended December 27, 2008, representing a decrease of approximately 12.3% or $0.3 million, compared to approximately $2.4 million for the comparable prior year period. The reduction was primarily the result of a decrease in upgrade
purchases along with negative foreign currency impact.



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##### Table of Contents

Revenues by geographic location expressed in dollars (in thousands) and as a percentage of total were:



|                   |  |                               |        |            |       |   |                               |   |            |  |       |  
|------------------ |  | ----------------------------- | ------ | ---------- | ----- | - | ----------------------------- | - | ---------- |  | ----- | -
|                   |  | Quarter EndedDecember 27,2008 |        | percentage |       |   | Quarter EndedDecember 29,2007 |   | percentage | 
|North America      |  | $                             | 11,469 |            | 29.3  | % |                               | $ | 13,035     |  | 32.1  | %
|Europe/Middle East |  |                               | 16,817 |            | 43.1  |   |                               |   | 16,353     |  | 40.3  |  
|Japan              |  |                               | 3,803  |            | 9.7   |   |                               |   | 3,292      |  | 8.1   |  
|Asia/Pacific       |  |                               | 7,018  |            | 17.9  |   |                               |   | 7,893      |  | 19.5  |  
|                   |  |                               |        |            |       |   |                               |   |            |  |       |  
|Total revenues     |  | $                             | 39,107 |            | 100.0 | % |                               | $ | 40,573     |  | 100.0 | %
|                   |  |                               |        |            |       |   |                               |   |            |  |       |  

For the quarter ended December 27,
2008, geographic revenues were higher in Europe/Middle East and Japan in terms of dollars and percentages of total revenues. European oscilloscope demand increased over the prior year comparable quarter, driven by traction for the WaveAceTM, our first offering in the low-cost scope market, which more than offset the negative foreign currency impact. Additionally, the increase in
revenues in Japan resulted from new protocol product introductions. Although the demand in Europe and Japan was strong, sales declined in North America and Asia/Pacific, where many customers postponed their spending as the economic outlook worsened.

Gross profit for the quarter ended December 27, 2008 was approximately $20.3 million, or 51.8% gross margin, compared to
approximately $23.5 million, or 57.9% gross margin, for the comparable prior year period. The lower gross profit in fiscal 2009 was primarily attributable to an approximate $2.7 million charge for the write-down of inventory and approximately $0.1
million of severance costs, as a result of realignment initiatives and change in product strategy. The prior period quarter gross profit was negatively impacted by approximately $0.2 million related to the amortization of an acquired Catalyst
intangible asset which was fully amortized in fiscal 2008. Absent these primarily non-cash charges, gross profit percentage increased compared to the prior year quarter due to the higher mix of protocol products relative to oscilloscope product
sales and lower manufacturing costs associated with our latest high-end products coupled with a lower sales base.

Selling, general and
administrative (SG&A) expense was approximately $12.8 million for the quarter ended December 27, 2008 as compared to approximately $13.3 million for the quarter ended December 29, 2007, representing a decrease of
approximately 3.3% or $0.4 million. The decrease was mainly due to a reduction in stock-based compensation expense of approximately $1.3 million, as a result of the reduction in the fair value of the SARs, partially offset by approximately $0.8
million related to business realignment initiatives. As a percentage of total revenues, SG&A expense remained flat at approximately 33.0% in both comparable quarters.

Research and development (R&D) expense was approximately $8.8 million for the quarter ended December 27, 2008, compared to approximately $7.9 million for the comparable prior year period, an
increase of approximately 11.3% or $0.9 million. The increase resulted primarily from an approximate $0.6 million charge related to business realignment initiatives, along with costs associated with new product development. As a percentage of total
revenues, R&D expense increased from 19.5% in the second quarter of fiscal 2008 to 22.5% in the second quarter of fiscal 2009 as a result of the fiscal 2009 realignment charges and costs associated with new product development, coupled with a
lower sales base.

Other expense, net, which consists primarily of interest income and expense and foreign exchange gains and losses was
approximately $0.9 million in the second quarter of fiscal 2009 compared to approximately $1.2 million for the second quarter of fiscal 2008. Net interest expense was approximately $0.9 million for the quarter ended December 27, 2008 as
compared to approximately $1.1 million for the comparable prior period. In addition, there was a foreign exchange gain of approximately $31,000 in the second quarter of fiscal 2009 as compared to a foreign exchange loss of approximately $0.1 million
in comparable prior quarter, resulting from the changes in our foreign exchange forward contracts and on transactions denominated in other than one of our functional currencies.

Comparison of the Two Quarters Ended December 27, 2008 and December 29, 2007

Total
revenues were approximately $79.8 million for the two quarters ended December 27, 2008, compared to $79.3 million for the comparable prior year period, representing an increase of approximately $0.6 million, or less than 1.0%, primarily as a
result of increased sales of Test and measurement products. Foreign currency fluctuations decreased total revenues by approximately $0.8 million in the two quarters of fiscal 2009 as compared to the same period last year. The increase in Test and
measurement products more than offset the negative impact of currency fluctuations and was driven mainly by increased oscilloscope product shipments due to the launch of our new oscilloscope products, including our first offering in the low-cost
scope market, channel effectiveness and recent market traction for our protocol storage products, as standards become more widely adopted.



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Service and other revenues consist primarily of service revenue and maintenance fees. Service and other
revenues were approximately $4.4 million for the two quarters ended December 27, 2008, representing a decrease of approximately 4.8% or a $0.2 million, compared to $4.6 million for the comparable prior year period. The reduction was primarily
the result of a decrease in upgrade purchases along with negative foreign currency impact.

Revenues by geographic location expressed in dollars (in
thousands) and as a percentage of total were:



|                   |  |                                   |        |            |       |   |                                       |   |            |  |       |  
|------------------ |  | --------------------------------- | ------ | ---------- | ----- | - | ------------------------------------- | - | ---------- |  | ----- | -
|                   |  | Two QuartersEndedDecember 27,2008 |        | percentage |       |   | Two QuartersEndedDecember 29,2007 (a) |   | percentage | 
|North America      |  | $                                 | 22,970 |            | 28.8  | % |                                       | $ | 25,315     |  | 31.9  | %
|Europe/Middle East |  |                                   | 32,268 |            | 40.4  |   |                                       |   | 29,188     |  | 36.8  |  
|Japan              |  |                                   | 6,618  |            | 8.3   |   |                                       |   | 7,271      |  | 9.2   |  
|Asia/Pacific       |  |                                   | 17,975 |            | 22.5  |   |                                       |   | 17,499     |  | 22.1  |  
|                   |  |                                   |        |            |       |   |                                       |   |            |  |       |  
|Total revenues     |  | $                                 | 79,831 |            | 100.0 | % |                                       | $ | 79,273     |  | 100.0 | %
|                   |  |                                   |        |            |       |   |                                       |   |            |  |       |  



|(a) | The two quarters ended December 29, 2007 reflects reclassifications of revenue between geographic areas
|--- | -------------------------------------------------------------------------------------------------------

For the two quarters ended December 27, 2008, geographic revenues were higher in Europe/Middle East and Asia/Pacific in terms of dollars and
percentages of total revenue. The gains in Europe/Middle East and Asia/Pacific were driven by improved sales productivity supported by strong distribution channels, despite negative foreign currency impact. These gains were partially offset by
decreases in North America due to slower than anticipated adoption of next-generation standards for our protocol products and the recent economic environment, which caused customers to postpone their spending, along with market softness in Japan.

Gross profit for the two quarters ended December 27, 2008 was approximately $43.3 million, or 54.2% gross margin, compared to $45.8
million, or 57.7% gross margin, for the comparable prior year period. The lower gross margin in fiscal 2009 was primarily attributable to an approximate $2.7 million charge for the write-down of inventory and approximately $0.1 million of severance
costs, as a result of realignment initiatives and change in product strategy. The prior year comparable period was negatively impacted by approximately $0.5 million related to the amortization of an acquired Catalyst intangible asset which was fully
amortized in fiscal 2008, along with approximately $0.1 million of business realignment charges. Absent these primarily non-cash charges, gross profit dollars remained substantially the same.

Selling, general and administrative (SG&A) expense was approximately $25.4 million for the two quarters ended December 27, 2008
compared to approximately $25.6 million for the two quarters ended December 29, 2007, representing a decrease of approximately $0.2 million or less than 1.0%. The decrease was mainly attributable to a reduction in stock-based compensation
expense of approximately $1.4 million, as a result of the reduction in fair value of the SARs, partially offset by approximately $0.8 million related to business realignment initiatives along with increased variable costs on a higher revenue base
and incremental marketing costs associated with the new product launches. As a percentage of total revenues, SG&A expense remained flat at approximately 32.0% in both comparable periods.

Research and development (R&D) expense was approximately $16.6 million for the two quarters ended December 27, 2008, compared to
$15.5 million for the comparable prior year period, an increase of approximately 7.1% or $1.1 million. The increase primarily resulted from an approximate $0.6 million charge related to business realignment initiatives, along with costs associated
with new product development. As a percentage of total revenues, R&D expense increased from 19.6% for the two quarters ended December 29, 2007 to 20.8% for the two quarters ended December 27, 2008.

Other expense, net, which consists primarily of interest income and expense and foreign exchange gains and losses was approximately $1.2 million for the
two quarters ended in fiscal 2009 compared to approximately $2.5 million for the two quarters ended in fiscal 2008. Net interest expense was approximately $1.8 million for the two quarters ended December 27, 2008 as compared to approximately
$2.2 million for the comparable prior period. In addition, there was a foreign exchange gain of approximately $0.3 million for the two quarters ended December 27, 2008, as compared to a foreign exchange loss of approximately $0.3 million in
comparable prior quarter, resulting from the changes in our foreign exchange forward contracts and on transactions denominated in other than one of our functional currencies. Further, the two quarters ended December 27, 2008 includes an
approximate $0.3 million gain on extinguishment of convertible debt, net of issue cost write-off, resulting from our repurchase of approximately $2.6 million of our convertible notes in the first quarter of fiscal 2009.



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Income Taxes

The effective income tax rate for the quarter and two quarters ended December 27, 2008 was 1.1% and 0.4%, respectively, compared to an effective income tax rate of (10.2)% and 10.8% for the quarter and two quarters ended
December 29, 2007, respectively. The effective income tax rate for the quarter and two quarters ended December 27, 2008 includes the effect of a non-deductible goodwill impairment charge of $103.8 million, the write-off of a deferred tax
asset related to equity-based compensation of $0.4 million, partially offset by a reduction of tax expense of $0.2 million related to a retroactive reinstatement of the federal research and development tax credit as a result of the Emergency
Economic Stabilization Act of 2008 (The Act), passed into law on October 3, 2008. The effective income tax rate for the quarter and two quarters ended December 29, 2007 includes the effect of a reduction of tax expense of $0.5
million resulting from both the final true-up of the prior years tax accrual upon filing the actual tax returns and an election for certain R&D credits made by the Company in the second quarter of fiscal 2008, slightly offset by a $15,000
increase to tax expense for interest related to income tax exposures.

We calculate income tax expense based upon an annual effective tax
rate forecast, including estimates and assumptions that could change during the year. The differences between the effective tax rate and the U.S. federal statutory rate of 35% principally result from our geographical distribution of taxable income,
and differences between the book and tax treatment of certain items.

Effective July 1, 2007, the Company adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, as amended by FASB Staff Position No. 48-1 (FSP-FIN 48-1), Definition of Settlement in FASB
Interpretation 48. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return.
FIN 48 states that a tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the position is sustainable, based on its technical merits. The tax benefit of a qualifying position is the largest
amount of tax benefit greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant information. A tax benefit from an uncertain position was previously recognized if it was probable of being
sustained. Under FIN 48, the liability for unrecognized tax benefits is classified as non-current unless the liability is expected to be settled in cash within twelve months of the reporting date.

We operate in multiple taxing jurisdictions, both within the United States and outside of the United States, and faces audits from various tax
authorities regarding the deductibility of certain expenses, intercompany transactions, as well as other matters. At December 27, 2008, the total amount of liability for unrecognized tax benefits related to federal, state and foreign taxes and
accrued interest was approximately $10.7 million, approximately $2.8 million are reflected as a non-current liability and approximately $7.9 million are reflected as a reduction of gross deferred tax assets, all of which would impact the effective
tax rate, if recognized.

We believe it is reasonably possible that approximately $1.1 million of net unrecognized tax benefits will be
recognized during the next twelve months and will impact our effective tax rate.

We recognize interest and, if applicable, penalties which
could be assessed related to unrecognized tax benefits in income tax expense. As of December 27, 2008, the total amount of accrued interest and penalties, before federal and, if applicable, state effect, was approximately $0.1 million.

We file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. For federal income tax purposes,
fiscal 2005 through 2008 tax years remain open for examination by the tax authorities under the normal three year statute of limitations. For state tax purposes, (principally California and New York) fiscal 2004 through 2008 tax years remain open
for examination by the tax authorities under a four year statute of limitations.

Liquidity and Capital Resources

Cash and cash equivalents at December 28, 2008 were approximately $9.2 million compared to approximately $10.2 million at June 28, 2008.

Net cash used in operating activities was approximately $1.2 million for the two quarters ended December 27, 2008 compared to net
cash provided by operating activities of approximately $6.6 million in the same period last year. The net cash used in operating activities was attributable to net loss of approximately $105.3 million, working capital requirements of approximately
$4.8 million and deferred income taxes of approximately $1.3 million, partially offset by a non-cash goodwill impairment charge of approximately $105.8 million, non-cash depreciation and amortization of approximately $3.2 million and share-based
compensation of approximately $1.0 million.



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##### Table of Contents

Net cash used in investing activities was attributable to the purchase of property, plant and equipment
of approximately $2.1 million in the two quarters ended December 28, 2008 compared to approximately $1.1 million in the same period in fiscal 2008. This increase was due to the incremental spending related to our new product launches.

Net cash provided by financing activities was approximately $2.8 million in the two quarters ended December 28, 2008 compared to net
cash used in financing activities of approximately $4.2 million in the same period in fiscal 2008. Net cash provided by financing activities in fiscal 2009 was primarily the result of net borrowings under the credit line of $6.0 million, partially
offset by the repurchase of convertible notes of approximately $2.8 million (cash payments for principal) and the purchase of treasury shares for approximately $0.7 million. Net cash used in financing activities in fiscal 2008 primarily resulted
from approximately $3.4 million repayment of borrowings under the credit agreement and $1.0 million for repurchases of treasury stock.

We
expect to generate cash from operations as we reduce our inventory, as well as realize the benefits associated with our business realignment initiatives in the next few quarters. Therefore, we believe that our cash and cash equivalents on hand, cash
flow expected to be generated by operations and availability under our revolving credit lines will be sufficient to fund our operations, working capital, debt repayment (excluding the repurchase of all or a portion of the convertible notes), share
repurchases and capital expenditure requirements for the foreseeable future.

Contractual Obligations and Other Commitments

Our contractual obligations and commitments include obligations associated with our employee severance agreements, supplier agreements, operating and
capital leases and convertible note obligations as set forth in the table below:



|                                        |       |                                                |                 |  |           |       |           |   |                  |  |   |       |  |   |  
|--------------------------------------- | ----- | ---------------------------------------------- | --------------- |  | --------- | ----- | --------- | - | ---------------- |  | - | ----- |  | - | -
|(In thousands)                          |       | Payments due by Period as of December 28, 2008
|                                        | Total |                                                | Less than1 Year |  | 1-3 Years |       | 3-5 Years |   | More than5 Years
|Severance                               |       | $                                              | 1,353           |  |           | 1,304 |           |   | 49               |  |   |      |  |   | 
|Supplier agreements                     |       |                                                | 190             |  |           | 190   |           |   |                 |  |   |      |  |   | 
|Operating lease obligations             |       |                                                | 5,717           |  |           | 2,334 |           |   | 2,306            |  |   | 1,069 |  |   | 8
|Vendor supplied capital lease agreement |       |                                                | 439             |  |           | 244   |           |   | 195              |  |   |      |  |   | 
|Convertible notes (1)                   |       |                                                | 64,850          |  |           |      |           |   | 64,850           |  |   |      |  |   | 
|                                        |       |                                                |                 |  |           |       |           |   |                  |  |   |       |  |   |  
|Total (2)                               |       | $                                              | 72,549          |  | $         | 4,072 |           | $ | 67,400           |  | $ | 1,069 |  | $ | 8
|                                        |       |                                                |                 |  |           |       |           |   |                  |  |   |       |  |   |  



|(1) | The Convertible notes mature on October 15, 2026. Holders of the Convertible notes have the right to require the Company to purchase all or a portion of the Convertible notes
on October 15, 2011, which is reflected above.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The table above does not include our reserves for income taxes under FIN 48 because we are unable to reasonably predict the ultimate amount or timing of settlement. See Note 17
 Income Taxes for additional information.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Forward-Looking Information

We discuss expectations regarding our future performance in our annual and quarterly reports, press releases, and other written and oral statements. These
forward-looking statements are based on currently available information, business plans and projections about future events and trends. They are inherently uncertain, and investors must recognize that events could turn out to be
significantly different from our expectations. When used in this Form 10-Q, the words anticipate, believe, estimate, will, plan, intend and expect and similar
expressions identify forward-looking statements. Except as required by federal securities law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. When evaluating
our business, the Risk Factors included in Item 1A. of our Annual Report filed on Form 10-K for the fiscal year ended June 28, 2008 should be considered in conjunction with all other information included in our filings.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

There have been no material changes in market risk since the filing of the Companys Annual Report on Form 10-K for the fiscal year ended June 28, 2008.



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##### Table of Contents

|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with
the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and
15d-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure
that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Controls Over Financial Reporting

There have been no changes in the Companys internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 27, 2008 that have materially affected, or are reasonably likely to materially affect, its internal control over
financial reporting.



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##### Table of Contents

LeCROY CORPORATION

PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

From time to time, the Company
is involved in lawsuits, claims, investigations and proceedings, including patent and environmental matters, which arise in the ordinary course of business. There are no such matters currently pending that the Company expects to have a material
adverse affect on business, results of operations, financial condition or cash flows.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

There has been no material changes
with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended June 28, 2008, other than the elimination of the risk factor set forth below, as we fully impaired the goodwill.

We are required to test our goodwill for impairment at least annually and that could result in a material impairment charge that would negatively
impact our results of operations.

Under current accounting standards, goodwill and certain other intangible assets with
indefinite lives are no longer amortized, but instead, are assessed for impairment when impairment indicators are present. Accounting principles generally accepted in the United States (GAAP) require a company to perform an impairment
test on goodwill annually. Testing is required between annual tests if events occur or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value. Such an event may occur if, for an
extended period of time, the market value of the Companys common stock plus a control premium were less than the carrying value of the Company.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

Issuer Repurchases of Equity Securities

On May 25, 2006, LeCroys Board of Directors approved the adoption of a
share repurchase plan authorizing the Company to purchase up to 2 million shares, not to exceed $25 million, of its common stock. Purchases under this buyback program may be made from time to time on the open market and in privately negotiated
transactions. The timing of these purchases is dependent upon several factors, including market conditions, the market price of the Companys common stock, the effect of the share dilution on earnings, available cash and any other potential
risks the Company may encounter. The share repurchase plan may be discontinued at any time at the discretion of the Company.

The following
table sets forth information regarding LeCroys purchases of its common stock on a monthly basis during the second quarter of fiscal 2009. Share repurchases are recorded on a trade date basis.



|                                       |  |                               |  |                            |      |                                                                             |        |                                                                            |        
|-------------------------------------- |  | ----------------------------- |  | -------------------------- | ---- | --------------------------------------------------------------------------- | ------ | -------------------------------------------------------------------------- | -------
|Period                                 |  | TotalNumber ofSharesPurchased |  | AveragePrice Paidper Share |      | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor
Program |        | Maximum Numberof Shares that MayYet Be PurchasedUnder the Plans orPrograms
|September 28, 2008 to October 31, 2008 |  | 61,658                        |  | $                          | 6.77 |                                                                             | 61,658 |                                                                            | 574,372
|November 1, 2008 to November 30, 2008  |  | 11,300                        |  | $                          | 3.13 |                                                                             | 11,300 |                                                                            | 563,072
|                                       |  |                               |  |                            |      |                                                                             |        |                                                                            |        
|Total                                  |  | 72,958                        |  | $                          | 6.21 |                                                                             | 72,958 |                                                                            | 563,072
|                                       |  |                               |  |                            |      |                                                                             |        |                                                                            |        



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|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

Our 2008 annual meeting of stockholders was held on November 3, 2008. At the meeting, our stockholders approved three proposals presented pursuant to the vote totals indicated below:

Proposal 1

Election of Directors



|                                                       |     |                      |          |        
|------------------------------------------------------ | --- | -------------------- | -------- | -------
|Director Nominee                                       |     | Vote (No. of Shares)
|                                                       | For |                      | Withheld
|Election of Norman R. Robertson, as a Class I Director |     | 11,204,758           |          | 225,161
|Election of Robert W. Chlebek, as a Class I Director   |     | 10,614,442           |          | 815,477

As of November 3, 2008, William G. Scheerer, Allyn C. Woodward, Jr., Walter O. LeCroy, Robert
E. Anderson and Thomas H. Reslewic were members of the Board of Directors whose terms of office continued after the annual meeting of stockholders.

Proposal 2

Approval of the 2008 Stock Incentive Plan



|                     |  |           |  |          |  |                  
|-------------------- |  | --------- |  | -------- |  | -----------------
|Vote (No. of Shares)
|For                  |  | Against   |  | Abstain* |  | Broker Non-Votes*
|6,945,775            |  | 2,187,229 |  | 13,247   |  | 2,283,668        

Proposal 3

Ratification of KPMG LLP as the Companys independent registered public accounting firm



|                     |  |         |  |         
|-------------------- |  | ------- |  | --------
|Vote (No. of Shares)
|For                  |  | Against |  | Abstain*
|11,414,354           |  | 7,760   |  | 7,805   
|                    

| | * | Shares that reflect abstentions or broker non-votes are counted for purposes of determining whether a quorum is present for the transaction of business at the
annual meeting, but are not counted as votes on any proposals presented at the annual meeting.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 6. | EXHIBITS
|------- | --------

The following exhibits are filed herewith.



|              |  |                                                                                                                   
|------------- |  | ------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                       
|31.1          |  | Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
|              | 
|31.2          |  | Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
|              | 
|32.1          |  | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350.                                  
|              | 
|32.2          |  | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350.                                  



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SIGNATURE

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



|                       |  |  |  |                                                                    
|---------------------- |  |  |  | -------------------------------------------------------------------
|Date: February 5, 2009 |  |  |  | LeCROY CORPORATION                                                 
|                       |  | 
|                       |  |  |  | /s/ Sean B. OConnor                                               
|                       |  |  |  | Sean B. OConnor                                                   
|                       |  |  |  | Vice President and Chief Financial Officer, Secretary and Treasurer



29