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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 31, 2003


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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
(State or Other Jurisdiction
of Incorporation or Organization)                  |  | 13-2507777
(I.R.S. Employer
Identification No.)
|                                                                                         |  |                                                
|700 CHESTNUT RIDGE ROAD
CHESTNUT RIDGE, NEW YORK
(Address of Principal Executive Office) |  | 10977
(Zip Code)                               

(845) 425-2000
(Registrants Telephone Number, Including Area Code)

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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

YES [X]       NO [  ]

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 JANUARY 26, 2004
|                                   |  |                                
|Common stock, par value $.01 share |  |                                 | 10,680,311 | 



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TABLE OF CONTENTS



|                                         |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION           
|                                         | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                         | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|RISK FACTORS                            
|                                         | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                         | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION              
|                                         | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                         | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                                         | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURE                               
|EXHIBIT INDEX                           
|Ex-10.49 Professional Services Agreement
|EX-31.1 302 Certification (CEO)         
|EX-31.2 302 Certification (CFO)         
|EX-32.1 906 Certification (CEO)         
|EX-32.2 906 Certification (CFO)         



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LeCROY CORPORATION
FORM 10-Q

INDEX

|          |  |                                                                                       |  |                                                                                                                           |    |          |   | 
|--------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------- | -- | -------- | - | 
|          |  |                                                                                       |  |                                                                                                                           |    | Page No.
|          |  |                                                                                       |  |                                                                                                                           |    |         
|PART I    |  | FINANCIAL INFORMATION                                                                 |  |                                                                                                                           |    |         
|Item 1.   |  | Financial Statements:                                                                 |  |                                                                                                                           |    |         
|          |  |                                                                                       |  | Condensed Consolidated Balance Sheets
as of December 31, 2003 (Unaudited) and June 30, 2003                               |    |          | 3 | 
|          |  |                                                                                       |  | Condensed Consolidated Statements of Operations (Unaudited)
for the Three and Six Months ended December 31, 2003 and 2002 |    |          | 4 | 
|          |  |                                                                                       |  | Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months ended December 31, 2003 and 2002           |    |          | 5 | 
|          |  |                                                                                       |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                          |    |          | 6 | 
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |  |                                                                                                                           | 13 |         
|Item 3.   |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                                                                           | 30 |         
|Item 4.   |  | Controls and Procedures                                                               |  |                                                                                                                           | 30 |         
|PART II   |  | OTHER INFORMATION                                                                     |  |                                                                                                                           |    |         
|Item 1.   |  | Legal Proceedings                                                                     |  |                                                                                                                           | 31 |         
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                   |  |                                                                                                                           | 32 |         
|Item 6.   |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                                           | 32 |         
|Signature |  |                                                                                       |  |                                                                                                                           | 33 |         

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PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS

LeCROY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

December 31,
    
    June 30,In thousands, except par value and share data
    
    2003
    
    2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,091
    
    
    $
    30,851Accounts receivable, net
    
    
    18,521
    
    
    
    20,523Inventories, net
    
    
    23,098
    
    
    
    24,720Other current assets
    
    
    12,688
    
    
    
    10,012Total current assets
    
    
    77,398
    
    
    
    86,106Property and equipment, net
    
    
    19,387
    
    
    
    20,021Other assets
    
    
    13,693
    
    
    
    16,025TOTAL ASSETS
    
    $
    110,478
    
    
    $
    122,152LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Short-term
debt and current portion of long-term debt
    
    $
    5,098
    
    
    $
    94Accounts payable
    
    
    10,802
    
    
    
    10,937Accrued expenses and other liabilities
    
    
    12,742
    
    
    
    12,244Total current liabilities
    
    
    28,642
    
    
    
    23,275Deferred revenue and other non-current liabilities
    
    
    2,106
    
    
    
    3,028Total liabilities
    
    
    30,748
    
    
    
    26,303Redeemable convertible preferred stock, $.01 par value (authorized 5,000,000
shares of preferred stock; 0 and 500,000 shares issued and outstanding
designated as redeemable convertible preferred stock; liquidation
value,
$0 and $15,735 at December 31, 2003 and June 30, 2003, respectively)
    
    
    
    
    
    
    15,335Stockholders equity:Common stock, $.01 par value (authorized 45,000,000 shares;
10,548,465 and 10,412,562 shares issued and outstanding as of
December 31, 2003 and June 30, 2003, respectively)
    
    
    105
    
    
    
    104Additional paid-in capital
    
    
    74,933
    
    
    
    79,864Warrants to purchase common stock
    
    
    2,165
    
    
    
    2,165Accumulated other comprehensive income (loss)
    
    
    609
    
    
    
    (1,598
    )Retained earnings (deficit)
    
    
    1,918
    
    
    
    (21
    )Total stockholders equity
    
    
    79,730
    
    
    
    80,514TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    110,478
    
    
    $
    122,152


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

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LeCROY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

Three months ended
    
    Six months endedDecember 31,
    
    December 31,In thousands, except per share data
    
    2003
    
    2002
    
    2003
    
    2002Revenues:Oscilloscopes and related products
    
    $
    27,019
    
    
    $
    24,382
    
    
    $
    51,624
    
    
    $
    46,855Service and other
    
    
    2,752
    
    
    
    2,255
    
    
    
    5,566
    
    
    
    4,773Total revenues
    
    
    29,771
    
    
    
    26,637
    
    
    
    57,190
    
    
    
    51,628Cost of sales (see Note 4)
    
    
    12,807
    
    
    
    15,007
    
    
    
    24,654
    
    
    
    27,397Gross profit
    
    
    16,964
    
    
    
    11,630
    
    
    
    32,536
    
    
    
    24,231Operating expenses:Selling, general and administrative (see Note 4)
    
    
    10,219
    
    
    
    9,363
    
    
    
    20,092
    
    
    
    20,053Research and development (see Note 4)
    
    
    3,781
    
    
    
    4,358
    
    
    
    7,465
    
    
    
    8,870Total operating expenses
    
    
    14,000
    
    
    
    13,721
    
    
    
    27,557
    
    
    
    28,923Operating income (loss)
    
    
    2,964
    
    
    
    (2,091
    )
    
    
    4,979
    
    
    
    (4,692
    )Other income (expense), net
    
    
    80
    
    
    
    (47
    )
    
    
    (242
    )
    
    
    (151
    )Income (loss) before income taxes
    
    
    3,044
    
    
    
    (2,138
    )
    
    
    4,737
    
    
    
    (4,843
    )Provision for (benefit from) income taxes
    
    
    1,126
    
    
    
    (791
    )
    
    
    1,752
    
    
    
    (1,792
    )Net income (loss)
    
    
    1,918
    
    
    
    (1,347
    )
    
    
    2,985
    
    
    
    (3,051
    )Charges related to convertible preferred stock
    
    
    
    
    
    
    517
    
    
    
    
    
    
    
    1,032Redemption of convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    7,665
    
    
    
    Net
income (loss) applicable to common stockholders
    
    $
    1,918
    
    
    $
    (1,864
    )
    
    $
    (4,680
    )
    
    $
    (4,083
    )Net
income (loss) per common share
applicable to common stockholders:Basic
    
    $
    0.18
    
    
    $
    (0.18
    )
    
    $
    (0.45
    )
    
    $
    (0.40
    )Diluted
    
    $
    0.18
    
    
    $
    (0.18
    )
    
    $
    (0.45
    )
    
    $
    (0.40
    )Weighted average number of common shares:Basic
    
    
    10,498
    
    
    
    10,340
    
    
    
    10,456
    
    
    
    10,332Diluted
    
    
    10,690
    
    
    
    10,340
    
    
    
    10,456
    
    
    
    10,332


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

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LeCROY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

Six months endedDecember 31,In thousands
    
    2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    2,985
    
    
    $
    (3,051
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    3,133
    
    
    
    3,464Deferred income taxes
    
    
    1,280
    
    
    
    (1,871
    )Recognition of deferred license revenue
    
    
    (648
    )
    
    
    (648
    )Impairment of intangible assets
    
    
    
    
    
    
    2,030Loss on disposal of property and equipment
    
    
    63
    
    
    
    Change in operating assets and liabilities:Accounts receivable
    
    
    2,901
    
    
    
    3,327Inventories
    
    
    2,502
    
    
    
    4,556Other current and non-current assets
    
    
    (1,819
    )
    
    
    398Accounts payable, accrued expenses and other liabilities
    
    
    113
    
    
    
    (4,744
    )Net cash provided by operating activities
    
    
    10,510
    
    
    
    3,461CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (1,727
    )
    
    
    (1,482
    )Purchase of intangible assets
    
    
    (150
    )
    
    
    (1,010
    )Net cash used in investing activities
    
    
    (1,877
    )
    
    
    (2,492
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of borrowings
    
    
    (5,047
    )
    
    
    (45
    )Borrowings under line of credit
    
    
    10,000
    
    
    
    Redemption of convertible preferred stock
    
    
    (23,000
    )
    
    
    Proceeds from employee stock purchase and option plans
    
    
    1,509
    
    
    
    245Repayment
of seller-financed acquisition of intangible assets
    
    
    (250
    )
    
    
    Net cash (used in) provided by in financing activities
    
    
    (16,788
    )
    
    
    200Effect of exchange rate changes on cash
    
    
    395
    
    
    
    (618
    )Net (decrease) increase in cash and cash equivalents
    
    
    (7,760
    )
    
    
    551Cash and cash equivalents at beginning of the period
    
    
    30,851
    
    
    
    27,322Cash and cash equivalents at end of the period
    
    $
    23,091
    
    
    $
    27,873Supplemental Cash Flow DisclosureCash paid during the period for:Interest
    
    $
    64
    
    
    $
    55Income taxes
    
    
    110
    
    
    
    217


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

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LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation

The accompanying interim condensed consolidated financial statements
include all the accounts of LeCroy Corporation (the Company or LeCroy) and
its wholly-owned subsidiaries. These condensed 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 30, 2003. The condensed consolidated
balance sheet as of December 31, 2003 has been derived from these audited
consolidated financial statements. Certain reclassifications have been made to
prior-year amounts to conform to the current-year presentation. All material
inter-company transactions and balances have been eliminated.

The Companys condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States, 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 condensed consolidated financial statements and the revenues and expenses
reported during the period. Examples include the allowance for doubtful
accounts, allowance for excess and obsolete inventory, intangible asset
valuation, determining if and when impairments have occurred, and the
assessment of the valuation of deferred income taxes and income tax reserves.
These estimates and assumptions are based on managements judgment and
available information and, consequently, actual results could differ from these
estimates.

These unaudited condensed consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, 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. Interim period
operating results may not be indicative of the operating results for a full
year. The operations of the U.S. parent company, LeCroy Corporation, have a
period ending on the Saturday closest to December 31 (December 27, 2003 and
December 28, 2002). Each of these fiscal periods represented a 13-week period.
The condensed consolidated financial statement period-end references are stated
as December 31.

2. Stock Plans and Awards

The Company accounts for stock-based compensation plans under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations. No stock-based employee and director compensation cost for the
stock option plans is reflected in the Companys Condensed Consolidated
Statements of Operations, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. Compensation cost for restricted stock is recorded based on the
market value on the date of grant. The fair value of restricted stock is
charged to Stockholders Equity and amortized to expense over the requisite
vesting periods.

The
following table illustrates the effect on net income (loss) and
net income
(loss) per common share applicable to common stockholders as if the Company had
applied the fair value recognition provisions for stock-based employee
compensation of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure.

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LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)

Three months ended
    
    Six months endedDecember 31,
    
    December 31,2003
    
    2002
    
    2003
    
    2002In thousandsNet income (loss), as reported
    
    $
    1,918
    
    
    $
    (1,347
    )
    
    $
    2,985
    
    
    $
    (3,051
    )Add: stock-based compensation expense
included in reported net income (loss), net
of income taxes
    
    
    4
    
    
    
    6
    
    
    
    9
    
    
    
    11Deduct: stock-based compensation expense
determined under fair value based method for
all awards, net of income taxes
    
    
    (1,166
    )
    
    
    (945
    )
    
    
    (1,858
    )
    
    
    (1,792
    )Pro forma net income (loss)
    
    
    756
    
    
    
    (2,286
    )
    
    
    1,136
    
    
    
    (4,832
    )Charges related to convertible preferred stock
    
    
    
    
    
    
    517
    
    
    
    7,665
    
    
    
    1,032Pro
forma net income (loss) applicable to common
stockholders
    
    $
    756
    
    
    $
    (2,803
    )
    
    $
    (6,529
    )
    
    $
    (5,864
    )Net
income
(loss) per common share applicable to common
stockholders:Basic, as reported
    
    $
    0.18
    
    
    $
    (0.18
    )
    
    $
    (0.45
    )
    
    $
    (0.40
    )Diluted, as reported
    
    $
    0.18
    
    
    $
    (0.18
    )
    
    $
    (0.45
    )
    
    $
    (0.40
    )Basic, pro forma
    
    $
    0.07
    
    
    $
    (0.27
    )
    
    $
    (0.62
    )
    
    $
    (0.57
    )Diluted, pro forma
    
    $
    0.07
    
    
    $
    (0.27
    )
    
    $
    (0.62
    )
    
    $
    (0.57
    )


3. Revenue Recognition

Revenue is recognized when products are shipped or services are
rendered to customers, net of allowances for anticipated returns. The
Companys revenue-earning activities generally involve delivering or
producing goods, and revenues are considered to be earned when the
Company has completed the process by which it is entitled to such
revenues. The following criteria are used for revenue recognition;
pervasive evidence of an arrangement exists, delivery has occurred,
selling price is fixed or determinable and collection is reasonably
assured. Revenues from service contracts are recognized ratably over
the contract period. A deferral is recorded for post-contract support
and any other further deliverables included within the sales contract
agreement. This deferral is earned and accordingly, recognized as
contract elements are completed.

In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements, which summarizes certain of the SEC Staffs views in
applying accounting principles generally accepted in the United States to
revenue recognition in financial statements. Under SAB 101, which the Company
adopted in fiscal 2001, certain previously recognized license fee revenue was
deferred and recognized in future periods over the terms of the agreements. The
adoption of SAB 101 was recorded as of the beginning of fiscal 2001 and
resulted in a non-cash charge for the cumulative effect of an accounting change
of $4.4 million, net of a tax benefit of $2.7 million. The deferred revenue is
being amortized into revenue over 5.5 years, the remaining terms of the license
agreements. The Company recognized pre-tax deferred license fee revenue of $0.3
million and $0.6 million during the three and six months ended December 31,
2003 and 2002, respectively. Such license fees were included in Service and
other revenue in the Condensed Consolidated Statements of Operations. As of
December 31, 2003, the remaining balance of pre-tax deferred license fee
revenue was $2.6 million, $1.3 million of which was included in Accrued
expenses and other liabilities and the remaining $1.3 million of which was
included in Deferred revenue and other non-current liabilities on the Condensed
Consolidated Balance Sheet.

The Company recognizes software license revenue in accordance with
American Institute of Certified Public Accountants (AICPA) 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). Revenues from perpetual software license agreements
are recognized upon shipment of the software if evidence of an arrangement
exists, pricing is fixed and determinable, and collectibility is probable. If
an acceptance period is required, revenues are recognized upon the earlier of
customer acceptance or the expiration of the acceptance period. The Company
allocates revenue on software arrangements involving multiple elements to each
element based on the relative fair values of the elements. The determination of
fair value of each element in multiple element-arrangements is based on vendor
specific objective evidence (VSOE). The Company analyzes all of the elements
and determines if there is sufficient VSOE to allocate revenue to maintenance
included in multiple element-arrangements. Accordingly, assuming all other
revenue recognition criteria are met, revenue is recognized upon delivery using
the residual method
in accordance with SOP 98-9, where the fair value of the undelivered elements
is deferred and the remaining portion of the arrangement fee is recognized as
revenue. The revenue allocated to licenses generally is recognized upon
delivery of the products. The revenue allocated to maintenance is generally
recognized ratably over the term of the support agreement. The Company did not
recognize any software license revenue during the three and six months ended
December 31, 2003 and 2002, respectively.

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LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)

4. Restructuring

During the fourth quarter of fiscal 2003, the Company adopted a plan to
consolidate its probe development activities into its Chestnut Ridge, New York
facility. In connection with this plan, the Company closed its Beaverton,
Oregon facility and recorded lease termination costs of $0.3 million and a
charge for severance of $0.6 million ($0.1 million of which was recorded in
Cost of sales, $0.6 million was recorded in Selling, general and administrative
expense and $0.2 million was recorded in Research and development expense). As
of December 31, 2003, $0.7 million of the total $0.9 million has been paid and
$0.2 million remains in Accrued expenses and other liabilities in the Condensed
Consolidated Balance Sheet. Lease termination costs under this plan will be
paid by the end of the third quarter of fiscal 2006 and severance will be paid
by the end of the fourth quarter of fiscal 2004.

During the second quarter of fiscal 2003, the Company recorded a $2.1
million charge for the impairment of technology, manufacturing and distribution
rights and a $0.2 million charge for a related future royalty payment, both of
which are recorded in Cost of sales. The impairment resulted from the
Companys strategic decision to exit certain older product lines and to make
significant changes to its manufacturing strategy to further improve operating
efficiency.

During the first quarter of fiscal 2003, the Company adopted a plan to
scale down fixed infrastructure due to the difficult economic environment and
to implement new management operating systems designed to improve processes in
sales, order management, customer relationship management and financial
performance management. In connection with the adoption of this plan, the
Company recorded a charge for severance and other related expenses in the first
quarter of fiscal 2003 of $2.7 million ($0.1 million of which was recorded in
Cost of sales, $2.1 million was recorded in Selling, general and administrative
expense and $0.5 million was recorded in Research and development expense in
the Condensed Consolidated Statement of Operations). As of December 31, 2003,
$2.2 million of the total $2.7 million has been paid and $0.5 million remains
in Accrued expenses and other liabilities in the Condensed Consolidated Balance
Sheet. Severance and other related amounts under this plan will be paid by the
end of first quarter of fiscal 2005.

The Company took steps during fiscal 2002 to reduce its expenses in
response to the continued weakness in the technology sector of the economy. In
connection with these workforce reductions, the Company recorded a $4.2 million
charge ($1.0 million recorded in Cost of sales, $3.0 million in Selling,
general and administrative expense and $0.2 million in Research and development
expense) for severance and related expenses, including costs associated with
the succession of the Companys Chief Executive Officer during the second
quarter of fiscal 2002. Of the $4.2 million total charge, $4.0 million was
initially credited to Accrued expenses and other liabilities and $0.2 million,
representing a non-cash expense for the amendment of employee stock options,
was credited to Additional paid-in capital. Cumulative through December 31,
2003, $3.9 million of the total $4.0 million has been paid and $0.1 million of
unused restructuring reserve was credited to Selling, general and
administrative expense in the fourth quarter of fiscal 2003. As of December 31,
2003, the 2002 restructuring plan was completed.

5. Derivatives

The Company enters into foreign exchange forward contracts to minimize the
risks associated with foreign currency fluctuations on assets or liabilities
denominated in other than the functional currency of the Company or its
subsidiaries. These foreign exchange forward contracts, which are not accounted
for as hedges, are recorded on the Condensed Consolidated Balance Sheet at fair
value. The changes in fair value of these contracts are highly inversely
correlated to changes in the value of certain of the Companys foreign
denominated assets and liabilities. 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 $0.1 million for the three and
six months ended December 31, 2003 and ($0.2) and ($0.4) million for the three
and six months ended December 31, 2002, respectively, and are included in Other
income (expense), net in the Condensed Consolidated Statements of Operations.
At December 31, 2003 and June 30, 2003, the
notional amounts of the Companys open foreign exchange forward
contracts, all with
maturities of less than six months, were approximately $7.4 million and $6.7
million, respectively.

8



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##### Table of Contents



LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)

6. Comprehensive Income (Loss)

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

Three months ended
    
    Six months endedDecember 31,
    
    December 31,2003
    
    2002
    
    2003
    
    2002In thousandsNet income (loss)
    
    $
    1,918
    
    
    $
    (1,347
    )
    
    $
    2,985
    
    
    $
    (3,051
    )Cumulative unrealized
foreign currency
translation gains
    
    
    1,738
    
    
    
    1,194
    
    
    
    2,207
    
    
    
    913Comprehensive income (loss)
    
    $
    3,656
    
    
    $
    (153
    )
    
    $
    5,192
    
    
    $
    (2,138
    )


7. Accounts Receivable, net

The
Company has agreements with two of its customers, who are also vendors,
that provide the Company with the legal right to offset outstanding accounts
receivable balances against outstanding accounts payable balances. At December
31, 2003 and 2002, the Company netted approximately $1.5 million and $2.5
million, respectively, of accounts receivable against accounts payable on the
Condensed Consolidated Balance Sheets related to these agreements.

8. Inventories, net

Inventories, including demonstration units in finished goods, are stated
at the lower of cost (first-in, first-out method) or market. Inventories
consist of the following:

December 31,
    
    June 30,2003
    
    2003In thousandsRaw materials
    
    $
    6,722
    
    
    $
    6,372Work in process
    
    
    5,087
    
    
    
    5,696Finished goods
    
    
    11,289
    
    
    
    12,652$
    23,098
    
    
    $
    24,720


The value of demonstration units included in finished goods was $8.5
million and $9.1 million at December 31, 2003 and June 30, 2003, respectively.

9. Other Current Assets

Other current assets consist of the following:

December 31,
    
    June 30,2003
    
    2003In thousandsDeferred tax assets, net
    
    $
    8,000
    
    
    $
    7,200Other receivables
    
    
    566
    
    
    
    560Other
    
    
    4,122
    
    
    
    2,252$
    12,688
    
    
    $
    10,012


10. Property and Equipment, net

Property and equipment consist of the following:

December 31,
    
    June 30,2003
    
    2003In thousandsLand and building
    
    $
    13,677
    
    
    $
    13,288Furniture, machinery and equipment
    
    
    35,721
    
    
    
    34,427Computer software
    
    
    6,190
    
    
    
    6,19055,588
    
    
    
    53,905Less: Accumulated depreciation and amortization
    
    
    (36,201
    )
    
    
    (33,884
    )$
    19,387
    
    
    $
    20,021


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LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)

Depreciation and amortization expense was $1.3 and $1.2 million for the
three month periods ended December 31, 2003 and 2002, respectively.
Depreciation and amortization expense for the six month periods ended December
31, 2003 and 2002 was $2.5 million and $2.3 million, respectively.

11. Other Assets

Other assets consist of the following:

December 31,
    
    June 30,2003
    
    2003In thousandsIntangibles, net
    
    $
    4,761
    
    
    $
    5,232Deferred tax assets, net
    
    
    5,854
    
    
    
    7,934Goodwill
    
    
    1,874
    
    
    
    1,874Other
    
    
    1,204
    
    
    
    985$
    13,693
    
    
    $
    16,025


Under SFAS No. 142 Goodwill and Other Intangible Assets, goodwill is not
amortized but reviewed for impairment annually or more frequently if certain
indicators arise. The Company completed the annual impairment test required
under SFAS No. 142 during the fourth quarter of fiscal 2003 and 2002 and
determined that there was no impairment to its recorded goodwill balances.

The following table reflects the gross carrying amount and accumulated
amortization of the Companys goodwill and intangible assets included in Other
assets on the Condensed Consolidated Balance Sheets as of the dates indicated:

Weighted
    
    December 31,
    
    June 30,Average Lives
    
    2003
    
    2003In thousandsIntangible assets:Amortizable intangible assets:Technology, manufacturing and distribution rights
    
    4.6 years
    
    $
    7,160
    
    
    $
    7,010Patents and other intangible assets
    
    4.4 years
    
    
    661
    
    
    
    661Effect of currency translation on intangible assets
    
    
    
    
    
    
    149
    
    
    
    105Accumulated amortization
    
    
    
    
    
    
    (3,209
    )
    
    
    (2,544
    )Net carrying amount
    
    
    
    
    
    $
    4,761
    
    
    $
    5,232Non-Amortizable intangible assets:Goodwill
    
    
    
    
    
    $
    1,874
    
    
    $
    1,874


Amortization expense for those intangible assets with finite lives was
$0.3 million and $0.4 million for the three months ended December 31, 2003 and
2002, respectively, and $0.7 million and $1.1 million for the six months ended
December 31, 2003 and 2002, respectively. The cost of technology, manufacturing
and distribution rights acquired is amortized primarily on the basis of the
higher of units shipped over the contract periods through June 2008 or on a
straight-line basis. Patents and other intangible assets are amortized on a
straight-line basis. Management estimates intangible assets amortization
expense on a straight-line basis in fiscal 2004 through 2008 will approximate
$1.3 million, $2.0 million, $0.7 million, $0.7 million and $0.6 million,
respectively.

12. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following:

December 31,
    
    June 30,2003
    
    2003In thousandsCompensation and benefits
    
    $
    3,607
    
    
    $
    4,489Income taxes
    
    
    2,758
    
    
    
    2,595Deferred license fee revenue, current portion
    
    
    1,296
    
    
    
    1,296Warranty
    
    
    1,243
    
    
    
    1,235Retained liabilities from discontinued operations
    
    
    308
    
    
    
    456Other
    
    
    3,628
    
    
    
    2,267$
    12,840
    
    
    $
    12,338


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##### Table of Contents



LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)

13. Warranties and Guarantees

The Company provides a warranty on its products, typically extending 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 operations in the period that the
related revenue is recognized. These estimates are derived from historical data
of product reliability. 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. On a quarterly basis, the Company studies trends of warranty claims
and performance of specific products and adjusts its warranty obligation
through charges or credits to operations.

The following table is a reconciliation of the changes in the Companys
aggregate product warranty liability during the three and six months ended
December 31, 2003 and 2002.

Three months ended
    
    Six months endedDecember 31,
    
    December 31,2003
    
    2002
    
    2003
    
    2002In thousandsBalance at beginning of period
    
    $
    1,241
    
    
    $
    1,237
    
    
    $
    1,235
    
    
    $
    1,247Accruals for warranties issued during
the period
    
    
    365
    
    
    
    316
    
    
    
    638
    
    
    
    618Warranty costs incurred during the period
    
    
    (363
    )
    
    
    (318
    )
    
    
    (630
    )
    
    
    (630
    )Balance at end of period
    
    $
    1,243
    
    
    $
    1,235
    
    
    $
    1,243
    
    
    $
    1,235


In connection with an agreement to license the Companys MAUI Instrument
Operating System technology entered into by the Company during the third
quarter of fiscal 2003, the Company agreed to indemnify the licensee against
losses arising from any third party claim against the licensee to the extent
such claim arose directly out of the infringement of a U.S. or Japanese patent
by any LeCroy software components delivered under the license agreement. As of
December 31, 2003, there have been no claims under such indemnification
provisions.

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, Accounting for Contingencies. To date, there have
been no claims under such indemnification provisions.

14. Debt

On November 13, 2003, the Company amended its existing credit agreement
with The Bank of New York. The amended agreement provides the Company with a
$25.0 million revolving line of credit expiring on November 30, 2006, which can
be used to provide funds for general corporate purposes and acquisitions.
Borrowings under this line bear interest at prime plus a margin not to exceed
1.00%, or at the London Interbank Offering Rate (LIBOR) plus a margin of
between 1.25% and 2.25%, depending on the Companys Leverage Ratio, as defined
in the credit agreement. A commitment fee of .375% per annum is payable on any
unused amount under the line. This revolving line of credit is secured by a
lien on substantially all of the domestic assets of the Company. As of December
31, 2003, the Company had $5.0 million outstanding under this line of credit
and has met its financial covenant requirements, including interest
coverage ratio,
minimum total net worth, minimum total tangible net worth and
liquidity ratio covenants.

15. Redeemable Convertible Preferred Stock

On September 27, 2003, the Company repurchased from the holders of its
Series A Redeemable Convertible Preferred Stock (the Preferred Stock) all
500,000 issued and outstanding shares of the Preferred Stock for $23.0 million
in cash. The shares of Preferred Stock were entitled to a 12% cumulative
dividend on the original purchase price of $10.0 million, with redemption
rights beginning on June 30, 2004 at the sole discretion of the holders of such
shares. At June 30, 2004, the redemption value of the Preferred Stock would
have been approximately $17.6 million.

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LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)

In connection with the repurchase of Preferred Stock, the Company recorded
a charge of approximately $7.7 million to stockholders equity representing the
premium paid to the holders of its Preferred Stock ($1.0 million charged to
Retained earnings and $6.7 million charged to Additional paid-in capital) and
recognized transaction costs of $0.4 million included in Other income
(expense), net in the Condensed Consolidated Statements of Operations for the
six months ended December 31, 2003. In accordance with the Security and
Exchange Commissions position published in an Emerging Issues Task Force
(EITF) Topic No. D-42 relating to induced conversions of preferred stock, the
Company recorded the $7.7 million premium paid to purchase the Preferred Stock
as a charge to arrive at net loss applicable to common stockholders for the six
months ended December 31, 2003.

16. Commitments and Contingencies

On April 28, 2003, Tektronix filed a
complaint against us in the United States District Court for the
District of Oregon claiming that we infringed on eight of its
U.S. patents. In our responsive pleading, we denied that we
have infringed, or are infringing, any of these patents, and
contend that the patents are invalid. On August 5, 2003, we
filed a counterclaim in the United States District Court for the
District of Oregon claiming that Tektronix infringed on four of
our patents. Four of these patents concern software user
interface features for oscilloscopes, two concern circuitry, and
two concern probes. We believe we have meritorious defenses and
we intend to vigorously defend this action.

On January 15, 2003, we were sued by Sicom
Systems in the United States District Court for the District of
Delaware for patent infringement of a U.S. patent relating
to the graphical display of test limits. We answered the
complaint denying infringement and asserted a counterclaim
alleging the invalidity of the patent and that Sicom had abused
the judicial process by bringing a baseless patent infringement
claim. On July 16, 2003, we filed a Motion to Dismiss
Sicoms case, contending that Sicom did not have standing
to bring the litigation. On November 20, 2003, the Court
granted our Motion to Dismiss. On December 18, 2003, Sicom
filed a Notice of Appeal to the United States Court of Appeals
for the Federal Circuit. On December 30, 2003, Sicom filed
a new patent infringement lawsuit against us in the United
States District Court for the District of Delaware. Tektronix
and Agilent Technologies are also co-defendants in this new
litigation. The complaint in this new case is essentially the
same as the complaint filed by Sicom on January 15, 2003,
except that Sicom now states that it entered into an amendment
to its license agreement with the Canadian government on
December 19, 2003, and that Sicom now has the exclusive
right to bring suit for infringement of the patent in the United
States. On January 5, 2004, Sicom filed a Notice and Order
of Dismissal of Appeal of its appeal to the Court of Appeals for
the Federal Circuit and the Order was entered on the following
day. In our responsive pleading, we have denied that we have
infringed, or are infringing, the patent, and contend that the
patent is invalid. We intend to vigorously defend ourselves in
this litigation.

From time to time, we are involved in lawsuits,
claims, investigations and proceedings, including patent and
environmental matters, that arise in the ordinary course of
business. There are no matters pending, including those
described above, that we expect to be material to our business,
results of operations, financial condition or cash flows.

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

The following discussion and analysis should be read in conjunction with
the other financial information and consolidated financial statements and
related notes appearing elsewhere in this prospectus and the documents
incorporated by reference herein. This discussion contains forward looking
statements that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in the forward looking statements as a
result of a variety of factors, including those discussed in Risk Factors and
elsewhere in this prospectus and the documents incorporated by reference
herein.

We utilize fiscal quarters that end on the Saturday nearest to March 31,
June 30, September 30, and December 31. For clarity of presentation, we have
described all periods as if they end at the end of the calendar quarter.

Overview

We develop, manufacture, sell and license oscilloscopes and related test
and measurement equipment. Our oscilloscopes are tools used by designers and engineers to measure and analyze complex electronic signals in
order to develop high-performance systems, to validate electronic
designs and to improve time to market. We currently offer three families of
oscilloscopes, which address different solutions to the markets we serve:
WaveMaster, our highest performance product family; WavePro, which is targeted
at the mid- to high- performance sector; and WaveRunner, designed for the
mid-performance sector of the market. We were founded in 1964 to develop,
manufacture and sell high performance signal analysis tools to scientists
engaged in high energy physics research, and in 1985, we introduced our first
oscilloscope using our core competency of designing signal acquisition and
digitizing technology.

We
generate revenue in a single segment within
the Test and Measurement market,
primarily from the sale of our oscilloscopes, probes
and accessories, and to a lesser extent, our extended warranty contracts and
repairs and calibrations we perform on our instruments after the expiration of
their warranties. Revenue is recognized when products are shipped or
services are rendered to customers net of allowances for anticipated
returns. We sell our products into a broad range of end markets,
including computer and semiconductor, data storage devices, automotive and
industrial, and military and aerospace markets. We believe designers in all of
these markets are developing products which rely on increasingly complex
electronic signals to provide the features and performance their customers
require. Our customers include leading original equipment manufacturers, or
OEMs, such as Hyundai, Intel, Maxtor, Raytheon, Robert Bosch, Seagate
and STMicroelectronics.

We rely upon a direct sales model and employ a highly skilled global sales
force where it makes economic sense to do so. We supplement our direct sales
force with a combination of manufacturers representatives and distributors in
areas where demand levels do not justify direct distribution by us. We segment
the world into three areas  North America, Europe/Middle East and
Asia/Pacific. In North America we sell our products directly in the United
States. In Europe, we sell our products directly in Switzerland, Germany,
Italy, France, the United Kingdom and Sweden. In Asia/Pacific we sell our
products directly in Japan, South Korea, Singapore and five regions in China.
Our geographic breakdown of revenues by area in total dollars and as a
percentage of total revenues has been:

Three
Months Ended
    Six Months EndedDecember 31,

    December 31,(unaudited)
    (unaudited)(in thousands)
    
    
    
    
    
    2002
    
    2003
    
    2002
    
    2003North America
    
    
    
    
    
    $
    8,122
    
    
    $
    9,423
    
    
    $
    16,483
    
    
    $
    18,931Europe/Middle East
    
    
    
    
    
    
    8,320
    
    
    
    9,709
    
    
    
    15,507
    
    
    
    17,105Asia/Pacific
    
    
    
    
    
    
    10,195
    
    
    
    10,639
    
    
    
    19,638
    
    
    
    21,154Total revenues
    
    
    
    
    
    $
    26,637
    
    
    $
    29,771
    
    
    $
    51,628
    
    
    $
    57,190


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Three Months Ended
    
    
    Six Months EndedUnaudited
    
    December
31,
    
    December 31,2002
    
    2003
    
    2002
    
    2003North America
    
    
    30.5
    %
    
    
    31.7
    %
    
    
    31.9
    %
    
    
    33.1
    %EMEA
    
    
    31.2
    
    
    
    32.6
    
    
    
    30.0
    
    
    
    29.9Asia Pacific
    
    
    38.3
    
    
    
    35.7
    
    
    
    38.1
    
    
    
    37.0Total revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %


Generally, we transact revenues and pay our operating expenses in the
local currencies of the countries in which we have a direct distribution
presence or other operations, with limited exceptions, most notably in China
where our sales and operating expenses are denominated in U.S. dollars. In
Europe/Middle East, we transact business in Euro, Swiss francs, British pounds
and U.S. dollars. In Japan we transact business in Japanese yen. In South
Korea we transact business in Korean won and in Singapore we transact business
in both U.S. dollars and Singapore dollars. For a discussion of our foreign
currency exchange rate exposure, see the section entitled Quantitative and
Qualitative Disclosure About Market Risk below.

We have historically experienced lower sales activity during our first
fiscal quarter than in other fiscal quarters which, we believe, is due
principally to the lower level of orders and general market activity during the
summer months, particularly in Europe.

Cost of sales represents manufacturing costs, which primarily comprise
materials, labor and factory overhead. Gross margins represent revenues less
cost of sales. Additional factors integral to gross margins earned on our
products are mix, as the average selling prices of our products range from
$5,000 to $80,000, and foreign currencies, as approximately two-thirds of our
revenues are derived overseas, much of which is denominated in local currencies
while manufacturing costs are U.S. dollar denominated.

Selling, general and administrative expenses consist of salaries and
related overhead costs for sales, marketing and administrative, personnel, and
legal, accounting and other professional services.

Research and development expenses consist primarily of salaries and
related overhead costs associated with employees engaged in research, design
and development activities, as well as the cost of masks, wafers and other
materials and related test services and equipment used in the development
process.

During the general economic downturn beginning in fiscal 2001,
specifically in the industries in which we sell our products, we maintained a
consistent commitment to new product development by investing, on average,
approximately $4.5 million per quarter for the past 14 quarters, excluding an
incremental $4.0 million charge for access to IBMs next generation silicon-germanium technology taken in
the fourth quarter of fiscal 2002. During that time,
research and development expense as a percentage of revenues ranged from 13.0%
to 23.0%.

In response to the economic downturn we took steps to change our
manufacturing strategy, discontinue older product lines and reduce our
operating expenses in an effort to better position our business for the long
term. The resultant charges taken to accomplish these efforts were:

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##### Table of Contents



Six Months endedDecember 31,Year Ended June 30,
    
    (unaudited)(In thousands)
    
    2001
    
    2002
    
    2003
    
    2002
    
    2003Charges for:Impaired intangible assets
    
    $
    
    
    
    $
    
    
    
    $
    2,280
    
    
    $
    2,280
    
    
    $
    Severance
and related costs
    
    
    70
    
    
    
    1,035
    
    
    
    163
    
    
    
    90
    
    
    
    Cost of sales
    
    $
    70
    
    
    $
    1,035
    
    
    $
    2,443
    
    
    $
    2,370
    
    
    $
    Charges for:Severance
and related costs
    
    $
    117
    
    
    $
    185
    
    
    $
    670
    
    
    $
    523
    
    
    $
    Research and development
    
    $
    117
    
    
    $
    185
    
    
    $
    670
    
    
    $
    523
    
    
    $
    Charges for:Severance
and related costs
    
    $
    724
    
    
    $
    3,020
    
    
    $
    2,382
    
    
    $
    2,041
    
    
    $
    Plant closure
    
    
    
    
    
    
    
    
    
    
    286
    
    
    
    
    
    
    
    Unused restructuring reserve
    
    
    (243
    )
    
    
    
    
    
    
    (78
    )
    
    
    
    
    
    
    Selling, general and administrative
    
    $
    481
    
    
    $
    3,020
    
    
    $
    2,590
    
    
    $
    2,041
    
    
    $
    


As of
December 31, 2003, all amounts accrued under the 2001 and 2002
restructurings were paid in full. For the 2003 plan,
$2.9 million of the total $3.6 million has been paid and
$0.7 million remains in accrued expenses and other liabilities.

Critical Accounting Policies

The discussion and analysis of our financial position and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets and
liabilities, consolidated and related disclosure at the date of our
financial statements and reported revenues and expenses during the
period. The significant accounting policies that we believe are
the most critical in understanding and evaluating our reported financial
results include the following:

Revenue
Recognition.We recognize revenue when products are shipped or
services are rendered to customers, net of allowances for anticipated
returns. Our revenue-earning activities generally
involve delivering or producing goods, and revenues are considered to
be earned when we have completed the process by which we are
entitled to such revenues. The following criteria are used for
revenue recognition; pervasive evidence of an arrangement exists,
delivery has occurred, selling price is fixed or determinable and
collection is reasonably assured. Revenues from service contracts are
recognized ratably over the contract period. A deferral is recorded
for post-contract support and any other further deliverables included
within the sales contract agreement. This deferral is earned and
accordingly, recognized as contract elements are completed.

In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue
Recognition in Financial Statements, which summarizes certain of the SEC
Staffs views in applying accounting principles generally accepted in the
United States to revenue recognition in financial statements. Under SAB 101,
which we adopted in fiscal 2001, certain previously recognized license fee
revenue was deferred and recognized in future periods over the terms of the
agreements. The adoption of SAB 101 was recorded as of the beginning of fiscal
2001 and resulted in a non-cash charge for the cumulative effect of an
accounting change of $4.4 million, net of a related tax benefit of $2.7
million. The deferred revenue is being amortized into revenue over 5.5 years
through the second quarter of fiscal 2006. We recognized pre-tax deferred
license fee revenue of $0.6 million during each of the six month
periods ended December 31, 2003 and 2002, respectively. Such license fees were
included in service and other revenue for such periods. As of December 31,
2003, the remaining balance of pre-tax deferred license fee revenue was $2.6
million, $1.3 million of which was included in accrued expenses and other
liabilities and the remaining $1.3 million of which was included in deferred
revenue and other non-current liabilities.

We recognize software license revenue 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).
Revenues from perpetual software license agreements are recognized upon
shipment of the software if evidence of an arrangement exists, pricing is fixed
and determinable, and collectibility is probable. If an acceptance period is
required, revenues are recognized upon the earlier of customer acceptance or
the expiration of the acceptance period. We allocate revenue on software
arrangements involving multiple elements to each element based on the relative
fair values of the elements. The determination of fair value of each element in
multiple element-arrangements is based on vendor specific objective evidence
(VSOE). We analyze all of the elements and determine if there is sufficient
VSOE to allocate revenue to maintenance included in multiple
element-arrangements. Accordingly, assuming all other revenue recognition
criteria are met, revenue is recognized upon delivery using the residual method
in accordance with SOP 98-9, where the fair value of the undelivered elements
is deferred and the remaining portion of the arrangement fee is recognized as

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revenue. The revenue allocated to licenses is recognized upon delivery of
the products. The revenue allocated to maintenance is recognized ratably over
the term of the support agreement. We did not recognize any software license
revenue during the six months ended December 31, 2003 and 2002, respectively.

Allowance for Excess and Obsolete Inventory. We provide an allowance for
estimated excess and obsolete inventory equal to the lower of the
cost of inventory and its estimated market value based on assumptions relating
to future demand and market conditions. The allowance for excess and obsolete
inventory was $2.7 million at December 31, 2003 and $2.1 million at June 30,
2003. If actual market conditions prove less favorable than those expected by
management, additional inventory write downs may be required which could have a
material adverse effect on our financial condition, results of operations and
cash flows.

Deferred Tax Assets.We have recorded $13.9 million of net deferred tax
assets as of December 31, 2003 for the future tax benefit of certain expenses
reported for financial statement purposes that have not yet been deducted on
our tax returns. Significant components of our deferred tax assets are federal,
state and foreign loss and credit carryforwards, inventory reserves and other
reserves. The recognition of this deferred tax asset is based on the assessment
that it is more likely than not that we will be able to generate sufficient
future taxable income within statutory carryforward periods to realize the
benefit of these tax deductions. The factors that management considers in
assessing the likelihood of realization include the forecast of future taxable
income and available tax planning strategies that could be implemented to
realize the deferred tax assets. Based on this information, we have recorded a
valuation allowance of $5.1 million as of December 31, 2003 to reserve for
those tax assets we believe are not likely to be realized in future periods.
Adjustments to the valuation allowance may be made in the future if it is
determined that the realized amount of net operating losses and other deferred
tax assets is greater or less than the amount recorded. Such adjustments may be material to our results of operations when made.

Warranty.Provisions for estimated expenses related to product warranties
are made at the time products are sold. These estimates are derived from
historical data of product reliability. The expected failure 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. On a quarterly basis, we study trends of warranty claims and
take action to improve the quality of our products and minimize our warranty
exposure. The warranty reserve was $1.2 million at December 31, 2003 and June
30, 2003. Management believes that the warranty reserve is appropriate;
however, actual claims incurred could differ from the original estimates,
requiring adjustments to the reserve.

Allowance for Doubtful Accounts.We maintain an allowance for doubtful
accounts relating to the portion of the accounts receivable which we estimate
is non-collectable. We analyze 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. The allowance for doubtful accounts, which includes the allowance for
anticipated returns, was $0.4 million at both December 31, 2003 and June 30,
2003. Changes in the overall economic environment or in the financial condition
of our customers may require adjustments to the allowance for doubtful accounts
which could have a material adverse effect on our financial condition, results
of operations and cash flows.

Valuation of Long-Lived and Intangible Assets.The carrying values of
long-lived assets and identifiable amortizable intangibles (including
technology, manufacturing and distribution rights) are assessed for impairment
whenever events or changes in circumstances indicate that the carrying values
may not be recoverable. When such events or changes in circumstances occur, we
assess the recoverability of long-lived assets by determining whether the
carrying values of such assets will be recovered through undiscounted expected
future cash flows. If the undiscounted cash flows are less than the carrying
amounts, an impairment loss is recorded to the extent that the carrying amounts
exceed the fair value. Factors which could trigger an impairment review include
the following: significant underperformance by us relative to historical or
projected operating results; significant changes in the manner of our use of
the assets or the strategy for the overall business; and significant negative
industry or economic trends. We recognized an intangible asset impairment of
$2.3 million for the six months ended December 31, 2002.

The cost of technology, manufacturing and distribution rights acquired is
amortized primarily on the basis of the higher of units shipped over the
contract periods or on a straight-line basis. Management assesses the
recoverability of these rights on the basis of actual and forecasted production
units as well as the average selling price and standard costs of the related
products after the amortization of the rights to determine profitability. If
required, an impairment charge is recorded as described above.

Goodwill.Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, requires goodwill to be tested for
impairment annually under a two-step approach, or more frequently, if events or
changes in circumstances indicate that the asset might be impaired. Impairment
is assessed at the reporting unit

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level by applying a fair value-based test. A reporting unit is defined as
the same as or one level below the operating segment level as described in SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information.

The first step is to identify if an impairment of goodwill has occurred by
comparing the fair value of a reporting unit with its carrying amount,
including goodwill. If the fair value of a reporting unit exceeds its carrying
amount, goodwill of the reporting unit is not considered impaired. If the
carrying amount of the reporting unit exceeds its fair value, the second step
of the goodwill test is performed to measure the amount of the impairment loss,
if any. In this second step, the implied fair value (as defined in SFAS No.
142) of the reporting units goodwill is compared with the carrying amount of
the goodwill. If the carrying amount of the reporting units goodwill exceeds
the implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess, not to exceed the carrying amount of the goodwill.
We completed the annual impairment test required under SFAS No. 142 during the
fourth quarter of fiscal 2003 and determined that there was no impairment to
our recorded goodwill balance of $1.9 million at June 30,
2003.

Consolidated Results of Operations

The following table indicates the percentage of total revenues represented
by each item in the Companys Condensed Consolidated Statements of Operations
for the three and six months ended December 31, 2003 and 2002.

Three months ended
    
    Six months endedDecember 31,
    
    December 31,(Unaudited)
    
    2003
    
    2002
    
    2003
    
    2002Revenues:Oscilloscopes and related products
    
    
    90.8
    %
    
    
    91.5
    %
    
    
    90.3
    %
    
    
    90.8
    %Service and other
    
    
    9.2
    
    
    
    8.5
    
    
    
    9.7
    
    
    
    9.2Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales
    
    
    43.0
    
    
    
    56.3
    
    
    
    43.1
    
    
    
    53.1Gross profit
    
    
    57.0
    
    
    
    43.7
    
    
    
    56.9
    
    
    
    46.9Operating expenses:Selling, general and administrative
    
    
    34.3
    
    
    
    35.1
    
    
    
    35.1
    
    
    
    38.8Research and development
    
    
    12.7
    
    
    
    16.4
    
    
    
    13.1
    
    
    
    17.2Total operating expenses
    
    
    47.0
    
    
    
    51.5
    
    
    
    48.2
    
    
    
    56.0Operating income (loss)
    
    
    10.0
    
    
    
    (7.8
    )
    
    
    8.7
    
    
    
    (9.1
    )Other income (expense), net
    
    
    0.2
    
    
    
    (0.2
    )
    
    
    (0.4
    )
    
    
    (0.3
    )Income (loss) before income taxes
    
    
    10.2
    
    
    
    (8.0
    )
    
    
    8.3
    
    
    
    (9.4
    )Provision for (benefit from) income taxes
    
    
    3.8
    
    
    
    (2.9
    )
    
    
    3.1
    
    
    
    (3.5
    )Net income (loss)
    
    
    6.4
    
    
    
    (5.1
    )
    
    
    5.2
    
    
    
    (5.9
    )Charges related to convertible preferred stock
    
    
    
    
    
    
    1.9
    
    
    
    13.4
    
    
    
    2.0Income (loss) applicable to common stockholders
    
    
    6.4
    %
    
    
    (7.0
    )%
    
    
    (8.2
    )%
    
    
    (7.9
    )%


Comparison of the Three Month Periods Ended December 31, 2003 and 2002

Total revenues were $29.8 million in the second quarter of fiscal 2004,
compared to $26.6 million in the second quarter of fiscal 2003, an increase of
11.8%, or $3.1 million. This increase, which was substantially all in Digital
oscilloscopes and related products, was primarily due to higher average selling
prices combined with increased demand for our application-specific Disk Drive
Analyzer and Serial Data Analyzer versions of our high-end WaveMaster digital
oscilloscopes and for our WavePro 7000 series of digital oscilloscopes
launched in the third quarter of fiscal 2003.

Gross margin was 57.0% in the second quarter of fiscal 2004 compared to
43.7% in the same period in fiscal 2003. Included in Cost of sales in the
second quarter of fiscal 2003 was a $2.1 million charge for the impairment of

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technology, manufacturing and distribution rights and a $0.2 million
charge for a related future royalty payment. The impairment resulted from our
strategic decision to exit certain older product lines and to make significant
changes to our manufacturing strategy to improve operating efficiency. The
increase in gross margin in the second quarter of fiscal 2004 was primarily due
to the improved product mix resulting from the launch of the WavePro 7000
series of digital oscilloscopes in the third quarter of fiscal 2003, higher
average selling prices in our high-end products, lower manufacturing costs
resulting from continued improvements in operational efficiency, the effect of
foreign exchange rates and the ongoing benefit of our shift to a direct sales
model in China and Singapore.

Selling, general and administrative expense was $10.2 million in the
second quarter of fiscal 2004 compared to $9.4 million in the second quarter of
fiscal 2003, an increase of 9.1% or $0.9 million. This increase was primarily
due to increased variable selling costs related to higher revenues, incremental
direct selling expenses resulting from new direct presences in Asia and Europe,
increased legal expenses and expenses related to performance bonuses that were
suspended in the first three quarters in fiscal 2003 due to the weakness in the
technology sector of the economy. As a percentage of sales, Selling general and
administrative expense decreased from 35.1% in the second quarter of fiscal
2003 to 34.3% in the second quarter of fiscal 2004. This decrease as a
percentage of sales was primarily due to the ability to leverage expenses over
the incremental revenues in the second quarter of fiscal 2004.

Research and development expense was $3.8 million in the second quarter of
fiscal 2004, compared to $4.4 million in the second quarter of fiscal 2003, a
decrease of 13.2% or $0.6 million. The decrease was primarily due to cost
savings realized from the consolidation of our probe development activities
into our Chestnut Ridge, New York facility in the fourth quarter of fiscal 2003
and the timing of certain non-recurring engineering expenses. As a percentage
of sales, Research and development expense decreased from 16.4% in the second
quarter of fiscal 2003 to 12.7% in the second quarter of fiscal 2004, which is
consistent with our long-term operating model of spending 13% of sales on
product development.

Other income (expense), net, which consists primarily of net interest
income or expense and foreign exchange gains or losses, was $0.1 million in the
second quarter of fiscal 2004, compared to ($47,000) in the second quarter of
fiscal 2003. The increase in Other income (expense), net was primarily due to
foreign exchange gains of $0.1 million in the second quarter of fiscal 2004,
compared to foreign exchange losses of ($0.1) million for the comparable period
in the prior year. Partially offsetting the foreign exchange gains in the
second quarter of fiscal 2004 was higher interest expense due to borrowings
under our revolving line of credit outstanding during the second quarter of
fiscal 2004.

Our effective tax rate was 37.0% in the second quarter of fiscal 2004 and
2003.

In the second quarter of fiscal 2003, charges related to Preferred Stock,
the Preferred Stock dividend and the accretion for the value of fully
exercisable warrants granted in connection with the outstanding Preferred
Stock, was $0.5 million.

Comparison of the Six Month Periods Ended December 31, 2003 and 2002

Total revenues were $57.2 million in the six months ended December 31,
2003, compared to $51.6 million in the six months ended December 31, 2002, an
increase of 10.8%, or $5.6 million. This increase, which was substantially all
in oscilloscopes and related products, was primarily due to higher average
selling prices combined with increased demand for our application-specific Disk
Drive Analyzer and Serial Data Analyzer versions of our high-end WaveMaster
oscilloscopes and our WavePro 7000 series of oscilloscopes launched in the
third quarter of fiscal 2003.

Gross margin was 56.9% in the six months ended December 31, 2003 compared
to 46.9% in the same period in fiscal 2002. Included in cost of sales for the
six months ended December 31, 2002 was a $2.1 million charge for the impairment
of technology, manufacturing and distribution rights and a $0.2 million charge
for a future royalty payment and a $0.1 million charge for severance expense.
The impairment resulted from our strategic decision to exit certain older
product lines and to make significant changes to our manufacturing strategy to
improve operating efficiency. The increase in gross margin in the first half of
fiscal 2004 was primarily due to the improved product mix resulting from the
launch of the WavePro 7000 series of oscilloscopes in the third quarter of
fiscal 2003, higher average selling prices in our high-end products, lower
manufacturing costs resulting from continued improvements in operational
efficiency, the effect of foreign exchange rates and the ongoing benefit of our
shift to a direct sales model in China and Singapore.

Selling, general and administrative expense was $20.1 million for the six
month periods ended December 31, 2003 and 2002. Included in selling, general
and administrative expense in the six months ended December 31, 2002 was a $2.1
million charge for severance expense. As a percentage of sales, selling general
and administrative expense decreased from 38.8% in the
six months ended December 31, 2002 to 35.1% in the six months

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ended December 31, 2003. This decrease as a percentage of sales was
primarily due to our ability to leverage expenses over the higher sales base in
the first half of fiscal 2004 and cost reduction initiatives taken in fiscal
2003 partially offset by increased variable selling costs related to higher
revenues, higher direct selling expenses resulting from new direct presences in
Asia and Europe, increased legal expenses and the expenses related to
performance bonuses that were suspended in the first three quarters in fiscal
2003 due to the weakness in the technology sector of the economy.

Research and development expense was $7.5 million for the six months ended
December 31, 2003, compared to $8.9 million in the same period in fiscal 2003,
a decrease of 15.8% or $1.4 million. The decrease was primarily due to cost
savings realized from the consolidation of our probe development activities
into our Chestnut Ridge, New York facility in the fourth quarter of fiscal
2003, the benefit of cost reduction initiatives taken in fiscal 2003, a $0.5
million charge for severance expense included in research and development
expense in the six months ended December 31, 2002 and the timing of certain
non-recurring engineering expenses. As a percentage of sales, research and
development expense decreased from 17.2% for the six months ended December 31,
2002 to 13.1% for the six months ended December 31, 2003.

Other income (expense), net, was ($0.2) million for the six months ended
December 31, 2003 and 2002. Included in other income (expense), net for the six
months ended December 31, 2003 was $0.4 million in transaction costs related to
the repurchase of our Series A redeemable convertible preferred stock,
partially offset by foreign exchange gains of $0.1 million. Included in other
income (expense), net, for the six months ended December 31, 2002 was foreign
exchange losses of ($0.4) million, partially offset by net interest income.

Our effective tax rate was 37.0% in the first half of each of fiscal 2004
and 2003.

On September 27, 2003, we repurchased from the holders of our redeemable
convertible preferred stock all 500,000 issued and outstanding shares of the
preferred stock for $23.0 million in cash. In accordance with the Security and
Exchange Commissions position published in Emerging Issues Task Force Topic
No. D-42 relating to induced conversions of preferred stock, we recorded a
charge of approximately $7.7 million representing the premium paid to the
holders of our preferred stock as a charge to arrive at net loss applicable to
common stockholders in the six months ended December 31, 2003. For the six
months ended December 31, 2002, charges related to our preferred stock, the
dividend on the preferred stock and the accretion for the value of fully
exercisable warrants granted in connection with the private placement of the
Preferred Stock, was $1.0 million.

Liquidity and Capital Resources

Working capital was $48.8 million at December 31, 2003, which represented
a working capital ratio of 2.7 to 1, compared to $62.8 million, or 3.7 to 1 at
June 30, 2003. The reduction of our working capital ratio was primarily due to
the repurchase of our Series A redeemable convertible preferred stock for $23.0
million, which was funded by $13.0 million of cash and $10.0 million of
borrowings under our revolving credit facility in the first fiscal quarter of
2004. As of December 31, 2003 we had repaid $5.0 million of the $10.0 million
that was outstanding under our revolving credit facility at September 30, 2003
from cash provided by operations and the exercise of employee stock options
during the second fiscal quarter of 2004. On January 24, 2004 we repaid
another $1.0 million of the outstanding debt.

Net cash provided by operating activities for the six months ended
December 31, 2003 was $10.5 million, compared with $3.5 million for the
comparable period in the prior year. The increase in net cash provided by
operating activities was primarily due to the $6.0 million improvement in net
income, the consumption of $1.3 million of deferred tax assets and the decrease
in severance-related payments, partially offset by the increase in other
current and non-current assets caused by the prepayment of advertising and
promotion expense, value added tax and insurance policies. For the
corresponding period in the prior year, net cash provided by operating
activities reflects reductions in inventory of $4.6 million due to increased
operating efficiencies and in accounts receivable of $3.3 million resulting
from enhanced collections activity and partially lower sales volume. These
benefits to operating cash flows during the six months ended December 31, 2002
were partially offset by a $4.7 million reduction in accounts payable, accrued
expenses and other liabilities resulting from severance payments of $2.8
million and a $1.0 million payment related to a technology license purchased in
fiscal 2002.

Net cash used in investing activities for the six months ended December
31, 2003 was $1.9 million, compared with $2.5 million for the comparable period
in the prior year. This decrease in net cash used in investing activities was
primarily due to a $1.0 million acquisition of a technology license during the
six months ended December 31, 2002, partially offset by an increase of $0.2
million in capital expenditures during the six months ended December 31, 2003.

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Net cash used in financing activities for the six months
ended December 31, 2003 was $16.8 million, compared with net cash provided by financing activities of $0.2 million for the
comparable period in the prior year. This increase in cash used in financing
activities was primarily due to the repurchase of our preferred stock for $23.0
million partially offset by net borrowings of $5.0 million under our revolving
credit facility and $1.5 million of proceeds from employee stock purchases and
stock option exercises.

On November 13, 2003, we amended our existing credit agreement with The
Bank of New York. The amended agreement provides us with a $25.0 million
revolving credit facility expiring on November 30, 2006, which can be used to
provide funds for general corporate purposes and acquisitions. Borrowings
under this line bear interest at an annual rate of prime plus a margin not to
exceed 1.00%, or at the London Interbank Offering Rate (LIBOR) plus a margin of
between 1.25% and 2.25%, depending on our leverage ratio, as such term is
defined in the credit agreement. A commitment fee of 0.375% per annum, is
payable on any unused amount under the facility. This revolving credit facility
is secured by a lien on substantially all of our domestic assets. As of
December 31, 2003, we had borrowed $5.0 million under this credit facility and
were in compliance with our financial covenant requirements.

We have a $2.0 million capital lease line of credit to fund certain
capital expenditures. As of December 31, 2003, we had $0.2 million outstanding
under this line of credit, $0.1 million of which was included in short-term debt and current portion of long-term debt and the remaining $0.1 million of which was
included in deferred revenue and other non-current liabilities. As of June 30,
2003, we had $0.3 million outstanding under this line of credit, $0.1 million
of which was included in accrued expenses and other liabilities and the
remaining $0.2 million of which was included in deferred revenue and other
non-current liabilities. Outstanding borrowings under this line bear interest
at an annual rate of 12.2%.

In addition to the above U.S.-based facilities, we maintain certain
short-term foreign credit facilities, principally facilities with two Japanese
banks totaling 150 million yen ($1.4 million as of December 31, 2003). No
amounts were outstanding under these facilities as of December 31, 2003 and
June 30, 2003.

We believe that our cash on hand, cash flow generated by our continuing
operations and our availability under our revolving credit lines will be
sufficient to fund working capital and capital expenditure requirements for at
least the next twelve months and provide funds for potential acquisition
opportunities.

Contractual Obligations and Other Commitments

Our contractual obligations and commitments include obligations associated
with our capital and operating leases, an employee severance agreement and a
technology license agreement as set forth in the table below:

Payments due by Period as of December 31, 2003Less than
    
    
    
    
    
    
    
    
    
    More than 5Total
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    Years(In thousands)Revolving credit facility
    
    $
    
    
    
    $
    5,000
    
    
    $
    
    
    
    $
    
    
    
    $
    Capital lease obligations
    
    
    245
    
    
    
    98
    
    
    
    147
    
    
    
    
    
    
    
    Employee severance agreement
    
    
    187
    
    
    
    187
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    2,965
    
    
    
    734
    
    
    
    1,437
    
    
    
    794
    
    
    
    Other contractual commitments to
purchase technology
    
    
    500
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    3,897
    
    
    $
    6,519
    
    
    $
    1,584
    
    
    $
    794
    
    
    $
    


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Forward-Looking Information

This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including without limitation,
statements regarding the intent, belief or current expectations of us or our
directors or officers with respect to, among other things, (i) market trends in
our industries and the projected impact on us, (ii) the increasing importance
of signal shape analysis; (iii) our ability to meet our customers evolving
needs; (iv) our position within our industries and ability to compete
effectively; (v) our ability to expand into new markets; (vi) the success of
our new product introductions; (vii) trends in the seasonality of our sales;
(viii) a shift in technology towards higher speed digital signals containing
more complex data and the demands of users of signal analyzer products; (ix)
market opportunities for dedicated signal analyzers; (x) the resolution of
certain environmental remediation activities; (xi) sufficiency of our cash
balances, cash flow and the availability of external financing sources to fund
working capital, capital expenditure requirements and business or technology
acquisitions; (xii) trends affecting our financial condition and results of
operations; (xiii) our business and growth strategies; (xiv) the impact of
adoption of accounting conventions; and (xv) certain other statements
identified or qualified by words such as likely, will, suggests, may,
would, could, should, expects, anticipates, estimates, plans,
projects, believes, is optimistic about, or similar expressions (and
variants of such words or expressions). Investors are cautioned that
forward-looking statements are inherently uncertain. These forward-looking
statements represent our best judgment as of the date of this Form 10-Q, and we
caution readers not to place undue reliance on such statements. Actual
performance and results of operations may differ materially from those
projected or suggested in the forward-looking statements due to certain risks
and uncertainties including, without limitation, risks associated with
fluctuations in our operating results; volume and timing of orders received;
changes in the mix of products sold; competitive factors, including pricing
pressure, technological developments and products offered by competitors; our
ability to deliver a timely flow of competitive new products and market
acceptance of these products; our ability to anticipate changes in the market;
our ability to negotiate or maintain financing arrangements with lenders on
terms that are acceptable; our ability to attract and retain qualified
personnel, including our management; changes in the global economy and
fluctuations in foreign currency rates; inventory risks due to changes in
market demand or our business strategies; risks due to an interruption in
supply or an increase in price for our parts, components and sub-assemblies;
our ability to realize sufficient margins on the sales of our products; the
development of future products and our ability to use intellectual property and
protect our patent portfolio; those risks listed under the heading Risk
Factors and in other cautionary statements in this document, as well as other
risk factors listed from time to time in our reports filed with the Securities
and Exchange Commission and press releases. We undertake no obligation to
update any forward-looking statements whether as a result of new information or
future events.




Risk Factors

An investment in our common stock involves a
high degree of risk. You should carefully consider the risks
described below together with all of the other information
included in this prospectus before making an investment
decision. The risks and uncertainties described below are not
the only ones we face. Additional risks and uncertainties that
we are unaware of, or that we may currently deem immaterial, may
become important factors that harm our business, financial
condition, or results of operations. If any of the following
risks actually occurs, our business, financial condition, or
results of operations could suffer. In that case, the trading
price of our common stock could decline, and you may lose all or
part of your investment.

Risks Related to Our Business



| |                                                       
| | ------------------------------------------------------
| | Our operating results are subject to
    fluctuations.

Our past operating results, and our gross
margins, have fluctuated from fiscal period to fiscal period. We
expect our future operating results and gross margins will
continue to fluctuate from fiscal period to fiscal period due to
a number of factors, many of which are outside our control and
any of which could cause our stock price to fluctuate. The
primary factors that affect us include the following:

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##### Table of Contents





| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in overall demand for our products;                                                                                          
|
| |  | the timing of the introduction and market
    acceptance of new products by us or competing companies;                               
|
| |  | the timing and magnitude of research and
    development expenses;                                                                   
|
| |  | changes in the estimation of the future size and
    growth rate of our markets;                                                     
|
| |  | changes in our production efficiency;                                                                                                
|
| |  | disruptions in operations at any of our
    facilities or the facilities of any of our contract
    manufacturers for any reason; and
|
| |  | changes in our selling prices.                                                                                                       

In addition, we have historically experienced
somewhat lower activity during our first fiscal quarter than in
other fiscal quarters which, we believe, is due principally to
the lower level of orders and market activity during the summer
months, particularly in Europe. We believe this seasonal aspect
of our business is likely to continue in the future.

Our stock
price may be volatile in the future.

The market price of our common stock fluctuates
significantly. The stock price could fluctuate in the future due
to a number of factors, some of which are beyond our control.
These factors include:



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | historically low trading volume in our stock;                                                                                       
|
| |  | announcements of developments related to our
    business;                                                                          
|
| |  | announcements of technological innovations or new
    products or enhancements by us or our competitors;                            
|
| |  | sales by competitors, including sales to our
    customers;                                                                         
|
| |  | sales of common stock into the public market,
    including by directors and members of management;                                 
|
| |  | developments in our relationships with our
    customers, partners, distributors, and suppliers;                                    
|
| |  | shortfalls or changes in revenue, gross margins,
    earnings or losses, or other financial results from
    analysts expectations;
|
| |  | regulatory developments;                                                                                                            
|
| |  | fluctuations in results of operations;                                                                                              
|
| |  | trends in the seasonality of our sales; and                                                                                         
|
| |  | general conditions in our market or the markets
    served by our customers.                                                        

In addition, in recent years the stock market in
general and the market for shares of technology stocks in
particular have experienced extreme price fluctuations, which
have often been due largely to factors other than the operating
performance of the affected companies. We cannot ensure that the
market price of our common stock will not decline substantially,
or otherwise continue to experience significant fluctuations in
the future, including fluctuations that are unrelated to our
operating performance.



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | If demand for our products does not match
    manufacturing capacity, our earnings may suffer.

The sale of our products is dependent, to a large
degree, on customers whose industries are subject to cyclical
trends in the demands for their products. We may not be able to
adapt production capacity and related cost structures to rapidly
changing market conditions in a timely manner. When demand does
not meet expectations, manufacturing capacity will likely exceed
production requirements. We have at times increased our
production capacity and the overhead that supports production
based on anticipated market demand which has not always
developed as expected. As a result, we have periodically
underutilized our capacity, which has adversely affected our
earnings due to existing fixed costs. In addition, conversely,
if during a market upturn we cannot increase manufacturing
capacity to meet product demand, we will not be able to fulfill
orders in a timely manner, which in turn may have a negative
effect on earnings and our overall business.



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our operating results do not continue to
    improve in the long-term, we may be required to establish a
    valuation allowance against our 
     net deferred tax assets.

We evaluate whether our deferred tax assets can
be realized and assess the need for a valuation allowance on an
ongoing basis. As of December 31, 2003, we had recorded
$13.9 million of net deferred

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tax assets for the future tax benefit of certain
expenses reported for financial statement purposes that have not
yet been deducted on our tax returns. Realization of our net
deferred tax assets is dependent on our ability to generate
future taxable income. An additional valuation allowance would
be recorded if it were more likely than not that some or all of
our net deferred assets will not be realized. If we establish additional valuation allowances, we might record
a tax expense in our consolidated statement of operations, which
would have an adverse impact on our operating results.




| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | We face risks from fluctuations in the
    value of foreign currency versus the U.S. dollar and the cost of
    currency exchange.

A large portion of our sales and expenses are
denominated in foreign currencies. We purchase materials from
suppliers and sell our products around the world and maintain
investments in foreign subsidiaries, all denominated in a
variety of currencies. As a consequence, we are exposed to risks
from fluctuations in foreign currency exchange rates with
respect to a number of currencies, changes in government
policies and legal and regulatory requirements, political
instability, transportation delays and the imposition of tariffs
and export controls. We are exposed to adverse changes in
interest rates primarily due to our investment in cash and cash
equivalents. Changes in the relation of foreign currencies to
the U.S. dollar will affect our cost of sales and operating
margins and could result in exchange losses. Among the more
significant potential risks to us of relative fluctuations in
foreign currency exchange rates is the relationship among and
between the U.S. dollar, the European monetary unit, Swiss
franc, British pound, Swedish krona, Japanese yen, Korean won,
Singapore dollar and Hong Kong dollar.

We have a program of entering into foreign
exchange forward contracts to minimize the risks associated with
currency fluctuations on assets or liabilities denominated in
other than the functional currency of us or our subsidiaries. It
cannot be assured, however, that this program will effectively
offset all of our foreign currency risk related to these assets
or liabilities. These foreign exchange forward contracts do not
qualify for hedge accounting. Other than this program, we do not
attempt to reduce our foreign currency exchange risks by
entering into foreign currency management programs. As a
consequence, there can be no assurance that fluctuations in
foreign currency exchange rates in the future as a result of
mismatches between local currency revenues and expenses, the
translation of foreign currencies into the U.S. dollar, our
financial reporting currency, or otherwise, will not adversely
affect our results of operations. Moreover, fluctuations in
exchange rates could affect the demand for our products.

No assurance can be given that our strategies
will prevent future currency fluctuations from having a material
adverse affect on our business, financial condition and results
of operations.



| |                                                                 
| | ----------------------------------------------------------------
| | We face risks in expanding our business
    operations in China.

We intend to continue to expand our business
operations and sales in China. However, we may be unsuccessful
in implementing this strategy as planned or at all. Factors that
could inhibit our successful expansion into China include its
highly cyclical business environment, historically poor
recognition of intellectual property rights and poor performance
in stopping counterfeiting and piracy activity.



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | We are subject to additional risks
    associated with our international operations.

We market and sell our products and services
outside the United States, and currently have employees located
in China, France, Germany, Italy, Hong Kong, Japan, Singapore,
South Korea, Sweden, Switzerland and the United Kingdom. Many of
our customers and licensees are located outside the United
States. As part of our strategy, we intend to expand our
international sales, particularly in China. We face numerous
risks in doing business outside the United States, including:



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | dependence on sales representatives or foreign
    distributors and their sales channels;
|
| |  | longer accounts receivable collection cycles;                                            
|
| |  | less effective and less predictable protection of
    intellectual property;             

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| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | trade protection measures, import or export
    licensing requirements, tariffs and other trade barriers;                    
|
| |  | unusual or burdensome foreign laws or regulatory
    requirements or unexpected changes to those laws or requirements;       
|
| |  | changes in the political or economic condition of
    a specific country or region, particularly in emerging markets;
    and
|
| |  | potentially adverse tax consequences.                                                                                        

Such factors could cause our future international
sales to decline.

Our business practices in international markets
are also subject to the requirements of the Foreign Corrupt
Practices Act. If any of our employees is found to have violated
these requirements, we could be subject to significant fines and
other penalties.

We may be greatly impacted by the political,
economic, and military conditions in China, Taiwan, North Korea,
and South Korea. These countries have recently conducted
military exercises in or near the others territorial
waters and airspace. Such disputes may continue or escalate,
resulting in economic embargos, disruptions in shipping, or even
military hostilities. This could severely harm our business by
interrupting or delaying production or shipment of our products.



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | We depend on single-source suppliers for
    some of our products, and the loss of these suppliers could harm
    our business.

We purchase a small number of parts from
single-source suppliers. In particular, several key integrated
circuits that we use are made by International Business
Machines, or IBM. Although we have not experienced significant
production delays attributable to supply changes, we believe
that, for integrated circuits in particular, alternative sources
of supply would be difficult to develop over a short period of
time. Because we have no direct control over our third-party
suppliers, interruptions or delays in the products and services
provided by these third parties may be difficult to remedy in a
timely fashion. In addition, if such suppliers are unable or
unwilling to deliver the necessary parts or products, we may be
unable to redesign or adapt our technology to work without such
parts or find alternative suppliers or manufacturers. In such
events, we could experience interruptions, delays, increased
costs, or quality control problems.



| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | We depend upon key personnel and qualified
    future hires to implement our expansion strategy.

Our success depends on the efforts and abilities
of senior management and key employees in the sales, marketing,
research and development, and manufacturing areas. Many of these
employees would be difficult to replace. We do not have
employment contracts with most of our key personnel. If we
cannot retain existing key managers and employ additional
qualified senior employees, our business, financial condition,
and results of operations could be materially and adversely
affected. We do not maintain key man life insurance
policies on any of our personnel. Future expansion of operations
will require us to attract, train and retain new personnel. In
addition, we may be limited by non-solicitation agreements
entered into by our key personnel with respect to hiring
employees from our competitors. These factors could increase our
operating expenses. If we are unable to recruit or retain a
sufficient number of qualified employees, or the costs of
compensation or employee benefits increase substantially, our
business, results of operations or financial condition could be
materially and adversely affected.



| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The actions we took at the end of fiscal
    2001 through fiscal 2003 in response to the reduced demand for
    our products could have long-term adverse effects on our
    business.

We experienced operating losses beginning in the
fourth quarter of fiscal 2001 and ending in the fourth quarter
of fiscal 2002 due to reduced demand for our products. In an
effort to decrease expenses in response to this reduced demand,
beginning at the end of fiscal 2001 and continuing through
fiscal 2003, we consolidated certain operations, reduced the
size of our workforce and increased operating efficiencies.

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There are several risks inherent in our
cost-cutting initiatives to transition to a reduced cost
structure. These include the risk that cost-cutting initiatives
have impaired our ability to develop and market products
effectively and remain competitive in the industries in which we
compete. Cost reduction measures could have long-term adverse
effects on our business by reducing our pool of technical
talent, decreasing or slowing improvements in our products,
making it more difficult for us to respond to customers,
limiting our ability to increase production quickly if and when
the demand for our products increases and limiting our ability
to hire and retain key personnel. These circumstances could have
a material adverse effect on our business, results of operations
or financial condition.



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | We may not be successful in protecting our
    intellectual and proprietary rights.

As a technology-based company, our success
depends on developing and protecting our intellectual property.
We rely generally on patent, copyright, trademark and trade
secret laws in the United States and abroad. Electronic
equipment as complex as most of our products, however, is
generally not patentable in its entirety. We also license
intellectual property from third parties and rely on those
parties to maintain and protect their technology. We cannot be
certain that actions we take to establish and protect
proprietary rights will be adequate, particularly in countries
where intellectual property rights are not highly developed or
protected. If we are unable to adequately protect our
technology, or if we are unable to continue to obtain or
maintain licenses for protected technology from third parties,
it may be difficult to design alternatives to such technology
without incurring significant costs. Thus, the loss of
intellectual property rights to technology could have a material
adverse effect on our business, results of operations or
financial condition.

We are engaged in intellectual property
litigations, including with Tektronix, Inc. On April 28,
2003, Tektronix filed a complaint against us in the United
States District Court for the District of Oregon claiming that
we infringed on eight of its U.S. patents. In our responsive
pleading, we denied that we have infringed, or are infringing,
any of these patents, and contend that the patents are invalid.
Four of these
patents concern software user interface features for
oscilloscopes, two concern circuitry, and two concern probes.
On August 5, 2003, we filed a counterclaim in the United
States District Court for the District of Oregon claiming that
Tektronix infringed on four of our patents.

From time to time in the ordinary course of
business, we receive notices from third parties regarding
intellectual property infringement or take action against others
with regard to intellectual property rights. Even where we are
successful in defending or pursuing such claims, we may incur
significant costs. In the event of a successful claim against
us, we could lose our rights to needed technology or be required
to pay license fees for the infringed rights, either of which
could have an adverse impact on our business.



| |                                                                 
| | ----------------------------------------------------------------
| | We license certain intellectual property
    from third parties.

We rely on licenses of intellectual property for
our businesses, including technology used in our products. We
cannot ensure that these licenses will be available in the
future on favorable terms or at all. The loss of these licenses
or the ability to maintain any of them on acceptable terms could
delay development of future products or prevent the further sale
or enhancement of existing products. This loss could adversely
affect our business, results of operations and financial
condition.



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | Our acquisitions, strategic alliances, and
    joint ventures may result in financial results that are
    different than expected.

In the normal course of business, we engage in
discussions with third parties relating to possible
acquisitions, strategic alliances, and joint ventures. As a
result of transactions which may be consummated, our financial
results may differ from the investment communitys
expectations in a given quarter. In addition, acquisitions and
strategic alliances may require us to integrate a different
company culture, management team and business infrastructure. We
may have difficulty developing, manufacturing and marketing the
products of a newly-acquired company in a way that enhances the
performance of our combined businesses or product lines to
realize the value from expected synergies. Depending on the size

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and complexity of an acquisition, our successful
integration of the entity depends on a variety of factors,
including:




| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | the retention of key employees;                                                                                                        
|
| |  | the management of facilities and employees in
    different geographic areas;                                                          
|
| |  | the retention of key customers; and                                                                                                    
|
| |  | the integration or coordination of different
    research and development, product manufacturing and sales
    programs and facilities.

Any impairment of the value of purchased assets
or goodwill could have a significant negative impact on our
future operating results.

All of these efforts require varying levels of
management resources, which may divert our attention from other
business operations. Further, if market conditions or other
factors lead us to change our strategic direction, we may not
realize the expected value from such transactions. If we do not
realize the expected benefits or synergies of such transactions,
our consolidated financial position, results of operations, cash
flows and stock price could be negatively impacted.

We may not be
able to obtain the capital we need to maintain or grow our
business.

Our ability to execute our long-term strategy may
depend to a significant degree on our ability to obtain
long-term debt and equity capital. We have no commitments for
additional borrowings, other than our existing credit facility,
or for sales of equity, other than under our existing employee
benefit plans. We cannot determine the precise amount and timing
of our funding needs at this time. We may be unable to obtain
future additional financing on terms acceptable to us, or at
all. If we fail to comply with certain covenants relating to our
indebtedness, we may need to refinance our indebtedness to repay
it. We also may need to refinance our indebtedness at maturity.
We may not be able to obtain additional capital on favorable
terms to refinance our indebtedness.

The following factors could affect our ability to
obtain additional financing on favorable terms, or at all:



| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | our results of operations;                                     
|
| |  | general economic conditions and conditions in our
    industry;
|
| |  | the perception in the capital markets of our
    business;     
|
| |  | our ratio of debt to equity;                                   
|
| |  | our financial condition;                                       
|
| |  | our business prospects; and                                    
|
| |  | changes in interest rates.                                     

In addition, certain covenants relating to our
existing indebtedness impose certain limitations on additional
indebtedness. If we are unable to obtain sufficient capital in
the future, we may have to curtail our capital expenditures and
reduce research and development expenditures. Any such actions
could have a material adverse effect on our business, financial
condition, results of operations and liquidity.

We could
incur substantial costs as a result of violations of our
liabilities under environmental laws.

Our operations are subject to laws and
regulations relating to the protection of the environment,
including those governing the discharge of pollutants into the
air or water, the management and disposal of hazardous
substances or wastes and the cleanup of contaminated sites. Some
of our operations require environmental permits and controls to
prevent and reduce air and water pollution, and these permits
are subject to modification, renewal and revocation by issuing
authorities. We could incur substantial costs,

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including cleanup costs, fines and civil or
criminal sanctions and third-party claims for property damage
and personal injury as a result of violations of or liabilities
under environmental laws or non-compliance with environmental
permits.


Our former subsidiary, Digitech Industries, Inc.,
has been involved in environmental remediation activities, the
liability for which was retained by us after the sale of the
Vigilant Networks segment and the residual assets of Digitech.
Any liability beyond what is currently expected and reserved for
could have a material adverse effect on our results of
operations.



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to laws and regulations
    governing government contracts, and failure to address these
    laws and regulations or comply with government contracts could
    harm our business by leading to a reduction in revenue
    associated with these customers.

We have agreements relating to the sale of our
products to government entities and, as a result, we are subject
to various statutes and regulations that apply to companies
doing business with the government. The laws governing
government contracts differ from the laws governing private
contracts. For example, many government contracts contain
pricing terms and conditions that are not applicable to private
contracts. We are also subject to investigation for compliance
with the regulations governing government contracts. A failure
to comply with these regulations might result in suspension of
these contracts, or administrative penalties.



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are required to account for options
    under our employee stock plans as a compensation expense, our
    net income and earnings per share would be significantly
    reduced.

There has been an increasing public debate about
the proper accounting treatment for employee stock options. In
November 2003, the Financial Accounting Standards Board
(FASB) issued a tentative decision to require
companies to expense the fair value of all employee equity-based
awards granted, modified or settled. The tentative requirements
would be effective for us in our 2006 fiscal year commencing
July 2005 and would require any options issued or vesting on or
after that date to be recognized as compensation expense in
accordance with the future statement. The FASB has not yet
determined the valuation model required to be adopted.
Currently, we record compensation expense only in connection
with option grants that have an exercise price below fair value.
It is possible that future laws, regulations and accounting
pronouncements will require us to record the fair value of all
stock options as compensation expense in our consolidated
statement of operations, which would have an adverse effect on
our results of operations.



| |                                                                            
| | ---------------------------------------------------------------------------
| | We have outstanding bank debt and must
    comply with financial covenants.

We have a $25.0 million revolving credit
facility with The Bank of New York. As of December 31,
2003, we had $5.0 million of bank debt outstanding under
this facility. We plan to use a portion of the net proceeds from
this offering to repay all amounts outstanding under this
facility. Following this repayment, we will continue to be
subject to financial covenants under our credit facility,
including interest coverage ratio, minimum total net worth,
minimum total tangible net worth and liquidity ratio
requirements. We expect that existing cash and cash equivalents,
cash provided from operations, and borrowings pursuant to our
existing credit facility with The Bank of New York will be
sufficient to meet ongoing cash requirements. Failure to
generate sufficient cash or comply with the financial covenants
under our credit facility may adversely affect our business,
results of operations and financial condition.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | Issuance of shares in connection with
    financing transactions or under stock plans and outstanding
    warrants will dilute current stockholders.

Pursuant to our stock plans, our management is
authorized to grant stock awards to our employees, directors and
consultants. In addition, we also have warrants outstanding to
purchase shares of our common stock. You will incur dilution
upon exercise of any outstanding stock awards or warrants. In
addition, if we raise additional funds by issuing additional
common stock, or securities convertible into or exchangeable or
exercisable for common stock, further dilution to our existing
stockholders will result, and new investors could have rights
superior to existing stockholders.



| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Anti-takeover provisions under our
    stockholder rights plan, charter documents and Delaware law
    could delay or prevent a change of control and could also limit
    the market price of our stock.

Our stockholder rights plan, certificate of
incorporation and bylaws contain provisions that could delay or
prevent a change of control of our company that our stockholders
might consider favorable. Certain provisions of our certificate
of incorporation and bylaws allow us to:



| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorize the issuance of preferred stock which
    can be created and issued by the board of directors without
    prior stockholder approval, with rights senior to those of the
    common stock;
|
| |  | provide for a classified board of directors, with
    each director serving a staggered three-year term;                                                                                            
|
| |  | prohibit stockholders from filling board
    vacancies, calling special stockholder meetings, or taking
    action by written consent; and                                                          
|
| |  | require advance written notice of stockholder
    proposals and director nominations.                                                                                                               

In addition, we are governed by the provisions of
Section 203 of the Delaware General Corporate Law, which
may prohibit certain business combinations with stockholders
owning 15% or more of our outstanding voting stock. These and
other provisions in our certificate of incorporation, bylaws and
stockholder rights plan and Delaware law could make it more
difficult for stockholders or potential acquirors to obtain
control of our board of directors or initiate actions that are
opposed by the then-current board of directors, including delay
or impede a merger, tender offer, or proxy contest involving our
company. Moreover, certain provisions of our license agreement
with Tektronix, which expires in September 2004, could
discourage certain companies or other third parties from
attempting to acquire control of us or limit the price that such
parties might be willing to pay for our common stock until the
expiration of such agreement. Any delay or prevention of a
change of control transaction or changes in our board of
directors could cause the market price of our common stock to
decline.

Risks Related to Our Industry

Competition
could reduce our market share and harm our
business.

The oscilloscope market is highly competitive and
characterized by rapid and continual advances in technology. Our
principal competitors in this market are Tektronix and Agilent
Technologies, Inc. Both of our principal competitors have
substantially greater sales and marketing, development and
financial resources than we do. We believe that Tektronix,
Agilent Technologies and other competitors each offer a wide
range of products that attempt to address most sectors of the
oscilloscope market.

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We have historically engaged in intense
competition with Tektronix. Some of our senior managers,
including our chief executive officer and chief operating
officer, are former employees of Tektronix. In 1994, we settled
litigation with Tektronix alleging that our oscilloscope
products infringed certain patents held by Tektronix by entering
into a license agreement for the right to use that intellectual
property. We are currently engaged in another intellectual
property litigation with Tektronix in which both sides have
claimed that the other is infringing its patents.

We believe that the principal bases of
competition in the oscilloscope market are a products
performance (bandwidth, sample rate, memory length and
processing power), its price and quality, the vendors name
recognition and reputation, product availability and the quality
of post-sale support. If any of our competitors surpass us or
are perceived to have surpassed us with respect to one or more
of these factors, we may lose customers. We also believe that
our success will depend in part on our ability to maintain and
develop the advanced technology used in our oscilloscope
products and our ability to offer high-performance products at a
favorable price-to-performance ratio. We cannot
assure that we will continue to compete effectively.

A prolonged
economic downturn could materially harm our
business.

Negative trends in the general economy, including
trends resulting from actual or threatened military action by
the United States and threats of terrorist attacks on the United
States and abroad, could cause a decrease in capital spending in
many of the markets we serve. In particular, a downward cycle
affecting the computer and semiconductor, data storage devices,
automotive and industrial, and military and aerospace markets
would likely result in a reduction in demand for our products
and would have a material adverse effect on our business,
results of operations, financial condition and liquidity. In
addition, if customers markets decline, we may not be able
to collect outstanding amounts due to us. Such declines could
harm our consolidated financial position, results of operations,
cash flows and stock price, and could limit our ability to
maintain profitability.

We must
successfully execute our strategy to introduce new
products.

One of our key strategies is to expand our
addressable portion of the oscilloscope market by introducing
new products such as sampling oscilloscopes and lower bandwidth
oscilloscopes. We have in the past withdrawn a product line due
to implementation concerns. In August 2000, we divested our
Vigilant Networks business segment because, while its technology
was potentially viable, the additional capital investment
required for its commercial success was judged to be too high.
The success of our new product offerings will depend on a number
of factors, including our ability to identify customer needs
properly, manufacture and deliver products in sufficient volumes
on time, differentiate offerings from competitors
offerings, price products competitively and anticipate
competitors development of new products or technological
innovations.



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | Without the timely introduction of
    competitive products, our products may become technologically
    obsolete.

We generally sell our products in industries that
are characterized by rapid technological changes, frequent new
product introductions and changing industry standards. Without
the timely introduction of new products, services and
enhancements, our products may become technologically obsolete,
in which case our revenue and operating results could suffer.
The success of new product offerings will depend on several
factors, including our ability to identify customer needs
properly, innovate and develop new technologies, manufacture and
deliver products in sufficient volumes on time, differentiate
offerings from competitors offerings, price products
competitively and anticipate competitors development of
new products or technological innovations.

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We could be
affected by government regulation and other legal
uncertainties.

We manufacture our products in the United States,
and sell our products and purchase parts, components and
sub-assemblies in a number of countries. We are therefore
subject to various significant international, federal, state and
local regulations, including but not limited to health and
safety, product content, labor and import/export regulations.
For example, the export of high-performance oscilloscopes from
the United States is subject to regulation under the Treaty for
Nuclear Non-Proliferation. These regulations are complex, change
frequently and have tended to become more stringent over time.
We may be required to incur significant expenses to comply with
these regulations or to remedy violations of these regulations.
Any failure by us to comply with applicable government
regulations could also result in cessation of our operations or
portions of our operations, product recalls or impositions of
fines and restrictions on our ability to carry on or expand our
operations. In addition, because many of our products are
regulated or sold into regulated industries, we must comply with
additional regulations in marketing our products.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We purchase materials from suppliers and sell our products around the
world and maintain investments in foreign subsidiaries, all denominated in a
variety of currencies. As a consequence, we are exposed to risks from
fluctuations in foreign currency exchange rates with respect to a number of
currencies, changes in government policies and legal and regulatory
requirements, political instability, transportation delays and the imposition
of tariffs and export controls. Among the more significant potential risks to
us of relative fluctuations in foreign currency exchange rates is the
relationship among and between the U.S. dollar, the European monetary unit,
Swiss franc, British pound, Swedish krona, Japanese yen, Korean won, Singapore
dollar and Hong Kong dollar.

We have a program of entering into foreign exchange forward contracts to
minimize the risks associated with currency fluctuations on assets or
liabilities denominated in other than the functional currency of us or our
subsidiaries. It cannot be assured, however, that this program will effectively offset
all of our foreign currency risk related to these assets or liabilities. These
foreign exchange forward contracts do not qualify for hedge accounting.

Other than this program, we do not attempt to reduce our foreign currency
exchange risks by entering into foreign currency management programs. As a
consequence, there can be no assurance that fluctuations in foreign currency
exchange rates in the future as a result of mismatches between local currency
revenues and expenses, the translation of foreign currencies into the U.S.
dollar, our financial reporting currency, or otherwise, will not adversely
affect our results of operations. Moreover, fluctuations in exchange rates
could affect the demand for our products.

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 $0.1
million for the three and six month periods ended December 31, 2003, and ($0.2) million and ($0.4) million for the three and six month periods ended December 31, 2002, respectively, and are included in other income
(expense), net. At December 31, 2003 and June 30, 2003, the notional amounts of
our open foreign exchange forward contracts, all with maturities of less than six months,
were approximately $7.4 million and $6.7 million, respectively.

We performed a sensitivity analysis assuming a hypothetical 10% adverse
change in foreign currency exchange rates on our foreign exchange forward
contracts and our assets or liabilities denominated in other than their
functional currencies. In managements opinion, a 10% adverse change in foreign
currency exchange rates would not have a material effect on these instruments
or, therefore, our results of operations, financial position or cash flows.

We are exposed to adverse changes in interest rates primarily due to our
investment in cash and cash equivalents. Market risk is estimated as the
potential change in fair value resulting from a hypothetical 1% adverse change
in interest rates, which would not have been significant to our results of
operations, financial position or cash flows.




ITEM 4. CONTROLS AND PROCEDURES

We carried out an evaluation required by the Securities Exchange Act of
1934, under the supervision and with the participation of our chief executive
officer and chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, our chief executive officer
and chief financial officer have concluded that, as of the end of the period
covered by this report, our disclosure controls and procedures were effective
in timely alerting them to material information required to be included in our
periodic Securities and Exchange Commission reports.

During the most recent fiscal quarter, there has been no change in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

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LeCROY CORPORATION




PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

On April 28, 2003, Tektronix filed a
complaint against us in the United States District Court for the
District of Oregon claiming that we infringed on eight of its
U.S. patents. In our responsive pleading, we denied that we
have infringed, or are infringing, any of these patents, and
contend that the patents are invalid. Four of these patents concern software user
interface features for oscilloscopes, two concern circuitry, and
two concern probes. On August 5, 2003, we
filed a counterclaim in the United States District Court for the
District of Oregon claiming that Tektronix infringed on four of
our patents. We believe we have meritorious defenses and
we intend to vigorously defend this action.

On January 15, 2003, we were sued by Sicom
Systems in the United States District Court for the District of
Delaware for patent infringement of a U.S. patent relating
to the graphical display of test limits. We answered the
complaint denying infringement and asserted a counterclaim
alleging the invalidity of the patent and that Sicom had abused
the judicial process by bringing a baseless patent infringement
claim. On July 16, 2003, we filed a Motion to Dismiss
Sicoms case, contending that Sicom did not have standing
to bring the litigation. On November 20, 2003, the Court
granted our Motion to Dismiss. On December 18, 2003, Sicom
filed a Notice of Appeal to the United States Court of Appeals
for the Federal Circuit. On December 30, 2003, Sicom filed
a new patent infringement lawsuit against us in the United
States District Court for the District of Delaware. Tektronix
and Agilent Technologies are also co-defendants in this new
litigation. The complaint in this new case is essentially the
same as the complaint filed by Sicom on January 15, 2003,
except that Sicom now states that it entered into an amendment
to its license agreement with the Canadian government on
December 19, 2003, and that Sicom now has the exclusive
right to bring suit for infringement of the patent in the United
States. On January 5, 2004, Sicom filed a Notice and Order
of Dismissal of Appeal of its appeal to the Court of Appeals for
the Federal Circuit and the Order was entered on the following
day. In our responsive pleading, we have denied that we have
infringed, or are infringing, the patent, and contend that the
patent is invalid. We intend to vigorously defend ourselves in
this litigation.

From time to time, we are involved in lawsuits,
claims, investigations and proceedings, including patent and
environmental matters, that arise in the ordinary course of
business. There are no matters pending, including those
described above, that we expect to be material to our business, results of operations, financial condition or cash flows.




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

At the Companys annual meeting of stockholders held on October 29, 2003,
the following three proposals were adopted.

Proposal I

To elect two Class II directors, each to hold office for a term of three
years.

|                       |                               |                                         |            |  |  |  |         | 
|---------------------- | ----------------------------- | --------------------------------------- | ---------- |  |  |  | ------- | 
|Director               | Total Votes For Each Director | Total Votes Withheld From Each Director
|William G. Scheerer    |                               |                                         | 10,097,846 |  |  |  | 334,176 | 
|Allyn C. Woodward, Jr. |                               |                                         | 10,132,681 |  |  |  | 299,341 | 

Proposal II

To approve the Companys 2003 Stock Incentive Plan.

|          |  |               |           |                  |  |                   |       |  |  |  |           | 
|--------- |  | ------------- | --------- | ---------------- |  | ----------------- | ----- |  |  |  | --------- | 
|Votes For |  | Votes Against |           | Votes Abstained* |  | Broker Non-Votes*
|7,287,684 |  |               | 2,053,645 |                  |  |                   | 6,785 |  |  |  | 1,083,908 | 

Proposal III

To approved the Companys Amended and Restated 1995 Employee Stock
Purchase Plan.

|          |  |               |        |                  |  |                   |       |  |  |  |           | 
|--------- |  | ------------- | ------ | ---------------- |  | ----------------- | ----- |  |  |  | --------- | 
|Votes For |  | Votes Against |        | Votes Abstained* |  | Broker Non-Votes*
|9,315,817 |  |               | 25,712 |                  |  |                   | 6,585 |  |  |  | 1,083,908 | 

*     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.

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##### Table of Contents






ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

|          |       |          |                                                                                                                                                                                                                                     
|--------- | ----- | -------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 6(a) |       | Exhibits
|         
|          | 10.45 |          | LeCroy Corporations 2003 Stock Incentive Plan, incorporated by reference to
Appendix A to the Companys Definitive Proxy Statement filed with the SEC on
September 26, 2003                                                        
|          |       |          |                                                                                                                                                                                                                                     
|          | 10.46 |          | LeCroy Corporations Amended and Restated Employee Stock Purchase Plan,
incorporated by reference to Appendix B to the Companys Definitive Proxy
Statement filed with the SEC on September 26, 2003                                
|          |       |          |                                                                                                                                                                                                                                     
|          | 10.47 |          | Amendment No. 2 to the Credit Agreement, dated November 13, 2003, between the
Company and The Bank of New York, as Administrative Agent, incorporated by
reference to the Companys Form 8-K filed with the SEC on November 24, 2003
|          |       |          |                                                                                                                                                                                                                                     
|          | 10.48 |          | Amendment No. 1 to the Amended and Restated Employment Agreement, dated November
25, 2003, between the Company and Lutz P. Henckels, incorporated by reference to
the Companys Form 8-K filed with the SEC on December 11, 2003    
|          |       |          |                                                                                                                                                                                                                                     
|          | 10.49 |          | Professional
Services Agreement (for use with Manufacturing Services only), dated
as of December 2, 2003, by and between the Company and Plexus
Services Corp.*                                                                     
|          |       |          |                                                                                                                                                                                                                                     
|          | 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                                                                                                                                                     

*We are seeking confidential treatment for the redacted portions of this agreement.

| |           |  |                                                               
| | --------- |  | --------------------------------------------------------------
| | Item 6(b) |  | Reports on Form 8-K during the quarter ended December 31, 2003

The Company filed a Form 8-K with the SEC on October 16, 2003, reporting under
Item 7 Financial Statements and Exhibits and under Item 12 Results of
Operations and Financial Condition the Companys earnings for the three months
ended September 30, 2003.

The Company filed a Form 8-K with the SEC on November 13, 2003, reporting under
Item 5 Other Events the amendment by the Company of its existing credit
agreement with The Bank of New York. The amendment, among other things,
increases the Companys revolving line of credit from $15 million to $25 million
and extends its maturity date to November 30, 2006.

The Company filed a Form 8-K with the SEC on November 25, 2003, reporting under
Item 5 Other Events the resignation of Lutz P. Henckels from the Board of
Directors and as an employee of the Company.

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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 9, 2004 |  | LECROY CORPORATION
|                       |  |                    |  |                                            
|                       |  | /s/                |  | Scott D. Kantor                            
|                       |  |                    |  |                                            
|                       |  |                    |  | Scott D. Kantor                            
|                       |  |                    |  | Vice President and Chief Financial Officer,
|                       |  |                    |  | Secretary and Treasurer                    

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##### Table of Contents






EXHIBIT INDEX

|             |  |                                                                                                                                                                                                                                     
|------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits No. |  | Description                                                                                                                                                                                                                         
|            
|10.45        |  | LeCroy Corporations 2003 Stock Incentive Plan, incorporated by reference to
Appendix A to the Companys Definitive Proxy Statement filed with the SEC on
September 26, 2003                                                        
|             |  |                                                                                                                                                                                                                                     
|10.46        |  | LeCroy Corporations Amended and Restated Employee Stock Purchase Plan,
incorporated by reference to Appendix B to the Companys Definitive Proxy
Statement filed with the SEC on September 26, 2003                                
|             |  |                                                                                                                                                                                                                                     
|10.47        |  | Amendment No. 2 to the Credit Agreement, dated November 13, 2003, between the
Company and The Bank of New York, as Administrative Agent, incorporated by
reference to the Companys Form 8-K filed with the SEC on November 24, 2003
|             |  |                                                                                                                                                                                                                                     
|10.48        |  | Amendment No. 1 to the Amended and Restated Employment Agreement, dated November
25, 2003, between the Company and Lutz P. Henckels, incorporated by reference to
the Companys Form 8-K filed with the SEC on December 11, 2003    
|             |  |                                                                                                                                                                                                                                     
|10.49        |  | Professional
Services Agreement (for use with Manufacturing Services only), dated
as of December 2, 2003, by and between the Company and Plexus
Services Corp.*                                                                     
|             |  |                                                                                                                                                                                                                                     
|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                                                                                                                                                     

*     We are
seeking confidential treatment for the redacted portions of this
agreement.

34