**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-Q**





T  QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      quarterly period ended **December
      31, 2006**




OR





£  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





Commission
      File Number: 0-26634





**LeCROY
      CORPORATION**


(Exact
      Name of Registrant as Specified in Its Charter)





**DELAWARE**
            **13-2507777**(State
                or other jurisdiction of
            (I.R.S.
                Employer Identification No.)incorporation
                or organization)





**700
                CHESTNUT RIDGE ROAD**
              **CHESTNUT
                RIDGE, NEW YORK**
            **10977**(Address
                of Principal Executive Office)
            (Zip
                Code)





**(845)
      425-2000**


(Registrant’s
      Telephone Number, Including Area Code)





Not
      Applicable


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





Indicate
      by check mark (“X”) whether the registrant: (1) has filed all reports required
      to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the preceding twelve months (or for such shorter period that the registrant
      was
      required to file such reports) and (2) has been subject to such filing
      requirements for the past 90 days.





YES T NO £





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





Large
      accelerated filer £ Accelerated filer T  Non-Accelerated
      filer £





Indicate
      by check mark (“X”) whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).


YES £ NO T





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





**CLASS**
            
            **OUTSTANDING
                AT February 1, 2007**Common
                stock, par value $.01 share
            
            12,197,321














**LeCROY
      CORPORATION**


**FORM
      10-Q**





**INDEX**





**Page
                No.**PART
                I
            FINANCIAL
                INFORMATIONItem
                1.
            Financial
                Statements:Consolidated
                Balance Sheets (Unaudited) as of December 31, 2006 and June 30,
                2006
            3Consolidated
                Statements of Operations (Unaudited) for the Three and Six Months
                ended
                December 31, 2006 and 2005
            4Consolidated
                Statements of Cash Flows (Unaudited) for the Six Months ended December
                31,
                2006 and 2005
            5Notes
                to Consolidated Financial Statements (Unaudited)
            6Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            24Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            35Item
                4.
            Controls
                and Procedures
            36PART
                II
            OTHER
                INFORMATIONItem
                1.
            Legal
                Proceedings
            37Item
                1A.
            Risk
                Factors
            37Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            40Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            40Item
                6.
            Exhibits
            41Signature
            
            44








LeCroy®,
      Wavelink TM ,
      WaveMaster ® ,
      WavePro®, WaveJet®, WaveRunner®, WaveScanTM, WaveSurferTM, WaveExpertTM, MAUITM ,
      CATC Ô and
      Catalyst Ô are our
      trademarks, among others not referenced in this document. All other trademarks,
      servicemarks or tradenames referred to in this Form 10-Q are the property of
      their respective owners.











**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**





**LeCROY
      CORPORATION**


**CONSOLIDATED
      BALANCE SHEETS**


**(UNAUDITED)**


**In
                thousands, except par value and share data**
            
            
            **December
                31,**
              **2006**
            
            
            **June
                30,**
              **2006****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            14,354
            
            $
            16,972Accounts
                receivable, net of reserves of $546 and $458 at December 31, 2006
                and June
                30, 2006, respectively
            
            
            28,297
            
            
            28,867Inventories,
                net
            
            
            38,298
            
            
            34,041Other
                current assets
            
            
            10,645
            
            
            13,237Total
                current assets
            
            
            91,594
            
            
            93,117Property
                and equipment, net
            
            
            21,711
            
            
            20,359Goodwill
            
            
            105,926
            
            
            78,473Other
                non-current assets
            
            
            14,987
            
            
            10,025Total
                Assets
            
            $
            234,218
            
            $
            201,974**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            16,211
            
            $
            19,282Accrued
                expenses and other current liabilities
            
            
            14,952
            
            
            13,408Short-term
                bank debt
            
            
            -
            
            
            3,500Current
                portion of long-term debt and capital leases
            
            
            353
            
            
            9,930Total
                current liabilities
            
            
            31,516
            
            
            46,120Long-term
                bank debt
            
            
            10,000
            
            
            24,700Convertible
                notes
            
            
            72,000
            
            
            ─Note
                payable - related party
            
            
            3,500
            
            
            ─Deferred
                revenue and other non-current liabilities
            
            
            1,401
            
            
            1,451Total
                liabilities
            
            
            118,417
            
            
            72,271Commitments
                and contingenciesStockholders’
                equity:Preferred
                stock, $.01 par value (authorized 5,000,000 shares; none issued and
                outstanding as of December 31, 2006 and June 30, 2006)
            
            
            —
            
            
            —Common
                stock, $.01 par value (authorized 45,000,000 shares; 13,210,441 and
                12,883,664 shares issued as of December 31, 2006 and June 30, 2006,
                respectively)
            
            
            132
            
            
            129Additional
                paid-in capital
            
            
            118,124
            
            
            114,447Accumulated
                other comprehensive income
            
            
            1,265
            
            
            1,292Retained
                earnings
            
            
            8,646
            
            
            15,693Treasury
                stock, at cost (1,038,283 and 142,283 shares at December 31, 2006
                and June
                30, 2006, respectively)
            
            
            (12,366
            )
            
            (1,858
            )Total
                stockholders’ equity
            
            
            115,801
            
            
            129,703Total
                liabilities and stockholders’ equity
            
            $
            234,218
            
            $
            201,974






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





3








**LeCROY
      CORPORATION**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(UNAUDITED)**




**Three
                    months ended**
                  **December
                    31,**
              **Six
                    months ended**
                  **December
                    31,****In
                  thousands, except per share data**
              
              
              **2006**
              
              
              **2005**
              
              
              **2006**
              
              
              **2005**Revenues:Test
                  and measurement products
              
              $
              36,258
              
              $
              39,996
              
              $
              71,556
              
              $
              79,120Service
                  and other
              
              
              1,858
              
              
              2,026
              
              
              3,601
              
              
              3,960Total
                  revenues
              
              
              38,116
              
              
              42,022
              
              
              75,157
              
              
              83,080Cost
                  of revenues
              
              
              18,294
              
              
              16,434
              
              
              33,117
              
              
              32,499Gross
                  profit
              
              
              19,822
              
              
              25,588
              
              
              42,040
              
              
              50,581Operating
                  expenses:Selling,
                  general and administrative
              
              
              14,681
              
              
              13,594
              
              
              27,527
              
              
              26,837Research
                  and development
              
              
              12,845
              
              
              7,806
              
              
              20,497
              
              
              15,230Total
                  operating expenses
              
              
              27,526
              
              
              21,400
              
              
              48,024
              
              
              42,067Operating
                  (loss) income
              
              
              (7,704
              )
              
              4,188
              
              
              (5,984
              )
              
              8,514Other
                  (expense) income:Interest
                  expense, net
              
              
              (1,160
              )
              
              (600
              )
              
              (1,952
              )
              
              (1,184
              )Loss
                  on extinguishment of debt
              
              
              (446
              )
              
              -
              
              
              (446
              )
              
              -Other,
                  net
              
              
              (100
              )
              
              (82
              )
              
              (97
              )
              
              (207
              )Other
                  expense, net
              
              
              (1,706
              )
              
              (682
              )
              
              (2,495
              )
              
              (1,391
              )(Loss)
                  income before income taxes
              
              
              (9,410
              )
              
              3,506
              
              
              (8,479
              )
              
              7,123(Benefit)
                  provision for income taxes
              
              
              (1,754
              )
              
              1,329
              
              
              (1,432
              )
              
              2,713Net
                  (loss) income
              
              $
              (7,656
              )
              $
              2,177
              
              $
              (7,047
              )
              $
              4,410Net
                  (loss) income per common share :Basic
              
              $
              (0.67
              )
              $
              0.18
              
              $
              (0.59
              )
              $
              0.36Diluted
              
              $
              (0.67
              )
              $
              0.17
              
              $
              (0.59
              )
              $
              0.36Weighted
                  average number of common shares:Basic
              
              
              11,492
              
              
              12,195
              
              
              11,858
              
              
              12,149Diluted
              
              
              11,492
              
              
              12,467
              
              
              11,858
              
              
              12,402










The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 4











**LeCROY
      CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**




**Six
                  months ended**
                **December
                  31,****In
                  thousands**
              
              
              **2006**
              
              
              **2005**CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  (loss) income
              
              $
              (7,047
              )
              $
              4,410Adjustments
                  to reconcile net (loss) income to net cash provided by operating
                  activities:Write-off
                  of acquired in-process research and development
              
              
              4,000
              
              
              —Depreciation
                  and amortization
              
              
              4,350
              
              
              3,948Share-based
                  compensation
              
              
              3,152
              
              
              2,870Amortization
                  of deferred financing costs
              
              
              241
              
              
              204Deferred
                  income taxes
              
              
              (430
              )
              
              1,795Write-off
                  of term loan deferred financing costs
              
              
              446
              
              
              —Loss
                  on disposal of property and equipment, net
              
              
              15
              
              
              —Recognition
                  of deferred license revenue
              
              
              —
              
              
              (648
              )Change
                  in operating assets and liabilities, net of assets acquired and
                  liabilities assumed in an acquisition:Accounts
                  receivable
              
              
              1,520
              
              
              (8
              )Inventories
              
              
              (531
              )
              
              (2,141
              )Other
                  current and non-current assets
              
              
              (291
              )
              
              (107
              )Accounts
                  payable, accrued expenses and other liabilities
              
              
              (3,959
              )
              
              (1,528
              )Net
                  cash provided by operating activities
              
              
              1,466
              
              
              8,795CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchase
                  of property and equipment
              
              
              (3,183
              )
              
              (1,892
              )Business
                  acquisition costs, net of acquired cash
              
              
              (31,215
              )
              
              —Net
                  cash used in investing activities
              
              
              (34,398
              )
              
              (1,892
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Repayment
                  of term loan
              
              
              (34,076
              )
              
              (5,604
              )Net
                  borrowings under revolving credit line
              
              
              6,500
              
              
              —Proceeds
                  from issuance of convertible notes
              
              
              72,000
              
              
              —Payment
                  of deferred financing costs
              
              
              (3,201
              )
              
              —Purchase
                  of treasury shares
              
              
              (10,508
              )
              
              —Repayment
                  of borrowings on capitalized leases
              
              
              (123
              )
              
              (226
              )Proceeds
                  from employee stock purchase and option plans
              
              
              78
              
              
              1,182Net
                  cash provided by (used in) financing activities
              
              
              30,670
              
              
              (4,648
              )Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              (356
              )
              
              13Net
                  (decrease) increase in cash and cash equivalents
              
              
              (2,618
              )
              
              2,268Cash
                  and cash equivalents at beginning of the period
              
              
              16,972
              
              
              13,866Cash
                  and cash equivalents at end of the period
              
              $
              14,354
              
              $
              16,134Supplemental
                  Cash Flow Disclosure
                Cash
                  paid during the period for:Interest
              
              $
              966
              
              $
              1,376Income
                  taxes
              
              
              468
              
              
              744Non-cash
                  investing and financing activities:Issuance
                  of note payable to related party for business acquisition
              
              $
              3,500
              
              
              —Issuance
                  of LeCroy stock options for business acquisition
              
              
              450
              
              
              —Transaction
                  costs for business acquisition, unpaid at December 31,
                  2006
              
              
              337
              
              
              —









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





5








**LeCROY
        CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**


**1.
      Basis of Presentation**





The
      accompanying interim Consolidated Financial Statements include all the accounts
      of LeCroy Corporation (the “Company” or “LeCroy”) and its wholly-owned
      subsidiaries. These Consolidated Financial Statements are unaudited and should
      be read in conjunction with the audited Consolidated Financial Statements
      included in the Company’s Annual Report on Form 10-K for the fiscal year ended
      June 30, 2006. The Consolidated Balance Sheet as of June 30, 2006 has been
      derived from those audited Consolidated Financial Statements. Inter-company
      transactions and balances have been eliminated in consolidation.





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





These
      unaudited Consolidated Financial Statements reflect all adjustments, of a normal
      recurring nature, that are, in the opinion of management, necessary for a fair
      presentation of the financial position and the results of operations for the
      interim periods. Operating income in the second quarter of fiscal 2007 also
      included a $4.0 million charge for the write-off of in-process research and
      development (“IPR&D”) related to the Catalyst Enterprises Inc., a California
      Corporation (“Catalyst”) acquisition (see Note 2 - Catalyst Acquisition). Other
      (expense) income in the second quarter of fiscal 2007 also included a Loss
      on
      extinguishment of debt of approximately $0.4 million for the write-off of
      unamortized deferred financing fees related to the term loan (See Note 14 -
      Long-term Debt and Capital Leases) that was fully repaid during the second
      quarter of fiscal 2007. Interim period operating results may not be indicative
      of the operating results for a full year.





The
      Company’s fiscal periods end on the Saturday closest to the end of the period,
      which resulted in reporting periods ended on December 30, 2006, December 31,
      2005 and July 1, 2006. For clarity of presentation, period-end references are
      stated as December 31 and June 30. Certain reclassifications were made to prior
      year Consolidated Financial Statements to conform to the fiscal 2007
      presentation.





**2.
      Catalyst Acquisition**





On
      September 29, 2006, the Company entered into an Agreement and Plan of Merger
      (the “Merger Agreement”) among the Company, 2006 Franklin Congress Corporation,
      a California corporation and a wholly owned subsidiary of the Company (“Sub”),
      Catalyst, and Nader Salehomoum, as Equityholder Representative, pursuant to
      which Sub merged with and into Catalyst (the “Merger”), with Catalyst continuing
      as the surviving corporation and as a 100% owned subsidiary of the
      Company .
      Catalyst is a manufacturer of data bus analysis and emulation tools for advanced
      serial data communications and strengthens the Company’s position in protocol
      solutions.





The
      Merger has been recorded under the purchase method of accounting in accordance
      with Statement of Financial Accounting Standards (“SFAS”) No. 141 (“SFAS No.
      141”), “Business Combinations,” which requires that the total consideration be
      allocated to the assets acquired and liabilities assumed based on their fair
      values. On October 2, 2006, the effective date of the Merger, each share of
      common stock of Catalyst issued and outstanding immediately prior to the Merger

















were
      converted to receive approximately $26.7 in cash immediately. In addition,
      pursuant to the terms of the Merger Agreement, 10% of the stated consideration
      was placed into escrow for the twelve-month period following the closing of
      the
      Merger to secure certain indemnification obligations under the terms of the
      Merger Agreement.





LeCroy
      paid cash of $31.2 million, including direct transaction costs of $2.2 million,
      net of cash acquired, using proceeds from the Revolver under the Credit
      Agreement ( Note
      14 -
      Long-term Debt and Capital Leases ),
      issued
      a $3.5 million promissory note payable on January 2, 2008, to Nader Salehomoum,
      the former sole shareholder of Catalyst and assumed
      the fair value of certain vested Catalyst stock options totaling $0.5 million.
      Approximately $337,000 of transaction costs had not yet been paid as of December
      31, 2006. The
      Merger consideration is summarized below (in thousands):





Cash
                for shares and certain vested options
            $
            26,650Cash
                paid in escrow
            
            3,350Note
                payable to former shareholder
            
            3,500Fair
                value of vested stock options assumed
            
            450Transaction
                costs
            
            2,570Total
                purchase price
            $
            36,520











In
      connection with the Merger, LeCroy assumed Catalyst’s Stock Option Plan. On
      October 2, 2006, Catalyst stock option holders approved technical amendments
      to
      their stock option grants in anticipation of their assumption by LeCroy pursuant
      to the Merger including, without limitation, amendments reflecting that any
      stock option or other award granted thereunder would be exercisable for LeCroy
      common stock. Pursuant to SFAS No. 123R, of the 136,826 stock options
      assumed by the Company in exchange for the stock options held by the
      employees of Catalyst, the fair value of 36,858 vested options or
      approximately $450,000 was considered part of the purchase price for Catalyst
      and the fair value of 99,968 unvested options or approximately $1,196,000,
      will
      be charged to compensation expense in operations as earned by employees over
      their remaining requisite service periods. The fair value of assumed
      options was determined using the Black-Scholes option pricing model.




The
      Company may also be required to grant restricted stock to certain former
      Catalyst employees contingent on the continuation of employment and the
      percentage of the escrow paid to the former shareholders of Catalyst twelve
      months subsequent to the Merger. The maximum value of the restricted shares
      that
      may be granted is approximately $0.2 million.





The
      fair
      value of tangible and intangible assets acquired and liabilities assumed was
      established based upon certain assumptions made regarding fair values. The
      fair
      value of finished goods inventory is based on estimated selling prices less
      direct costs to sell and a reasonable profit margin on the selling effort.
      The
      fair value of work in process inventory is based on estimated selling prices
      less cost to complete, direct costs to sell and a reasonable profit margin
      on
      the cost to complete and selling effort. The fair value of the IPR&D,
      purchased technology, trade name, backlog and manufacturer’s representative
      relationships was determined by an independent appraisal firm. The fair value
      of
      the IPR&D was based on the total estimated costs to develop the related
      technologies less the costs incurred to date for the projects, and the
      intangible asset values were based on estimates of future cash flows associated
      with those assets. The purchased technology, backlog and manufacturer’s
      representative relationships related to this acquisition are being amortized
      over their estimated economic useful lives ranging from two to fifteen months. It
      was
      determined that the Catalyst trade name has an indefinite life and therefore,
      the Company will test the carrying value of $700,000 annually for impairment.





The
      excess of the purchase price over the fair value of the net assets acquired
      has
      been allocated to goodwill. The principle factors that contributed to a purchase
      price that resulted in the recognition of goodwill was the fair




7











value
      of
      the going-concern element of the Catalyst business, which includes their
      technology position within emerging communication standards, as well as the
      expected synergies that will be achieved by combining both companies. The
      goodwill is not deductible for tax purposes. The purchase price allocation
      as of
      October 2, 2006 is summarized below (in thousands):








Cash
            
            $
                1,017Accounts
                receivable
            
            738Inventory
            
            4,269Other
                assets
            
            206In-process
                research and development
            
            4,000Purchased
                intangibles
            
            2,220Goodwill
            
            27,453Current
                liabilities assumed
            
            (1,095)Deferred
                tax liability
            
            (2,288)Total
                purchase price
            
            $36,520





The
      following table presents the details of the amortizable intangible assets
      acquired in the Merger and their carrying values as of December 31, 2006 (in
      thousands):





**Weighted**
              **Average****Lives**
            
            
            **Cost**
            
            
            **Accumulated****Amortization**
            
            
            **Net**Amortizable
                intangible assets:Purchased
                technology
            
            
            0.9
                years
            
            $
            1,030
            
            $
            206
            
            $
            824Purchased
                backlog
            
            
            0.1
                years
            
            
            450
            
            
            450
            
            
            ─Purchased
                manufacturer’s representative
              relationships
            
            
            0.0
                years
            
            
            40
            
            
            40
            
            
            ─Total
                amortizable intangibles purchased
            
            
            
            
            $
            1,520
            
            $
            696
            
            $
            824








Amortization
      expense for intangible assets acquired in the Merger was approximately $0.7
      million for the three and six months ended December 31, 2006 of which
      approximately $0.7 million was recorded in Cost of revenues and $40,000 was
      recorded in Selling, general and administrative expense in the Consolidated
      Statements of Operations.





The
      amortization expense related to intangible assets acquired in the Merger for
      the
      remainder of fiscal 2007 and 2008 is expected to be approximately $0.4 million
      for each period.





The
      $4.0
      million related to IPR&D was written off subsequent to the acquisition in
      accordance with FASB Interpretation No. 4, “Applicability of FASB Statement No.
      2 to Business Combinations Accounted for by the Purchase Method.” This charge
      was included in Research and development expense in the Consolidated Statement
      of Operations in the second quarter of fiscal 2007.





The
      Consolidated Statements of Operations includes the results of operations of
      Catalyst since October 2, 2006.





**3.
      Share-Based Compensation**





In
      the
      first quarter of fiscal 2006, the Company adopted the provisions of SFAS No.
      123
      (revised 2004), "Share-Based Payment” ("SFAS 123R"), which requires that the
      costs resulting from all share-based payment transactions be recognized in
      the
      financial statements at their fair values. The Company adopted SFAS 123R using
      the *modified
      prospective application* method
      under which the provisions of SFAS 123R apply to new awards and to
      awards












modified,
      repurchased, or cancelled after the adoption date. Additionally, compensation
      cost for the portion of the awards for which the requisite service has not
      been
      rendered that are outstanding as of the adoption date is recognized in the
      Consolidated Statement of Operations over the remaining service period after
      the
      adoption date based on the award’s original estimate of fair value.





On
      November 10, 2005, the FASB issued FASB Staff Position 123(R)-3 ("FSP 123R-3"),
      "Transition Election Related to Accounting for the Tax Effects of Share-based
      Payment Awards," that provides an elective alternative transition method of
      calculating the pool of excess tax benefits available to absorb tax deficiencies
      recognized subsequent to the adoption of SFAS 123R (the "APIC Pool") to the
      method otherwise required by paragraph 81 of SFAS 123R. The Company may take
      up
      to one year from the effective date of this FSP to evaluate its available
      alternatives and make its one-time election. During the second quarter of fiscal
      2007, the Company made the election to use the alternative method, however,
      the
      alternative method does not have an impact on the Company’s results of
      operations or financial condition for the periods ended December 31, 2006 and
      2005 due to the Company's net operating loss position.





The
      fair
      value of options granted is estimated on the date of grant using a Black-Scholes
      option pricing model. Expected volatilities are calculated based on the
      historical volatility of the Company’s stock. Management monitors share option
      exercise and employee termination patterns to estimate forfeiture rates.
      Separate groups of employees that have similar historical exercise behavior
      are
      considered separately for valuation purposes. The expected holding period of
      options represents the period of time that options granted are expected to
      be
      outstanding. The risk-free interest rate for periods within the contractual
      life
      of the option is based on the interest rate of a 5-year U.S. Treasury note
      in
      effect on the date of the grant.





The
      table
      below presents the assumptions used to calculate the fair value of options
      granted during the three and six months ended December 31, 2006 and 2005,
      including the assumed Catalyst options.





**Three
                Months**
              **Ended**
              **December
                31, 2006**
            
            
            **Six
                Months Ended****December
                31, 2006**
            
            
            **Three
                Months**
              **Ended**
              **December
                31, 2005**
            
            
            **Six
                Months Ended****December
                31, 2005**Expected
                holding period (years)
            
            
            3.5
            
            
            3.6
            
            
            5.0
            
            
            5.0Risk-free
                interest rate
            
            
            4.58%-4.90%
            
            
            4.58%-4.90%
            
            
            4.23%
            
            
            3.86%
                - 4.23%Weighted
                average risk-free interest rate
            
            
            4.63%
            
            
            4.64%
            
            
            4.23%
            
            
            4.08%Dividend
                yield
            
            
            0.0%
            
            
            0.0%
            
            
            0.0%
            
            
            0.0%Expected
                volatility
            
            
            32.0%-52.9%
            
            
            32.0%-54.2%
            
            
            61.8%
            
            
            61.8%
                - 64.9%Weighted
                average expected volatility
            
            
            37.8%
            
            
            41.26%
            
            
            61.8%
            
            
            62.9%Fair
                value of options granted
            
            
            $5.56-$12.24
            
            
            $5.56-$12.24
            
            
            $8.43
            
            
            $7.91
                - $8.43Weighted
                average fair value of options granted
            
            
            $10.98
            
            
            $11.41
            
            
            $8.43
            
            
            $8.25





The
      Company maintains stock incentive plans for selected employees. As of December
      31, 2006, there were 4,886,277 shares of the Company’s common stock reserved for
      stock options, of which 2,157,233 were reserved for outstanding options. Under
      the terms of the stock incentive plans, stock options are granted at an option
      price not less than the market value at the date of grant. The vesting and
      exercise periods for each option is at the discretion of the Compensation
      Committee.





In
      connection with the Merger, LeCroy assumed Catalyst’s Stock Option Plan. On
      October 2, 2006, Catalyst stock option holders approved technical amendments
      to
      their stock option grants in anticipation of their assumption by LeCroy pursuant
      to the Merger including, without limitation, amendments reflecting that any
      stock option or other award granted thereunder would be exercisable for LeCroy
      common stock. Pursuant to SFAS No. 123R, of the 136,826 stock
      options assumed by the Company in exchange for the stock options held by
      the employees of Catalyst, the fair value of 36,858 vested options or
      approximately $450,000 was considered part of the purchase price for Catalyst
      and the fair value of 99,968 unvested options or approximately $1,196,000,
      will
      be charged to compensation expense in operations as earned by employees over
      their remaining requisite service periods.



















Stock
      option transactions for the three and six months ended December 31, 2006 under
      all plans are as follows:





**Number
                of**
              **Shares**
            
            
            **Weighted
                Average**
              **Exercise
                Price**
            
            
            **Weighted
                Average Remaining Contractual Terms (Years)**
            
            
            **Aggregate**
              **Intrinsic
                Value**
              **as
                of December 31, 2006****($000)**Outstanding
                at June 30, 2006
            
            
            2,230,848
            
            $
            15.85Granted
            
            
            9,700
            
            
            12.85Exercised
            
            
            (10,687
            )
            
            5.55Expired
            
            
            (117,448
            )
            
            21.87Forfeited
            
            
            (2,864
            )
            
            15.73Outstanding
                at September 30, 2006
            
            
            2,109,549
            
            
            15.55
            
            
            4.80
            
            $
            3,200Granted
            
            
            144,626
            
            
            1.26Exercised
            
            
            (14,972
            )
            
            2.63Expired
            
            
            (44,580
            )
            
            16.36Forfeited
            
            
            (37,390
            )
            
            15.20Outstanding
                at December 31, 2006
            
            
            2,157,233
            
            
            14.67
            
            
            4.86
            
            $
            2,641Vested
                and expected to vest at December 31, 2006
            
            
            2,148,485
            
            $
            14.67
            
            
            4.82
            
            $
            2,641Exercisable
                at December 31, 2006..
            
            
            1,801,416
            
            $
            15.37
            
            
            4.27
            
            $
            1,558





The
      weighted-average grant-date fair value of the stock options granted during
      the
      three months ended December 31, 2006 and 2005 was $10.98 and $8.43 per option,
      respectively. The weighted-average grant-date fair value of the stock options
      granted during the six months ended December 31, 2006 and 2005 was $11.41 and
      $8.25 per option, respectively. The total intrinsic value of stock options
      exercised during the three and six months ended December 31, 2006 was $0.1
      million and $0.2 million, respectively, as compared to $0.2 million and $0.3
      million for the three and six months ended December 31, 2005, respectively.
      The
      fair value of stock options vested during the three and six months ended
      December 31, 2006 was $0.7 million and $1.4 million, respectively, as compared
      to $0.7 million and $2.0 million for the three and six months ended December
      31,
      2005.





The
      following table summarizes information about stock options outstanding at
      December 31, 2006:




**Options
                  Outstanding at**
                **December
                  31, 2006**
              
              **Options
                  Exercisable at**
                **December
                  31, 2006****Option
                  Exercise Price****Range**
              
              
              **Number
                  of**
                **Shares**
              
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              
              **Weighted
                  Average**
                **Remaining**
                **Contractual
                  Life**
                **(years)**
              
              
              
              **Number
                  of**
                **Shares**
              
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**$
                  0.45 - $11.98
              
              
              580,469
              
              $
              6.97
              
              
              6.05
              
              
              
              470,736
              
              $
              8.20$11.99
                  - $18.25
              
              
              1,003,331
              
              
              14.80
              
              
              5.20
              
              
              
              767,480
              
              
              14.71$18.26
                  - $23.64
              
              
              511,122
              
              
              21.41
              
              
              3.25
              
              
              
              500,889
              
              
              21.42$23.65
                  - $37.00
              
              
              62,311
              
              
              29.16
              
              
              1.52
              
              
              
              62,311
              
              
              29.16Total
              
              
              2,157,233
              
              
              14.67
              
              
              4.86
              
              
              
              1,801,416
              
              
              15.37










Stock
      options and restricted stock awards available for grant under all plans were
      1,116,165 and 1,667,986 at December 31, 2006 and June 30, 2006,
      respectively.





As
      of
      December 31, 2006, there was approximately $3.7 million of total unrecognized
      compensation cost related to stock options granted under the plans. That cost
      is
      expected to be recognized over a remaining weighted-average period of 2.38
      years.




10














Compensation
      expense for restricted stock (non-vested stock) is recognized ratably over
      the
      associated service period, giving effect to estimated forfeitures. The fair
      value of new grants is determined based on the closing price on the date of
      grant. During the six months ended December 31, 2006 and 2005 there were 287,464
      shares and 66,000 shares, respectively, of non-vested stock granted. The shares
      granted in fiscal 2007, were issued under the 2003 Plan, of which 68,655 shares
      were immediately vested, 20,000 shares have 3-year ratable vesting, 178,809
      shares have 4-year ratable vesting and 20,000 fully vest after 5 years.





The
      following table summarizes transactions related to non-vested stock for the
      three and six months ended December 31, 2006:





**Number
                of**
              **Shares**
            
            
            **Weighted
                Average**
              **Grant
                Date**
              **Fair
                Value**Non-vested
                stock at June 30, 2006
            
            
            528,075
            
            $
            17.33Granted
            
            
            189,464
            
            
            12.87Vested
            
            
            (57,680
            )
            
            12.87Forfeited
            
            
            (2,484
            )
            
            13.05Non-vested
                stock at September 30, 2006
            
            
            657,375
            
            
            16.55Granted
            
            
            98,000
            
            
            12.78Vested
            
            
            (46,667
            )
            
            15.62Forfeited
            
            
            (24,392
            )
            
            14.24Non-vested
                stock at December 31, 2006
            
            
            684,316
            
            
            16.07





As
      of
      December 31, 2006, there was approximately $7.2 million of total unrecognized
      compensation cost related to non-vested stock granted under the plans. That
      cost
      is expected to be recognized over a remaining weighted-average period of 2.60
      years.




The
      Company has an Employee Stock Purchase Plan (“ESPP”) with a look-back option
      that allows employees to purchase shares of common stock at 85% of the market
      value at the lower of either the date of enrollment or the date of purchase.
      Payment for the ESPP is a fixed amount, set at the beginning of the period,
      made
      through payroll withholding over the enrollment period which is six months.
      The
      number of shares the participant can acquire is variable based on the fixed
      amount withheld and the applicable fair value. SFAS No. 123R requires an ESPP
      with a purchase price discount of greater than 5% and a look-back option to
      be
      compensatory. The fair value of the ‘put’ and ‘call’ features of the estimated
      shares to be purchased are estimated at the beginning of the purchase period
      using a Black-Scholes option pricing model. Expected volatilities are calculated
      based on the historical six-month volatility of the Company’s stock. The
      expected holding period is equal to the six-month enrollment period. The
      risk-free interest rate for periods within the contractual life of the share
      is
      based on the interest rate of a six-month U.S. Treasury note in effect on the
      first day of the enrollment period. The fair value of the shares is liability
      classified until the end of the six-month period at which time the fair value
      is
      re-calculated as of the end of the period and compared to the estimate. The
      lower amount is then equity classified and any over accrual reversed. As of
      December 31, 2006 and June 30, 2006, there was $73,411 and $42,000,
      respectively, of liability classified share-based compensation expense included
      in Accrued expenses and other current liabilities on the Consolidated Balance
      Sheets.




Total
      share-based compensation expense recorded in the Consolidated Statement of
      Operations for the three months ended December 31, 2006 and 2005 is $1.4 million
      and $1.5 million, respectively, and $3.2 million and $2.9 million for the six
      months ended December 31, 2006 and 2005, respectively.









11










4.
      Revenue Recognition




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





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





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





In
      the
      first quarter of fiscal 2006, in an effort to provide end-user customers an
      alternative to purchasing the Company’s higher end products under its standard
      terms and conditions, the Company began offering customers an opportunity to
      enter into sales-type or direct financing leases for these products. The Company
      is accounting for these leases in accordance with SFAS Statement No. 13, “
Accounting for Leases.” Lease and rental revenues are reported within Test and
      measurement product revenue.





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





*Service
      and other revenue.* Service
      and other revenue includes extended warranty contracts, software maintenance
      agreements and repairs and calibrations performed on instruments after the
      expiration of their normal warranty period. The Company records deferred revenue
      for extended warranty contracts, software maintenance agreements and
      calibrations included within the sales contract agreement. This deferred revenue
      is then recognized on a straight-line basis over the related service period.
      When arrangements include multiple elements, the Company uses relative fair
      values in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21,
“Revenue Arrangements with Multiple Deliverables,” to allocate revenue to the
      elements and recognize revenue when the criteria for revenue recognition have
      been met for each element.




12














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





Beginning
      in fiscal 2001 with the adoption of the SEC’s Staff Accounting Bulletin (“SAB”)
      No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements,” (superseded
      by SAB 104), 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 was being
      amortized into revenue over 5.5 years, the remaining terms of the license
      agreements. The Company recognized license fee revenue of zero and $0.3 million
      for the three months ended December 31, 2006 and 2005, respectively, and zero
      and $0.6 million for the six months ended December 31, 2006 and 2005,
      respectively. Such license fees were included in Service and other revenue
      in
      the Consolidated Statements of Operations. As of March 31, 2006, there was
      no
      remaining deferred license fee balance from the adoption of SAB
      101.





**5.
      Restructuring**





In
      the
      second quarter of fiscal 2007, as a result of a change in our organization
      stemming from the Catalyst acquisition, the Company recorded severance and
      related expenses of approximately $0.4 million, of which approximately $0.1
      million was expensed to Selling, general and administrative and $0.3 million
      was
      expensed to Research and development. The implementation of this plan resulted
      in headcount reductions of eleven employees or 2.4% of the workforce as compared
      to June 30, 2006. As of December 31, 2006, approximately $0.2 million has been
      paid in cash and approximately $0.2 million remains in Accrued expenses and
      other current liabilities on the Consolidated Balance Sheet. Severance and
      other
      related amounts under this plan are estimated to be paid by the end of the
      third
      quarter of fiscal 2007.





In
      the
      fourth quarter of fiscal 2006, the Company realigned some of its business
      processes and, as a result, incurred severance and related expenses of
      approximately $0.4 million, of which approximately $0.1 million was charged
      to
      Cost of revenues, $0.2 million was expensed to Selling, general and
      administrative and $0.1 million was expensed to Research and development. The
      implementation of this plan resulted in headcount reductions of sixteen
      employees or 3.5% of the workforce as compared to June 30, 2005. As of December
      31, 2006 all $0.4 million of severance has been paid which includes
      approximately $0.2 million in the first six months of fiscal 2007.





**6.
      Derivatives**





The
      Company accounts for derivatives and hedging activities in accordance with
      SFAS
      No. 133, “Accounting
      for Derivative Investments and Hedging Activities,” as amended ("SFAS
      133") ,
      which
      requires that all derivative instruments be recorded on the balance sheet at
      their respective fair values. The
      accounting for changes in the fair value (i.e., gains or losses) of a derivative
      instrument is dependent upon whether the derivative has been designated and
      qualifies as part of a hedging relationship and on the type of hedging
      relationship. The Company's current foreign exchange forward contracts and
      past
      interest rate swap agreements are not accounted for as hedges in accordance
      with
      SFAS 133; therefore, any changes in fair value of these contracts are recorded
      in Other, net in the Consolidated Statements of Operations.





The
      Company does not use derivative financial instruments for trading or other
      speculative purposes and does not enter into fair value hedges.









13








*Interest
        Rate Swap*


As
      required by the terms of the Credit Agreement (See Note 14 - Long-term Debt
      and
      Capital Leases), on January 27, 2005 the Company entered into an interest
      rate swap pursuant to a Master Agreement with Manufacturers & Traders
      Trust Co. (“M&T Bank”), the purpose of which was to protect against rising
      interest rates during the term of the Credit Agreement.





On
      October 16, 2006 in conjunction with the repayment of the term loan (See Note
      14
      - Long-term Debt and Capital Leases), the Company terminated its interest rate
      swap with M&T Bank. The net interest income earned on the swap was
      approximately $0.3 million and net interest expense of ($8,000) was recognized
      during the three months ended December 31, 2006 and 2005, respectively, and
      net
      interest income of $0.3 million and net interest expense of ($14,000) was
      recognized for the six months ended December 31, 2006 and 2005, respectively.





As
      of
      December 31, 2006, the Company has the following derivative instruments:





*Forward
      foreign exchange contracts*





The
      Company and its subsidiaries enter into short-term forward exchange agreements
      to purchase foreign currencies at set rates in the future. These foreign
      currency forward exchange agreements are used to limit exposure to fluctuations
      in foreign currency exchange rates on assets and liabilities denominated in
      currencies other than the subsidiaries' functional currency. The Company records
      these short-term forward exchange agreements on the balance sheet at fair value
      and changes in the fair value are recognized currently in the Consolidated
      Statement of Operations.





The
      net
      (losses) gains resulting from changes in the fair value of these derivatives
      and
      on transactions denominated in other than their functional currencies were
      net
      losses of approximately ($0.1) million and ($0.2) million for the three and
      six
      months ended December 31, 2006, respectively, as compared to net losses of
      ($82,000) and ($0.2) million for the three and six months ended December 31,
      2005. These amounts are included in Other, net in the Consolidated Statement
      of
      Operations. At December 31, 2006 and June 30, 2006, the notional amounts of
      the
      Company’s open foreign exchange forward contracts, all with maturities of less
      than six months, were approximately $14.1 million and $14.6 million,
      respectively.





**7.
      Comprehensive (Loss) Income**





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


**Three
                  months ended**
                **December
                  31,**
              
              **Six
                  months ended**
                **December
                  31,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Net
                  (loss) income
              ($7,656)
              
              $2,177
              
              ($7,047)
              
              $4,410Foreign
                  currency translation (loss) gain
              201
              
              (60)
              
              (27)
              
              (160)Comprehensive
                  (loss) income
              ($7,455)
              
              $2,117
              
              ($7,074)
              
              $4,250





**8.
        Accounts Receivable, net**





The
      Company has an agreement with one of its customers, who is also a vendor, which
      provides the Company with the legal right to offset outstanding accounts
      receivable balances against outstanding accounts payable balances. At December
      31, 2006 and June 30, 2006, the Company netted approximately $0.1 million and
      $25,000, respectively, of accounts receivable against accounts payable on the
      Consolidated Balance Sheets related to this agreement.







14





**9.
      Inventories, net**


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





**December
                31,**
              **2006**
            
            
            **June
                30,**
              **2006**Raw
                materials
            
            $
            8,480
            
            $
            7,726Work
                in process
            
            
            6,779
            
            
            6,933Finished
                goods
            
            
            23,039
            
            
            19,382$
            38,298
            
            $
            34,041





The
      value
      of demonstration units included in finished goods was $13.2  million
      and $10.9 million at December 31, 2006 and June 30, 2006, respectively. The
      Company’s demonstration units are held for sale and are sold regularly in the
      ordinary course of business through its normal sales distribution channels
      and
      existing customer base *.*





**10.
      Other Current Assets**





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


**December
                  31,**
                **2006**
              
              
              **June
                  30,**
                **2006**Deferred
                  tax assets, net
              
              $
              4,900
              
              $
              8,200Prepaid
                  other taxes
              
              
              310
              
              
              762Other
                  receivables
              
              
              660
              
              
              488Deferred
                  financing costs on convertible notes
              
              
              540
              
              
              ─Value-added
                  tax receivable
              
              
              1,415
              
              
              433Other
              
              
              2,820
              
              
              3,354$
              10,645
              
              $
              13,237







**11.
      Goodwill and Other Non-current Assets**





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


**December
                  31,**
                **2006**
              
              
              **June
                  30,**
                **2006**Goodwill
              
              $
              105,926
              
              $
              78,473Intangibles,
                  net
              
              $
              4,432
              
              $
              4,022Deferred
                  tax assets, net
              
              
              6,946
              
              
              3,964Deferred
                  financing costs on convertible notes
              
              
              2,303
              
              
              ─Other
                  non-current assets
              
              
              1,306
              
              
              2,039$
              14,987
              
              $
              10,025




Under
      SFAS No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”) 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 142 during the fourth quarter of fiscal 2006 and determined that
      there was no impairment to the recorded goodwill balances. No impairment
      indicators arose during the first six months of fiscal 2007.





The
      increase in Goodwill is attributable to the Catalyst acquisition (See Note
      2 -
      Catalyst Acquisition).





Purchased
      intangibles acquired in the Catalyst acquisition totaled $2.2 million of which
      $1.5 million related to amortizable intangible assets with finite lives and
      $0.7
      million related to the Catalyst trade name, which is included




15







in
      Intangibles, net. It was determined that the Catalyst tradename has an
      indefinite life and therefore, the Company will test the trademark annually
      for
      impairment.





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





**Original**
              **Weighted**
              **Average
                Lives**
            
            
            **December
                31,**
              **2006**
            
            
            **June
                30,**
              **2006**Amortizable
                intangible assets:Technology,
                manufacturing and distribution rights
            
            
            2.9
                years
            
            $
            8,545
            
            $
            7,025Patents
                and other intangible assets
            
            
            5.9
                years
            
            
            1,593
            
            
            1,593Accumulated
                amortization
            
            
            
            
            
            (6,406
            )
            
            (4,596
            )Net
                carrying amount
            
            
            
            
            $
            3,732
            
            $
            4,022





Amortization
      expense for intangible assets, all with finite lives, was $1.2 million and
      $1.8
      million for the three and six months ended December 31, 2006, respectively,
      as
      compared to $0.7 million and $1.5 million for the three and six months ended
      December 31, 2005, respectively. The cost of an amortizable intangible asset
      is
      amortized on a straight-line basis over the estimated economic life of the
      asset. Management estimates intangible assets amortization expense on a
      straight-line basis will approximate $1.2 million for the remainder of fiscal
      2007 and $1.4 million, $0.5 million, $0.1 million and $0.5 million for fiscal
      2008, 2009, 2010 and 2011 and beyond, respectively.





**12.
      Accrued Expenses and Other Current Liabilities**





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





**December
                31,**
              **2006**
            
            
            **June
                30,**
              **2006**Compensation
                and benefits
            
            $
            6,309
            
            $
            5,450Income
                taxes
            
            
            2,305
            
            
            2,718Warranty
            
            
            1,107
            
            
            1,005Deferred
                revenue, current portion
            
            
            782
            
            
            1,144Accrued
                interest on convertible notes
            
            
            600
            
            
            ─Retained
                liabilities from discontinued operations
            
            
            160
            
            
            160Other
                current liabilities
            
            
            3,689
            
            
            2,931$
            14,952
            
            $
            13,408





**13.
      Warranties**





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 Cost of revenues in the period that the related revenue
      is recognized. These estimates are derived from historical data of product
      reliability and for new products, published (by a third party) expected failure
      rates. The expected failure rate is arrived at in terms of units, which are
      then
      converted into labor hours to which an average fully burdened cost per hour
      is
      applied to derive the amount of accrued warranty required. 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
      Cost
      of revenues.





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,
      2006 and 2005 (in thousands):





16










**Three
                  months ended**
                **December
                  31,**
              
              
              **Six
                  months ended**
                **December
                  31,****2006**
              
              
              **2005**
              
              
              **2006**
              
              
              **2005**Balance
                  at beginning of period
              
              $
              986
              
              $
              962
              
              $
              1,005
              
              $
              971Accruals
                  for warranties entered into during the period
              
              
              165
              
              
              141
              
              
              307
              
              
              301Warranty
                  liability assumed in the Merger
              
              
              150
              
              
              -
              
              
              150
              
              
              -Warranty
                  costs incurred during the period
              
              
              (194
              )
              
              (171
              )
              
              (355
              )
              
              (340
              )Balance
                  at end of period
              
              $
              1,107
              
              $
              932
              
              $
              1,107
              
              $
              932


During
      fiscal 2006, management determined that certain amounts previously reported
      as
      warranty costs were services expense that had been misclassified. This caused
      an
      overstatement of the related warranty accruals in the table above. The warranty
      accrual and cost activity for the December 31, 2005 period presented above
      has
      been revised to properly reflect only warranty expense. These revisions had
      no
      impact on the Company’s beginning or ending warranty liability balance,
      financial position or Cost of revenue for any of the periods
      presented.





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,
      2006, 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.
      Long-term Debt and Capital Leases**





On
      October 12, 2006, the Company sold and issued $72.0 million in convertible
      senior subordinated notes to qualified institutional buyers pursuant to
      Rule 144A of the Securities Act of 1933, as amended (the “Notes”). The
      Notes bear interest at a rate of 4.00% per annum, payable in cash semi-annually
      in arrears on each April 15 and October 15, beginning April 15, 2007. The
      Notes are direct, unsecured, senior subordinated obligations of the Company
      and
      rank: (i) subordinate in right of payment to all of the Company’s existing
      and future secured indebtedness; (ii) equal in right of payment with all of
      our existing and future senior unsecured indebtedness, and (iii) senior in
      right of payment to all of our existing and future subordinated indebtedness,
      except that the Notes rank equally with the $3.5 million note issued in
      connection with the Catalyst acquisition, which is subordinated to the Company’s
      credit facility. In connection with the issuance and sale of the Notes, the
      Company entered into an indenture dated as of October 12, 2006, with U.S. Bank
      National Association as trustee. The terms of the Notes are governed by the
      indenture.





The
      Notes
      mature on October 15, 2026 unless earlier redeemed, repurchased or converted.
      Holders of the Notes will have the right to require the Company to repurchase
      for cash all or a portion of their Notes on each of October 15, 2011, October
      15, 2016 and October 15, 2021, at a repurchase price equal to 100% of the
      principal amount of the Notes to be repurchased plus accrued and unpaid
      interest, if any, up to but not including, repurchase date. In addition, the
      Company may redeem the Notes for cash, either in whole or in part, anytime
      after
      October 20, 2011 at a redemption price equal to 100% of the principal amount
      of
      the Notes to be redeemed plus accrued and unpaid interest, if any, up to but
      not
      including the redemption date. The Notes are convertible into Company common
      stock by the holders at an initial conversion rate equal to 68.7285 shares
      per
      $1,000 principal amount of the













Notes
      (equal to an initial conversion price of approximately $14.55 per share), on
      or
      after September 15, 2026, subject to adjustment as described in the indenture.
      Upon conversion, the Company will deliver for each $1,000 principal amount
      of
      Notes, an amount consisting of cash equal to the lesser of $1,000 and the
      conversion value (as defined in the indenture) and, to the extent that the
      conversion value exceeds $1,000, at the Company’s election, cash or shares of
      Company common stock in respect of the remainder.





If
      the
      Company undergoes a “change in control” (as defined in the indenture), holders
      of the Notes will have the right, subject to certain conditions, to require
      the
      Company to repurchase for cash all or a portion of their Notes at a repurchase
      price equal to 100% of the principal amount of the Notes to be repurchased
      plus
      accrued and unpaid interest, if any.





The
      Company received net proceeds from the sale of the Notes of approximately
      $69.0 million. Immediately thereafter, the net proceeds from the sale were
      used to repay the outstanding term debt balance of approximately $31.9 million
      under its credit facility, repurchase 850,000 shares of Company common
      stock at a cost of approximately $9.9 million and repay approximately
      $20.8 million of debt under its revolving credit facility that was drawn down
      to
      fund the acquisition of Catalyst.





The
      Company incurred approximately $3.0 million of transaction fees in connection
      with issuing the Notes, which have been deferred and are being amortized over
      the term of the Note using the effective interest method. The term of the Notes
      for amortization purposes is considered to be five years in accordance with
      SAB
      Topic 3-C, “Redeemable Preferred Stock,”  as
      that
      is the first period in which the convertible feature of the Notes can be
      executed by either the Noteholders or LeCroy and therefore is considered the
      mandatory redemption date.  At
      December 31, 2006, of the total $2.8 million unamortized fees related to the
      Notes, $0.5 million was included in Other current assets, and $2.3 million
      was
      included in Other non-current assets on the Consolidated Balance
      Sheet.





On
      October 29, 2004, LeCroy entered into a $75.0 million senior, secured, five-year
      credit agreement with the lenders listed therein and JP
      Morgan
      Chase Bank, N.A., successor to The
      Bank
      of New York, as administrative agent for such lenders (the “Credit Agreement”),
      which replaced LeCroy’s prior $25.0 million revolving credit facility with JP
      Morgan
      Chase Bank, N.A., successor to The
      Bank
      of New York. The terms of the Credit Agreement provided LeCroy with a $50.0
      million term loan (the “Term Loan”) and a $25.0 million revolving credit
      facility (the “Revolver”), which includes a $1.0 million swingline loan
      subfacility and a $1.0 million letter of credit subfacility.





On
      May 9,
      2006, the Company amended the Credit Agreement (“Amendment No. 2”) to, among
      other terms, (a) increase the Revolver Commitments from $25.0 million to $50.0
      million, (b) amend the financial covenants and reduce certain fees and margins,
      (c) extend the Revolver termination date from October 29, 2009 to October 29,
      2010, (d) increase the aggregate amount the Company is permitted to pay for
      acquisitions and (e) permit the Company to make certain payments for cash
      dividends and repurchases of common stock.





On
      September 26, 2006, the Company amended the Credit Agreement (“Amendment No.
      3”), in order to permit the Catalyst acquisition and merger and the transactions
      contemplated thereby. On September 28, 2006, the Company amended the Credit
      Agreement (“Amendment No. 4”), in order to permit the issuance of the Notes and
      to require the prepayment of the Term Loan from the proceeds thereof, and to
      permit certain acquisitions, as defined therein.





On
      December 29, 2006 the Company amended the Credit Agreement (“Amendment No. 5”),
      in order to amend certain covenants following the Catalyst acquisition and
      the
      issuance of the Notes.




The
      performance by LeCroy of its obligations under the Credit Agreement is secured
      by all of the assets of LeCroy and its domestic subsidiaries, and is guaranteed
      by LeCroy’s domestic subsidiaries. Proceeds from the Revolver may be used for
      general corporate purposes, including the financing of working capital
      requirements, capital expenditures and acquisitions. As of December 31, 2006,
      in
      conjunction with the issuance of the Notes, the Company has repaid the entire
      balance of the Term Loan. As of December 31, 2006, the Company has borrowed
      $10.0
      million against the Revolver and nothing against the letter of credit
      subfacility or the swingline loan subfacility.




18











Borrowings
      under the Credit Agreement bear interest at variable rates equal to, at the
      Company’s election, (1) the higher of (a) the prime rate or (b) the federal
      funds rate plus 0.5%, plus an applicable margin of between 0.00% and 1.50%
      based
      on the Company’s leverage ratio, as defined in the Credit Agreement, or (2) the
      London Interbank Offering Rate (“LIBOR”) plus an applicable margin of between
      1.25% and 2.75% based on the Company’s leverage ratio. In addition, the Company
      must pay commitment fees on unused Revolver borrowings during the term of the
      Credit Agreement at rates between 0.375% and 0.5% dependent upon its leverage
      ratio. As of June 30, 2006 the interest rate on the Term Loan was 6.75% and
      as
      of June 30, 2006 and December 31, 2006 the interest rate on the Revolver was
      8.25% and 8.75%, respectively.





Under
      the
      Credit Agreement, as amended, the Company is required to comply with certain
      financial covenants, measured quarterly, including a minimum interest coverage
      ratio, minimum total net worth, maximum leverage ratio, minimum fixed charge
      coverage ratio and limitations on capital expenditures. As of December 31,
      2006,
      the Company was in compliance with its financial covenants under the Credit
      Agreement.





The
      Company incurred approximately $1.4 million of deferred financing costs in
      connection with entering into the Credit Agreement, which were deferred and
      were
      being amortized over the term of the Credit Agreement using the effective
      interest method for the amount allocated to the Term Loan and the straight-line
      method for amount allocated to the Revolver. During fiscal 2006, the Company
      incurred additional deferred financing costs of approximately $0.2 million
      in
      connection with Amendment No. 2 which are being deferred and amortized on a
      straight line basis over the remaining term of the amended Credit Agreement.
      In
      fiscal 2007, the Company incurred additional deferred financing costs of
      approximately $0.3 million in connection with Amendments No. 3, No. 4 and No.
      5
      which were being deferred and amortized, on a straight line basis or effective
      interest method, over the remaining term of the Credit Agreement. During the
      second quarter of fiscal 2007, in conjunction with the repayment of the Term
      Loan, the Company wrote off approximately $0.4 million of unamortized deferred
      financing costs related to the Term Loan. This was included as part of Other
      (expense) income as a Loss on extinguishment of debt in the Consolidated
      Statement of Operations for the three and six months ended December 31, 2006.
      Deferred financing costs related to the Revolver continue to be amortized on
      a
      straight line basis over the remaining term of the Credit Agreement. At December
      31, 2006, of the $0.6 million of remaining unamortized deferred financing costs
      under the Credit Agreement, as amended, $0.2 million were included in Other
      current assets, and $0.4 million were included in Other non-current assets
      on
      the Consolidated Balance Sheets.





In
      addition to the above U.S.-based credit facilities, the Company maintains
      certain short-term foreign credit facilities, principally with two Japanese
      banks totaling 150.0 million yen (approximately $1.3 million as of December
      31,
      2006). No amounts were outstanding under these facilities as of December 31,
      2006 and June 30, 2006. The Company's Swiss subsidiary, LeCroy S.A., also has
      an
      overdraft facility totaling 1.0 million Swiss francs (approximately $0.8 million
      as of December 31, 2006). As of December 31, 2006 and June 30, 2006,
      approximately 0.4 million Swiss francs were held against supplier obligations
      leaving an available balance of 0.6 million Swiss francs under this credit
      facility. These obligations to suppliers, such as rent and utilities, are
      payable under the credit facility only in the event that the Company is unable
      to meet its financial obligations to those suppliers.





The
      Company had a five year $2.0 million capital lease line of credit to fund
      certain capital expenditures that bore interest at an annual rate of 12.2%
      on
      outstanding borrowings. The capital lease line of credit was terminated in
      the
      second quarter of fiscal 2007. As of December 31, 2006 and June 30, 2006, the
      Company had zero and $0.1 million, respectively, outstanding under this line
      of
      credit.





During
      fiscal 2005, the Company entered into vendor supplied capital lease agreements
      for technology rights of $1.3 million. These leases bear interest at 4.5% to
      4.88% with three-year terms. At December 31, 2006, the Company’s outstanding
      balance under these agreements was $0.3 million all of which was included within
      Current portion of long-term debt and capital leases in the Consolidated Balance
      Sheet. Under these capital lease obligations, payments, including interest,
      are
      $0.2 million for the remainder of fiscal 2007 and $0.1 million for fiscal year
      2008.




19







**15.
      Commitments and Contingencies**





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





**16.
      Earnings per Common Share**





The
      following is a presentation of the numerators and the denominators of the basic
      and diluted net (loss) income per common share computations for the three and
      six months ended December 31, 2006 and 2005:




**Three
                  months ended**
              
              **Six
                  months ended****December
                  31,**
              
              **December
                  31,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Numerator:Net
                  (loss) income
              
              $(7,656)
              
              $
                  2,177
              
              $(7,047)
              
              $
                  4,410Denominator:Weighted
                  average shares outstanding:Basic
              
              11,492
              
              12,195
              
              11,858
              
              12,149Employee
                  stock options and other
              
              -
              
              272
              
              -
              
              253Diluted
              
              11,492
              
              12,467
              
              11,858
              
              12,402
  The
        computations of diluted net (loss) income per common share for the three
        and six
        months ended December
        31, 2006 do not include approximately 1.9 million and 1.8 million, respectively,
        of shares related to stock options, restricted stock and warrants to purchase
        common stock as the effect of their inclusion would have been anti-dilutive
        to
        earnings per share. The computation of diluted net (loss) income per common
        share for the three and six months ended December 31, 2005 does not include
        approximately 2.0 million of stock options, restricted stock and warrants
        to
        purchase common stock as the effect of their inclusion would have been
        anti-dilutive to earnings per share. For the three and six months ended December
        31, 2006, the Notes had no impact on diluted EPS because the average share
        price
        during the three months ended December 31, 2006 was below $14.55 per share
        (the
        initial conversion price), and accordingly, the Notes, if converted, would
        have
        required only cash at settlement.





**17.
      Income Taxes**





The
      effective income tax benefit rate for the three and six months ended December
      31, 2006 was 18.6% and 16.9% respectively, compared to an effective income
      tax
      provision rate of 37.9% and 38.1% for the three and six months ended December
      31, 2005, respectively. The effective income tax benefit rate for the three
      and
      six months ended December 31, 2006 includes the effects of the IPR&D charge
      of $4.0 million related to the Catalyst acquisition, a discrete item, which
      is
      not deductible for tax purposes. .





The
      Company calculates income tax expense based upon an annual effective tax rate
      forecast, including estimates and assumptions that could change during the
      year.
      The differences between the effective tax rate and the U.S. federal statutory
      rate of 35% principally result from the Company’s geographical distribution of
      taxable income, and differences between the book and tax treatment of certain
      items. The tax impact of the nondeductible IPR&D charge associated with the
      Catalyst acquisition has been recognized in the three months ended December
      31,
      2006 , as this is a discrete item for the quarter.




20










**18.
      Segment and Geographic Revenue**





The
      Company operates in a single segment in the test and measurement market, in
      which it develops, manufactures, sells and licenses high-performance
      oscilloscopes, serial data analyzers and global communication protocol test
      solutions. These products are used by design engineers and researchers to
      measure and analyze complex electronic signals in order to develop high
      performance systems, to validate electronic designs and to improve time to
      market.





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




**Three
                Months Ended December 31,**
            **Six
                Months Ended**
              **December
                31,**2006
            
            
            2005
            
            
            2006
            
            
            2005North
                America
            
            $
            13,003
            
            $
            14,066
            
            $
            23,950
            
            $
            28,392Europe/Middle
                East
            
            
            14,607
            
            
            14,558
            
            
            26,883
            
            
            24,994Japan
            
            
            3,452
            
            
            5,022
            
            
            8,049
            
            
            10,588Asia/Pacific
            
            
            7,054
            
            
            8,376
            
            
            16,275
            
            
            19,106Total
                Revenues
            
            $
            38,116
            
            $
            42,022
            
            $
            75,157
            
            $
            83,080





Total
      assets by geographic area are as follows (in thousands):




**December
                31,**
              **2006**
            ****
            ****
            **June
                30,**
              **2006**North
                America
            
            $
            212,760
            
            $
            180,070Europe/Middle
                East
            
            
            13,821
            
            
            12,053Japan
            
            
            3,799
            
            
            5,360Asia/Pacific
            
            
            4,192
            
            
            4,491Total
                assets
            
            $
            234,572
            
            $
            201,974




Total
      long-lived assets (1) by geographic area are as follows (in
      thousands):




**December
                31,**
              **2006**
            ****
            ****
            **June
                30,**
              **2006**North
                America
            
            $
            134,840
            
            $
            103,473Europe/Middle
                East
            
            
            532
            
            
            581Japan
            
            
            272
            
            
            400Asia/Pacific
            
            
            388
            
            
            439Total
                long-lived assets
            
            $
            136,032
            
            $
            104,893




(1)
      Long-lived assets presented in the table above exclude non-current net deferred
      tax assets.






21

















**19.
      New Accounting Pronouncements**





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,”
(“SFAS 154”) which was effective for LeCroy for reporting changes in accounting
      principles and for correction of errors beginning in fiscal year 2007. SFAS
      154
      requires a change in accounting principle to be applied retrospectively to
      prior
      periods’ financial statements, unless explicit transition provisions are
      provided for in new accounting pronouncements or existing pronouncements that
      are in the transition phase when SFAS 154 becomes effective. There has been
      no
      impact on the Company’s financial statements from the adoption of SFAS 154 in
      fiscal 2007.





In
      June
      2005, the FASB issued FASB Staff Position (“FSP”) 143-1, “Accounting for
      Electronic Equipment Waste Obligations.” FSP 143-1 addresses the accounting
      related to obligations associated with Directive 2002/96/EC on Waste Electrical
      and Electronic Equipment (the “Directive”) adopted by the European Union. Under
      the Directive, the waste management obligation for historical equipment
      (products put on the market on or prior to August 13, 2005) remains with the
      commercial user until the equipment is replaced. FSP 143-1 is effective on
      the
      date of adoption of the law by the applicable EU-member country. The law was
      adopted by certain EU countries in calendar year 2006 and is still under review
      in several other countries. The Company is exempt from this Directive, as a
      result, FSP 143-1 will not have an impact on the Company’s results of operations
      or financial condition.





On
      February 16, 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Instruments, an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). SFAS
      155 allows financial instruments that have embedded derivatives to be accounted
      for as a whole (eliminating the need to separate the derivative from its host)
      if the holder elects to account for the whole instrument on a fair value basis.
      It also clarifies which interest-only strips and principal-only strips are
      not
      subject to the requirements of Statement 133; establishes a requirement to
      evaluate interest in securitized financial assets to identify interests that
      are
      freestanding derivatives or that are hybrid financial instruments that contain
      an embedded derivative requiring separation; clarifies that concentrations
      of
      credit risk in the form of subordination are not embedded derivatives; and
      amends Statement 140 to eliminate the prohibition on a qualifying
      special-purpose entity from holding a derivative financial instrument that
      pertains to a beneficial interest other than another derivative financial
      instrument. SFAS 155 is effective for all financial instruments acquired or
      issued after the beginning of an entity’s first fiscal year that begins after
      September 15, 2006. Management is currently evaluating the effect that adoption
      of SFAS 155 will have on the Company’s consolidated financial position and
      results of operations.





In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - An Interpretation of FASB Statement No. 109” (“FIN 48”), which
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. FIN 48 will be effective for fiscal years beginning
      after
      December 15, 2006. Management is currently evaluating the effect that adoption
      of this interpretation will have on the Company’s consolidated financial
      position and results of operations.





In
      September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring fair
      value and requires enhanced disclosures about fair value measurements. SFAS
      157
      requires companies to disclose the fair value of their financial instruments
      according to a fair value hierarchy as defined in the standard. Additionally,
      companies are required to provide enhanced disclosure regarding financial
      instruments in one of the categories, including a reconciliation of the
      beginning and ending balances separately for each major category of assets
      and
      liabilities. SFAS 157 is effective for financial statements issued for fiscal
      years beginning after November 15, 2007, and interim periods within those fiscal
      years. Management is currently evaluating the effect that adoption of this
      interpretation will have on the Company’s consolidated financial position and
      results of operations.





In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current year Financial




22











Statements”
      (“SAB 108”), which provides interpretive guidance on the consideration of the
      effects of prior year misstatements in quantifying current year misstatements
      for the purpose of a materiality assessment. SAB 108 is effective as of the
      end
      of the Company’s 2007 fiscal year, allowing a one-time transitional cumulative
      effect adjustment to beginning retained earnings as of July 1, 2006 for errors
      that were not previously deemed material, but are material under the guidance
      in
      SAB 108. The Company is currently evaluating the impact of adopting SAB 108
      on
      the Company’s consolidated financial statements.








23













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




**Overview**





We
      were
      founded in 1964 to develop, manufacture and sell high performance signal
      analysis tools to scientists engaged in high-energy physics research. In 1985
      we
      introduced our first oscilloscope using our core competency of designing signal
      acquisition and digitizing technology.





We
      are a
      leading, worldwide provider of oscilloscopes and protocol analyzers as well
      as a
      provider of related test and measurement equipment and currently operate as
      one
      business segment in the Test and Measurement market. 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 six families of
      oscilloscopes, which address different solutions to the markets we serve:
      WaveExpert, a powerful family of sampling oscilloscopes and modules; WaveMaster,
      one of our high performance product families; WavePro, which is targeted at
      the
      mid- to high-performance sector; WaveRunner, designed for the mid-performance
      sector; WaveSurfer, designed for value-oriented users in the low-performance
      bandwidth sector of the market; and WaveJet, our entry-level oscilloscope
      products. Our protocol analyzers are tools used by designers and engineers
      to
      generate and monitor traffic over high speed serial data interfaces, including
      USB2.0, Bluetooth, PCI Express, Serial ATA, Serial Attached SCSI (SAS), Wireless
      USB, and others.





We
      sell
      our products into a broad range of end markets, including the
      Computer/Semiconductor/Consumer Electronics, Data Storage,
      Automotive/Industrial, and Military/Aerospace markets. We believe that our
      products offer the strongest value proposition in these markets by providing
      advanced analysis capabilities coupled with innovative and proprietary
      technology features. 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.





We
      employ
      a direct sales model utilizing a highly skilled global sales force where it
      makes economic sense to do so. We supplement our direct sales force,
      particularly in Europe, with a combination of manufacturers’ representatives and
      distributors in areas where demand levels do not justify direct distribution.
      We
      divide the world into four areas - North America, Europe/Middle East, Japan
      and
      Asia/Pacific. In North America we sell our products directly in the United
      States and we have recently engaged in manufacturers’ representative
      relationships to provide greater market penetration in the low-end product
      markets. In Europe/Middle East, we sell our products directly in Switzerland,
      Germany, Italy, France, the United Kingdom and Sweden. In Japan, we sell our
      products directly. In Asia/Pacific, we sell our products directly in South
      Korea, Singapore and five regions in China.





We
      generate revenue in a single segment within the Test and Measurement market,
      primarily from the sale of our oscilloscopes, protocol analyzers, probes,
      accessories and applications solutions. To a lesser extent, we also generate
      revenue from the sales of our extended warranty, maintenance contracts and
      repairs and calibrations on our instruments after their warranties
      expire.





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 Euros, Swiss francs, British pounds, Swedish krona 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 Item 3 entitled “Quantitative and Qualitative
      Disclosure About Market Risk” below.




24














Historically,
      we have, at times, experienced lower levels of demand during our first fiscal
      quarter than in other fiscal quarters which, we believe, has been principally
      due to the lower level of general market activity during the summer months,
      particularly in Europe.





Cost
      of
      revenues represents manufacturing and service costs, which primarily comprise
      materials, labor and factory overhead. Gross profits represent revenues less
      cost of revenues. Additional factors integral to gross profit earned on our
      products are mix, as the list prices of our products range from $2,900 to
      $128,000, and the effects of foreign currencies, as approximately two-thirds
      of
      our revenues are derived overseas, much of which is denominated in local
      currencies while product manufacturing costs are primarily U.S. dollar
      denominated.





Selling,
      general and administrative expenses consist of salaries and related overhead
      costs for sales, marketing and administrative personnel as well as 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.





Our
      results of operations and financial condition are affected by a variety of
      factors. As discussed below, we believe the most significant recurring factors
      are the economic strength of the technology markets into which we sell our
      products, our ability to identify market demands and develop competitive
      products to meet those demands, the announcements and actions of our competitors
      and our ability to enter into new markets and broaden our presence in existing
      markets.





Our
      sales
      are largely dependent on the health and growth of technology companies whose
      operations tend to be cyclical. Consequently, demand for our products tends
      to
      coincide with the increase or decrease in capital spending in the technology
      industry.





In
      addition, in response to fluctuations in the technology markets we target,
      we
      continually assess and adopt programs aimed at positioning us for long-term
      success. These programs may include streamlining operations, discontinuing
      older
      and less profitable product lines, and reducing operating expenses from time
      to
      time. As an example, in fiscal 2007 and 2006 we implemented restructuring and
      business realignment plans intended to reduce costs and more efficiently
      allocate product development resources. For a more detailed discussion of our
      restructuring efforts in fiscal 2007 and 2006 see the section entitled
“Restructuring” below.





We
      face
      significant competition in our target markets. We believe that in order to
      continue to compete successfully, we need to timely anticipate, recognize and
      respond to changing market demands by providing products that serve our
      customers’ needs as they arise at prices acceptable to the market. We believe
      that we compete favorably with our competition in each of these areas.
      Consequently, we are constantly reviewing our product development strategy
      and
      invest time, resources and capital in development projects we deem most likely
      to succeed.





In
      furtherance of our drive to meet our customers' changing demands, we also look
      outside our organization for opportunities to expand our markets. Accordingly,
      in March 2006, we completed purchase and settlement agreements with Iwatsu
      Electric Corporation that included the rights to a new low-end product line,
      ‘ViewGo,’ re-engineered and launched as the WaveJet Family of products, as well
      as unrelated intellectual property designs and a 10-year non-compete agreement.
      In October 2006, the Company acquired Catalyst Enterprises, Inc. (“Catalyst”), a
      manufacturer of data bus analysis and emulation tools for advanced serial data
      communications. This strengthens the Company’s position in protocol
      solutions.





Also
      during fiscal 2006, we transformed our entire low and mid-range product lines
      by
      introducing a new line of WaveRunners and WaveSurfers and adding the new WaveJet
      product line noted above. Additionally, we expanded






25







our
      high-end product line by introducing the SDA 18000. We believe that our
      diversified product mix strategically positions us to expand our presence in
      the
      Test and Measurement market.





**Restructuring**





In
      the
      second quarter of fiscal 2007, as a result of a change in our organization
      stemming from the Catalyst acquisition the Company recorded severance and
      related expenses of approximately $0.4 million, of which approximately $0.1
      million was expensed to Selling, general and administrative and $0.3 million
      was
      expensed to Research and development. The implementation of this plan resulted
      in headcount reductions of eleven employees or 2.4% of the workforce as compared
      to June 30, 2006. As of December 31, 2006, approximately $0.2 million has been
      paid in cash and approximately $0.2 million remains in Accrued expenses and
      other current liabilities on the Consolidated Balance Sheet. Severance and
      other
      related amounts under this plan will be paid by the end of the third quarter
      of
      fiscal 2007.





In
      the
      fourth quarter of fiscal 2006, we realigned certain of our business processes
      and as a result, incurred expenses of approximately $0.4 million of which
      approximately $0.1 million was charged to Cost of revenues, $0.2 million was
      expensed to Selling, general and administrative and $0.1 million was expensed
      to
      Research and development. The implementation of this plan resulted in headcount
      reductions of sixteen employees or 3.5% of the workforce as compared to June
      30,
      2005. As of December 31, 2006 all $0.4 million of severance has been paid which
      includes approximately $0.2 million in the first half of fiscal
      2007.





**Critical
      Accounting Policies**





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





These
      Consolidated Financial Statements 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, 2006, which include a description
      of our accounting policies. Our critical accounting policies which involve
      significant judgment by LeCroy’s management, as described in the Company’s
      Annual Report on Form 10-K for the fiscal year ended June 30, 2006 and include
      revenue recognition, net reserves on accounts receivable, allowance for excess
      and obsolete inventory, valuation of deferred tax assets, valuation of
      long-lived and intangible assets, valuation of goodwill, estimation of warranty
      liabilities and share-based compensation.





There
      have been no changes to our critical accounting policies since June 30,
      2006.





**Consolidated
      Results of Operations**





The
      following table indicates the percentage of total revenues represented by each
      item in the Company’s Consolidated Statements of Operations for the three and
      six months ended December 31, 2006 and 2005.





26








**Three
                  months ended**
                **December
                  31,**
              
              **Six
                  months ended**
                **December
                  31,****(Unaudited)**
              **2006**
              
              **2005**
              
              **2006**
              
              **2005**Revenues:Test
                  and measurement products
              95.1
              %
              95.2
              %
              95.2
              %
              95.2
              %Service
                  and other
              4.9
              
              4.8
              
              4.8
              
              4.8Total
                  revenues
              100.0
              
              100.0
              
              100.0
              
              100.0Cost
                  of revenues
              48.0
              
              39.1
              
              44.1
              
              39.1Gross
                  profit
              52.0
              
              60.9
              
              55.9
              
              60.9Operating
                  expenses:Selling,
                  general and administrative
              38.5
              
              32.3
              
              36.6
              
              32.3Research
                  and development
              33.7
              
              18.6
              
              27.3
              
              18.3Total
                  operating expenses
              72.2
              
              50.9
              
              63.9
              
              50.6Operating
                  (loss) income
              (20.2)
              
              10.0
              
              (8.0)
              
              10.3Interest
                  expense, net
              (3.2)
              
              (1.4)
              
              (2.6)
              
              (1.5)Loss
                  on extinguishment of debt
              (1.1)
              
              0.0
              
              (0.6)
              
              0.0Other,
                  net
              (0.3)
              
              (0.2)
              
              (0.1)
              
              (0.2)Other
                  (expense), net
              (4.6)
              
              (1.6)
              
              (3.3)
              
              (1.7)(Loss)
                  income before income taxes
              (24.8)
              
              8.4
              
              (11.3)
              
              8.6(Benefit)
                  provision for income taxes
              (4.6)
              
              3.2
              
              (1.9)
              
              3.3Net
                  (loss) income
              (20.2)
              %
              5.2
              %
              (9.4)
              %
              5.3
              %










**Comparison
      of the Three-Month Periods Ended December 31, 2006 and
      2005**





Total
      revenues were $38.1 million for the quarter ended December 31, 2006, compared
      to
      $42.0 million for the comparable prior year period, representing a decrease
      of
      9.3%, or approximately $3.9 million, primarily as a result of decreased sales
      of
      Test and measurement products. The decrease in Test and measurement products
      was
      mainly due to a significant reduction in shipments to our disk drive customers
      as a result of decreased demand and the average selling prices in our high
      end
      products being impacted by competitive pressure in the marketplace.
      Additionally, the new mid- to low-end oscilloscope products have not produced
      the results we were anticipating in the U.S. and Asia-Pacific regions and the
      industry’s adoption of the next generation serial data standards is taking
      longer than we expected. However, Catalyst contributed approximately 9.0% to
      revenues for the quarter ended December 31, 2006. Foreign currency fluctuations
      increased total revenues by $1.2 million in the second quarter of fiscal 2007
      as
      compared to the same period last year.





Service
      and other revenues primarily consist of service revenues and license and
      maintenance fees. Service and other revenues were $1.9 million for the quarter
      ended December 31, 2006, representing a decrease of 8.3% or approximately $0.2
      million, compared to $2.0 million for the comparable prior year period. This
      decrease was primarily the result of a reduction in the amount recognized of
      previously deferred revenue from the adoption of the SEC’s Staff Accounting
      Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements,” as
      of the beginning of fiscal 2001. The three months ended December 31, 2006
      included no revenue from previously deferred revenue compared to $0.3 million
      in
      the comparable prior year period, since it was fully amortized as of March
      31,
      2006.




27














Revenues
      by geographic location expressed in dollars and as a percentage of total
      revenues were:





**Three
                months ended**
              **December
                31,**
              **(unaudited)****2006**
            
            
            **2005****(In
                thousands)**North
                America
            
            $
            13,003
            
            $
            14,066Europe/Middle
                East
            
            
            14,607
            
            
            14,558Japan
            
            
            3,452
            
            
            5,022Asia/Pacific
            
            
            7,054
            
            
            8,376Total
                revenues
            
            $
            38,116
            
            $
            42,022








**Three
                months ended**
              **December
                31,**
              **(unaudited)****2006**
            
            
            **2005**North
                America
            
            
            34.1
            %
            
            33.5
            %Europe/Middle
                East
            
            
            38.3
            
            
            34.6Japan
            
            
            9.0
            
            
            12.0Asia/Pacific
            
            
            18.6
            
            
            19.9Total
                revenues
            
            
            100.0
            %
            
            100.0
            %





For
      the
      three months ended December 31, 2006 geographic revenues were lower mainly
      in
      Japan and the Asia/Pacific markets. This decrease was primarily due to reduced
      average selling prices of our high end products. Additionally, revenues in
      North
      America were impacted by our slower than anticipated establishment of new
      indirect sales channels set up to enhance sales of our newer low end products.
      Europe/Middle East was the exception where our operations have incorporated
      our
      diverse product lines through indirect and direct channels more
      effectively.





Gross
      profit for the quarter ended December 31, 2006 was $19.8 million, or 52.0%
      gross
      margin, compared to $25.6 million, or 60.9% gross margin, for the comparable
      prior year period. The
      lower gross margin in the second quarter of fiscal 2007 was primarily
      attributable to $1.5 million of higher costs associated with the sell through
      of
      inventory acquired in the Catalyst acquisition than is expected from the cost
      to
      manufacture the products post - acquisition and the impact of lower average
      selling prices on our high end products.




Selling,
      general and administrative (“SG&A”) expense was $14.7 million for the
      quarter ended December 31, 2006 compared to $13.6 million for the quarter ended
      December 31, 2005, representing an increase of 8.0% or $1.1 million. As a
      percentage of total revenues, SG&A expense increased from 32.3% in the
      second quarter of fiscal 2006 to 38.5% in the second quarter of fiscal 2007,
      as
      a result of decreased revenue and incremental charges as a result of the
      Catalyst acquisition.





Research
      and development (“R&D”) expense was $12.8 million for the quarter ended
      December 31, 2006, compared to $7.8 million for the comparable prior year
      period, an increase of 64.6% or $5.0 million, mainly due to a $4.0 million
      charge for acquired in-process research and development (“IPR&D”) related to
      the Catalyst acquisition and $0.3 million of restructuring charges. As a
      percentage of total revenues, R&D expense increased from 18.6% in the second
      quarter of fiscal 2006 to 33.7% in the second quarter of fiscal
      2007.





Other
      (expense), net, which consists primarily of net interest income and expense
      and
      foreign exchange gains and losses, was an expense of ($1.7) million in the
      second quarter of fiscal 2007 compared to ($0.7) million for the second quarter
      of fiscal 2006. Net interest expense was approximately ($1.2) million for the
      quarter ended December 31, 2006 as compared to ($0.6) million for the comparable
      prior year period. In addition, there were foreign exchange losses of ($0.1)
      million in the second quarter of both fiscal 2007 and 2006. The increase in
      net
      interest expense is primarily due to the higher average debt balance outstanding
      as a result of the $72.0 million convertible note issued during the quarter
      ended December 31, 2006 offset in part by a lower interest rate on the Notes
      than
      on borrowings under the Credit Agreement and by $0.3 million in interest income
      related to the termination of the interest rate swap. Additionally, ($0.4)
      million was recorded as Loss on extinguishment of debt related to the write-off
      of deferred finance charges associated with the term loan that was fully repaid
      during the quarter.




28











The
      effective income tax benefit rate for the three months ended December 31, 2006
      was 18.6%, compared to an effective income tax provision rate of 37.9% for
      the
      three months ended December 31, 2005. The effective income tax benefit rate
      for
      the three months ended December 31, 2006 includes the effects of the IPR&D
      charge of $4.0 million related to the Catalyst acquisition, a discrete item,
      which is not deductible for tax purposes.





The
      Company calculates income tax expense based upon an annual effective tax rate
      forecast, including estimates and assumptions that could change during the
      year.
      The differences between the effective tax rate and the U.S. federal statutory
      rate of 35% principally result from the Company’s geographical distribution of
      taxable income, and differences between the book and tax treatment of certain
      items. The tax impact of the nondeductible IPR&D charge associated with the
      Catalyst acquisition has been recognized in the three months ended December
      31,
      2006 , as this is a discrete item for the quarter.





**Comparison
      of the Six-Month Periods Ended December 31, 2006 and 2005**





Total
      revenues were $75.2 million for the six months ended December 31, 2006, compared
      to $83.1 million for the comparable prior year period, representing a decrease
      of 9.5%, or approximately $7.9 million, primarily as a result of decreased
      sales
      of Test and measurement products. This decrease was partially offset by revenue
      derived from the Catalyst acquisition which mitigated the impact by 4.2%.
      Foreign currency fluctuations increased total revenues by $1.5 million in the
      first six months of fiscal 2007 as compared to the same period last year. The
      decrease in Test and measurement products was mainly due to a significant
      reduction in shipments to our disk drive customers as a result of decreased
      demand and the average selling prices in our high-end products which have been
      impacted by competitive pressure in the marketplace. Additionally, mid- and
      low-end products have not penetrated the market fully, and there has been lower
      than expected demand from our next generation products and serial data protocol
      solutions.





Service
      and other revenues primarily consist of service revenues and license and
      maintenance fees. Service and other revenues were $3.6 million for the six
      months ended December 31, 2006, representing a decrease of 9.1% or approximately
      $0.4 million, compared to $4.0 million for the comparable prior year period.
      The
      decrease was primarily the result of a reduction in the amount recognized of
      previously deferred revenue from the adoption of the SEC’s Staff Accounting
      Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements,” as
      of the beginning of fiscal 2001. The six months ended December 31, 2006 included
      no revenue from previously deferred revenue compared to $0.6 million in the
      comparable prior year period, since it was fully amortized as of March 31,
      2006.





Revenues
      by geographic location expressed in dollars and as a percentage of total
      revenues were:






**Six
                  months ended**
                **December
                  31,**
                **(unaudited)****2006**
              
              
              **2005****(In
                  thousands)**North
                  America
              
              $
              23,950
              
              $
              28,392Europe/Middle
                  East
              
              
              26,883
              
              
              24,994Japan
              
              
              8,049
              
              
              10,588Asia/Pacific
              
              
              16,275
              
              
              19,106Total
                  revenues
              
              $
              75,157
              
              $
              83,080







29










**Six
                months ended**
              **December
                31,**
              **(unaudited)****2006**
            
            
            **2005**North
                America
            
            
            31.8
            %
            
            34.2
            %Europe/Middle
                East
            
            
            35.8
            
            
            30.1Japan
            
            
            10.7
            
            
            12.7Asia/Pacific
            
            
            21.7
            
            
            23.0Total
                revenues
            
            
            100.0
            %
            
            100.0
            %





For
      the
      six months ended December 31, 2006 our geographic revenues were lower mainly
      in
      North America, Japan and Asia/Pacific. This decrease was mainly attributable
      to
      a slower than anticipated market penetration of our mid- to low-end product
      line, as well as a decrease in the average selling prices in the high end
      product line. Additionally, revenues were impacted by our slower than
      anticipated establishment of new indirect sales channels set up to enhance
      sales
      of our newer low end products. Europe/Middle East was the exception where our
      operations have incorporated our diverse product lines through indirect and
      direct channels more effectively.





Gross
      profit for the six months ended December 31, 2006 was $42.0 million, or 55.9%
      gross margin, compared to $50.6 million, or 60.9% gross margin, for the
      comparable prior year period. The
      lower gross margin was primarily attributable to $1.5 million of higher costs
      associated with the sell through of inventory acquired in the Catalyst
      acquisition than is expected from the cost to manufacture the products post
      -
      acquisition and the impact of lower average selling prices on our high end
      products.




Selling,
      general and administrative (“SG&A”) expense was $27.5 million for the six
      months ended December 31, 2006 compared to $26.8 million for the six months
      ended December 31, 2005, representing an increase of 2.6% or $0.7 million.
      As a
      percentage of total revenues, SG&A expense increased from 32.3% in the six
      months ended December 31, 2005 to 36.6% in the six months ended December 31,
      2006, as a result of decreased revenue and incremental charges as a result
      of
      the Catalyst acquisition.




Research
      and development (“R&D”) expense was $20.5 million for the six months ended
      December 31, 2006, compared to $15.2 million for the comparable prior year
      period, an increase of 34.6% or $5.3 million. The increase was mainly due to
      a
      $4.0 million charge for acquired in-process research and development related
      to
      the Catalyst acquisition, recorded in the second quarter of fiscal 2007, along
      with $0.3 million of restructuring charges also recorded in the second quarter.
      Additionally, expenses incurred for prototype materials and supplies used for
      several product launches in the beginning of the year contributed to the overall
      increase. As a percentage of total revenues, R&D expense increased from
      18.3% in the six months ended December 31, 2005 to 27.3% in the six months
      ended
      December 31, 2006, primarily attributable to the decreased revenue in fiscal
      2007.





Other
      (expense), net, which consists primarily of net interest income and expense
      and
      foreign exchange gains and losses, was an expense of ($2.5) million in the
      six
      months ended December 31, 2006 compared to ($1.4) million for the six months
      ended December 31, 2005. Net interest expense was approximately ($2.0) million
      for the six months ended December 31, 2006 as compared to ($1.2) million for
      the
      comparable prior year period. In addition, there was a foreign exchange loss
      of
      ($0.2) million in the six months ended December 31, 2006 compared to a foreign
      exchange loss of ($0.2) million in the comparable prior year period. The change
      in net interest expense is primarily due to the higher average debt balance
      outstanding as a result of the issuance of $72.0 million in convertible notes
      during the second quarter offset in part by a lower interest rate on the Notes
      than on borrowings under the Credit Agreement and by $0.3 million related to
      the
      termination of the interest rate swap associated with the term loan. The Loss
      on
      extinguishment of debt of $0.4 million relates to the write-off of deferred
      financing costs associated with the repayment of the term loan.




The
        effective income tax benefit rate for the six months ended December 31, 2006
        was
        16.9%, compared to an effective income tax provision rate of 38.1% for the
        six
        months ended December 31, 2005. The effective income tax benefit rate for
        the
        six months ended December 31, 2006 of 16.9%, differs from our projected
        normalized current year 32.0% annual effective tax rate, principally due
        to
        purchased IPR&D charges associated with the Catalyst acquisition, which are
        nondeductible for tax purposes. The normalized current year annual effective
        tax
        rate of 32.0% differs from the first quarter rate of 34.6% principally due
        to
        changes to projections of the Company’s pre-tax income for the
        year.
  30








The
      Company calculates income tax expense based upon an annual effective tax rate
      forecast, including estimates and assumptions that could change during the
      year.
      The differences between the effective tax rate and the U.S. federal statutory
      rate of 35% principally result from the Company’s geographical distribution of
      taxable income, and differences between the book and tax treatment of certain
      items. The tax impact of the nondeductible IPR&D charge associated with the
      Catalyst acquisition has been recorded for the six months ended December 31,
      2006, as this is a discrete item for the period.





**Liquidity
      and Capital Resources**





Cash
      and
      cash equivalents at December 31, 2006 were $14.4 million compared to $17.0
      million at June 30, 2006.





The
      Company provided $1.5 million of net cash from operating activities in the
      six
      months ended December 31, 2006 compared to $8.8 million in the same period
      last
      year. The $7.3 million decrease from prior period represents primarily the
      decrease in net income, including the effects of certain non-cash
      items.





Net
      cash
      used in investing activities was ($34.4) million in the six months ended
      December 31, 2006 compared to ($1.9) million in the same period in fiscal 2006.
      The $32.5 million increase was primarily due to the $31.2 million net cash
      paid
      in connection with the Catalyst acquisition.





Net
      cash
      provided by financing activities was $30.7 million in the six months ended
      December 31, 2006 compared to net cash used of ($4.6) million in the same period
      in fiscal 2006. The $35.3 million increase was mainly due to the issuance of
      the
      convertible notes of $72.0 million, net of $3.0 million in related issuance
      costs (see below for more information on the convertible notes), and net
      borrowings under the revolving credit line of $6.5 million partially offset
      by
      net repayments of the term loan of $34.1 million, and an additional $10.5
      million of cash to repurchase common stock in conjunction with the Company’s
      treasury stock buy back program.





On
      October 12, 2006, the Company sold and issued $72.0 million in convertible
      senior subordinated notes to qualified institutional buyers pursuant to
      Rule 144A of the Securities Act of 1933, as amended (the “Notes”). The
      Notes bear interest at a rate of 4.00% per annum, payable in cash semi-annually
      in arrears on each April 15 and October 15, beginning April 15, 2007. The
      Notes are direct, unsecured, senior subordinated obligations of the Company
      and
      rank: (i) subordinate in right of payment to all of the Company’s existing
      and future secured indebtedness; (ii) equal in right of payment with all of
      our existing and future senior unsecured indebtedness, and (iii) senior in
      right of payment to all of our existing and future subordinated indebtedness,
      except that the Notes rank equally with the $3.5 million note issued in
      connection with the Catalyst acquisition, which is subordinated to the Company’s
      credit facility. In connection with the issuance and sale of the Notes, the
      Company entered into an indenture dated as of October 12, 2006, with U.S. Bank
      National Association as trustee. The terms of the Notes are governed by the
      indenture.





The
      Notes
      mature on October 15, 2026 unless earlier redeemed, repurchased or converted.
      Holders of the Notes will have the right to require the Company to repurchase
      for cash all or a portion of their Notes on each of October 15, 2011, October
      15, 2016 and October 15, 2021, at a repurchase price equal to 100% of the
      principal amount of the Notes to be repurchased plus accrued and unpaid
      interest, if any, up to but not including, the repurchase date. In addition,
      the
      Company may redeem the Notes for cash, either in whole or in part, anytime
      after
      October 20, 2011 at a redemption price equal to 100% of the principal amount
      of
      the Notes to be redeemed






31







plus accrued
      and unpaid interest, if any, up to but not including the redemption date. The
      Notes are convertible into Company common stock by the holders at an initial
      conversion rate equal to 68.7285 shares per $1,000 principal amount of the
      Notes
      (equal to an initial conversion price of approximately $14.55 per share), on
      or
      after September 15, 2026 subject to adjustment as described in the indenture.
      Upon conversion, the Company will deliver for each $1,000 principal amount
      of
      Notes, an amount consisting of cash equal to the lesser of $1,000 and the
      conversion value (as defined in the indenture) and, to the extent that the
      conversion value exceeds $1,000, at the Company’s election, cash or shares of
      Company common stock in respect of the remainder.





If
      the
      Company undergoes a “change in control” (as defined in the indenture), holders
      of the Notes will have the right, subject to certain conditions, to require
      the
      Company to repurchase for cash all or a portion of their Notes at a repurchase
      price equal to 100% of the principal amount of the Notes to be repurchased
      plus
      accrued and unpaid interest, if any.





On
      October 29, 2004, we entered into a $75.0 million senior, secured, five-year
      credit agreement with the lenders listed therein and JP
      Morgan Chase Bank, N.A., successor to The Bank
      of New York, as administrative agent for such lenders (the “Credit Agreement”).
      The terms of the Credit Agreement provided us with a $50.0 million term loan
      (the “Term Loan”) and a $25.0 million revolving credit facility (the
“Revolver”), which includes a $1.0 million swing-line loan sub-facility and a
      $1.0 million letter of credit sub-facility.





On
      May 9,
      2006, we amended the Credit Agreement (“Amendment No. 2”) to, among other terms,
      (a) increase the Revolver Commitments from $25.0 million to $50.0 million,
      (b)
      amend the financial covenants and reduce certain fees and margins, (c) extend
      the Revolver termination date from October 29, 2009 to October 29, 2010, (d)
      increase the aggregate amount we are permitted to pay for acquisitions and
      (e)
      permit LeCroy to make certain payments for cash dividends and repurchases of
      common stock.





On
      September 26, 2006, the Company amended the Credit Agreement (“Amendment No. 3”)
      to amend the Credit Agreement, in certain respects, in order to permit the
      Catalyst Enterprise, Inc. acquisition and merger and the transactions
      contemplated thereby. On September 28, 2006, the Company amended the Credit
      Agreement (“Amendment No. 4”) to amend the Credit Agreement, in certain
      respects, in order to permit the issuance of the convertible note offering
      and
      to require the prepayment of the Term Loan from the proceeds thereof, and to
      permit certain acquisitions, as defined therein.





On
      December 29, 2006 the Company amended the Credit Agreement (“Amendment No. 5”),
      in certain respects to amend certain covenants following the Catalyst
      acquisition and the issuance of the Notes.





The
      borrowings by us under the Credit Agreement are secured by all of our assets
      and
      the assets of our domestic subsidiaries, and our performance thereunder is
      guaranteed by our domestic subsidiaries. Proceeds from the Revolver may be
      used
      for general corporate purposes, including the financing of working capital
      requirements, capital expenditures and acquisitions. As of December 31, 2006,
      the Company has borrowed $10.0 million against the Revolver and has not borrowed
      against the letter of credit subfacility or the swingline loan subfacility.
      There is $40.0 million still available to the Company under the
      Revolver.





In
      October 2006, in conjunction with our issuance of the Notes the Company repaid
      approximately $31.9 million and $20.8 million due under the Term Loan and
      Revolver, respectively.





Borrowings
      under the Credit Agreement bear interest at variable rates equal to, at our
      election, (1) the higher of (a) the prime rate or (b) the federal funds rate
      plus 0.5%, plus an applicable margin of between 0.00% and 1.50% based on our
      leverage ratio, as defined in the Credit Agreement, or (2) LIBOR plus an
      applicable margin of between 1.25% and 2.75% based on our leverage ratio. In
      addition, we must pay commitment fees on unused Revolver borrowings during
      the
      term of the Credit Agreement at rates between 0.375% and 0.5% dependent upon
      our
      leverage ratio. As of June 30, 2006, the interest rate on the Term Loan was
      6.75% and as of June 30, 2006 and December 31, 2006 the interest rate on the
      Revolver was 8.25% and 8.75%, respectively.




Under
        the
        Credit Agreement, as amended, we are required to comply with certain financial
        covenants, measured quarterly, including a minimum interest coverage ratio,
        minimum total net worth, maximum leverage ratio, minimum fixed charge coverage
        ratio and limitations on capital expenditures. As of December 31, 2006, we
        were
        in compliance with our financial covenants under the Credit
        Agreement.
  32










The
      Term
      Loan was fully repaid during the second fiscal quarter of 2007.





In
      addition to the above U.S.-based credit facilities, we maintain certain
      short-term foreign credit facilities, principally with two Japanese banks
      totaling 150.0 million yen (approximately $1.3 million as of December 31, 2006).
      No amounts were outstanding under these facilities as of December 31, 2006.
      Our
      Swiss subsidiary, LeCroy S.A., also has an overdraft facility totaling 1.0
      million Swiss francs (approximately $0.8 million as of December 31, 2006).
      As of
      December 31, 2006 and June 30, 2006, approximately 0.4 million Swiss francs
      were
      held against supplier obligations leaving an available balance of 0.6 million
      Swiss francs under this credit facility. These obligations to suppliers, such
      as
      rent and utilities, are payable under the credit facility only in the event
      that
      we are unable to meet our financial obligations to those suppliers.





On
      May
      25, 2006, the Board of Directors approved the adoption of a share purchase
      plan
      authorizing the Company to purchase up to 2 million shares, not to exceed $25.0
      million, of its common stock for the treasury. Purchases under this buyback
      program may be made from time to time on the open market and in privately
      negotiated transactions, including pursuant to the terms of a 10b5-1 plan.
      A
      10b5-1 plan allows a company to purchase shares during a blackout period,
      provided the company communicates its share purchase instructions to the broker
      prior to the blackout period, pursuant to written plan that may not be changed.
      The timing of these purchases is dependent upon several factors, including
      market conditions, the market price of the Company’s common stock, the effect of
      the share dilution on earnings, available cash and any other potential risks
      we
      may encounter. The share repurchase plan may be discontinued at any time at
      our
      discretion. As of December 31, 2006, we have spent $12.4 million to purchase
      1,038,283 shares under this buyback program.





We
      believe that our cash on hand, cash flow generated by our continuing operations,
      and availability under our revolving credit lines will be sufficient to fund
      our
      operations, working capital, debt service and capital expenditures requirements
      for the foreseeable future and provide funds for potential acquisition
      opportunities and share repurchases.





**Contractual
      Obligations and Other Commitments**





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





**Payments
                due by Period as of December 31, 2006****Total**
            
            
            **Less
                than**
              **1
                Year**
            
            
            **1-3
                Years**
            
            
            **3-5
                Years**
            
            
            **More
                than 5**
              **Years****(In
                thousands)**Capital
                lease obligations
            
            $
            353
            
            $
            353
            
            $
            —
            
            $
            —
            
            $
            —Severance
            
            
            232
            
            
            232
            
            
            —
            
            
            —
            
            
            —Supplier
                agreements
            
            
            2,987
            
            
            2,987
            
            
            —
            
            
            —
            
            
            —Operating
                lease obligations
            
            
            4,143
            
            
            2,123
            
            
            1,831
            
            
            136
            
            
            53Note
                payable
            
            
            3,500
            
            
            —
            
            
            3,500
            
            
            —
            
            
            —Revolving
                credit obligations
            
            
            10,000
            
            
            —
            
            
            —
            
            
            10,000
            
            
            —Convertible
                notes
            
            
            72,000
            
            
            —
            
            
            —
            
            
            72,000
            
            
            —Total
            
            $
            93,215
            
            $
            5,695
            
            $
            5,331
            
            $
            82,136
            
            $
            53





**Recent
      Accounting Pronouncements**




In
        May
        2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,”
(“SFAS 154”) which was effective for LeCroy for reporting changes in accounting
        principles and for correction of errors beginning in fiscal year 2007. SFAS
        154
        requires a change in accounting principle to be applied retrospectively to
        prior
        periods’ financial statements, unless explicit transition provisions are
        provided for in new accounting pronouncements or existing pronouncements
        that
        are in the transition phase when SFAS 154 becomes effective. There has been
        no
        impact on the Company’s financial statements from the adoption of SFAS 154 in
        fiscal 2007.
  33










In
      June
      2005, the FASB issued FASB Staff Position (“FSP”) 143-1, “Accounting for
      Electronic Equipment Waste Obligations.” FSP 143-1 addresses the accounting
      related to obligations associated with Directive 2002/96/EC on Waste Electrical
      and Electronic Equipment (the “Directive”) adopted by the European Union. Under
      the Directive, the waste management obligation for historical equipment
      (products put on the market on or prior to August 13, 2005) remains with the
      commercial user until the equipment is replaced. FSP 143-1 is effective on
      the
      date of adoption of the law by the applicable EU-member country. The law was
      adopted by certain EU countries in calendar year 2006 and is still under review
      in several other countries. The Company is exempt from this Directive, and
      as a
      result, FSP 143-1 will not have an impact on the Company’s results of operations
      or financial condition.





On
      February 16, 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Instruments, an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). SFAS
      155 allows financial instruments that have embedded derivatives to be accounted
      for as a whole (eliminating the need to separate the derivative from its host)
      if the holder elects to account for the whole instrument on a fair value basis.
      It also clarifies which interest-only strips and principal-only strips are
      not
      subject to the requirements of Statement 133; establishes a requirement to
      evaluate interest in securitized financial assets to identify interests that
      are
      freestanding derivatives or that are hybrid financial instruments that contain
      an embedded derivative requiring separation; clarifies that concentrations
      of
      credit risk in the form of subordination are not embedded derivatives; and
      amends Statement 140 to eliminate the prohibition on a qualifying
      special-purpose entity from holding a derivative financial instrument that
      pertains to a beneficial interest other than another derivative financial
      instrument. SFAS 155 is effective for all financial instruments acquired or
      issued after the beginning of an entity’s first fiscal year that begins after
      September 15, 2006. Management is currently evaluating the effect that adoption
      of SFAS 155 will have on the Company’s consolidated financial position and
      results of operations.





In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - An Interpretation of FASB Statement No. 109” (“FIN 48”), which
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. FIN 48 will be effective for fiscal years beginning
      after
      December 15, 2006. Management is currently evaluating the effect that adoption
      of this interpretation will have on the Company’s consolidated financial
      position and results of operations.





In
      September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring fair
      value and requires enhanced disclosures about fair value measurements. SFAS
      157
      requires companies to disclose the fair value of their financial instruments
      according to a fair value hierarchy as defined in the standard. Additionally,
      companies are required to provide enhanced disclosure regarding financial
      instruments in one of the categories, including a reconciliation of the
      beginning and ending balances separately for each major category of assets
      and
      liabilities. SFAS 157 is effective for financial statements issued for fiscal
      years beginning after November 15, 2007, and interim periods within those fiscal
      years. Management is currently evaluating the effect that adoption of this
      interpretation will have on the Company’s consolidated financial position and
      results of operations.





In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current year Financial Statements” (“SAB 108”),
      which provides interpretive guidance on the consideration of the effects of
      prior year misstatements in quantifying current year misstatements for the
      purpose of a materiality assessment. SAB 108 is effective as of the end of
      the
      Company’s 2007 fiscal year, allowing a one-time transitional cumulative effect
      adjustment to beginning retained earnings as of July 1, 2006 for errors that
      were not previously deemed material, but are material under the guidance in
      SAB
      108. The Company is currently evaluating the impact of adopting SAB 108 on
      the
      Company’s consolidated financial statements.




34










**Forward-Looking
      Information**





Certain
      statements in this report, other than purely historical information, including
      estimates, projections, statements relating to our business plans, objectives
      and expected operating results, and the assumptions upon which those statements
      are based, are “forward-looking statements” within the meaning of the Private
      Securities Litigation Reform Act of 1995. These forward-looking statements
      generally are identified by the words “believe,” “project,” ”expect,”
“anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,”
“would,” “will be,” “will continue,” “will likely result,” and similar
      expressions. Forward-looking statements are based on current expectations and
      assumptions that are subject to risks and uncertainties which may cause actual
      results to differ materially from the forward-looking statements. A detailed
      discussion of these and other risks and uncertainties that could cause actual
      results and events to differ materially from such forward-looking statements
      is
      included in our 2006 Annual Report on Form 10-K under the heading “Risks Related
      to Our Business,” as well as those risk factors a set forth in Part II, Item IA
      herein. We undertake no obligation to update or revise publicly any
      forward-looking statements, whether as a result of new information, future
      events, or otherwise.





**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 the relative
      fluctuations in foreign currency exchange rates are the relationships among
      and
      between the U.S. dollar, Euro, Swiss franc, British pound, Swedish krona,
      Japanese yen, Korean won and Singapore 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 our functional currency or the functional currency of 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
      in
      accordance with SFAS No. 133, “Accounting for Derivative Investments and Hedging
      Activities”, as amended (“SFAS No. 133”).





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 resulting in mismatches between local currency revenues and
      expenses will not adversely affect our results of operations. Moreover,
      fluctuations in exchange rates could affect the demand for our
      products.





The
      net
      losses resulting from changes in the fair value of these derivatives and on
      transactions denominated in other than their functional currencies were
      approximately $0.1 million and $0.2 million for the three and six months ended
      December 31, 2006, respectively. For the three and six months ended December
      31,
      2005, there were net losses of $82,000 and $0.2 million, respectively. At
      December 31, 2006 and June 30, 2006, the notional amounts of the Company’s open
      foreign exchange forward contracts, all with maturities of less than six months,
      were approximately $14.1 million and $14.6 million, respectively.





We
      performed a sensitivity analysis for the first six months of fiscal 2007
      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 have an immaterial
      effect on these instruments and therefore, on our consolidated results of
      operations, financial position and cash flows.




35







On
      October 15, 2006, the Company completed the sale of $72.0 million of 4.00%
      convertible senior notes (the “Notes”) due October 15, 2026. The Notes will pay
      interest semiannually through maturity and will be convertible at an initial
      conversion rate of 68.7285 shares of common stock per $1,000 principal amount
      of
      Notes, which is equivalent to a conversion price of approximately $14.55 per
      share of the Company’s common stock. The conversion rate will be subject to
      adjustment upon the occurrence of specified events. Upon conversion of the
      Notes, holders will receive cash up to the principal amount of each note, and
      any excess conversion value will be delivered in cash or shares of LeCroy’s
      common stock, at the Company’s option. As of December 31, 2006, the market value
      of the convertible note was $74.9 million.





We
      are
      exposed to adverse changes in interest rates primarily due to our investment
      in
      cash and cash equivalents, as well amounts outstanding under our $50.0 million
      revolver. Market risk is estimated as the potential change in fair value
      resulting from a hypothetical 1% adverse change in interest rates, which would
      have been immaterial to our results of operations, financial position or cash
      flows for the three and six months ended December 31, 2006. Borrowings under
      the
      revolving line of credit have variable rates and the carrying amount is
      considered by management to be a reasonable estimate of its fair value. See
      Note
      14 - Long Term Debt and Capital Leases, for specifics related to our credit
      facility.





As
      required by the terms of the Credit Agreement (See Note 14 - Long-term Debt
      and
      Capital Leases), on January 27, 2005 the Company entered into a Master Agreement
      with Manufacturers & Traders Trust Co. (“M&T Bank”), the purpose of
      which was to protect against rising interest rates during the term of the Credit
      Agreement.





On
      October 16, 2006 in conjunction with the repayment of the term loan (See Note
      14
      - Long-term Debt and Capital Leases), the Company terminated its interest rate
      swap with Manufacturers & Traders Trust Co. (“M&T Bank”). The net
      interest income earned on the swap was approximately $0.3 million and net
      interest expense of ($8,000) was recognized during the three months ended
      December 31, 2006 and 2005, respectively, and net interest income of $0.3
      million and net interest expense of ($14,000) was recognized for the
      six months ended December 31, 2006 and 2005, respectively.





**ITEM
      4. CONTROLS AND PROCEDURES**





*Evaluation
      of Disclosure Controls and Procedures*





The
      Company, under the supervision and with the participation of its management,
      including the Chief Executive Officer and Chief Financial Officer, evaluated
      the
      effectiveness of the design and operation of the Company's "disclosure controls
      and procedures" (as defined in Rule 13a-15(e) under the Exchange Act) as of
      the
      end of the period covered by this report. Based on that evaluation, the Chief
      Executive Officer and the Chief Financial Officer concluded that the Company's
      disclosure controls and procedures are effective in recording, processing,
      summarizing and reporting, on a timely basis, information relating to the
      Company and the Company's consolidated subsidiaries required to be disclosed
      in
      the Company's reports filed or submitted under the Exchange Act.








*Changes
      in Internal Controls Over Financial Reporting*





There
      have been no changes in the Company's internal control over financial reporting
      (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
      the
      quarter ended December 31, 2006 that have materially affected, or are reasonably
      likely to materially affect, its internal control over financial
      reporting.





*Other*




The
      Company plans to exclude the acquired Catalyst business from its fiscal
      2007 evaluation of the effectiveness of internal controls over financial
      reporting as the Catalyst business utilizes separate information and accounting
      systems and processes.





36











**LeCROY
      CORPORATION**





**PART
      II. OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





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





**ITEM
      1A. RISK FACTORS**




Other
      than with respect to the risk factors below, there have been no material changes
      from the risk factors disclosed in the “Risk Factors” section of the Company’s
      Annual Report on Form 10-K for the year ended June 30, 2006.





***Catalyst
      outsources a portion of its research and development activities to a third
      party
      in a foreign jurisdiction; the failure of this third party to adequately protect
      Catalyst’s proprietary rights in the technologies developed for us by this third
      party or a change in the laws of its jurisdiction may result in the loss of
      those proprietary rights.***


Catalyst
      currently outsources a portion of its research and development activities to
      a
      third party engineering firm located in the United Arab Emirates. Catalyst
      does
      not have any long-term contractual commitment from this engineering firm to
      continue to provide such services. The discontinuance of such services on short
      notice or any significant cost increases in the services they provide could
      harm
      our results of operations and slow our introduction of new products. In
      addition, the failure of this engineering firm to adequately protect Catalyst’s
      proprietary rights in the technologies developed by this firm, including the
      failure to comply with the intellectual property laws of the United Arab
      Emirates, may result in the loss of some or all of the proprietary rights in
      such technologies. In addition, any changes in the laws of the United Arab
      Emirates could also result in the loss of some or all of the proprietary rights
      in technologies developed in that country. It may also be more difficult to
      obtain a judgment enforcing our intellectual property rights in the United
      Arab
      Emirates than it may be in the United States.




***We
      have significantly increased our leverage as a result of the sale of the
      Notes.***


In
      connection with the sale of the Notes, we have incurred new indebtedness of
      $72.0 million. The degree to which we are leveraged could, among other
      things:


•
            make
                it difficult for us to make payments on the Notes;•
            make
                it difficult for us to obtain financing for working capital, acquisitions
                or other purposes on favorable terms, if at all;•
            make
                us more vulnerable to industry downturns and competitive pressures;
                and•
            limit
                our flexibility in planning for, or reacting to changes in, our
                business.





37







Our
      ability to meet our debt service obligations will depend upon our future
      performance, which will be subject to financial, business and other factors
      affecting our operations, many of which are beyond our control.





***We
      may be unable to repay, repurchase or redeem the
      Notes.***


At
      maturity, the entire outstanding principal amount of the Notes will become
      due
      and payable by us. Upon a designated event, as defined in the indenture, or
      on
      each of October 15, 2011, October 15, 2016 and October 15, 2021, or upon
      conversion, the holders may require the Company to repurchase all or a portion
      of the Notes at a repurchase price of 100% of the principal amount of the Notes,
      plus accrued and unpaid interest and additional interest, if any, up to, but
      excluding, the date of the repurchase of the Notes. We cannot assure the note
      holders that we will have enough funds or be able to arrange for additional
      financing to pay the principal at maturity or to repurchase the Notes upon
      a
      designated event or that our then-existing debt agreements will permit us to
      repay the principal amount at maturity or repurchase notes.





Our
      failure to repay the Notes at maturity or to repurchase tendered notes upon
      a
      designated event or on each of October 15, 2011, October 15, 2016 and October
      15, 2021, would constitute an event of default under the indenture that governs
      the Notes and may also constitute an event of default under any other indenture
      or other agreement governing then-existing indebtedness, which could prevent
      us
      from repurchasing the Notes. If a designated event occurred and accelerated
      our
      other indebtedness, we cannot assure you that we would have sufficient financial
      resources, or be able to arrange for additional financing, to repay the
      principal amount at maturity or pay the repurchase price for the Notes and
      amounts due under any other indebtedness. The change in control feature of
      the
      Notes could make it more difficult for a third party to acquire us, even if
      such
      an acquisition would be beneficial to the note holders and our stockholders.
      Our
      obligation to offer to repurchase the Notes upon a designated
      event would not necessarily afford protection in the event of a highly leveraged
      transaction, reorganization, merger or similar transaction involving
      us.





***Conversion
      of the Notes will dilute the ownership interest of existing stockholders,
      including stockholders who had previously converted their
      Notes.***


The
      conversion of the Notes into shares of our common stock, to the extent we choose
      not to deliver all cash for the conversion value in excess of the principal
      amount, will dilute the ownership interests of existing stockholders. Any sales
      in the public market of the common stock issuable upon conversion of the Notes
      could adversely affect prevailing market prices of our common stock. In
      addition, the existence of the Notes may encourage short selling by market
      participants due to this dilution or facilitate trading strategies involving
      the
      Notes and our common stock.





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


Our
      certificate of incorporation, bylaws, and stockholder rights plan 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.




Under
      our
      stockholder rights plan, if a person or group acquires, in the future, 15%
      or
      more of our common stock or announces a tender offer or exchange offer, the
      consummation of which would result in the beneficial ownership by a person
      or
      group of 15% or more of our common stock, then holders of our common stock,
      other than the acquirors, are entitled to purchase our common stock at a 50%
      discount to the then-current share price.




38







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
      acquirers 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. 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. Any
      of
      these results could
      adversely affect the price of our common stock and, therefore, the price of
      our
      Notes. We may in the future issue shares of authorized preferred stock at any
      time.





***We
      have a credit facility that contains financial covenants, and the failure to
      comply with these covenants could harm our financial condition because our
      credit facility may be unavailable to us.***


We
      have a
      $100.0 million credit facility with JP Morgan Chase Bank N.A., successor to
      The Bank of New York and the other lenders party thereto. The credit facility
      consisted of a $50.0 million term loan and a $50.0 million revolving loan.
      We
      paid the $50.0 million term loan in full and only $40.0 million of the revolving
      loan remains available. We are subject to financial covenants under this credit
      facility, including interest coverage ratio, minimum total net worth, leverage
      ratio and fixed charge coverage ratio requirements. Failure to comply with
      the
      financial covenants under our credit facility would cause us to be in default
      under the facility, which could result in the acceleration of the indebtedness
      under the credit facility. The acceleration of our indebtedness under the credit
      facility would adversely affect our business, results of operations, liquidity
      and financial condition.





***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 at this time, other than
      $40.0 million **** remaining
      under our revolver with JP Morgan Chase Bank, N.A., successor to The Bank of
      New
      York and the other lenders party thereto, which is subject to a borrowing base,
      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 or 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 $100.0 million credit facility
      impose limitations on additional indebtedness. The credit facility initially
      consisted of a $50.0 million term loan and a $50.0 million revolving
      loan.













We
      paid
      the $50.0 million term loan in full and only the $40.0 million of the revolving
      loan remains available. 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.





***Because
      we do not intend to pay dividends, stockholders will benefit from an investment
      in our common stock only if it appreciates in value.***


We
      have
      never declared or paid any cash dividends on our common stock. For the
      foreseeable future, it is expected that earnings, if any, generated from our
      operations will be used to finance the growth of our business, and that no
      dividends will be paid to holders of the common stock. As a result, the success
      of an investment in our common stock will depend upon any future appreciation
      in
      its value. There is no guarantee our common stock will appreciate in value.





**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**





**Issuer
      Repurchases of Equity Securities**





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





The
      following table sets forth information regarding LeCroy’s purchases of its
      common stock on a monthly basis during the second quarter of fiscal 2007. Share
      repurchases are recorded on a trade date basis.





**Period**
            
            
            **Total**
              **Number
                of**
              **Shares**
              **Purchased**
            
            
            **Average**
              **Price
                Paid**
              **per
                Share**
            
            
            **Total
                Number of**
              **Shares
                Purchased**
              **as
                Part of Publicly Announced Plans**
              **or
                Program**
            
            
            **Maximum
                Number**
              **of
                Shares that May**
              **Yet
                Be Purchased**
              **Under
                the Plans**
              **or
                Programs**October
                1, 2006 to October 31, 2006
            
            
            850,000
            
            
            $11.64
            
            
            850,000
            
            
            961,717November
                1, 2006 to November 30, 2006
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            961,717December
                1, 2006 to December 31, 2006
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            961,717Total
            
            
            850,000
            
            
            $11.64
            
            
            850,000
            
            
            961,717








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





Our
      2006
      annual meeting of stockholders was held on October 25, 2006. At the meeting,
      our
      stockholders approved one proposal presented pursuant to the vote totals
      indicated below:




















Vote
                  (No. of Shares)For
              
              Against/WithheldElection
                  of William G. Scheerer as a Class II Director
              10,857,307
              
              499,910Election
                  of Allyn C. Woodward, Jr. as a Class II Director
              8,429,317
              
              2,927,900




As
      of
      October 25, 2006, Robert E. Anderson, Charles A. Dickinson, Walter O. LeCroy,
      Thomas H. Reslewic and Norman R. Robertson were members of the Board of
      Directors whose terms of office continued after the annual meeting of the
      stockholders.





**ITEM
      6. EXHIBITS**





The
      following exhibits are filed herewith or incorporated by reference to exhibits
      previously filed with the SEC.





ExhibitNumber
            Description2.1
            Agreement
                and Plan of Merger, dated as of September 1, 2004, among the Registrant,
                Cobalt Acquisition Corporation and Computer Access Technology Corporation,
                filed as Exhibit 2.1 to Form 8-K dated September 2, 2004, incorporated
                herein by reference.2.2
            Agreement
                and Plan of Merger dated as of September 29, 2006, among the Registrant,
                2006 Franklin Congress Corporation, Catalyst Enterprises, Inc., and
                Nader
                Salehomoum, filed as Exhibit 2.1to
                Form 8-K filed on October 3, 2006, incorporated herein by
                reference.3.1
            Certificate
                of Incorporation of the Registrant as of July 24, 1995, filed as
                Exhibit
                3.1 to Form S-1 Registration Statement No. 33-95620, incorporated
                herein
                by reference.3.2
            Amendment
                to the Certificate of Designation of the Series A Convertible Redeemable
                Preferred Stock as of April 9, 2001, filed as Exhibit 10.37 to Form
                10-Q
                for the quarterly period ended March 31, 2001, incorporated herein
                by
                reference.3.3
            By-Laws
                of the Registrant, as amended, dated August 16, 2000, filed as Exhibit
                3.3
                to Form 10-Q for the quarterly period ended September 30, 2000,
                incorporated herein by reference.4.1
            Purchase
                Agreement dated October 5, 2006, between LeCroy Corporation and Cowen
                and
                Company, LLC, filed as Exhibit 4.1 to Form 8-K filed on October 12,
                2006,
                incorporated herein by reference.4.2
            Registration
                Rights Agreement dated October 12, 2006, between LeCroy Corporation
                and
                Cowan and Company, LLC, filed as Exhibit 4.2 to Form 8-K filed on
                October
                12, 2006, incorporated herein by reference.4.3
            Indenture
                dated October 12, 2006, between LeCroy Corporation, as issuer, and
                U.S.
                Bank National Association, as trustee, filed as Exhibit 4.3 to Form
                8-K
                filed on October 12, 2006, incorporated herein by
                reference.10.1
            Credit
                Agreement, dated as of October 29, 2004, among the Registrant, the
                lenders
                party thereto and The Bank of New York, as Administrative Agent,
                filed as
                Exhibit 10.14 to Form 8-K filed on November 2, 2004, incorporated
                herein
                by reference.10.2
            LeCroy
                Corporation Amended and Restated 1993 Stock Incentive Plan filed
                as
                Exhibit 10.1 to Form S-1 Registration Statement No. 33-95620, incorporated
                herein by reference.*10.3
            Amendment
                to LeCroy Corporation Amended and Restated 1993 Stock Incentive Plan,
                filed as Exhibit 10.33 to Form 10-Q for the quarterly period ended
                September 30, 2000, incorporated herein by reference.*10.4
            LeCroy
                Corporation 1995 Non-Employee Director Stock Option Plan filed as
                Exhibit
                10.2 to Form S-1 Registration Statement No. 33-95620, incorporated
                herein
                by reference.*10.5
            LeCroy
                Corporation 1995 Employee Stock Purchase Plan, filed as Exhibit 10.3
                to
                Form S-1 Registration Statement No. 33-95620, incorporated herein
                by
                reference.*


10.6
            LeCroy
                Corporation 1998 Non-Employee Director Stock Option Plan, incorporated
                by
                reference to Appendix A to the Company’s Definitive Proxy Statement filed
                on September 18, 1998.


10.7
            Amendment
                to the LeCroy Corporation 1998 Non-Employee Director Stock Option
                Plan,
                dated August 16, 2000,filed
                as Exhibit 10.34 to Form 10-Q for the quarterly period ended September
                30,
                2000, incorporated herein by
                reference.*













10.8
            Amendment
                to the LeCroy Corporation 1998 Non-Employee Director Stock Option
                Plan,
                dated October 25, 2000, filed as Exhibit 10.35 to Form 10-Q for the
                quarterly period ended September 30, 2000, incorporated herein by
                reference.*10.9
            LeCroy
                Corporation’s 2003 Stock Incentive Plan, incorporated by reference to
                Appendix A to the Company’s Definitive Proxy Statement filed on September
                26, 2003.*10.10
            Form
                of Restricted Stock Purchase Agreement, filed as Exhibit 10.41 to
                Form
                10-K for the fiscal year ended June 30, 2002, incorporated herein
                by
                reference.*10.11
            LeCroy
                Corporation Amended and Restated 1995 Employee Stock Purchase Plan,
                incorporated by reference to Appendix B to the Registrant’s Definitive
                Proxy Statement filed on September 26, 2003.*10.12
            LeCroy
                Corporation’s 2004 Employment Inducement Stock Plan, filed as Exhibit 10.5
                to Form 8-K filed on November 2, 2004, incorporated herein by
                reference.*10.13
            Computer
                Access Technology Corporation Special 2000 Stock Option Plan, filed
                as
                Exhibit 10.7 to Form 8-K filed on November 2, 2004, incorporated
                herein by
                reference.*10.14
            Amendments
                to Computer Access Technology Corporation 2000 Special Stock Option
                Plan,
                filed as Exhibit 10.11 to Form 8-K filed on November 2, 2004, incorporated
                herein by reference.*10.15
            Amendment
                to LeCroy Corporation (CATC) Special 2000 Stock Option Plan, filed
                as
                Exhibit 10.2 to Form 8-K filed on November 19, 2004, incorporated
                herein
                by reference.*10.16
            Computer
                Access Technology Corporation 2000 Stock Incentive Plan, filed as
                Exhibit
                10.8 to Form 8-K filed on November 2, 2004, incorporated herein by
                reference.*10.17
            Amendments
                to Computer Access Technology Corporation 2000 Stock Incentive Plan,
                filed
                as Exhibit 10.12 to Form 8-K filed on November 2, 2004, incorporated
                herein by reference.*10.18
            Amendment
                to LeCroy Corporation (CATC) 2000 Stock Incentive Plan, filed as
                Exhibit
                10.3 to Form 8-K filed on November 19, 2004, incorporated herein
                by
                reference.*10.19
            Computer
                Access Technology Corporation 1994 Stock Option Plan, filed as Exhibit
                10.9 to Form 8-K filed on November 2, 2004, incorporated herein by
                reference.*10.20
            Amendments
                to Computer Access Technology Corporation 1994 Stock Option Plan,
                filed as
                Exhibit 10.13 to Form 8-K filed on November 2, 2004, incorporated
                herein
                by reference.*10.21
            Amendment
                to LeCroy Corporation (CATC) 1994 Stock Option Plan, filed as Exhibit
                10.4
                to Form 8-K filed on November 19, 2004, incorporated herein by
                reference.*10.22
            Employee
                Agreement Regarding Inventions, Confidentiality and Non-Competition,
                dated
                as of March 28, 1995, between the Registrant and Walter O. LeCroy,
                Jr.,
                filed as Exhibit 10.13 to Form S-1 Registration Statement No. 33-95620,
                incorporated herein by reference.*10.23
            Form
                of Indemnification Agreement, between the Registrant and each of
                its
                executive officers and directors filed as Exhibit 10.29 to Form S-1
                Registration Statement No. 33-95620, incorporated herein by
                reference.*10.24
            Employment
                Agreement, dated August 13, 2001, between the Registrant and R. Scott
                Bausback, filed as Exhibit 10.38 to Form 10-Q for the quarterly period
                ended December 31, 2001, incorporated herein by
                reference.*10.25
            Separation
                Agreement, dated August 19, 2004, between the Registrant and R. Scott
                Bausback, filed as Exhibit 10.50 to Form 10-K for the fiscal year
                ended
                June 30, 2004, incorporated herein by reference.*10.26
            Employment
                Agreement, dated January 1, 2002, between the Registrant and Thomas
                H.
                Reslewic, filed as Exhibit 10.40 to Form 10-Q for the quarterly period
                ended March 31, 2003, incorporated herein by
                reference.*


10.27
            Amendment
                No. 1 to Employment Agreement, dated December 16, 2002, between the
                Registrant and Thomas H. Reslewic, filed as Exhibit 10.43 to Form
                10-Q for
                the quarterly period ended March 31, 2003, incorporated herein by
                reference.*10.28
            Separation
                Agreement, dated August 19, 2004, between the Registrant and Thomas
                H.
                Reslewic, filed as Exhibit 10.49 to Form 10-K for the fiscal year
                ended
                June 30, 2004, incorporated herein by reference.*10.29
            Form
                of Separation Agreement between the Registrant and certain of its
                executive officers, filed as Exhibit 10.51 to Form 10-K for the fiscal
                year ended June 30, 2004, incorporated herein by
                reference.*









10.30
            Employment
                Agreement, dated September 1, 2004 and effective October 29, 2004,
                between
                the Registrant and Carmine Napolitano, filed as Exhibit 10.1 to Form
                8-K
                filed on November 2, 2004, incorporated herein by
                reference.*10.31
            Amendment
                No. 1 to Employment Agreement, dated September 30, 2004 and effective
                October 29, 2004, between the Registrant and Carmine Napolitano,
                filed as
                Exhibit 10.2 to Form 8-K filed on November 2, 2004, incorporated
                herein by
                reference.*10.32
            Services
                Agreement, dated August 31, 2004, between Computer Access Technology
                Corporation and Dan Wilnai, filed as Exhibit 10.3 to Form 8-K filed
                on
                November 2, 2004, incorporated herein by reference.*10.33
            Employment
                Agreement, dated August 31, 2004, between Computer Access Technology
                Corporation and Peretz Tzarnotsky, filed as Exhibit 10.4 to Form
                8-K filed
                on November 2, 2004, incorporated herein by reference.*10.34
            Amendment
                No. 2 to Credit Agreement, dated as of May 9, 2006, among the Registrant,
                the lenders party thereto and The Bank of New York, as Administrative
                Agent, filed as Exhibit 10.40 to Form 10-Q filed on May 10, 2006,
                incorporated herein by reference.10.35
            Amendment
                No. 3 to Credit Agreement, dated as of September 26, 2006, among
                the
                Registrant, the lenders party thereto and The Bank of New York, as
                Administrative Agent, filed as Exhibit 10.36 to Form 10-Q filed on
                November 9, 2006, incorporated herein by reference.10.36
            Amendment
                No. 4 to Credit Agreement, dated as of September 28, 2006, among
                the
                Registrant, the lenders party thereto and The Bank of New York, as
                Administrative Agent, filed as Exhibit 10.37 to Form 10-Q filed on
                November 9, 2006, incorporated herein by reference.10.37
            Amendment
                No. 5 to Credit Agreement, dated as of December 29, 2006, among the
                Registrant, the lenders party thereto and The Bank of New York, as
                Administrative Agent, filed as Exhibit 10.1 to Form 8-K filed on
                December
                29, 2006, incorporated herein by reference.*.10.38
            Catalyst
                Enterprises, Inc. 2005 Stock Option Plan, filed as Exhibit 10.1 to
                Form
                8-K filed on December 22, 2006, incorporated herein by
                reference.*10.39
            Amendments
                to Catalyst Enterprises, Inc. 2005 Stock Option Plan filed as Exhibit
                10.2
                to Form 8-K filed on December 22, 2006, incorporated herein by
                reference.*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.







*
      Indicates management contract or compensatory plan, contract or
      arrangement.




43














**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.





LeCROY
                  CORPORATION/s/
                  Sean B. O'ConnorDate:
                  February 8, 2007
              Sean
                  B. O’Connor
                Vice
                  President and Chief Financial Officer,
                Secretary
                  and Treasurer