TERADYNE, INC (Form: 10-K, Received: 03/02/2009 17:18:47)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT

PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

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

Commission file number 001-06462

TERADYNE, INC.

(Exact Name of Registrant as Specified in Its Charter)

MASSACHUSETTS

04-2272148

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification Number)

600 RIVERPARK DRIVE

NORTH READING, MASSACHUSETTS

01864

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s telephone number, including area code: (978) 370-2700

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $0.125 per share		New York Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x

Indicate by check mark 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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 27, 2008 was approximately $1.8 billion based upon the closing price of the registrant’s Common Stock on the New York Stock Exchange on that date.

The number of shares outstanding of the registrant’s only class of Common Stock as of February 23, 2009 was 172,696,518 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement in connection with its 2009 annual meeting of shareholders are incorporated by reference into Part III.

TERADYNE, INC.

FORM 10-K

PART I

Item 1:

Business

We are a leading global supplier of automatic test equipment.

Our automatic test equipment products and services include:

•

semiconductor test (“Semiconductor Test”) systems;

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military/aerospace test (“Mil/Aero”) instrumentation and systems, circuit-board test and inspection (“Commercial Board Test”) systems and automotive diagnostic and test (“Diagnostic Solutions”) systems, collectively these products represent “Systems Test Group”.

On November 14, 2008, we completed our acquisition of Eagle Test Systems, Inc. (“Eagle Test”) of Buffalo Grove, Illinois for a purchase price of $259.9 million, net of cash and marketable securities acquired and including the fair value of fully vested employee equity instruments and transaction costs. Eagle Test designs, manufactures, sells and services high-performance automated test equipment for the semiconductor industry. Eagle Test’s customers include semiconductor manufacturers and assembly and test subcontractors primarily in the low pin count analog/mixed signal discrete markets that cover more cost sensitive applications. Customers use Eagle Test products to test analog, mixed-signal, and radio frequency semiconductors. Eagle Test’s proprietary SmartPin ^TM technology enables multiple semiconductor devices to be tested simultaneously, or in parallel, on an individual test system, permitting greater test throughput. Semiconductors tested by Eagle Test’s systems are incorporated into a wide range of products in historically high-growth markets, including digital cameras, MP3 players, cellular telephones, video/multimedia products, automotive electronics, computer peripherals, and notebook and desktop computers. Eagle Test is included within our Semiconductor Test segment.

On January 24, 2008, we completed our acquisition of Nextest Systems Corporation (“Nextest”) of San Jose, California for a purchase price of $311.3 million, net of the cash and marketable securities acquired including the fair value of fully vested employee equity instruments and transaction costs. Nextest designs, develops, manufactures, sells and services low-cost, high throughput automated test equipment systems for the semiconductor industry. Nextest competes in the flash memory, flash card, and flash memory based system-on-chip (“SOC”) markets. Nextest’s products are used to test integrated circuits such as microcontrollers, image sensors, smart cards and field programmable logic devices. Nextest is included within our Semiconductor Test segment.

On August 1, 2007, we completed the sale of our broadband test products business (“Broadband Test Division”), that provided test systems for testing lines and qualifying lines for Digital Subscriber Line (“DSL”) telephone networks, to Tollgrade Communications, Inc. (“Tollgrade”).

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), we are reporting Broadband Test Division as discontinued operations in the consolidated financial statements for all periods presented. See “Note E: Discontinued Operations” in Notes to Consolidated Financial Statements for further discussion of the Broadband Test Division divestiture. Unless indicated otherwise, amounts provided throughout this Form 10-K relate to continuing operations only.

On March 7, 2007, we purchased in-process enabling test technology and hired certain engineers from MOSAID Technologies Inc. for $17.6 million, which included $0.6 million in fees directly related to the acquisition. Of the purchase price, $16.7 million was allocated to in-process research and development and therefore was immediately charged to the statement of operations. The balance of the purchase price was

allocated to acquired workforce and fixed assets. In the year ended December 31, 2008, as a result of a workforce reduction, we recorded an impairment charge of $0.6 million to write-off the acquired workforce asset.

Statements in this Annual Report on Form 10-K which are not historical facts, or so called “forward-looking statements,” are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Investors are cautioned that all forward-looking statements involve risks and uncertainties and are qualified in their entirety by reference to the risk factors described in “Item 1A: Risk Factors” and those risks detailed in our filings with the Securities and Exchange Commission (the “SEC”).

Investor Information

We are a Massachusetts corporation incorporated on September 23, 1960. We are subject to the informational requirements of the Exchange Act. We file periodic reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, N.E., Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

You can access financial and other information, including the charters of our Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee, our Corporate Governance Guidelines and Standards of Business Conduct, by clicking the Investors link on our website at www.teradyne.com. Our website is not incorporated by reference herein. We make available, free of charge, copies of our filings with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act through our website as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.

Products

Semiconductor Test

We design, manufacture, sell and support Semiconductor Test products and services on a world wide basis. The test systems we provide are used both for wafer level and device package testing. These chips are used in automotive, communications, consumer, computer and electronic game applications, among others. Semiconductor devices span a broad range of functionality, from very simple low-cost devices such as appliance microcontrollers, operational amplifiers or voltage regulators to complex digital signal processors, microprocessors, high-density as well as high speed memory devices. Semiconductor Test products and services are sold to Integrated Device Manufacturers (“IDMs”) that integrate the fabrication of silicon wafers into their business, “Fabless” companies that outsource the manufacturing of silicon wafers, “Foundries” that cater to the processing and manufacturing of silicon wafers, and outsourced semiconductor assembly and test companies (“OSATs”) that provide test and assembly services for the final packaged devices to both Fabless companies and IDMs. Fabless companies perform the design of integrated circuits without manufacturing capabilities, and use Foundries for wafer manufacturing and OSATs for test and assembly. These customers obtain the overall benefit of both comprehensively testing devices and reducing the total costs associated with testing by using our Semiconductor Test systems to:

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improve and control product quality;

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measure and improve product performance;

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reduce time to market; and

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increase production yields.

Our FLEX Test Platform Architecture advances our core technologies to produce test equipment that is designed for high efficiency multi-site testing. Multi-site testing involves the simultaneous testing of many

devices and functions in parallel. Leading semiconductor manufacturers are using multi-site testing to significantly improve their “Cost of Test” economics. The FLEX Test Platform architecture addresses customer requirements through the following key capabilities:

1) A high efficiency multi-site architecture that eliminates tester overhead such as instrument setup, synchronization and data movement, and signal processing;

2) The IG-XL™ software operating system which provides fast program development, including instant conversion from single to multi-site test; and

3) Broad technology coverage by instruments designed to cover the range of test parameters, coupled with a Universal Slot test head design that allows easy test system reconfiguration to address changing test needs.

FLEX Test Platform purchases are being made by IDMs, OSATs and Fabless customers. The FLEX Test Platform has become a widely used test solution at OSATs and test houses by providing versatile testers that can handle the widest range of devices, allowing OSATs to leverage their capital investments. The broad consumer, automotive and broadband markets have historically driven most of the device volume growth in the semiconductor industry. These markets include cell phones, set top boxes, HDTVs, game controllers, computer graphics, and automotive controllers to name a few. These end use markets are continuing to be drivers for the FLEX Test Platform family of products because they require a wide range of technologies and instrument coverage. The FLEX Test Platform has an installed base of more than 2,000 customer systems to date and it continues to grow.

Our J750™ test system shares the IG-XL software environment with the family of FLEX Test Platform systems. The J750 is designed to address the highest volume semiconductor devices such as microcontrollers that are central to the functionality of almost every consumer electronics product, from small appliances to automotive engine controllers. J750 test systems combine compact packaging, high throughput and ease of production test. These benefits are possible due to the high level of integration in the design. A single circuit board in the J750 test system provides up to 64 digital input/output channels. We extended the J750 platform technology to create the IP750 Image Sensor™ test system. The IP750 is focused on testing image sensor devices used in digital cameras and other imaging products. The J750 platform has an installed base of over 2,900 systems and it continues to grow.

We have continued to invest in the J750 platform with a set of J750Ex™ instrumentation that was released in 2007, with additional instrument releases in 2008. These instruments are bringing new capabilities to existing market segments and expanding the J750 platform to critical new devices that include high end microcontroller, LCD drivers, and the latest generation of cameras. These new J750Ex instruments are designed to be compatible with our customer’s existing hardware and software investments and deliver industry leading parallel test economics while providing customers with flexibility to address next generation functional requirements.

Our acquisition of Nextest in January of 2008 expanded our product offerings to include the Magnum test platform. The Magnum products address the requirements of mass production test of memory devices such as flash memory and dynamic random access memory (DRAM). Flash and DRAM memory are widely used core building blocks in modern electronic products finding wide application in consumer, industrial, and computing equipment. Magnum II is the newest member of the family. With test rates up to 800 megabits per second and a versatile architecture designed for maximal throughput, Magnum II tests both flash and DRAM devices, an important advantage for large memory producers that manufacture both types of memory. The Magnum platform has an installed base of over 650 systems and it continues to grow.

Our acquisition of Eagle Test in November of 2008 expanded our product offerings to include the ETS platform. The ETS platform is used by semiconductor manufacturers and assembly and test subcontractors, primarily in the low pin count analog/mixed signal discrete markets that cover more cost sensitive applications. Eagle Test’s proprietary SmartPin™ technology enables multiple semiconductor devices to be tested simultaneously, or in parallel, on an individual test system, permitting greater test throughput. Semiconductors

tested by Eagle Test’s systems are incorporated into a wide range of products in historically high-growth markets, including digital cameras, MP3 players, cellular telephones, video/multimedia products, automotive electronics, computer peripherals, and notebook and desktop computers. The ETS platform has an installed base of over 1,800 systems and it continues to grow.

Systems Test Group

Our Systems Test Group segment is comprised of 3 business units: Mil/Aero, Commercial Board Test and Diagnostic Solutions.

Mil/Aero Test

Our expertise in the test and diagnosis of printed circuit boards (“PCB”) and subsystems has proven to be essential in supporting the ever-demanding military, defense and aerospace markets. Our test solutions for these markets include high-performance systems, instruments and software solutions that manufacturers and repair depots depend on to ensure the readiness of commercial and military electronic systems.

New programs from tactical aircraft to missile systems, as well as widespread enhancement programs, continue to fuel the demand for high performance test systems. We are a leading provider of test instrumentation and systems with performance well suited to the demands of military/aerospace electronics manufacturers and repair depots worldwide. Success in this market is illustrated by our penetration into major Department of Defense programs across all U.S. military service branches and many allied military services worldwide.

Commercial Board Test

We also produce a variety of test and inspection systems sold to many of the industry’s leading PCB original equipment manufacturers (“OEMs”) and Subcons around the world. Because today’s PCBs and electronic assemblies handle more functionality than ever before, they contain highly integrated circuits and more complex components that operate faster, use lower voltages and are more susceptible to assembly problems. Our assembly test and inspection systems combine the advanced diagnostic hardware and operating software needed to ensure product quality, sustain high manufacturing yield, verify functional operation, diagnose faults and effectively reduce manufacturing costs. Our products are sold to the electronics manufacturers of cell phones, servers, computers, Internet switches, automobiles and military avionics systems worldwide.

In-Circuit Test Systems

We manufacture in-circuit test (“ICT”) systems that are used to assess electrical interconnections, verify interoperation and find faulty circuits aboard fully assembled and soldered PCBs. Fast, accurate and cost-effective diagnostic capabilities are hallmark features of our ICT systems, including the TestStation™ and Spectrum™ product families used in a variety of in-line, high-volume PCB test applications. These systems are also used in sample test environments for prototype testing and early-stage PCB design and development. Supporting technologies such as our patented SafeTest™ technology allow TestStation users to safely troubleshoot the low-voltage components and interconnects commonly found in battery-powered portable consumer electronics and low-power commercial equipment. In addition to standard ICT equipment, we offer combinational test platforms and handler-ready in-line test systems for high-volume board manufacturing.

Imaging Inspection Systems

We manufacture automated x-ray inspection (“AXI”) machines that are used to test PCB assemblies. These machines use patented technologies to quickly and automatically inspect the solder joints of the components on the board. Using x-rays allows our XStation™ MX to inspect joints that are on either side of the PCB assembly,

or that are hidden by the component packages themselves. The XStation MX uses ClearVue™, a patented three-dimensional X-Ray imaging technique, to more accurately detect subtle defects and manufacturing flaws, even as board complexities grow.

Diagnostic Solutions

We provide electronic test and diagnostic systems to the automotive OEMs and their major subcontractors. The systems are used throughout the vehicle’s lifecycle from design through manufacture to after sale service and consist of highly integrated software and hardware components. As the number and complexity of electronic systems and embedded software proliferate in vehicles, the ability to manufacture and service those vehicles becomes increasingly dependent on electronic diagnostic equipment. Our Diagnostic Solutions’ products fall into two categories:

OEM Service Diagnostics

OEM dealer service technicians use our systems to find faults in vehicles in use by their customers, and to reduce OEM warranty costs. Historically, the focus has been on fixing faults in the service bay, but is now growing to include the programming of vehicle software.

Vehicle Configuration and Test Solutions

Our VCATS™ products are used on automotive and major automotive subassembly production lines. These products connect to the vehicle to test and program or “configure” the electronic systems on vehicles. These vehicle electronic systems include engine control modules and subsystems such as braking, navigation and climate control. Our VCATS products are also able to link to an OEM’s manufacturing control system in order to provide statistical quality reports to operators and management.

Both VCATS and OEM Service Diagnostics products utilize our GRADE-X™ authoring software enabling the manufacturing and service phases of vehicle development. Diagnostics for electronic modules and systems used on vehicles of our customers can be developed and written using the GRADE-X authoring software. The actual diagnosis of a customer’s vehicle occurs in the OEM dealer’s service bay utilizing a runtime portion of the software to facilitate the service and repair of the vehicle.

Discontinued Operations

On August 1, 2007, our Broadband Test Division business was sold to Tollgrade Communications, Inc. This business provided test systems for testing lines and qualifying lines for DSL telephone networks. Broadband Test Division has been reflected as discontinued operations in the accompanying financial statements. On November 30, 2005, our Connection Systems business was sold to Amphenol Corporation. This business designed and manufactured high-performance connection systems including backplane systems, printed circuit boards and high-speed, high-density connectors. Connection Systems and Broadband Test Division have been reflected as discontinued operations in the accompanying financial statements.

Summary of Net Revenue by Reportable Segment

Our two reportable segments accounted for the following percentages of consolidated net revenue for each of last three years:


	2008		2007		2006
Semiconductor Test	81	%	80	%	80	%
Systems Test Group	19		20		20

Total	100	%	100	%	100	%

During the third quarter of 2007, our internal management reporting changed to better align with our operational management structure, resulting in a change in our reportable segments. Segment reporting has been restated for all periods presented to reflect this change. See “Note S: Operating Segments and Geographic Information” in Notes to Consolidated Financial Statements for more information.

Sales and Distribution

Prices for our systems can reach $2 million or more. In 2008, 2007 and 2006, no single customer accounted for more than 10% of our consolidated net revenue. In each of the years 2008, 2007 and 2006, our three largest customers in aggregate accounted for 14% , 16% and 18% of consolidated net revenue, respectively.

Direct sales to United States government agencies accounted for 2%, 5% and 3% of consolidated net revenue in 2008, 2007 and 2006, respectively. Approximately 11%, 23% and 14% of Systems Test Group’s revenue in 2008, 2007 and 2006, respectively, was to United States government agencies and 27%, 16%, and 13% of Systems Test Group’s revenue in 2008, 2007 and 2006, respectively, was to government contractor customers.

We have sales and service offices located throughout North America, Asia and Europe, as our customers outside the United States are located primarily in these geographic areas. We sell in these areas predominantly through a direct sales force. Our manufacturing activities are primarily conducted through subcontractors and outsourced contract manufacturers with a significant operation concentrated in China.

Sales to customers outside the United States accounted for 78%, 77% and 77% of consolidated net revenue in 2008, 2007 and 2006, respectively. Sales to customers located in Taiwan were 18%, 13%, and 14% of consolidated net revenue in 2008, 2007 and 2006, respectively. Sales to customers located in Japan were 11%, 12% and 12% of consolidated net revenue in 2008, 2007 and 2006, respectively. Sales are attributed to geographic areas based on the location of the customer site. Sales to customers located in Singapore were 10%, 15% and 11% of consolidated net revenue in 2008, 2007, and 2006, respectively.

See also “Item 1A: Risk Factors” and “Note S: Operating Segment and Geographic Information” in Notes to Consolidated Financial Statements.

Competition

We face significant competition throughout the world in each of our reportable segments. These competitors include, among others, Advantest Corporation, Verigy Inc. and LTX–Credence Corporation. Some of our competitors have substantially greater financial and other resources to pursue engineering, manufacturing, marketing and distribution of their products. We also face competition from internal suppliers at several of our customers. Some of our competitors have introduced or announced new products with certain performance characteristics which may be considered equal or superior to those we currently offer. We expect our competitors to continue to improve the performance of their current products and to introduce new products or new technologies that provide improved cost of ownership and performance characteristics. See also “Item 1A: Risk Factors.”

Backlog

At December 31, 2008 and 2007, our backlog of unfilled orders in our two reportable segments was as follows:


	2008		2007
	(in millions)
Semiconductor Test	$	129.4	$	236.2
Systems Test Group		106.9		102.5

	$	236.3	$	338.7

Of the backlog at December 31, 2008, approximately 89% of the Semiconductor Test backlog and 84% of Systems Test Group backlog is expected to be delivered in 2009.

Customers may delay delivery of products or cancel orders suddenly and without significant notice, subject to possible cancellation penalties. Due to possible customer changes in delivery schedules and cancellation of orders, our backlog at any particular date is not necessarily indicative of the actual sales for any succeeding period. Delays in delivery schedules and/or cancellations of backlog during any particular period could have a material adverse effect on our business, financial condition, and results of operations.

Raw Materials

Our products contain electronic and mechanical components that are provided by a wide range of suppliers. Certain of these components are standard products, while others are manufactured to our specifications. We can experience occasional delays in obtaining timely delivery of certain items. While the majority of our components are available from multiple suppliers, certain items are obtained from sole sources. We may experience a temporary adverse impact if any of our sole source suppliers’ delays or ceases to deliver products.

Intellectual Property and Licenses

The development of our products, both hardware and software, is based in significant part on proprietary information, our brands and technology. We protect our rights in proprietary information, brands and technology through various methods, such as:

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patents;

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copyrights;

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trademarks;

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trade secrets;

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standards of business conduct and related business practices; and

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technology license agreements, software license agreements, non-disclosure agreements, employment agreements, and other agreements.

However, these protections might not be effective in all circumstances. Competitors might independently develop similar technology or exploit our proprietary information and our brands in countries where we lack enforceable intellectual property rights or where enforcement of such rights through the legal system provides an insufficient deterrent. Also, intellectual property protections can lapse or be invalidated through appropriate legal processes. We do not believe that any single piece of intellectual property or proprietary rights is essential to our business.

Employees

As of December 31, 2008, we employed approximately 3,800 people. Since the inception of our business, we have experienced no work stoppages or other labor disturbances. We have no collective bargaining contracts.

Engineering and Development Activities

The highly technical nature of our products requires a large and continuing engineering and development effort. Engineering and development expenditures for the years ended December 31, 2008, 2007 and 2006 were $216.5 million, $204.3 million, and $202.4 million, respectively. These expenditures amounted to approximately 20%, 19%, and 15% of consolidated net revenue in 2008, 2007, and 2006, respectively.

Environmental Affairs

We are subject to various federal, state, and local government laws and regulations relating to the protection of employee health and safety and the environment. We accrue for all known environmental liabilities when it becomes probable that we will incur cleanup costs and those costs can reasonably be estimated. The amounts accrued do not cover sites that are in the preliminary stages of investigation. Estimated environmental costs are not expected to materially affect the financial position or results of our operations in future periods. However, estimates of future costs are subject to change due to protracted cleanup periods and changing site conditions and environmental remediation laws and regulations.

CEO Certification

An annual CEO certification was filed with the New York Stock Exchange on May 23, 2008 in accordance with its listing standards.

OUR EXECUTIVE OFFICERS

Pursuant to General Instruction G(3) of Form 10-K, the following table is included in Part I of this Annual Report on Form 10-K in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders. The table sets forth the names of all of our executive officers and certain other information relating to their positions held with Teradyne and other business experience. Our executive officers do not have a specific term of office but rather serve at the discretion of the Board of Directors.


Executive Officer	Age	Position	Business Experience For The Past 5 Years
Michael A. Bradley	60	Chief Executive Officer and President	Chief Executive Officer since 2004; President of Teradyne since 2003; President of Semiconductor Test from 2001 to 2003.

Gregory R. Beecher	51	Vice President, Chief Financial Officer and Treasurer	Vice President and Chief Financial Officer of Teradyne since 2001 and Treasurer of Teradyne from 2003 to 2005 and since 2006.

Eileen Casal	50	Vice President, General Counsel and Secretary	Vice President, General Counsel and Secretary of Teradyne since 2003; Vice President, General Counsel and Corporate Secretary of GSI Lumonics Inc. from 2001 until 2003.

Jeffrey R. Hotchkiss	61	President of Systems Test Group	President of Systems Test Group since 2007; President of Assembly Test Systems from 2004 to 2007, and President of Diagnostic Solutions from 2005 to 2007; Director, Chief Executive Officer and President of Empirix, Inc. from 2000 to 2004.

Mark E. Jagiela	48	President of Semiconductor Test	President of Semiconductor Test since 2003; Vice President of Teradyne since 2001.

Item 1A:

Risk Factors.

Risks Associated with Our Business

The risks described below are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Our business is impacted by worldwide economic cycles, which are difficult to predict.

Capital equipment providers in the electronics and semiconductor industries, such as Teradyne, have, in the past, been negatively impacted by sudden slowdowns in the global economies, and resulting reductions in customer capital investments. The duration of slowdowns in customer capital investments are difficult to predict.

The global economy and financial markets have been experiencing extreme disruption in recent months, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. Governments have taken historic actions intended to address extreme market conditions that include severely restricted credit. There may be a further deterioration in financial markets and confidence in major economies. We are unable to predict the likely duration and severity of the current disruptions in financial markets, credit availability, and adverse economic conditions throughout the world. These economic developments affect businesses such as ours and those of our customers and vendors in a number of ways that could result in unfavorable consequences to us. Further disruption and deterioration in economic conditions may further reduce customer purchases of our products, thereby reducing our revenues and earnings. In addition, such adverse economic conditions may, among other things, result in increased price competition for our products, increased risk of excess and obsolete

inventories, increased risk in the collectability of our accounts receivable from our customers, increased risk in potential reserves for doubtful accounts and write-offs of accounts receivable, and higher operating costs as a percentage of revenues. We are taking actions to address the effects of the current economic crisis, including implementing cost control and reduction measures, such as the reduction in force we announced on January 28, 2009. It is possible that we may experience difficulties in successfully implementing these cost controls and reduction measures in a timely manner or at all, and that we may experience delays and unexpected costs and expenses in implementing the reduction plan. Because of these and other factors, we cannot predict whether these cost control and reduction measures will be sufficient to offset certain of the negative trends that might affect our business.

Our business is dependent on the current and anticipated market for electronics, which historically has been highly cyclical.

Our business and results of operations depend in significant part upon capital expenditures of manufacturers of semiconductors and other electronics, which in turn depend upon the current and anticipated market demand for those products. As evidenced by our current business and results of operations, the market demand for electronics is impacted by economic slowdowns. Historically, the electronics and semiconductor industry has been highly cyclical with recurring periods of over-supply, which often have had a severe negative effect on demand for test equipment, including systems we manufacture and market. We believe that the markets for newer generations of electronic products such as those that we manufacture and market will also be subject to similar fluctuations. We are dependent on the timing of orders from our customers, and the deferral or cancellation of previous customer orders could have an adverse effect on our results of operations. We cannot assure that the level of revenues or new orders for a calendar quarter will be sustained in subsequent quarters. In addition, any factor adversely affecting the electronics industry or particular segments within the electronics industry may adversely affect our business, financial condition and operating results. The current economic environment has adversely affected our business, financial condition and operating results. We are actively taking steps to minimize the impact of this downturn but we cannot be certain those steps will have the desired impact, or of how long the downturn will continue and when our results will improve, if at all.

We are subject to intense competition.

We face significant competition throughout the world in each of our reportable segments. Some of our competitors have substantial financial and other resources to pursue engineering, manufacturing, marketing and distribution of their products. We also face competition from internal suppliers at several of our customers. Some of our competitors have introduced or announced new products with certain performance characteristics which may be considered equal or superior to those we currently offer. We expect our competitors to continue to improve the performance of their current products and to introduce new products or new technologies that provide improved cost of ownership and performance characteristics. New product introductions by competitors could cause a decline in revenues or loss of market acceptance of our products. Moreover, increased competitive pressure could lead to intensified price based competition, which could materially adversely affect our business, financial condition and results of operations.

Our operating results are likely to fluctuate significantly.

Our operating results are affected by a wide variety of factors that could materially adversely affect revenues and profitability.

The following factors are expected to impact future operations:

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the current worldwide economic slowdown and extreme disruption in the global financial markets;

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competitive pressures on selling prices;

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our ability to introduce, and the market acceptance of, new products in 2009 and beyond;

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changes in product revenue mix resulting from changes in customer demand;

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the level of orders received which can be shipped in a quarter because of the tendency of customers to wait until late in a quarter to commit to purchase due to capital expenditure approvals and constraints occurring at the end of a quarter, or the hope of obtaining more favorable pricing from a competitor seeking the business;

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engineering and development investments relating to new product introductions in 2009 and beyond, and the expansion of manufacturing, outsourcing and engineering operations in Asia;

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provisions for excess and obsolete inventory relating to the lack of demand for and the discontinuance of products;

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impairment charges for certain long-lived and intangible assets and goodwill. For example in 2008, we recorded a goodwill impairment charge of $333.3 million;

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parallel or multi-site testing could lead to a decrease in the ultimate size of the market for our products; and

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the ability of our suppliers and subcontractors to meet product quality or delivery requirements needed to satisfy customer orders for our products, especially if product demand increases rapidly.

As a result of the foregoing and other factors, we have experienced and may continue to experience material fluctuations in future operating results on a quarterly or annual basis which could materially and adversely affect our business, financial condition, operating results and stock price.

We are subject to risks of operating internationally.

A significant portion of our total revenue is derived from customers outside the United States. Our international sales and operations are subject to significant risks and difficulties, including:

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unexpected changes in legal and regulatory requirements affecting international markets;

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changes in tariffs and exchange rates;

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social, political and economic instability, acts of terrorism and international conflicts;

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difficulties in protecting intellectual property;

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difficulties in accounts receivable collection;

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cultural differences in the conduct of business;

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difficulties in staffing and managing international operations; and

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compliance with customs regulations.

In addition, an increasing portion of our products and the products we purchase from our suppliers are sourced or manufactured in foreign locations, including China, and a large portion of the devices our products test are fabricated and tested by foundries and subcontractors in Taiwan, Singapore, China and other parts of Asia. As a result, we are subject to a number of economic and other risks, particularly during times of political or financial instability in these regions. Disruption of manufacturing or supply sources in these international locations could materially adversely impact our ability to fill customer orders and potentially result in lost business.

If we fail to develop new technologies to adapt to our customers’ needs and if our customers fail to accept our new products, our revenues will be adversely affected.

We believe that our technological position depends primarily on the technical competence and creative ability of our engineers. In a rapidly evolving market, such as ours, the development of new technologies, commercialization of those technologies into products and market acceptance and customer demand for those products are critical to our success. Successful product development, introduction and acceptance depend upon a number of factors, including:

•

new product selection;

•

ability to meet customer requirements;

•

development of competitive products by competitors;

•

timely and efficient completion of product design;

•

timely and efficient implementation of manufacturing and manufacturing processes;

•

timely remediation of product performance issues, if any, identified during testing;

•

assembly processes and product performance at customer locations;

•

differentiation of our products from our competitors’ products;

•

management of customer expectations concerning product capabilities and product life cycles;

•

ability to attract and retain technical talent; and

•

innovation that does not infringe on the intellectual property rights of third parties.

If our suppliers do not meet product or delivery requirements, we could have reduced revenues and earnings.

Certain components, including semiconductor chips, may be in short supply from time to time because of high industry demand or the inability of some vendors to consistently meet our quality or delivery requirements. Approximately 30% of material purchases require some custom work where having multiple suppliers would be cost prohibitive. If any of our suppliers were to cancel contracts or commitments or fail to meet the quality or delivery requirements needed to satisfy customer orders for our products, we could lose time-sensitive customer orders and have significantly decreased revenues and earnings, which would have a material adverse effect on our business, results of operations and financial condition. In addition, we rely on contract manufacturers for certain subsystems used in our products, and our ability to meet customer orders for those products depends upon the timeliness and quality of the work performed by these subcontractors, over whom we do not exercise any control.

To a certain extent, we are dependant upon the ability of our suppliers and contractors to help meet increased product or delivery requirements. Many of our suppliers have implemented cost reduction strategies, just as we have, to address the slowdowns in the market. It may be difficult for these suppliers to meet delivery requirements in a period of rapid growth, therefore impacting our ability to meet our customers’ demands.

We rely on the financial strength of our suppliers. There can be no assurance that the loss of suppliers either as a result of financial viability, bankruptcy or otherwise will not have a material adverse effect on our business, results of operations or financial condition.

Our operations may be adversely impacted if our outsourced contract manufacturers or service providers fail to perform.

We depend on Flextronics International Ltd. (“Flextronics”) to manufacture and test our FLEX and J750 family of products from its facility in China. If for any reason Flextronics cannot provide us with these products in a timely fashion, or at all, we may not be able to sell these products to our customers until we enter a similar arrangement with an alternative contract manufacturer. If we experience a problem with our supply of products from Flextronics, it may take us significant time to either manufacture the product or find an alternate contract manufacturer, which could result in substantial expense and disruption to our business.

We have also outsourced a number of our general and administrative functions, including information technology, to reputable service providers, many of which are in foreign countries, sometimes impacting communication with them because of language and time difficulties. Their presence in foreign countries also increases the risk they could be exposed to political risk. Additionally, there may be difficulties encountered in coordinating the outsourced operations with existing functions and operations. If we fail in successfully coordinating and managing the outsourced service providers, it may cause an adverse affect on our operations which could result in a decline in our stock price.

We may not fully realize the benefits of our acquisition of Nextest Systems Corporation, Eagle Test Systems, Inc., and other businesses that we may acquire or strategic alliances that we may form in the future.

In January 2008, we acquired Nextest Systems Corporation, and in November 2008, we acquired Eagle Test Systems, Inc. We may continue to acquire additional businesses, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing businesses. We may not be able to realize the expected synergies and cost savings from the integration with our existing operations of Nextest Systems Corporation, Eagle Test Systems, Inc. and other businesses or technologies that we may acquire. In addition, the integration process for our acquisitions may be complex, costly and time consuming and include unanticipated issues, expenses and liabilities. We may have difficulty in developing, manufacturing and marketing the products of a newly acquired company in a manner that enhances the performance of our combined businesses or product lines and allows us to realize value from expected synergies. We cannot assure you that, following an acquisition, we will achieve the revenue or net income levels that justify the acquisition. Acquisitions may also result in one-time charges (such as acquisition-related expenses, write-offs or restructuring charges) or in the future, impairment of goodwill, that adversely affect our operating results. Additionally we may fund acquisitions of new businesses, strategic alliances or joint ventures by utilizing our cash, raising debt, issuing shares of our common stock, or by other means.

We may need additional financing, which could be difficult to obtain .

We expect, based upon our current estimate of our revenue and operating results for fiscal year 2009, that our cash, cash equivalents and marketable securities balance of $374.3 million will be sufficient to meet our cash requirements for the next twelve months. If our estimates of revenue and operating results for fiscal year 2009 significantly decrease, we could be required to obtain additional financing. However, if financing is necessary, we cannot be certain that we will be able to obtain such financing or that the terms will be acceptable to us. In addition, financings may place restrictions on how we operate our business. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products and services, take advantage of future opportunities, grow our business or respond to competitive pressures, which could adversely harm our business.

Restrictive covenants in the agreement governing our senior credit facility may restrict our ability to pursue business strategies.

The agreement governing our senior credit facility limits our ability, among other things, to: incur additional indebtedness; sell, transfer, license or dispose of assets; consolidate or merge; enter into transactions with our affiliates; and incur liens. In addition, our senior credit facility contains financial and other restrictive covenants that limit our ability to engage in activities that may be in our long term best interest, such as, subject to permitted exceptions, making capital expenditures in excess of certain thresholds, making investments, loans and other advances, and prepaying our other indebtedness while our indebtedness under our senior credit facility is outstanding. Our failure to comply with financial and other restrictive covenants could result in an event of default, which if not cured or waived, could result in the lenders requiring immediate payment of all outstanding borrowings or foreclosing on collateral pledged to them to secure the indebtedness.

We have taken measures to address slowdowns in the market for our products, which could have long-term negative effects on our business or impact our ability to adequately address a rapid increase in customer demand.

We have taken, and continue to take, measures to address slowdowns in the market for our products. These measures include shifting more of our operations to lower cost regions, outsourcing manufacturing processes, divesting of certain businesses, implementing material cost reduction programs, reducing both the number of our employees and the compensation paid to our employees, and reducing planned capital expenditures and expense budgets. We cannot assure that the measures we have taken will not impair our ability to effectively develop and market products, to remain competitive in the industries in which we compete, to operate effectively, to operate

profitably during slowdowns or to effectively meet a rapid increase in customer demand. These measures may have long-term negative effects on our business by reducing our pool of technical talent, decreasing or slowing improvements in our products, making it more difficult to hire and retain talented individuals and to quickly respond to customers or competitors in an upward cycle.

We may incur significant liabilities if we fail to comply with environmental regulations.

We are subject to both domestic and international environmental regulations and statutory strict liability relating to the use, storage, discharge, site cleanup and disposal of hazardous chemicals used in our manufacturing processes. If we fail to comply with present and future regulations, or are required to perform site remediation, we could be subject to future liabilities or costs, including penalties or the suspension of production. Present and future regulations may also:

•

restrict our ability to expand facilities;

•

restrict our ability to ship certain products into the European Union or elsewhere;

•

require us to modify our operations logistics;

•

require us to acquire costly equipment; or

•

require us to incur other significant costs and expenses.

Pursuant to present regulations and agreements, we are conducting groundwater and subsurface assessment and monitoring and are implementing remediation and corrective action plans for facilities located in California, Massachusetts and New Hampshire which are no longer conducting manufacturing operations. As of December 31, 2008, we have not incurred material costs as result of the monitoring and remediation steps taken at the California, Massachusetts and New Hampshire sites.

On January 27, 2003, the European Union adopted the following directives: (i) the directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (the “RoHS Directive”); and (ii) the directive on Waste Electrical and Electronic Equipment (the “WEEE Directive”). The WEEE Directive became effective August 13, 2005 and the RoHS Directive became effective on July 6, 2006. Both the RoHS Directive and the WEEE Directive alter the form and manner in which electronic equipment is imported, sold and handled in the European Union. Other jurisdictions, such as China, have followed the European Union’s lead in enacting legislation with respect to hazardous substances and waste removal. Ensuring compliance with the RoHS Directive, the WEEE Directive and similar legislation in other jurisdictions, and integrating compliance activities with our suppliers and customers could result in additional costs and disruption to operations and logistics and thus could have a negative impact on our business, operations and financial condition.

We currently are and in the future may be subject to litigation that could have an adverse effect on our business.

From time to time, we may be subject to litigation or other administrative and governmental proceedings that could require significant management time and resources and cause us to incur expenses and, in the event of an adverse decision, pay damages in an amount that could have a material adverse effect on our financial position or results of operations.

For example, in connection with our August 2000 acquisition of each of Herco Technology Corp. and Perception Laminates, Inc., a complaint was filed on or about September 5, 2001 by the former owners of those companies naming as defendants Teradyne and two of our then executive officers. Additionally, in 2001, we were designated as a “potentially responsible party” at a clean-up site in Los Angeles, California and in 2008 we were notified of potential liability relating to contamination at a disposal site in West Covina, California. Both of these claims also arise out of our acquisition of Perception Laminates in August 2000. Prior to that date, Perception Laminates had itself acquired certain assets of Alco Industries Inc. under an asset purchase agreement dated October 20, 1992. These matters are further described in “Item 3: Legal Proceedings.”

Third parties may claim we are infringing their intellectual property and we could suffer significant litigation costs, licensing expenses or be prevented from selling our products.

We receive notifications from time to time that we may be in violation of patents held by others. In October 2008, we were served with patent infringement litigation from Xyratex Technology Ltd (“Xyratex”). The Xyratex matter is further described in “Item 3: Legal Proceedings.” An assertion of patent infringement against us such as the Xyratex suit, if successful, could have a material adverse effect on our ability to sell our new hard disk drive testing product or it could force us to seek a license to the intellectual property rights of others or alter such product so that they no longer infringe the intellectual property rights of others. A license could be very expensive to obtain or may not be available at all. Similarly, changing our products or processes to avoid infringing the rights of others may be costly or impractical. Additionally, patent litigation, such as the Xyratex suit, could require a significant use of management resources and involve a lengthy and expensive defense, even if we eventually prevail. If we do not prevail, we might be forced to pay significant damages, obtain licenses, modify our products, or stop making our products; each of which could have a material adverse affect on our financial condition and operating results.

We have significant guarantees and indemnification obligations.

From time to time we make guarantees to customers regarding the performance of our products and guarantee certain indebtedness, performance obligations or lease commitments of our subsidiary and affiliate companies. We also have agreed to provide indemnification to our officers, directors, employees and agents, to the extent permitted by law, arising from certain events or occurrences while the officer, director, employee or agent, is or was serving at our request in such capacity. If we become liable under any of these obligations, it could materially and adversely affect our business, financial condition and operating results. For additional information see “Note K: Commitments and Contingencies—Guarantees and Indemnification Obligations” in Notes to Consolidated Financial Statements.

If we are unable to protect our intellectual property, we may lose a valuable asset or may incur costly litigation to protect our rights.

We protect the technology that is incorporated in our products (“IP”) in several ways, including through patent, copyright, and trade secret protection and by contractual agreement. However, even with these protections, our IP may still be challenged, invalidated or subject to other infringement actions. While we believe that our IP has value in the aggregate, no single element of our IP is in itself essential. If a significant portion of our IP is invalidated or ineffective, our business could be materially adversely affected. In addition, we receive notifications from time to time that we may be in violation of patents held by others. An assertion of patent infringement against us, if successful, could have a material adverse effect on our ability to sell our products, or require a significant use of management resources and necessitate a lengthy and expensive defense which could adversely affect our operating results.

Our business may suffer if we are unable to attract and retain key employees.

Competition for employees with skills we require is intense in the high technology industry. Our success will depend on our ability to attract and retain key technical employees. The loss of one or more key or other employees, a decrease in our inability to attract additional qualified employees, or the delay in hiring key personnel could each have a material adverse effect on our business, results of operations or financial condition.

Acts of war, terrorist attacks and the threat of domestic and international terrorist attacks may adversely impact our business.

Acts of war and terrorist attacks may cause damage or disruption to our employees, facilities, customers, suppliers and distributors which could have a material adverse effect on our business, results of operation or financial condition. As we, our outsourced manufacturing providers and our suppliers sell and manufacture products both in the United States and internationally, the threat of future terrorist attacks could lead to changes in security and operations at these locations which could increase our operating costs and which may adversely affect our business. Such conflicts may

also cause damage or disruption to transportation and communication systems. We have completed some emergency preparedness planning and have a business continuity plan in case some of these events occur. However, we cannot be certain that our plans will be effective in the event of a disaster or other situation. All of these conditions make it difficult for us, and our customers, to accurately forecast and plan future business activities and could have a material adverse effect on our business, financial condition and results of operations.

Provisions of our charter and by-laws and Massachusetts law make a takeover of Teradyne more difficult.

During 2007, we made several important corporate governance changes, which included declassification of our Board of Directors, adoption of majority voting standard for the election of our directors, and early termination of our shareholder rights plan. Despite these changes, there are still provisions in our basic corporate documents and under Massachusetts law that could discourage, delay or prevent a change in control, even if a change in control may be regarded as beneficial to some or all of our stockholders.

Item 1B:

Unresolved Staff Comments.

None.

Item 2:

Properties

The following table provides certain information as to our principal general offices and manufacturing facilities.


Location	Operating Segment	Major Activity+	Approximate Square Feet of Floor Space
Properties Owned:
North Reading, Massachusetts	Semiconductor Test, Systems Test Group & Corporate Offices	1-2-3-4-5	413,000
Agoura Hills, California	Semiconductor Test	3-5	120,000
Kumamoto, Japan	Semiconductor Test	2-3-4-5	75,000

Subtotal of Owned Properties			608,000

Properties Leased:
North Reading, Massachusetts	Semiconductor Test, Systems Test Group & Corporate Offices	1-2-3-4-5	267,600	(a)
Westford, Massachusetts	—	—	230,000	(b)
San Jose, California	Semiconductor Test (Nextest business unit)	2-3-4-5	128,000
Buffalo Gove, Illinois	Semiconductor Test (Eagle Test business unit)	2-3-4-5	84,600
Stockport, England	Systems Test Group (Diagnostic Solutions business unit)	2-3-4-5-6	75,000
Woburn, Massachusetts	Semiconductor Test	2-6	69,000
Cebu, Philippines	Semiconductor Test	2-6	64,000
Agoura Hills, California	Semiconductor Test	3-5	57,000	(c)
Shanghai, China	Semiconductor Test & Systems Test Group	2-5-6	43,000
Tai Yuan, Taiwan	Semiconductor Test & Systems Test Group	5	43,000
San Jose, California	Semiconductor Test	4-5	36,000

Subtotal of Leased Properties			1,097,200

Total Square Feet of Floor Space			1,705,200

+	Major activities have been separated into the following categories: 1. Corporate Administration, 2. Sales Support and Manufacturing, 3. Engineering and Development, 4. Marketing, 5. Sales and Administration, and 6. Storage and Distribution.

(a)

In 2008, Teradyne sold two buildings in its North Reading, Massachusetts campus and leased back approximately 267,600 square feet. Teradyne is consolidating and relocating the operations in these building into the 3 remaining buildings on the campus. The consolidation is estimated to be complete by July of 2009.

(b)	This space consists of two buildings. One building is subleased and the other is vacant.

(c)	In 2008, Teradyne sold one of its buildings in Agoura Hills, California and leased back approximately 57,000 square feet.

Item 3:

Legal Proceedings

On July 11, 2008, Xyratex Technology, Ltd (“Xyratex”) filed a complaint against us in the United States Federal District Court in Los Angeles, California alleging that certain of our disk drive test products infringe one of Xyratex’s patents. The complaint was served on Teradyne on October 29, 2008. The suit seeks temporary, preliminary and permanent injunctive relief as well as unspecified monetary damages, including treble damages, for patent infringement. On December 17, 2008, we filed our answer and counterclaims, denying that our disk drive test products infringe the asserted Xyratex patent and asking the court to declare such patent invalid. The case is currently in the discovery phase and trial is scheduled to begin in November 2009. We intend to vigorously defend against the Xyratex claim and to vigorously pursue our counterclaims against Xyratex.

On September 5, 2001, after our August 2000 acquisition of Herco Technology Corp. and Perception Laminates, Inc., the former owners of those companies filed a complaint against Teradyne and two of our then executive officers in the Federal District Court in San Diego, California, asserting securities fraud and breach of contract related to the acquisition. The District Court dismissed certain of the plaintiffs’ claims, granted partial summary judgment against them with respect to their breach of contract claim and denied their motion for reconsideration. In July 2007, after an appeal by the plaintiffs, the U.S. Court of Appeals for the Ninth Circuit affirmed in part and reversed in part the District Court rulings. We petitioned the Ninth Circuit for rehearing, which was denied, and the case was remanded back to the District Court. On August 29, 2008, the District Court granted Teradyne’s motion for judgment on the pleadings. On September 11, 2008, the plaintiffs filed their notice of appeal.

In 2001, we were designated as a Potentially Responsible Party (“PRP”) at a clean-up site in Los Angeles, California. This claim arose out of our acquisition of Perception Laminates in August 2000. Prior to that date, Perception Laminates had itself acquired certain assets of Alco Industries Inc. under an asset purchase agreement in 1992. Neither Teradyne nor Perception Laminates have ever conducted any operations at the Los Angeles site. We have asked the State of California to drop the PRP designation, but California has not yet agreed to do so.

In November 2008, we received a general notice letter from the California Department of Toxic Substances Control (“DTSC”) which informed us of potential liability with respect to contamination at the BKK Corporation Landfill Facility Site in West Covina, California. Similar to the PRP claim discussed above, this claim arose out of our acquisition of Perception Laminates in August 2000. Neither we nor Perception Laminates have ever conducted any operations at the West Covina site. We have asked the DTSC and the group of settling defendants to remove us as a PRP for this site.

We believe that we have meritorious defenses against the above unsettled claims and intend to vigorously contest them. While it is not possible to predict or determine the outcomes of the unsettled claims or to provide possible ranges of losses that may arise, we believe the potential losses associated with all of these actions are unlikely to have a material adverse effect on our consolidated financial position, but could possibly be material to our consolidated results of operations and of cash flows of any one period.

In addition, we are subject to legal proceedings, claims and investigations that arise in the ordinary course of business such as, but not limited to, patent, employment, commercial and environmental matters. Although there can be no assurance, there are no such matters pending that we expect to be material with respect to our business, financial position or results of operations.

Item 4:

Submission of Matters to a Vote of Security Holders.

None.

PART II

Item 5:

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

The following table shows the market range for our common stock based on reported sale prices on the New York Stock Exchange.


Period	High		Low
2007
First Quarter	$	17.30	$	14.64
Second Quarter		18.53		16.22
Third Quarter		18.28		13.72
Fourth Quarter		14.36		10.02
2008
First Quarter	$	13.13	$	8.75
Second Quarter		14.50		10.53
Third Quarter		11.38		7.88
Fourth Quarter		8.24		2.80

The number of record holders of our common stock at February 28, 2009 was 2,650.

We have never paid cash dividends because it has been our policy to use earnings to finance expansion and growth. Payment of future cash dividends will rest within the discretion of our Board of Directors and will depend, among other things, upon our earnings, capital requirements and financial condition.

See “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Equity Compensation Plans,” for information on our equity compensation plans and our performance graph.

In November 2007, Teradyne’s Board of Directors (the “Board”) authorized a $400 million stock repurchase program. During the three months ended December 31, 2008, Teradyne did not repurchase any shares of common stock. For the year ended December 31, 2008, Teradyne repurchased 7.5 million shares of common stock for $91.2 million at an average price of $12.20 per share. The cumulative repurchases as of December 31, 2008 total 8.5 million shares of common stock for $102.6 million at an average price of $12.14 per share. As of November 4, 2008, the Board temporarily suspended the implementation of the stock repurchase program.

The following table includes information with respect to repurchases we made of our common stock during the quarter ended December 31, 2008 (in thousands except per share price):


Period	(a) Total Number of Shares (or units) Purchased	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may Yet Be Purchased Under the Plans or Programs
September 29, 2008 – October 26, 2008	—	$	—	—	$	297,375
October 27, 2008 – November 23, 2008	—	$	—	—	$	297,375
November 24, 2008 to December 31, 2008	—	$	—	—	$	297,375

Item 6:

Selected Financial Data


	Years Ended December 31,
	2008			2007		2006		2005			2004
	(dollars in thousands, except per share amounts)
Consolidated Statement of Operations Data (1)(2):
Net revenues	$	1,107,042		$	1,102,280	$	1,356,249	$	1,045,104		$	1,375,140

(Loss) income from continuing operations		(398,602	)		71,883		208,162		(63,656	)		131,197

(Loss) net income		(397,834	)		77,711		198,757		90,648			165,237

(Loss) income from continuing operations per common share—basic		(2.34	)		0.39		1.07		(0.32	)		0.68

(Loss) income from continuing operations per common share—diluted		(2.34	)		0.39		1.06		(0.32	)		0.67

Net (loss) income per common share—basic		(2.33	)		0.42		1.02		0.46			0.85

Net (loss) income per common share—diluted		(2.33	)		0.42		1.01		0.46			0.84

Consolidated Balance Sheet Data (1)(2):
Total assets		1,235,247			1,555,288		1,721,055		1,859,732			1,922,562

Long-term debt obligations		—			—		—		1,819			398,932

(1)

As a result of the divestiture of Broadband Test Division and Connection Systems, we are reporting Broadband Test Division and Connection Systems as discontinued operations for all periods presented. See “Note E: Discontinued Operations” in the Notes to Consolidated Financial Statements for further discussion of the divestitures.

(2)

The Consolidated Statement of Operations Data for the year ended December 31, 2008 includes the results of operations of Nextest from January 24, 2008 and the results of operations of Eagle Test from November 15, 2008. The Consolidated Balance Sheet Data as of December 31, 2008 includes the acquired Nextest and Eagle Test assets.

Item 7:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. In addition to the historical information contained in this document, the discussion in this Annual Report on Form 10-K contains forward-looking statements, made pursuant to Section 21E of the Exchange Act, that involve risks and uncertainties, such as statements of our plans, expectations and intentions. The cautionary statements made in this Annual Report on Form 10-K should be read as being applicable to all related forward-looking statements whenever they appear in this Annual Report on Form 10-K. Our actual results could differ materially from the results contemplated by these and any other forward-looking statements. Factors that could contribute to such differences include those discussed below as well as those cautionary statements and other factors set forth in “Item 1A: Risk Factors” and elsewhere herein.

Critical Accounting Policies and Estimates

We have identified the policies discussed below as critical to understanding our business and our results of operations and financial condition. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results.

Preparation of Financial Statements and Use of Estimates

The preparation of consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent liabilities. On an on-going basis, management evaluates its estimates, including those related to inventories, investments, goodwill, intangible and other long-lived assets, bad debts, income taxes, pensions, warranties, contingencies, and litigation. Management bases its estimates on historical experience and on appropriate and customary assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates.

Revenue Recognition

We recognize revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to our customers upon shipment or at delivery destination point. In circumstances where either title or risk of loss pass upon destination, acceptance or cash payment, we defer revenue recognition until such events occur.

Our equipment includes embedded software which is considered incidental to the product. Revenue is recognized upon shipment or at delivery destination point, provided that customer acceptance criteria can be demonstrated prior to shipment. Certain contracts require us to perform tests of the product to ensure that performance meets the published product specifications or customer requested specifications, which are generally conducted prior to shipment. Where the criteria cannot be demonstrated prior to shipment, revenue is deferred until customer acceptance has been received.

For multiple element arrangements we defer the fair value of any undelivered elements of the contract. We also defer the portion of the sales price that is not due until acceptance, which represents deferred profit. For a delivered item to be considered a separate unit, the delivered item must have value to the customer on a standalone basis, there must be objective and reliable evidence of fair value of the undelivered items in the arrangement and the delivery or performance of the undelivered item must be considered probable and substantially in our control. Fair value is the price charged when the element is sold separately. Our post-shipment obligations include installation, training services, one-year standard warranties, and extended warranties. Installation does not alter the product capabilities, does not require specialized skills or tools and can be performed by the customers or other vendors. Installation is typically provided within five to fifteen days of product shipment and is completed within one to two days thereafter. Training services are optional and do not affect the customer’s ability to use the product. We defer revenue for the fair value of installation and training. Extended warranties constitute warranty obligations beyond one year and we defer revenue in accordance with Financial Accounting Standards Board (“FASB”) Technical Bulletin 90-1, Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.

Our products are generally subject to warranty and related costs of the warranty are provided for in cost of revenue when product revenue is recognized. We classify shipping and handling costs in cost of revenue. Service revenue is recognized over the contractual period or as the services are performed.

We generally do not provide our customers with contractual rights of return for any of our products.

For transactions involving the sale of software which is not incidental to the product, revenue is recognized in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.” We recognize revenue when there is persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable and collectibility is probable. In instances where an arrangement contains multiple elements, revenue is deferred related to the undelivered elements to the extent that vendor-specific objective evidence of fair value (“VSOE”) exists for such elements. In instances where VSOE does not exist for one or more of the undelivered elements of an arrangement, all revenue related to the arrangement is deferred until all elements have been delivered. VSOE is

the price charged when the element is sold separately. Revenue for the separate elements is only recognized where the functionality of the undelivered element is not essential to the delivered element.

For certain contracts eligible for contract accounting under SOP No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” revenue is recognized using the percentage-of-completion accounting method based upon the percentage of incurred costs to estimated total costs. These arrangements require significant production, modification or customization. In all cases, changes to total estimated costs and anticipated losses, if any, are recognized in the period in which they are determined. With respect to contract change orders, claims or similar items, judgment must be used in estimating related amounts and assessing the potential for realization. Such amounts are only included in the contract value when they can be reliably estimated and realization is reasonably assured, generally upon receipt of a customer approved change order.

Inventories

Inventories, which include materials, labor, and manufacturing overhead, are stated at the lower of cost (first-in, first-out basis) or net realizable value. On a quarterly basis, we use consistent methodologies to evaluate all inventories for net realizable value. We record a provision for both excess and obsolete inventory when such write-downs or write-offs are identified through the quarterly review process. The inventory valuation is based upon assumptions about future demand, product mix and possible alternative uses.

Equity Incentive and Stock Purchase Plans

Effective January 1, 2006, we adopted the fair value recognition provision of Financial Accounting Standards No. 123 (revised 2004) “Share Based Payment” (“SFAS 123R”), using the modified prospective transition method and therefore have not restated results for prior periods. Under this transition method, stock based compensation expense for the first quarter of fiscal 2006 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, and is calculated based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 “Accounting for Stock Based Compensation” (“SFAS 123”). Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provision of SFAS 123R. As required by SFAS 123R, we have made an estimate of expected forfeitures and are recognizing compensation costs only for those stock-based compensation awards expected to vest. The cumulative effect of the initial adoption of SFAS 123R was not material.

Prior to the adoption of SFAS 123R, we recognized stock-based compensation expense in accordance with Accounting Principles Board (“APB”) Opinion No. 25 (“APB 25”). In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payments for public companies. We have applied provisions of SAB 107 in our adoption of SFAS 123R.

On May 26, 2005, our Board of Directors approved the accelerated vesting of certain outstanding, unvested “out of the money” stock options awarded to employees, officers and other eligible participants under our various stock option plans in effect at that time. The stock options that were accelerated had exercise prices that were in excess of $13.26, the closing price of our common stock on the New York Stock Exchange on May 26, 2005 and ranged in exercise price from $13.73 to $41.37 per share. As a result of the vesting acceleration, options to purchase approximately 7.6 million shares became exercisable immediately and we reduced the compensation expense we otherwise would have been required to record under SFAS 123R by approximately $48.6 million in the aggregate on a pre-tax basis over fiscal years 2006, 2007 and 2008.

Income Taxes

On a quarterly basis, we evaluate the realizability of our deferred tax assets by jurisdiction and assess the need for a valuation allowance. As a result of this review, undertaken at December 31, 2002, we concluded under

applicable accounting criteria that it was more likely than not that our deferred tax assets would not be realized and established a valuation allowance in several jurisdictions, most notably the United States. Due to the continued uncertainty of realization, we have maintained our valuation allowance at December 31, 2008 and 2007.

Investments

We account for our investments in debt and equity securities in accordance with the provisions of Statement of Financial Accounting Standards No 115 “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”) and FASB Staff Position Nos. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” On a quarterly basis we review our investments to identify and evaluate those that have an indication of a potential other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include:

•

The length of time and the extent to which the market value has been less than cost;

•

The financial condition and near-term prospects of the issuer; and

•

The intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

We have determined that we do not intend to hold certain marketable securities for a period of time sufficient to allow for recovery in market value and recognized an other-than-temporary impairment loss in the amount of $11.0 million, in the year ended December 31, 2008, primarily related to mortgage and asset backed debt securities.

Effective January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”) for financial assets and liabilities. As defined in SFAS No. 157, fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. We use the market and income approach techniques to value our financial instruments. SFAS No. 157 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted prices in active markets for identical assets as of the reporting date.

Level 2: Inputs other than Level 1, that are observable either directly or indirectly as of the reporting date. For example, a common approach for valuing fixed income securities is the use of matrix pricing. Matrix pricing is a mathematical technique used to value securities by relying on the securities’ relationship to other benchmark quoted prices, and therefore is considered a Level 2 input.

Level 3: Unobservable inputs that are not supported by market data. Unobservable inputs are developed based on the best information available, which might include Teradyne’s own data.

As a result of our November 14, 2008 acquisition of Eagle Test, we acquired $26.5 million of auction rate securities (ARS) at fair value ($30.0 million par value). In addition, we acquired (1) the right (“UBS Put”) to sell our ARS back to UBS at par plus interest, at our sole discretion, during a two-year period beginning on June 30, 2010, and (2) received an option to borrow up to 75% of the fair value of the ARS at no cost.

Beginning in February 2008 and continuing through December 31, 2008, the securities in our acquired ARS portfolio have experienced failed auctions, resulting in inability to sell these securities. Consequently, as set forth in the trust indentures, the coupon rate resets to a contractual rate which may not equal the current market rate. A failed auction results in a lack of liquidity in the securities but does not necessarily represent a deterioration of the credit quality of the issuer. All of our ARS, are AAA, AA or A rated by one or more of the major credit rating

agencies and are substantially guaranteed by a U.S. Department of Education agency or a third party insurer. At December 31, 2008, the underlying securities for the ARS have remaining maturities ranging from five to thirty-one years. Substantially, all of these securities are collateralized by student loans. The estimated fair value of our ARS portfolio was $26.0 million as of December 31, 2008.

Because the UBS Put is expected to allow us to sell our ARS securities at par within a relatively short time horizon and provides UBS with the ability to require us to sell the securities to them at any time between acceptance of the UBS Put through July 2012, we do not anticipate holding these investments to the earlier of maturity or redemption by the issuer. We intend to exercise the UBS Put and require UBS to repurchase our ARS at par at the earliest possible time, June 2010. As a result, as of the Eagle Test acquisition date (November 14, 2008), we classified the ARS as trading securities under SFAS No. 115. During the fourth quarter of 2008, we recorded a loss of $0.5 million in interest expense and other, net in our consolidated statement of operations for the decrease in the ARS fair value from November 14, 2008 to December 31, 2008. Future changes in fair value of the ARS will be recorded in operating results.

In determining the fair value of our ARS and other investments we utilize the provisions of SFAS No. 157. In determining the value of our ARS as of December 31, 2008 we utilized a discounted cash flow valuation model with the major inputs to such model based on our estimates of the assumptions that market participants would use in valuing these instruments. Specifically, we used the following key inputs to our valuation model:

•

Term — we estimated a five-year expected life of the instruments, based on our expectations of the most likely time in which it would take for the instruments to be called by the issuer or liquidity to be restored to the market place.

•

Probability of Default — we determined the probability of default using market credit spreads.

•

Discount Rate — we determined the discount rate based on estimated yields of similar publicly traded instruments (e.g., similar collateral, terms, credit quality, etc.).

•

Liquidity Risk Premium — given the recent instability in the financial markets and the low demand for auction rate securities, it is unclear as to when these securities will become liquid again. Without the auction process functioning again, it would be extremely difficult to estimate the expected holding period for these instruments. As a result, we included a 500 to 600 basis point premium to the discount rate to reflect the illiquidity of these bonds.

Based on these key inputs, we estimated the fair value of our ARS portfolio was $26.0 million as of December 31, 2008 representing a $0.5 million decrease in fair value since November 14, 2008. Our ARS securities and the related put option were the only investments as of December 31, 2008 in which we utilized Level 3 valuation techniques under SFAS No. 157.

On November 14, 2008, we recognized the UBS Put as an asset measured at a fair value of $2.7 million. At December 31, 2008, the fair value of the UBS Put was $3.3 million. We recorded a $0.6 million gain in interest income during the fourth quarter of 2008 for the increase in the fair value of the UBS Put since November 14, 2008. In determining the fair value of the UBS Put as of December 31, 2008, we assumed we would redeem the auction rate securities at par at the earliest possible time, June 30, 2010. We utilized a discounted cash flow model to determine the fair value of the UBS Put using the following assumptions (1) a time period of 1.5 years, representing the period from December 31, 2008 to the earliest date we can expect to be able to redeem the UBS Put (June 30, 2010) and (2) a discount rate of 3.79%, which included a spread based on the credit default swap of UBS in order to account for the credit risk of UBS.

We have elected fair value treatment for the UBS Put under SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). The UBS Put is the only instrument of its nature/type that we hold and for which we have elected the fair value option under SFAS No. 159.

Goodwill, Intangible and Long-Lived Assets

We assess the impairment of identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important in the determination of an impairment include significant underperformance relative to historical or projected future operating results, significant changes in the manner that we use the acquired asset and significant negative industry or economic trends. When we determine that the carrying value of intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate commensurate with the associated risks. We assess goodwill for impairment at least annually in the fourth quarter, on a reporting unit basis, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. If the book value of a reporting unit exceeds its fair value, the implied fair value of goodwill is compared with the carrying amount of goodwill. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recorded in an amount equal to that excess.

We determined that the worsening in our demand outlook experienced during the fourth quarter of 2008 was a significant event that indicated that the carrying amount of certain long-lived and intangible asset groups might not be recoverable. We conducted recoverability tests in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). As the undiscounted future cash flows of the long-lived asset groups exceeded their carrying amount, we determined that no impairment of our long-lived assets had occurred at December 31, 2008.

SELECTED RELATIONSHIPS WITHIN THE CONSOLIDATED

STATEMENTS OF OPERATIONS


	Year Ended December 31,
	2008		2007		2006
Percentage of net revenue:
Net Revenue:
Products	75.5	%	78.2	%	82.5	%
Services	24.5		21.8		17.5

Total net revenue	100.0		100.0		100.0
Cost of revenues:
Cost of products	40.8		39.0		40.6
Cost of services	14.2		14.4		11.3

Total cost of revenue	55.0		53.4		51.9
Gross profit	45.0		46.6		48.1
Operating Expenses:
Engineering and development	19.6		18.6		14.9
Selling and administrative	22.4		22.5		20.6
Acquired intangible assets amortization	1.9		0.3		0.3
In-process research and development	0.1		1.5		—
Restructuring and other, net	5.6		(0.1	)	(2.7	)
Goodwill impairment	30.1		—		—

Total operating expenses	79.7		42.8		33.1
Net interest and other	(0.2	)	3.4		2.4

(Loss) income from continuing operations before income taxes	(34.9	)	7.2		17.4
Provision for income taxes	1.1		0.7		2.1

(Loss) income from continuing operations	(36.0	)%	6.5	%	15.3	%

Results of Operations

Discontinued Operations

On August 1, 2007, we completed the sale of the Broadband Test Division to Tollgrade for $11.3 million in cash. Broadband Test Division had revenues for the seven month period ended July 31, 2007 of $11.2 million

and for the year ended December 31, 2006 of $20.6 million. Loss from discontinued operations of our Broadband Test Division for the year ended December 31, 2007 was $6.3 million and loss for the year ended December 31, 2006 was $5.6 million. In 2007, we recorded a gain on the sale of Broadband Test Division of $5.9 million, net of a tax provision of $0.4 million.

In accordance with SFAS 144, we are reporting Broadband Test Division as discontinued operations in the consolidated financial statements for all periods presented throughout this Annual Report on Form 10-K. Unless indicated otherwise, the discussion and amounts provided in this “Results of Operations” section and elsewhere in this Form 10-K relate to continuing operations only.

Bookings

Net bookings for our two reportable segments were as follows:


	2008		2007		2006		2007-2008 Dollar Change			2006-2007 Dollar Change
	(in millions)
Semiconductor Test	$	768.1	$	899.7	$	1,012.6	$	(131.6	)	$	(112.9	)
Systems Test Group		211.5		208.2		270.5		3.3			(62.3	)

	$	979.6	$	1,107.9	$	1,283.1	$	(128.3	)	$	(175.2	)

The Semiconductor Test business is dependent on the current and anticipated market for test equipment, which historically has been highly cyclical. Semiconductor Test bookings decreased $131.6 million or 15% from 2007 to 2008 due primarily to lower demand across all customer groups. In 2008, Nextest contributed $67.6 million of bookings and Eagle Test contributed $1.0 million of bookings.

The Semiconductor Test bookings decreased $112.9 million or 11% from 2006 to 2007 due to lower demand across a wide range of end markets, applications and geographies, as SOC device units grew at a lower rate in 2007 than in 2006. The lower demand in SOC market was lessened by our increase in SOC market share during 2007, by approximately 2 to 3 points.

Systems Test Group bookings increased $3.3 million or 2% from 2007 to 2008, primarily due to an increase in Mil/Aero board test program related bookings partially offset by decreases in Commercial Board Test and Diagnostic Solutions.

Systems Test Group bookings decreased $62.3 million or 23% from 2006 to 2007, primarily due to decreases across all business units. Diagnostic Solutions orders are program related and have significant fluctuations. There was a large program rollout in 2006 for the Vehicle Measurement Module product line. Mil/Aero bookings are also often program related, and there was also a significant military program that took place in 2006. Commercial Board Test bookings decreased in 2007 due to a contraction in the size of the ICT market.

Order cancellations and backlog adjustments for our two reportable segments for the last three years were as follows:


	2008		2007		2006
	(in millions)
Semiconductor Test	$	10.3	$	13.6	$	3.3
Systems Test Group		—		0.3		0.5

	$	10.3	$	13.9	$	3.8

Customers may delay delivery of products or cancel orders suddenly and without significant notice, subject to possible cancellation penalties. In 2008, 2007 and 2006, there were no significant cancellation penalties received.

Due to possible changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily indicative of the actual sales for any succeeding period. Delays in delivery schedules and/or cancellations of backlog during any particular period could have a material adverse effect on our business, financial condition and results of operations.

Net bookings by region as a percentage of our total net bookings were as follows:


	2008		2007		2006
United States	27	%	22	%	28	%
South East Asia	24		24		20
Taiwan	16		16		12
Europe	11		12		14
Japan	11		11		13
Singapore	10		14		12
Rest of the World	1		1		1

	100	%	100	%	100	%

For the past three years, our backlog of unfilled orders for our two reportable segments was as follows:


	2008		2007		2006
	(in millions)
Semiconductor Test	$	129.4	$	236.2	$	212.4
Systems Test Group		106.9		102.5		120.2

	$	236.3	$	338.7	$	332.6

Revenue

Net revenues for our two reportable segments were as follows:


	2008		2007		2006		2007-2008 Dollar Change			2006-2007 Dollar Change
	(in millions)
Semiconductor Test	$	900.3	$	876.5	$	1,088.9	$	23.8		$	(212.4	)
Systems Test Group		206.7		225.8		267.3		(19.1	)		(41.5	)

	$	1,107.0	$	1,102.3	$	1,356.2	$	4.7		$	(253.9	)

Semiconductor Test revenue increased $23.8 million or 3% from 2007 to 2008, primarily due to $79.4 million of sales from our Nextest acquisition partially offset by lower sales due to decreased demand due to SOC device units growing at a lower rate in 2008 compared to 2007.

Semiconductor Test revenue decreased $212.4 million or 20% from 2006 to 2007 due to SOC device units growing at a lower rate in 2007 compared to 2006. This resulted in decreased demand across a wide range of end markets, applications and geographies. The lower demand rate was lessened by an increase in SOC market share during 2007 by approximately 2 to 3 points.

Systems Test Group revenue decreased $19.1 million or 8% from 2007 to 2008, primarily due to a lower Mil/Aero board test program-related sales.

Systems Test Group revenue decreased $41.5 million or 16% from 2006 to 2007 due to decreased sales in Diagnostic Solutions. The decrease was related to a large program rollout for the Vehicle Measurement Module product line that took place in 2006 and was concluded in 2007.

Our two reportable segments accounted for the following percentages of consolidated net revenue for each of the last three years:


	2008		2007		2006
Semiconductor Test	81	%	80	%	80	%
Systems Test Group	19		20		20

	100	%	100	%	100	%

Net revenue by region as a percentage of total revenue was as follows:


	2008		2007		2006
South East Asia	26	%	22	%	24	%
United States	22		23		23
Taiwan	18		13		14
Japan	11		12		12
Singapore	10		15		11
Europe	10		12		14
Rest of the World	3		3		2

	100	%	100	%	100	%

The breakout of product and service revenue for the past three years was as follows:


	2008		2007		2006		2007-2008 Dollar Change			2006-2007 Dollar Change
	(in millions)
Product Revenue	$	836.0	$	861.6	$	1,118.8	$	(25.6	)	$	(257.2	)
Service Revenue		271.0		240.7		237.4		30.3			3.3

	$	1,107.0	$	1,102.3	$	1,356.2	$	4.7		$	(253.9	)

Our product revenue decreased $25.6 million or 3% in 2008 from 2007 due to decreased demand. Service revenue, which is derived from the servicing of our installed base of products and includes maintenance contracts, repairs, extended warranties, parts sales and applications support, increased $30.3 million or 13% due to a larger installed base.

Our product revenue decreased $257.2 million or 23% in 2007 from 2006 due to SOC device units growing at a lower rate in 2007 compared to 2006. Service revenue increased $3.3 million or 1% in 2007 from 2006.

In the past three years, no single customer accounted for more than 10% of consolidated net revenue. In 2008, 2007, and 2006, our three largest customers in the aggregate accounted for 14%, 16%, and 18% of consolidated net revenue, respectively.

Gross Profit


	2008			2007			2006			2007-2008 Dollar / Point Change			2006-2007 Dollar / Point Change
	(dollars in millions)
Gross Profit	$	498.2		$	513.4		$	651.9		$	(15.2	)	$	(138.5	)
Percent of Total Revenue		45.0	%		46.6	%		48.1	%		(1.6	)		(1.5	)

Gross profit as a percentage of revenue decreased from 2007 to 2008 by 1.6 percentage points. A decrease of 2.5 points was due to a $27.6 million increase in provision for excess and obsolete inventory recorded as a result of the significant decrease in forecasted semiconductor demand coupled with a product transition; this decrease was partially offset by improved service margins in our Semiconductor Test group.

Gross profit as a percentage of revenue decreased from 2006 to 2007 by 1.5 percentage points. A reduction in Semiconductor Test sales volume contributed to a decrease of 1.5 points, a shift in product mix, primarily related to higher service revenue as a percentage of total revenue, contributed to a decrease of 2 points; these decreases were partially offset by an increase of 1 point related to lower Semiconductor Test inventory provision in 2007, and an increase of 1 point resulting from lower fixed costs and employee compensation across both segments.

The breakout of product and service gross profit was as follows:


	2008			2007			2006			2007-2008 Dollar / Point Change			2006-2007 Dollar / Point Change
	(dollars in millions)
Product Gross Margin	$	384.8		$	431.1		$	568.5		$	(46.3	)	$	(137.4	)
Percent of Product Revenue		46.0	%		50.0	%		50.8	%		(4.0	)		(0.8	)

Service Gross Margin	$	113.4		$	82.3		$	83.4		$	31.1		$	(1.1	)
Percent of Service Revenue		41.8	%		34.2	%		35.1	%		7.6			(0.9	)

We assess the carrying value of our inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory positions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are not expected to be consumed during the next four quarters, is written-down to estimated net realizable value.

The provision for excess and obsolete inventory included in cost of revenues for the year ended December 31, 2008 was $29.4 million. Of the $29.4 million of total excess and obsolete provisions recorded, $24.9 million was related to Semiconductor Test and $4.5 million was related to Systems Test Group.

The provision for excess and obsolete inventory included in cost of revenues for the year ended December 31, 2007 was $1.8 million. Of the $1.8 million of total excess and obsolete provisions recorded, $0.5 million related to Semiconductor Test and $1.3 million related to Systems Test Group.

The provision for excess and obsolete inventory included in cost of revenues for the year ended December 31, 2006 was $12.8 million. Of the $12.8 million of total excess and obsolete provisions recorded, $11.5 million related to Semiconductor Test (including an $8.0 million provision for the write-down of excess non-FLEX inventory) and $1.3 million related to Systems Test Group.

During the year ended December 31, 2008, 2007 and 2006 we scrapped $1.3 million, $33.5 million and $29.5 million of inventory, respectively, and sold $2.4 million, $1.1 million and $2.8 million of previously written-down or written-off inventory, respectively. As of December 31, 2008, we have inventory related reserves for amounts which had been written-down or written-off totaling $124.9 million. We have no pre-determined timeline to scrap the remaining inventory.

Engineering and Development

Engineering and development expenses were as follows:


	2008			2007			2006			2007-2008 Change		2006-2007 Change
	(dollars in millions)
Engineering and Development	$	216.5		$	204.3		$	202.4		$	12.2	$	1.9
Percent of Total Revenue		19.6	%		18.6	%		14.9	%

The increase of $12.2 million or 6% in engineering and development expenses from 2007 to 2008 was mainly due to an increase of $10.3 million in spending related to investments in adjacent markets, an increase of $12.9 million due to the acquisition of Nextest and Eagle Test, partially offset by a decrease in other Semiconductor Test spending primarily related to headcount reduction of $8.3 million and lower variable employee compensation of $2.8 million.

The increase of $1.9 million or 1% in engineering and development expenses from 2006 to 2007 was due in part to a $10.3 million increase in spending related to new products and entry into adjacent markets, primarily in the Semiconductor Test segment. This was partially offset by lower variable employee compensation of $8.4 million.

Selling and Administrative

Selling and administrative expenses were as follows:


	2008			2007			2006			2007-2008 Change			2006-2007 Change
	(dollars in millions)
Selling and Administrative	$	247.8		$	248.1		$	278.8		$	(0.3	)	$	(30.7	)
Percent of Total Revenue		22.4	%		22.5	%		20.6	%

The decrease in selling and administrative spending of $0.3 million from 2007 to 2008 consists of the following: $14.7 million decrease due to lower labor costs from reductions in headcount, $7.0 million decrease due to lower variable employee compensation, partially offset by $18.5 million increase due to the acquisition of Nextest and $3.0 million increase related to the acquisition of Eagle Test.

The decrease in selling and administrative spending of $30.7 million or 11% from 2006 to 2007 consists of the following: $13.5 million decrease due to lower variable employee compensation, $17.2 million decrease due to lower transition expenses, including the consolidation of facilities in Massachusetts and costs associated with the outsourcing of certain information technology functions, both of which occurred in 2006.

Acquired Intangible Assets Amortization

Acquired intangible assets amortization expense was as follows:


	2008			2007			2006			2007-2008 Change		2006-2007 Change
	(dollars in millions)
Acquired Intangible Assets Amortization	$	20.6		$	3.7		$	3.6		$	16.9	$	0.1
Percent of Total Revenue		1.9	%		0.3	%		0.3	%

Acquired intangible assets amortization expense increased from 2007 to 2008 due to the acquisitions of Nextest and Eagle Test.

Goodwill Impairment

In 2008, we recorded a non-cash impairment charge of $333.3 million. We experienced a worsening in our demand outlook during the fourth quarter of 2008. This sharp decline is not expected to recover in the near term. Consequently, this has led to an impairment of our goodwill of $333.3 million as of December 31, 2008.

In-process Research and Development

In 2008, we recorded an expense of $1.6 million related to in-process research and development related to the acquisition of Nextest and Eagle Test.

On March 7, 2007, we purchased in-process enabling test technology and hired certain engineers from MOSAID Technologies Inc. for $17.6 million, which includes $0.6 million in fees directly related to the acquisition. Of the purchase price, $16.7 million has been allocated to in-process research and development and therefore has been immediately charged to the statement of operations. The balance of the purchase price has been allocated to acquired workforce and fixed assets. In the year ended December 31, 2008, as a result of a workforce reduction, Teradyne recorded an impairment charge of $0.6 million to write-off the acquired workforce asset.

Restructuring and Other, Net

In response to a downturn in the industry, we initiated restructuring activities across all segments to reduce costs and redundancies, principally through headcount reductions and facility consolidations. The tables below represent activities related to these actions. The remaining accrual for severance and benefits is reflected in the accrued employees’ compensation and withholdings account on the balance sheet and is expected to be paid in 2009. The remaining accrual for lease payments on vacated facilities is reflected in the other accrued liabilities account and the long-term other accrued liabilities account and is expected to be paid out over the lease terms, the latest of which expires in 2013. We expect to pay out approximately $2.4 million against the lease accruals over the next twelve months. Our future lease commitments are net of expected sublease income of $7.7 million as of December 31, 2008. We have subleased approximately 64% of our unoccupied space as of December 31, 2008.

2008 Activities


	Facility Related			Acquisition Costs			Loss on Sale of Land and Buildings			Severance and Benefits			Long-Lived Asset Impairment			Total
	(in thousands)
2008 provision	$	13,748		$	823		$	20,883		$	24,421		$	550		$	60,425
Cash payments		(951	)		(823	)		—			(19,079	)		—			(20,853	)
Accelerated depreciation and other		(11,966	)		—			(20,883	)		—			(550	)		(33,399	)

Balance at December 31, 2008	$	831		$	—		$	—		$	5,342		$	—		$	6,173

We recorded the following activities related to the 2008 restructuring activities:

•

$24.4 million of severance charges across all functions and segments related to headcount reductions of approximately 470 people;

•

$20.9 million loss on sale of land and buildings, including $22.6 million loss on the sale of real estate across both segments for a manufacturing facility in North Reading, MA as a result of the transfer of manufacturing to an outsourced partner and $1.7 million gain on the sale of real estate in the Semiconductor Test segment for a facility in Agoura Hills, CA;

•

$13.7 million of facility related charges, including $12.0 million of facility charges across both segments related to the accelerated depreciation of a manufacturing facility in North Reading, Massachusetts as a result of the transfer of manufacturing to an outsourced partner; $0.7 million of facility charges across both segments related to the early exit of a facility in Bracknell, UK, $0.7 million of facility charges in the Semiconductor Test segment related to the early exit of a facility in Ontario, Canada and $0.3 million of other miscellaneous charges across both segments mainly related to housing in Japan and Belgium office;

•

$0.8 related to the acquisition financing costs; and

•

$0.6 million charge in the Semiconductor Test segment for a long-lived asset impairment related to acquired intangible assets.

The restructuring actions taken during the year ended December 31, 2008 are expected to generate quarterly cost savings of approximately $11.2 million across all segments.

2007 Activities


	Gain on Sale of Land and Buildings			Severance and Benefits			Insurance Recovery			Total
	(in thousands)
2007 (credit) provision	$	(3,597	)	$	6,963		$	(4,326	)	$	(960	)
Cash receipts (payments)		3,597			(5,855	)		4,326			2,068

Balance at December 31, 2007	$	—		$	1,108		$	—		$	1,108
2008 credit		—			(194	)		—			(194	)
Cash payments		—			(833	)		—			(833	)

Balance at December 31, 2008	$	—		$	81		$	—		$	81

We recorded the following activity related to the 2007 restructuring activities:

•

$3.6 million gain on the sale of land and building in Deerfield, IL;

•

$7.0 million of severance charges related to 202 people across all functions and segments; and

•

$4.3 million of cash proceeds recovered from insurance related to a facility fire in Taiwan.

2006 Activities


	Gain on Sale of Land and Buildings			Severance and Benefits			Facility Related			Long-Lived Asset Impairment			Total
	(in thousands)
2006 (credit) provision	$	(39,098	)	$	4,292		$	1,153		$	50		$	(33,603	)
Cash receipts (payments)		39,098			(2,659	)		(528	)		—			35,911
Asset write-downs		—			—			—			(50	)		(50	)

Balance at December 31, 2006	$	—			1,633			625		$	—			2,258
2007 credit		—			(152	)		—			—			(152	)
Cash payments		—			(1,473	)		(590	)		—			(2,063	)

Balance at December 31, 2007	$	—		$	8		$	35		$	—		$	43
2008 credit		—			(8	)		—			—			(8	)
Cash payments		—			—			(35	)		—			(35	)

Balance at December 31, 2008	$	—		$	—		$	—		$	—		$	—

We recorded the following activity related to the 2006 restructuring activities:

•

$39.1 million gain on the sale of real estate, including $35.8 million for two Semiconductor Test facilities in Boston, MA, $1.5 million for a Semiconductor Test parking facility in Boston, MA, $1.3 million for a Semiconductor Test facility in San Jose, CA and $0.5 million for buildings in Nashua, NH;

•

$4.3 million of severance charges related to 179 people across all segments; and

•

$1.2 million of facility related charges for the exit of Semiconductor Test facilities in Newbury Park, CA and Waltham, MA.

Pre-2006 Activities


	Severance and Benefits			Loss on Sale of Product Lines			Other Charges			Facility Related			Total
Balance at December 31, 2005	$	10,116		$	—		$	529		$	17,061		$	27,706
2006 credit		(50	)		(406	)		—			(1,974	)		(2,430	)
Cash (payments) receipts		(8,883	)		406			(529	)		(5,483	)		(14,489	)

Balance at December 31, 2006		1,183			—			—			9,604			10,787
2007 (credit) provision		(292	)		(906	)		—			1,651			453
Cash (payments) receipts		(649	)		906			—			(3,488	)		(3,231	)

Balance at December 31, 2007		242			—			—			7,767			8,009
2008 (credit) provision		(124	)		—			—			2,676			2,552
Cash payments		(118	)		—			—			(1,971	)		(2,089	)

Balance at December 31, 2008	$	—		$	—		$	—		$	8,472		$	8,472

For pre-2006 restructuring activity, we recorded the following activity in 2008:

•

$2.7 million facility related charge in Systems Test Group segment for changes in the estimated amount and timing of sublease income on a facility in Westford, MA.

Interest and Other, net


	2008			2007			2006			2007-2008 Change			2006-2007 Change
	(in millions)
Interest income	$	12.6		$	39.1		$	44.6		$	(26.5	)	$	(5.5	)
Interest expense and other, net	$	(14.2	)	$	(1.1	)	$	(11.6	)	$	(13.1	)	$	10.5

The interest income decreased by $26.5 million, from $39.1 million in 2007 to $12.6 million in 2008, due primarily to lower cash balances as a result of the acquisition of Nextest and Eagle Test and stock repurchase activity. The interest income decrease of $5.5 million, from $44.6 million in 2006 to $39.1 million in 2007, was primarily attributable to lower cash balances due to the stock repurchase activity in 2007.

The increase in interest expense and other, net of $13.1 million, from $1.1 million in 2007 to $14.2 million in 2008, was due primarily to recognizing other-than-temporary losses related to marketable securities and realized losses from sales of marketable securities. The decrease in interest expense and other, net of $10.5 million, from $11.6 million in 2006 to $1.1 million in 2007, was due primarily to the repayment of our 3.75% Senior Convertible Notes in the fourth quarter of 2006.

(Loss) Income from Continuing Operations before Income Taxes


	2008			2007		2006		2007-2008 Change			2006-2007 Change
	(in millions)
Semiconductor Test	$	(295.4	)	$	25.1	$	183.1	$	(320.5	)	$	(158.0	)
Systems Test Group		(83.6	)		12.0		24.2		(95.6	)		(12.2	)
Corporate		(7.0	)		42.1		28.7		(49.1	)		13.4

Total	$	(386.0	)	$	79.2	$	236.0	$	(465.2	)	$	(156.8	)

The decrease in income from continuing operations before income taxes from 2007 to 2008 is primarily due to the goodwill impairment charge in 2008 and increased restructuring and other costs in 2008 compared to 2007.

The decrease in income from continuing operations before income taxes from 2006 to 2007 was mainly due to the 20% reduction in revenue in the Semiconductor Test segment, which was a result of SOC device units growing at a lower rate in 2007 compared to 2006. The increase in Corporate from 2006 to 2007 is primarily related to the elimination of our interest expense due to the repayment of our Notes in 2006 and gains from sales of real estate which totaled $3.6 million.

Income Taxes

The income tax expense from continuing operations for 2008 and 2007 totaled $12.6 million and $7.4 million, respectively. The expense relates primarily to tax provisions for foreign taxes. During 2006, the income tax expense from continuing operations totaled $27.9 million. The expense relates primarily to a tax provision for foreign taxes offset by benefits from a $6.0 million credit related to U.S. pension funding and the settlement of a California income tax audit for 1998 through 2000.

Contractual Obligations

The following table reflects our contractual obligations as of December 31, 2008:


Payments Due by Period	Purchase Obligations		Non-cancelable Lease Commitments (1)		Debt		Interest on Debt		Pension Contributions		Total
2009	$	103,342	$	20,160	$	122,500	$	3,299	$	7,531	$	256,832
2010		—		18,091		—		—		—		18,091
2011		—		15,729		—		—		—		15,729
2012		—		11,847		—		—		—		11,847
2013		—		6,281		—		—		—		6,281
Beyond 2013		—		9,264		—		—		—		9,264

Total	$	103,342	$	81,372	$	122,500	$	3,299	$	7,531	$	318,044

(1)	Non-cancelable lease payments have not been reduced by sublease income of $7.7 million due in the future under non-cancelable sublease agreements.

Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities balance decreased $368.6 million in 2008 from 2007, to $374.3 million. Cash activity for 2008, 2007 and 2006 was as follows (in millions):


	2008			2007			2006			2007-2008 Change			2006-2007 Change
Cash provided by operating activities:
Income (loss) from continuing operations, adjusted for non cash items	$	123.7		$	176.0		$	283.8		$	(52.3	)	$	(107.8	)
Change in operating assets and liabilities, net of product lines and businesses sold and acquired		38.6			(44.2	)		169.1			82.8			(213.3	)
Cash provided by (used for) discontinued operations		0.8			(3.6	)		(2.8	)		4.4			(0.8	)

Total cash provided by operating activities	$	163.1		$	128.2		$	450.1		$	34.9		$	(321.9	)

Cash (used for) provided by investing activities for continuing operations		(449.1	)		105.8			196.6			(554.9	)		(90.8	)
Cash provided by (used for) investing activities of discontinued operations		0.0			10.8			(0.4	)		(10.8	)		11.2

Total cash (used for) provided by investing activities	$	(449.1	)	$	116.6		$	196.2		$	(565.7	)	$	(79.6	)

Total cash provided by (used for) financing activities	$	46.3		$	(250.5	)	$	(419.0	)	$	296.8		$	168.5

Total	$	(239.7	)	$	(5.7	)	$	227.3		$	(234.0	)	$	(233.0	)

In 2008, changes in operating assets and liabilities, net of product lines and businesses sold and acquired, provided cash of $38.6 million. This was due primarily to a decrease in accounts receivable of $118.2 million due to a decrease in sales volume in the fourth quarter of 2008 and a decrease in days sales outstanding from 66 days in 2007 to 51 days in 2008, as a result of improved collections. This was partially offset by a decrease in accounts payable and other accruals of $34.4 million and an increase in other assets of $29.9 million.

In 2007, changes in operating assets and liabilities, net of product lines and businesses sold and acquired, used cash of $44.2 million. This was due to a number of factors including, an increase in accounts receivable of $33.7 million due to an increase in days sales outstanding from 55 days in 2006 to 66 days in 2007, a reduction of accrued income taxes of $30.9 million due to the payments of 2006 foreign income taxes around the world, and an increase in other assets of $25.0 million primarily related to balances due for inventory provided to our outsourced subcontract manufacturer of $15.7 million. These uses of cash were partially offset by a decrease in our inventory balances due to shorter cycle times with our FLEX products.

In 2006, changes in operating assets and liabilities, net of product lines and businesses sold and acquired, provided cash of $169.1 million primarily due to a decrease in accounts receivable balances of $67.9 million resulting mostly from the decrease in sales volume in the fourth quarter of 2006 compared to the fourth quarter of 2005. Additionally, there was a decrease in inventory of $79.3 million due to shorter cycle times with our FLEX products, and an increase of $32.8 million in accrued income taxes due to higher foreign income taxes in 2006 compared to 2005. These providers of cash were partially offset by retirement plan contributions of $30.2 million of which $20.0 million was a contribution to our U.S. Qualified Pension Plan.

Investing activities consist of purchases, sales and maturities of marketable securities, cash paid for acquisitions of businesses or technology, proceeds from the sale of land and buildings, proceeds from asset and product line disposals, cash paid for purchases of capital assets. In 2008, we completed the acquisition of Nextest and Eagle Test, for a total cash purchase price and related fees, net of cash acquired, of $574.3 million. In March 2007, we bought an enabling technology from MOSAID Technologies Inc. for a purchase price and related costs totaling $17.6 million. Capital expenditures were $87.2 million in 2008, $86.1 million in 2007 and $110.0 million in 2006. Capital expenditures decreased by $23.9 million in 2007 compared to 2006, primarily due to a decrease of internally manufactured systems for use in marketing and engineering activities in Semiconductor Test of approximately $18.1 million. The remainder of the decrease was attributable to lower purchases of manufacturing and engineering equipment across Teradyne. Proceeds from asset disposals were $61.7 million, $8.8 million and $85.0 million in 2008, 2007 and 2006, respectively and primarily consist of sales of real estate. Investing activities of discontinued operations provided $10.8 million of cash in 2007. Included in this balance is the net proceeds we received related to the sale of our Broadband Test Division to Tollgrade in August 2007.

Financing activities include proceeds from revolving credit facility, issuance of our common stock, repurchases of our common stock as well as repayments of debt.

In November of 2008, we obtained a revolving credit facility that provided net cash of $119.7 million. The credit facility will be available on a revolving basis until November 14, 2011. As of December 31, 2008, the outstanding balance under the credit facility was $122.5 million. We may optionally prepay loans or reduce the credit facility commitments at any time, without penalty. Borrowings under the credit facility are guaranteed by certain domestic subsidiaries of Teradyne, currently Nextest and Eagle Test. The obligations of Teradyne and the guarantors are collateralized by (i) all personal property of Teradyne and each guarantor, (ii) all present and future shares of capital stock of (or other ownership or profit interest in) each of Teradyne’s present and future subsidiaries (limited to 65% of the capital stock of each first-tier foreign subsidiary), and (iii) all real property of Teradyne and each guarantor, if the ratio of consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) to consolidated indebtedness, for any period of four consecutive fiscal quarters, exceeds 2.5 to 1.0. The credit facility contains customary representations and warranties, as well as affirmative and negative covenants, including the financial measures of a leverage ratio, fixed charge coverage ratio and an available domestic cash to total revolving borrowings ratio. As of December 31, 2008, we were in compliance with the financial covenants contained in the credit facility.

During 2008, 2007 and 2006, issuances of common stock under stock option and stock purchase plans provided cash of $17.8 million, $23.2 million and $23.3 million, respectively.

In July 2006, our Board of Directors authorized a stock repurchase program which was completed in October 2007. In total, $400 million of common stock was repurchased in the open market or in privately negotiated transactions. During 2006, we repurchased 10.6 million shares of common stock for $137.8 million for an average price per share of $12.98. During 2007, we repurchased 18.3 million shares of common stock for $273.7 million for an average price per share of $14.94. In November 2007, our Board of Directors authorized another stock repurchase program, allowing us to spend an aggregate of $400 million to repurchase shares of our common stock. During 2008, we repurchased 7.5 million shares of common stock for $91.2 million at an average price of $12.20 per share.

In October 2001, we issued $400 million principal amount of the Notes in a private placement and received net proceeds of $389 million. The Notes were convertible at the option of the holders at a rate which was equivalent to a conversion price of approximately $26.00 per share, which was equal to a conversion rate of approximately 38.4615 shares of common stock per $1,000 principal amount of Notes. We made annual interest payments of $15 million, paid semi-annually, on the Notes commencing on April 15, 2002. During 2004 and 2005, we repurchased $100 million of the outstanding Notes pursuant to authorization from our Board of Directors. The decision to repurchase a portion of the Notes was based on the fair market value of the Notes being below the return we would earn on high grade investment securities. On January 26, 2006, management was given further authorization by our Board to repurchase up to the full $300 million of the principal amount that remained outstanding under the Notes through open market purchases, privately negotiated transactions and auctions for a price not to exceed 100% of the principal amount plus any accrued but unpaid interest thereon. During 2006, repayments of long-term debt and notes payable used cash of $304.6 million. In the first and third quarter of 2006, we repurchased Notes of $15.0 million and $24.0 million, respectively, and we repaid the remaining $261 million in the fourth quarter of 2006

We operate in a highly cyclical industry and we may experience, with relatively short notice, significant fluctuations in demand for our products. This could result in a material effect on our liquidity position. We expect, based upon our current estimate of our revenue and operating results for fiscal year 2009, that our cash, cash equivalents and marketable securities balance of $374.3 million will be sufficient to meet our cash requirements for the next twelve months. If our estimates of revenue and operating results for fiscal year 2009 significantly decrease, we could be required to obtain additional financing. However, if financing is necessary, there can be no assurance that such capital will be available or that the terms will be acceptable to us. Inflation has not had a significant long-term impact on earnings

Retirement Plans

We adopted the funded status recognition provision of SFAS 158 effective December 31, 2006. This standard amends SFAS 87, 88, 106, and 132(R). SFAS 158 requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by SFAS 158. The pension asset or liability represents the difference between the fair value of the pension plan’s assets and the projected benefit obligation as of December 31. For other postretirement benefit plans, the liability is the difference between the fair value of the plan’s assets and the accumulated postretirement benefit obligation as of December 31.

Our pension expense, which includes the U.S. Qualified Pension Plan, certain Qualified Plans for non-U.S. subsidiaries and a Supplemental Executive Defined Benefit Plan, was approximately $3.4 million for the year ended December 31, 2008. The largest portion of our 2008 pension expense was $2.8 million for our Supplemental Executive Defined Benefit Plan. Pension expense is calculated based upon a number of actuarial assumptions, a significant input to the actuarial models that measure pension benefit obligations. Two assumptions: discount rate and expected return on assets are important elements of pension plan expense and

asset/liability measurement. We evaluate these critical assumptions at least annually on a plan and country specific basis. We evaluate other assumptions involving demographic factors, such as retirement age, mortality and turnover periodically, and update them to reflect our experience and expectations for the future.

In developing the expected return on plan assets assumption, we evaluated input from our investment manager and pension consultants, including their review of asset class return expectations. Based on this review, we believe that 7.75% was an appropriate rate to use for fiscal year 2008. We will continue to evaluate the expected return on plan assets at least annually, and will adjust the rate as necessary. The current asset allocation for our U.S. Qualified Pension Plan is 37% invested in equity securities and 63% invested in fixed income securities. Our investment manager regularly reviews the actual asset allocation and periodically rebalances the portfolio to ensure alignment with our targeted allocations.

We base our determination of pension expense or benefit on a market-related valuation of assets, which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return on assets. Since the market-related value of assets recognizes gains or losses over a five-year period, the future value of assets will be impacted as previously deferred gains or losses are recognized. As of December 31, 2008, under the U.S. Qualified Pension Plan, we had cumulative losses of approximately $62.5 million, which remain to be recognized in the calculation of the market-related value of assets. The discount rate that we utilized for determining future pension obligations for the U.S. Qualified Pension Plan is based on Citigroup Pension Index adjusted for the plan’s expected cash flows and was 6.2% at December 31, 2008, down from 6.5% at December 31, 2007. We estimate that in 2009 we will recognize approximately $1.1 million of pension expense for the U.S. Qualified Pension Plan. The pension expense estimate for 2009 is based on a 6.2% discount rate, and 7.75% return on Plan assets. Future pension expense or benefit will depend on future investment performance, changes in future discount rates and various other factors related to the employee population participating in our pension plans. As of December 31, 2008, we had unrecognized pension losses of $144.6 million, of which $127.3 million is for the U.S. Qualified Pension Plan.

We performed a sensitivity analysis, which expresses the estimated U.S. Qualified Pension Plan pension expense (benefit) that would have resulted for the year ended December 31, 2008, if we changed either the discount rate or the expected return on plan assets.


	Discount Rate
Return on Plan Assets	5.7%		6.2%			6.7%
	(in millions)
7.25%	$	3.8	$	2.3		$	1.2
7.75%		2.5		1.1			0.0
8.25%		1.3		(0.1	)		(1.2	)

The assets of the U.S. Qualified Pension Plan consist primarily of equity and fixed income securities. The value of our U.S. Qualified Pension Plan assets has decreased from $254.0 million at December 31, 2007 to $184.5 million at December 31, 2008. Our funding policy is to make contributions to the Pension Plan in accordance with local laws and to the extent that such contributions are tax deductible. During 2008, there were no additional contributions made to the U.S. Qualified Pension Plan, and we made $4.3 million of additional contributions to certain Qualified Plans for non-U.S. subsidiaries. Based upon the U.S. Qualified Pension Plan funded status as of December 31, 2008, we do not expect to make any contributions to this plan in 2009. Contributions that will be made in 2009 to certain Qualified Plans for non-U.S. subsidiaries are based on local statutory requirements and will be approximately $3.1 million.

Equity Compensation Plans

In addition to our 1996 Employee Stock Purchase Plan discussed in “Note O: Stock Based Compensation” in Notes to Consolidated Financial Statements, we have the 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”) under which equity securities are authorized for issuance. The 2006 Equity Plan was approved by stockholders on May 25, 2006. The 2006 Equity Plan replaces our 1996 Non-Employee Director Stock Option Plan, our 1997 Employee Stock Option Plan, and our 1991 Employee Stock Option Plan, each of which were terminated upon the shareholders approval of the 2006 Equity Plan. We may not issue any additional option grants or awards under the terminated plans, but the options and awards previously granted and currently outstanding under these plans will remain in effect until the earlier of the date of their exercise, vesting or expiration, as applicable.

The following table presents information about these plans as of December 31, 2008 (share numbers in thousands):


Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (1))

Equity plans approved by shareholders	7,152	(1)	$	17.55	11,072	(3)

Equity plans not approved by shareholders (4)(5)(6)	14,786	(2)	$	14.15	—


Total	21,938		$	14.66	11,072

(1)	Includes 4,642,185 shares of restricted stock units that are not included in the calculation of the weighted average exercise price.

(2)	Includes 504,519 shares of restricted stock units that are not included in the calculation of the weighted average exercise price.

(3)	Consists of 6,875,000 securities available for issuance under the 2006 Equity Plan and 4,197,000 of securities available for issuance under the Employee Stock Purchase Plan.

(4)

In connection with the acquisition of GenRad, Inc. in October 2001 (the “Acquisition”), we assumed the outstanding options granted under the GenRad, Inc. 1991 Equity Incentive Plan, the GenRad, Inc. 1991 Directors’ Stock Option Plan and the GenRad, Inc. 1997 Non-Qualified Employee Stock Option Plan (collectively, the “GenRad Plans”). Upon the consummation of the Acquisition, these options became exercisable for shares of our common stock based on an exchange ratio of 0.1733 shares of our common stock for each share of GenRad’s common stock. No additional options will be granted pursuant to the GenRad Plans. As of December 31, 2008, there were outstanding options exercisable for an aggregate of 88,849 shares of our common stock pursuant to the GenRad Plans, with a weighted average exercise price of $54.58 per share.

(5)

In connection with the acquisition of Nextest Systems Corporation (the “Nextest Acquisition”), we assumed the options and restricted stock units granted under the Nextest Systems Corporation 1998 Equity Incentive Plan, as amended, and the Nextest Systems Corporation 2006 Equity Incentive Plan (collectively, the “Nextest Plans”). Upon the consummation of the Nextest Acquisition, these options and restricted stock units were converted automatically into, respectively, options to purchase and restricted stock units representing, an aggregate of 4,417,594 shares of our common stock. No additional awards will be granted under the Nextest Plans. As of December 31, 2008, there were outstanding options exercisable for an aggregate of 2,127,936 shares of our common stock pursuant to the Nextest Plans, with a weighted average exercise price of $3.17 per share. As of December 31, 2008, there were outstanding restricted stock units covering an aggregate of 479,772 shares of our common stock, none of which are included in the calculation of the weighted average exercise price.

(6)

In connection with the acquisition of Eagle Test Systems, Inc. (the “Eagle Acquisition”), we assumed the options granted under the Eagle Test Systems, Inc. 2003 Stock Option and Grant Plan and the Eagle Test Systems, Inc. 2006 Stock Option and Incentive Plan (collectively, the “Eagle Plans”). Upon the consummation of the Eagle Acquisition, these options were converted automatically into options to purchase an aggregate of 3,594,916 shares of our common stock. No additional awards will be granted under the Eagle Plans. As of December 31, 2008, there were outstanding options exercisable for an aggregate of 3,130,129 shares of our common stock pursuant to the Eagle Plans, with a weighted average exercise price of $3.71 per share.

The purpose of the 2006 Equity Plan is to motivate employees, officers, directors, consultants and advisors by providing equity ownership and compensation opportunities in Teradyne. The aggregate number of shares available under the 2006 Equity Plan as of December 31, 2008 was 6,875,000 shares of our common stock. The 2006 Equity Plan authorizes the grant of stock-based awards in the form of (1) non-qualified and incentive stock options, (2) stock appreciation rights, (3) restricted stock awards and restricted stock unit awards, (4) phantom stock, and (5) other stock-based awards. Awards may be tied to time-based vesting schedules and/or performance-based vesting measured by reference to performance criteria chosen by the Compensation Committee of the Board of Directors, which administers the 2006 Equity Plan. Awards may be made to any employee, officer, consultant and advisor of Teradyne and our subsidiaries, as well as, to our directors. The maximum number of shares of stock-based awards that may be granted to one participant during any one fiscal year is 2,000,000 shares of common stock. The 2006 Equity Plan will expire on May 24, 2016. In 2008 and 2007, we only issued restricted stock unit awards to our employees and directors.

As of December 31, 2008 total unrecognized compensation expense related to non-vested awards and options totaled $40.3 million, and is expected to be recognized over a weighted average period of 2.65 years.

Performance Graph

The following graph compares the change in our cumulative total shareholder return in our common stock with the Standard & Poor’s 500 Index and the S&P Information Technology 500 Index. The comparison assumes $100.00 was invested on December 31, 2003 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any.

LOGO


	2003		2004		2005		2006		2007		2008
Teradyne, Inc.	$	100.00	$	67.07	$	57.25	$	58.78	$	40.63	$	16.58
S&P 500 Index	$	100.00	$	110.85	$	116.28	$	134.61	$	141.99	$	89.54
S&P Information Technology 500 Index	$	100.00	$	102.55	$	103.57	$	112.28	$	130.60	$	74.29

(1)

This graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any other filing under the Securities Act or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

(2)	The stock price performance shown on the graph is not necessarily indicative of future price performance. Information used on the graph was obtained from Hewitt Associates, a source believed to be reliable, but we are not responsible for any errors or omissions in such information.

Related Party Transaction

During 2007, Paul Tufano, a member of our Board of Directors, was Executive Vice President, Chief Financial Officer and Interim Chief Executive Officer of Solectron Corporation until it was acquired by Flextronics in October 2007. Mr. Tufano ceased being an employee of Solectron or Flextronics in October 2007. In the ordinary course of business, Teradyne has for the last ten years purchased printed circuit board assemblies from Solectron, and has also sold in-circuit testers to Solectron which Teradyne refers to as Flextronics. In August 2007, prior to the Flextronics acquisition, we expanded our contract with Solectron to have it provide additional manufacturing and test services, including areas of final configuration and test for most of Teradyne’s FLEX family of products. In the years ended December 31, 2007 and 2006, we purchased $207.8 million and $229.9 million, respectively, of printed circuit board assemblies and services from Flextronics. Sales of in-circuit testers to Flextronics for the years ended December 31, 2007 and 2006 were $4.0 million and $5.7 million, respectively. As of December 31, 2007, $19.8 million was included in accounts payable and $17.5 million was included in accounts receivable, representing amounts due to/from Flextronics.

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations.” (“SFAS No. 141(R)”) This Statement replaces FASB Statement No. 141, “Business Combinations.” SFAS No. 141(R) establishes new principles and requirements for how an acquiring company 1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree, 2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and 3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for business combinations occurring in the fiscal year beginning on or after December 15, 2008. The adoption of SFAS No. 141(R) is not expected to materially impact our consolidated financial position, results of operations or liquidity. Subsequent to the adoption of SFAS No. 141(R), the resolution of existing balances related to uncertain tax positions from prior acquisitions that differ from previously recorded amounts will be adjusted through earnings.

In February 2008, the FASB issued FSP FAS No. 157-2, “Effective Date of FASB Statement No. 157”. The FSP defers the provisions of SFAS No. 157 with respect to nonfinancial assets and nonfinancial liabilities that are measured at fair value on a nonrecurring basis subsequent to initial recognition until fiscal years beginning after November 15, 2008. Items in this classification include goodwill, intangible assets with indefinite lives, guarantees and certain other items. The adoption of FSP FAS 157-2 effective January 1, 2009 will not have a material impact on our financial position or results of operations.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”), an amendment of FASB Statement No. 133. “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 161 expands the current disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” such that entities must now provide enhanced disclosures on a quarterly basis regarding how and why the entity uses derivatives; how derivatives and related hedged items are accounted for under SFAS No. 133 and how derivatives and related hedged items affect the entity’s financial position, performance and cash flow. SFAS No. 161 is effective prospectively for periods beginning on or after November 15, 2008. We will adopt SFAS No. 161 in fiscal year 2009. The adoption of SFAS No. 161 will not have an impact on our financial position or results of operations.

arrangements have explicit renewal or extension provisions. The FSP is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements are to be applied prospectively to all intangible assets. The adoption of FSP No. 142-3 will not have an impact on our financial position or results of operations.

Item 7A:

Quantitative and Qualitative Disclosures About Market Risks

Concentration of Credit Risk

Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash equivalents, marketable securities, forward currency contracts and accounts receivable. Our cash equivalents consist primarily of money market funds invested in U.S. Treasuries and government agencies. All of our auction rate marketable securities are AAA, AA or A rated by one or more of the major credit rating agencies and are substantially guaranteed by a U.S. Department of Education agency or a third party insurer. We place forward currency contracts with high credit-quality financial institutions in order to minimize credit risk exposure. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of geographically dispersed customers. We perform ongoing credit evaluations of its customers’ financial condition and from time to time may require customers to provide a letter of credit from a bank to secure accounts receivable.

Exchange Rate Risk Management

We regularly enter into foreign currency forward contracts to hedge the value of our net monetary assets in the European Euro, Great Britain Pound, Japanese Yen and the Taiwan Dollar. These foreign currency forward contracts have maturities of less than one year. These contracts are used to reduce our risk associated with exchange rate movements, as gains and losses on these contracts are intended to offset exchange losses and gains on underlying exposures. In addition, we periodically hedge anticipated cash flow transactions with foreign currency forward contracts. The gains and losses on these contracts are deferred and recognized in the same period as the hedged transaction is recognized in income. We do not engage in currency speculation.

We performed a sensitivity analysis assuming a hypothetical 10% fluctuation in foreign exchange rates to the hedging contracts and the underlying exposures described above. As of December 31, 2008, 2007, and 2006, the analysis indicated that these hypothetical market movements would not have a material effect on our consolidated financial position, results of operations or cash flows.

Interest Rate Risk Management

We are exposed to potential loss due to changes in interest rates. Our interest rate exposure is primarily in the United States in short-term and long-term marketable securities.

In order to estimate the potential loss due to interest rate risk, a 10% fluctuation in interest rates was assumed. Market risk for the short and long-term marketable securities was estimated as the potential change in the fair value resulting from a hypothetical change in interest rates for securities contained in the investment portfolio. On these bases, the potential change in fair value from changes in interest rates is $0.6 million and $0.3 million as of December 31, 2008 and 2007, respectively.

Item 8:

Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Teradyne, Inc. (the “Company”):

In our opinion, the accompanying consolidated financial statements listed in the listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Teradyne, Inc. and its subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15 (a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note R of the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in 2007. As discussed in Notes B and N to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2006 and the manner in which it accounts for defined benefit pension and other postretirement plans effective December 31, 2006.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Item 9A of the consolidated financial statements, management has excluded Nextest Systems Corporation and Eagle Test Systems from its assessment of internal control over financial reporting as of December 31, 2008 because they were acquired by the Company in purchase business combinations during 2008. Nextest Systems Corporation and Eagle Test Systems are wholly-owned subsidiaries whose total assets represent 4% and 6%, respectively, and total revenues represent 7% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2008.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

March 2, 2009

TERADYNE, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2008 and 2007


	2008			2007
	(in thousands, except per share information)
ASSETS
Current assets:
Cash and cash equivalents	$	322,705		$	562,371
Marketable securities		—			75,593
Accounts receivable, less allowance for doubtful accounts of $4,712 and $4,493 in 2008 and 2007, respectively		109,625			189,487
Inventories
Parts		89,140			27,627
Assemblies in process		56,780			31,272
Finished goods		22,531			21,414

		168,451			80,313
Prepayments and other current assets		77,872			37,169

Total current assets		678,653			944,933
Property, plant and equipment:
Land		16,561			24,579
Buildings and improvements		134,327			198,287
Machinery and equipment		630,446			601,031
Construction in progress		1,440			1,874

Total		782,774			825,771

Less: Accumulated depreciation		484,325			473,064

Net property, plant and equipment		298,449			352,707
Marketable securities		51,613			104,978
Retirement plans assets		—			46,396
Intangible assets, net		186,998			5,992
Other assets		19,534			31,135
Goodwill		—			69,147

Total assets	$	1,235,247		$	1,555,288

LIABILITIES
Current liabilities:
Accounts payable		61,164			57,426
Accrued employees’ compensation and withholdings		73,521			71,691
Deferred revenue and customer advances		58,030			41,928
Other accrued liabilities		51,748			47,002
Current debt		122,500			—
Accrued income taxes		—			5,187

Total current liabilities		366,963			223,234
Retirement plans liabilities		125,877			80,388
Long-term other accrued liabilities		36,295			22,492

Total liabilities		529,135			326,114

Commitments and contingencies (Note K)

SHAREHOLDERS’ EQUITY
Common stock, $0.125 par value, 1,000,000 shares authorized, 169,651 and 173,088 shares issued and outstanding at December 31, 2008 and 2007, respectively		21,206			21,636
Additional paid-in capital		1,124,390			1,105,441
Accumulated other comprehensive loss		(148,108	)		(46,028	)
(Accumulated deficit) retained earnings		(291,376	)		148,125

Total shareholders’ equity		706,112			1,229,174

Total liabilities and shareholders’ equity	$	1,235,247		$	1,555,288

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

TERADYNE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2008			2007			2006
	(in thousands, except per share amounts)
Net revenue:
Products	$	836,045		$	861,583		$	1,118,811
Services		270,997			240,697			237,438

Total net revenue		1,107,042			1,102,280			1,356,249
Cost of revenues:
Cost of products		451,225			430,464			550,312
Cost of services		157,625			158,383			154,055

Total cost of revenue		608,850			588,847			704,367

Gross profit		498,192			513,433			651,882
Operating expenses:
Engineering and development		216,461			204,344			202,436
Selling and administrative		247,789			248,096			278,832
Acquired intangible assets amortization		20,633			3,667			3,644
In-process research and development		1,600			16,700			—
Restructuring and other, net		62,775			(659	)		(36,033	)
Goodwill impairment		333,281			—			—

Total operating expenses		882,539			472,148			448,879

(Loss)/Income from operations		(384,347	)		41,285			203,003
Interest income		12,558			39,066			44,624
Interest expense and other, net		(14,236	)		(1,108	)		(11,596	)

(Loss)/Income from continuing operations before income taxes		(386,025	)		79,243			236,031
Provision for income taxes		12,577			7,360			27,869

(Loss)/Income from continuing operations		(398,602	)		71,883			208,162

Income/(Loss) from discontinued operations before income taxes		768			6,346			(5,636	)
Provision for income taxes		—			518			3,769

Income/(Loss) from discontinued operations		768			5,828			(9,405	)

Net (Loss)/Income	$	(397,834	)	$	77,711		$	198,757

(Loss)/Income from continuing operations:
Basic	$	(2.34	)	$	0.39		$	1.07

Diluted	$	(2.34	)	$	0.39		$	1.06

Net (loss)/income per common share:
Basic	$	(2.33	)	$	0.42		$	1.02

Diluted	$	(2.33	)	$	0.42		$	1.01

Weighted average common shares—basic		170,593			184,020			194,729

Weighted average common shares—diluted		170,593			185,374			204,414

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

TERADYNE, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

Years Ended December 31, 2008, 2007 and 2006


	Shares Issued		Common Stock Par Value			Additional Paid-in Capital			Deferred Compen- sation			Accumulated Other Compre- hensive Loss			Retained Earnings (Accumulated Deficit)			Total Shareholders’ Equity			Compre- hensive Income (Loss)
	(in thousands)
Balance, December 31, 2005	197,011		$	24,626		$	1,221,990		$	(22,104	)	$	(78,348	)	$	96,502		$	1,242,666
Issuance of stock to employees under benefit plans, net of shares withheld for payroll tax of $2,635	2,551			319			20,318												20,637
Stock-based compensation expense							2,547			22,104									24,651
Repurchase of stock	(10,610	)		(1,326	)		(65,840	)								(70,397	)		(137,563	)
Comprehensive income:
Net income																198,757			198,757		$	198,757
Foreign currency translation adjustment													2,723						2,723			2,723
Unrealized loss on cash flow hedge													(30	)					(30	)		(30	)
Unrealized gain on investments, net of applicable tax of $0													2,807						2,807			2,807
Decrease in additional minimum pension liability, net of applicable tax of $8,057													71,164						71,164			71,164
Adjustment to initially apply SFAS 158, net of applicable tax of $2,827													(64,625	)					(64,625	)		—

Total comprehensive income																					$	275,421

Balance, December 31, 2006	188,952			23,619			1,179,015			—			(66,309	)		224,862			1,361,187
Issuance of stock to employees under benefit plans, net of shares withheld for payroll tax of $2,653	2,454			307			20,211												20,518
Stock-based compensation expense							23,142												23,142
Repurchase of stock	(18,318	)		(2,290	)		(116,927	)								(154,448	)		(273,665	)
Comprehensive income:
Net income																77,711			77,711		$	77,711
Foreign currency translation adjustment													(741	)					(741	)		(741	)
Unrealized gain on investments, net of tax of $0													3,454						3,454			3,454
Actuarial gain arising during period, net of tax of $817													13,216						13,216			13,216
Amortization included in net periodic pension and postretirement costs:
Actuarial gains, net of tax of $112													3,788						3,788			3,788
Prior service costs, net of tax of $0													613						613			613
Net transition asset, net of tax of ($19)													(49	)					(49	)		(49	)

Total comprehensive income																					$	97,992

Balance, December 31, 2007	173,088			21,636			1,105,441			—			(46,028	)		148,125			1,229,174
Issuance of stock to employees under benefit plans, net of shares withheld for payroll tax of $4,395	4,036			504			12,918												13,422
Stock-based compensation expense							22,250												22,250
Stock options and restricted stock units issued in purchase acquisitions							32,372												32,372
Repurchase of stock	(7,473	)		(934	)		(48,591	)								(41,667	)		(91,192	)
Comprehensive income:
Net loss																(397,834	)		(397,834	)	$	(397,834	)
Foreign currency translation adjustment													(4,878	)					(4,878	)		(4,878	)
Unrealized loss on investments, net of tax of $0													(1,997	)					(1,997	)		(1,997	)
Actuarial loss arising during period, net of tax of ($2,408)													(97,220	)					(97,220	)		(97,220	)
Amortization included in net periodic pension and postretirement costs:
Actuarial gains, net of tax of $34													1,421						1,421			1,421
Prior service costs, net of tax of $0													613						613			613
Net transition asset, net of tax of ($8)													(19	)					(19	)		(19	)

Total comprehensive income																					$	(449,914	)

Balance, December 31, 2008	169,651		$	21,206		$	1,124,390		$	—		$	(148,108	)	$	(291,376	)	$	706,112

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

TERADYNE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31, 2008
	2008			2007			2006
	(in thousands)
Cash flows from operating activities:
Net (Loss)/Income	$	(397,834	)	$	77,711		$	198,757
Less: Income/(Loss) from discontinued operations		768			(68	)		(9,405	)
Less: Gain on disposal of discontinued operations (Note E)		—			5,896			—

(Loss)/Income from continuing operations		(398,602	)		71,883			208,162
Adjustments to reconcile (loss)/income from continuing operations to net cash (used for) provided by operating activities:
Goodwill impairment		333,281			—			—
Depreciation		71,255			59,384			68,253
Amortization		23,505			8,111			4,829
Stock-based compensation		22,250			23,474			23,509
In-process research and development		1,600			16,700			—
Loss/(gain) on sale of land and buildings		20,883			(3,597	)		(39,098	)
Loss on sale and impairment of marketable securities		16,240			—			—
Provision for excess and obsolete inventory		29,363			1,835			12,815
Non cash charge for the sale of inventories revalued at the date of acquisition		5,046			—			—
Other		(1,108	)		(1,827	)		5,355
Changes in operating assets and liabilities, net of businesses and product lines sold and acquired:
Accounts receivable		118,196			(33,717	)		67,939
Inventories		(3,074	)		45,179			79,324
Other assets		(29,907	)		(24,958	)		6,569
Accounts payable, deferred revenue and accruals		(34,397	)		2,753			12,636
Retirement plan contributions		(7,158	)		(2,616	)		(30,232	)
Accrued income taxes		(5,008	)		(30,865	)		32,818

Net cash provided by continuing operations		162,365			131,739			452,879
Net cash provided by (used for) discontinued operations		768			(3,552	)		(2,793	)

Net cash provided by operating activities		163,133			128,187			450,086

Cash flows from investing activities:
Investments in property, plant and equipment		(87,202	)		(86,088	)		(110,009	)
Proceeds from sale of land and buildings		44,072			7,888			84,617
Proceeds from sale of equity investments and product lines		2,811			906			406
Proceeds from life insurance		14,832			—			—
Acquisition of businesses, net of cash acquired		(574,342	)		—			—
Acquisition of technology		—			(17,600	)		—
Purchases of available-for-sale marketable securities		(135,475	)		(388,385	)		(396,922	)
Proceeds from sales and maturities of available-for-sale marketable securities		286,206			589,167			618,495

Net cash (used for) provided by continuing operations		(449,098	)		105,888			196,587
Net cash provided by (used for) discontinued operations		—			10,765			(408	)

Net cash (used for) provided by investing activities		(449,098	)		116,653			196,179

Cash flows from financing activities:
Payments of long-term debt and notes payable		—			—			(304,648	)
Net proceeds from revolving credit facility		119,674			—			—
Repurchase of common stock		(91,192	)		(273,665	)		(137,563	)
Issuance of common stock under stock option and stock purchase plans		17,817			23,171			23,272

Net cash provided by (used for) financing activities		46,299			(250,494	)		(418,939	)

(Decrease) increase in cash and cash equivalents		(239,666	)		(5,654	)		227,326
Cash and cash equivalents at beginning of year		562,371			568,025			340,699

Cash and cash equivalents at end of year	$	322,705		$	562,371		$	568,025

Supplementary disclosure of cash flow information:
Cash paid during the year for:
Interest	$	1,063		$	1,286		$	12,469
Income taxes	$	17,952		$	31,584		$	6,763

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

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.	THE COMPANY

Teradyne, Inc. is a leading global supplier of automatic test equipment.

Teradyne’s automatic test equipment products and services include:

•

semiconductor test (“Semiconductor Test”) systems;

•

B.	ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of Teradyne and its wholly-owned subsidiaries. All significant intercompany balances and transactions are eliminated. Certain prior years’ amounts were reclassified to conform to the current year presentation.

In August 2007, Teradyne sold Broadband Test Division, its Digital Subscriber Line and telephone network test division. The results of operations of Broadband Test Division as well as balance sheet amounts pertaining to this businesses has been classified as discontinued operations in the consolidated financial statements (see “Note E: Discontinued Operations”).

Preparation of Financial Statements and Use of Estimates

The preparation of consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, management evaluates its estimates, including those related to inventories, investments, goodwill, intangible and other long-lived assets, doubtful accounts, income taxes, pensions, warranties, and loss contingencies. Management bases its estimates on historical experience and on appropriate and customary assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates.

Revenue Recognition

Teradyne recognizes revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to Teradyne’s customers upon shipment or at delivery destination point. In circumstances where either title or risk of loss pass upon destination, acceptance or cash payment, Teradyne defers revenue recognition until such events occur.

Teradyne’s equipment includes embedded software which is considered incidental to the product. Revenue is recognized upon shipment or at delivery destination point, provided that customer acceptance criteria can be demonstrated prior to shipment. Certain contracts require Teradyne to perform tests of the product to ensure that performance meets the published product specifications or customer requested specifications, which are generally conducted prior to shipment. Where the criteria cannot be demonstrated prior to shipment, revenue is deferred until customer acceptance has been received.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

B.	ACCOUNTING POLICIES—(Continued)

For multiple element arrangements Teradyne defers the fair value of any undelivered elements of the contract. Teradyne also defers the portion of the sales price that is not due until acceptance, which represents deferred profit. For a delivered item to be considered a separate unit, the delivered item must have value to the customer on a standalone basis, there must be objective and reliable evidence of fair value of the undelivered items in the arrangement and the delivery or performance of the undelivered item must be considered probable and substantially in the control of Teradyne. Teradyne also defers the portion of the sales price that is not due until acceptance, which represents deferred profit. Fair value is the price charged when the element is sold separately. Teradyne’s post-shipment obligations include installation, training services, one-year standard warranties, and extended warranties. Installation does not alter the product capabilities, does not require specialized skills or tools and can be performed by the customers or other vendors. Installation is typically provided within five to fifteen days of product shipment and is completed within one to two days thereafter. Training services are optional and do not affect the customer’s ability to use the product. Teradyne defers revenue for the fair value of installation and training. Extended warranties constitute warranty obligations beyond one year and Teradyne defers revenue in accordance with FASB Technical Bulletin 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts”.

Teradyne’s products are generally subject to warranty and related costs of the warranty are provided for in cost of revenue when product revenue is recognized. Teradyne classifies shipping and handling costs in cost of revenue. Service revenue is recognized over the contractual period or as the services are performed.

Teradyne generally does not provide its customers with contractual rights of return for any of its products.

For transactions involving the sale of software which is not incidental to the product, revenue is recognized in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions”. Teradyne recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable and collectibility is probable. In instances where an arrangement contains multiple elements, revenue is deferred related to the undelivered elements to the extent that vendor-specific objective evidence of fair value (“VSOE”) exists for such elements. In instances where VSOE does not exist for one or more of the undelivered elements of an arrangement, all revenue related to the arrangement is deferred until all elements have been delivered. VSOE is the price charged when the element is sold separately. Revenue for the separate elements is only recognized where the functionality of the undelivered element is not essential to the delivered element.

For certain contracts eligible for contract accounting under SOP No. 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” revenue is recognized using the percentage-of-completion accounting method based upon the percentage of incurred costs to estimated total costs. These arrangements require significant production, modification or customization. In all cases, changes to total estimated costs and anticipated losses, if any, are recognized in the period in which they are determined. With respect to contract change orders, claims or similar items, judgment must be used in estimating related amounts and assessing the potential for realization. Such amounts are only included in the contract value when they can be reliably estimated and realization is reasonably assured, generally upon receipt of a customer approved change order. As of December 31, 2008 and 2007, Teradyne had $4.5 million and $10.5 million in unbilled amounts on long-term contracts included in accounts receivable, respectively. These amounts will be billed on a milestone basis in accordance with contractual terms.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

B.	ACCOUNTING POLICIES—(Continued)

Inventories

Inventories, which include materials, labor, and manufacturing overhead, are stated at the lower of cost (first-in, first-out basis) or net realizable value. On a quarterly basis, Teradyne uses consistent methodologies to evaluate all inventories for net realizable value. Teradyne records a provision for both excess and obsolete inventory when such write-downs or write-offs are identified through the quarterly review process. The inventory valuation is based upon assumptions about future demand, product mix and possible alternative uses.

Property, Plant and Equipment

Property, plant and equipment are stated at cost and depreciated over the estimated useful lives of the assets. Leasehold improvements and major renewals are capitalized and included in property, plant and equipment accounts while expenditures for maintenance and repairs and minor renewals are charged to expense. When assets are retired, the assets and related allowances for depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in operations.

Teradyne provides for depreciation of its assets principally on the straight-line method with the cost of the assets being charged to expense over their useful lives as follows:


Buildings		40 years
Building improvements		5 to 10 years
Leasehold improvements		Lesser of lease term or useful life
Furniture and fixtures		10 years
Test systems manufactured internally		6 years
Machinery and equipment		3 to 5 years
Software		3 to 5 years

Test systems manufactured internally are used by Teradyne for customer evaluations and manufacturing and support of its customers. Teradyne depreciates the test systems manufactured internally over a six-year life to cost of revenues and selling and administrative expenses. Teradyne often sells internally manufactured test equipment to customers. Upon the sale of an internally manufactured test system, the net book value of the system is transferred to inventory and expensed as cost of revenues. The net book value of internally manufactured test systems sold in the years ended December 31, 2008, 2007 and 2006 was $41.4 million, $33.0 million and $40.0 million, respectively.

Investments

Teradyne accounts for its investments in debt and equity securities in accordance with the provisions of Statement of Financial Accounting Standards No 115 “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”) and FASB Staff Positions Nos. FAS 115-1 and FAS 124-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. SFAS No. 115 requires that certain debt and equity securities be classified into one of three categories; trading, available-for-sale or held-to-maturity securities. On a quarterly basis Teradyne reviews its investments to identify and evaluate those that have an indication of a potential other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include:

•

The length of time and the extent to which the market value has been less than cost;

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

B.	ACCOUNTING POLICIES—(Continued)

•

The financial condition and near-term prospects of the issuer; and

•

The intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

Effective January 1, 2008, Teradyne adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”) for financial assets and liabilities. As defined in SFAS No. 157, fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Teradyne uses the market and income approach techniques to value its financial instruments and there were no changes in valuation techniques during the year ended December 31, 2008. SFAS No. 157 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted prices in active markets for identical assets as of the reporting date.

Level 3: Unobservable inputs that are not supported by market data. Unobservable inputs are developed based on the best information available, which might include Teradyne’s own data.

In accordance with SFAS No. 157, Teradyne measures its investments in debt and equity investments at fair value. Teradyne’s marketable securities are classified within Level 1 and Level 2 with the exception of Teradyne’s investments in auction rate securities, which are classified within Level 3. Teradyne’s investments in auction rate securities are classified within Level 3 because there are no active markets for the auction rate securities and therefore Teradyne is unable to obtain independent valuations from market sources. The valuation technique used under Level 3 consists of a discounted cash flow analysis which includes numerous factors, such as type of security, tax status, credit quality, duration, insurance and the portfolio composition as well as observable market data including yield or spreads of trading instruments.

Goodwill, Intangible and Long-Lived Assets

Teradyne accounts for its goodwill and intangible assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” Intangible assets are amortized over their estimated useful economic life and are carried at cost less accumulated amortization. Goodwill is assessed for impairment at least annually in the fourth quarter, on a reporting unit basis, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. If the book value of a reporting unit exceeds its fair value, the implied fair value of goodwill is compared with the carrying amount of goodwill. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recorded in an amount equal to that excess.

In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”) Teradyne reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the estimated undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis. The cash flow estimates used to determine the impairment, if any, contain management’s best estimates using appropriate assumptions and projections at that time.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

B.	ACCOUNTING POLICIES—(Continued)

Engineering and Development Costs

Teradyne’s products are highly technical in nature and require a large and continuing engineering and development effort. Software development costs incurred prior to the establishment of technological feasibility are charged to expense. Software development costs incurred subsequent to the establishment of technological feasibility are capitalized until the product is available for release to customers. To date, the period between achieving technological feasibility and general availability of the product has been short and software development costs eligible for capitalization have not been material. Engineering and development costs are expensed as incurred and consist primarily of salaries, contractor fees, building costs, depreciation, and tooling costs.

Advertising Costs

Teradyne expenses all advertising costs as incurred. Advertising costs were $1.5 million, $2.4 million and $2.7 million in 2008, 2007 and 2006, respectively.

Product Warranty

Teradyne generally provides a one-year warranty on its products, commencing upon installation or shipment. A provision is recorded upon revenue recognition to cost of revenues for estimated warranty expense based upon historical experience. Related costs are charged to the warranty accrual as incurred. The balance below is included in other accrued liabilities.


	Balance
	(in thousands)
Balance at December 31, 2005	$	10,496
Accruals for warranties issued during the period		19,563
Settlements made during the period		(17,162	)

Balance at December 31, 2006	$	12,897
Accruals for warranties issued during the period		11,369
Settlements made during the period		(14,926	)

Balance at December 31, 2007	$	9,340
Acquisitions		1,872
Accruals for warranties issued during the period		12,975
Settlements made during the period		(15,815	)

Balance at December 31, 2008	$	8,372

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

B.	ACCOUNTING POLICIES—(Continued)

When Teradyne receives revenue for extended warranties beyond one year, it is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred. The balance below is included in long-term other accrued liabilities.


	Balance
	(in thousands)
Balance at December 31, 2005	$	5,596
Deferral of new extended warranty revenue		5,777
Recognition of extended warranty deferred revenue		(3,023	)

Balance at December 31, 2006	$	8,350
Deferral of new extended warranty revenue		3,997
Recognition of extended warranty deferred revenue		(5,737	)

Balance at December 31, 2007	$	6,610
Deferral of new extended warranty revenue		4,549
Recognition of extended warranty deferred revenue		(4,790	)

Balance at December 31, 2008	$	6,369

Stock Compensation Plans and Employee Stock Purchase Plan

Equity Plans and Employee Stock Purchase Plan

Under its stock compensation plans, Teradyne has granted stock options and restricted stock units, and employees are eligible to purchase Teradyne’s common stock through its Employee Stock Purchase Plan (“ESPP”).

Stock options to purchase Teradyne’s common stock at 100% of the fair market value on the grant date generally vest in equal installments over four years from the grant date and have a maximum term of seven years. Options granted to non-employee directors are immediately vested, fully exercisable and have a maximum term of either five or seven years.

Restricted stock unit awards granted to employees (excluding executive officers) vest in equal annual installments over four years. Restricted stock unit awards granted to non-employee directors vest after a one year period, with 100% of the award vesting on the first anniversary of the grant date. Restricted stock unit awards granted to executive officers, including the CEO, in January 2006, vest over two years. Restricted stock unit awards granted to executive officers, including the CEO, in January 2008 and 2007 vest over four years. A portion of these restricted stock unit awards granted to executive officers, including the CEO, is subject to time-based vesting and a portion of the awards is subject to performance-based vesting. The percentage level of performance satisfied for performance-based grants is assessed on or near the anniversary of the grant date and, in turn, that percentage level determines the number of performance-based restricted stock units available for vesting over the vesting period; portions of the performance-based grants not available for vesting will be forfeited. Restricted stock units do not have common stock voting rights, and the shares underlying the restricted stock units are not considered issued and outstanding until they become vested. Teradyne expenses the cost of the restricted stock unit awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse.

Under the ESPP, eligible employees (including executive officers) may purchase shares of common stock through regular payroll deductions of up to 10% of their eligible compensation. The price paid for the common

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

B.	ACCOUNTING POLICIES—(Continued)

stock is equal to 85% of the lower of the fair market value of Teradyne’s common stock on the first business day and the last business day of the purchase period. There are two six-month purchase periods in each fiscal year.

Effective January 1, 2006, Teradyne adopted the fair value recognition provision of Financial Accounting Standards No. 123 (revised 2004) “Share Based Payment” (“SFAS 123R”), using the modified prospective transition method and therefore has not restated results for prior periods. Under this transition method, stock based compensation expense for the years ended December 31, 2008, 2007 and 2006 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, and is calculated based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 “Accounting for Stock Based Compensation” (“SFAS 123”). Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with SFAS 123R. As required by SFAS 123R, Teradyne has made an estimate of expected forfeitures and is recognizing compensation costs only for those stock-based compensation awards expected to vest.

Prior to the adoption of SFAS 123R, Teradyne accounted for its equity incentive plans and employee stock purchase plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations (“APB 25”). In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payments for public companies. Teradyne has applied provisions of SAB 107 in its adoption of SFAS 123R. The cumulative effect of the initial adoption of SFAS 123R was not material.

On May 26, 2005, the Board of Directors approved the accelerated vesting of certain outstanding, unvested “out of the money” stock options awarded to employees, officers and other eligible participants under Teradyne’s various stock option plans. The stock options that were accelerated had exercise prices that were in excess of $13.26, the closing price of Teradyne’s common stock on the New York Stock Exchange on May 26, 2005 and ranged in exercise price from $13.73 to $41.37 per share. As a result of the vesting acceleration, options to purchase approximately 7.6 million shares became exercisable immediately and Teradyne reduced the compensation expense it otherwise would have been required to record under SFAS 123R by approximately $48.6 million on a pre-tax basis over fiscal years 2006, 2007 and 2008.

The effect to (loss)/income from continuing operations for recording stock-based compensation for the years ended December 31 was as follows (in thousands):


	2008		2007			2006
Cost of revenue	$	3,480	$	4,460		$	4,467
Engineering and development		6,912		7,278			7,287
Selling and administrative		11,858		11,736			11,755

Stock-based compensation		22,250		23,474			23,509
Income tax benefit		—		(75	)		(423	)

Total stock-based compensation expense after income taxes	$	22,250	$	23,399		$	23,086

Valuation Assumptions

There were no stock options granted in 2008, 2007 and 2006.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

B.	ACCOUNTING POLICIES—(Continued)

The weighted-average fair value of employee stock purchase rights granted pursuant to the ESPP in the first and last six months of 2008 was $2.38 and $1.27, respectively, the first and last six months of 2007 was $3.56 and $2.67, respectively, and the first and last six months of 2006 was $3.81 and $3.48. The fair value of the employees’ purchase rights was estimated using the Black-Scholes option-pricing model with the following assumptions:


	2008		2007		2006
Expected life (years)	0.5		0.5		0.5
Interest rate	2.8	%	5.1	%	4.9	%
Volatility-historical	24.4	%	24.4	%	34.4	%
Dividend yield	0.0	%	0.0	%	0.0	%

As of December 31, 2008, there were 4.2 million shares available for grant under the ESPP.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. U.S. income taxes are not provided for on the earnings of non-U.S. subsidiaries, which are expected to be reinvested indefinitely in operations outside the U.S. For intra-period tax allocations, Teradyne considers only the direct effects of stock options and elects to first utilize non-equity related tax attributes, such as net operating losses and credit carryforwards and then equity-related tax attributes.

Translation of Non-U.S. Currencies

The functional currency for all non-U.S. subsidiaries is the U.S. dollar, except for the Systems Test Group business unit Diagnostic Solutions for which the local currency is its functional currency. All foreign currency denominated monetary assets and liabilities are re-measured on a monthly basis into the functional currency using exchange rates in effect at the end of the period. All foreign currency denominated non-monetary assets and liabilities are re-measured into the functional currency using historical exchange rates. Net foreign exchange gains and losses resulting from re-measurement are included in interest expense and other, net and were immaterial for the years ended December 31, 2008, 2007 and 2006. For Diagnostic Solutions, assets and liabilities are translated into U.S. dollars using exchange rates in effect at the end of the period. Revenue and expense amounts are translated using an average of exchange rates in effect during the period. Translation adjustments are recorded within accumulated other comprehensive loss.

Net (Loss) Income per Common Share

Basic net (loss) income per common share is calculated by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Except where the result would be antidilutive to income before continuing operations, diluted net (loss) income per common share is calculated by dividing net (loss) income by the sum of the weighted average number of common shares plus common stock equivalents, if applicable.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

B.	ACCOUNTING POLICIES—(Continued)

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The volatility of the industries that Teradyne serves can cause certain of its customers to experience shortages of cash flows, which can impact their ability to make required payments. Teradyne maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Estimated allowances for doubtful accounts are reviewed periodically taking into account the customer’s recent payment history, the customer’s current financial statements and other information regarding the customer’s credit worthiness. Account balances are charged off against the allowance when it is determined the receivable will not be recovered.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income (loss), unrealized pension gains and losses, unrealized gains and losses on certain investments in debt, equity and derivative securities and cumulative translation adjustments.

C.	RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations.” (“SFAS No. 141(R)”) This Statement replaces FASB Statement No. 141, “Business Combinations” SFAS No. 141(R) establishes new principles and requirements for how an acquiring company 1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree, 2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and 3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for business combinations occurring in the fiscal year beginning on or after December 15, 2008. The adoption of SFAS No. 141(R) is not expected to materially impact Teradyne’s consolidated financial position, results of operations or liquidity. Subsequent to the adoption of SFAS No. 141(R), the resolution of existing balances related to uncertain tax positions from prior acquisitions that differ from previously recorded amounts will be adjusted through earnings.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”), an amendment of FASB Statement No. 133. “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 161 expands the current disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” such that entities must now provide enhanced disclosures on a quarterly basis regarding how and why the entity uses derivatives; how derivatives and related hedged items are accounted for under SFAS No. 133 and how derivatives and related hedged items affect the entity’s financial position, performance and cash flow. SFAS No. 161 is effective prospectively for periods beginning on or after November 15, 2008. Teradyne will adopt SFAS No. 161 in fiscal year 2009. The adoption of SFAS No. 161 will not have an impact on Teradyne’s financial position or results of operations.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

C.	RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS—(Continued)

In April 2008 the FASB issued Staff Position No. 142-3 (“FSP No. 142-3”), “Determination of the Useful Life of Intangible Assets”. This FSP amends the guidance in FASB Statement No. 142 , “Goodwill and Other Intangible Assets”, about estimating useful lives of recognized intangible assets and requires additional disclosures related to renewing or extending the terms of recognized intangible assets. In estimating the useful life of a recognized intangible asset, the FSP requires companies to consider their historical experience in renewing or extending similar arrangements together with the asset’s intended use, regardless of whether the arrangements have explicit renewal or extension provisions. The FSP is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements are to be applied prospectively to all intangible assets. The adoption of FSP No. 142-3 will not have an impact on Teradyne’s financial position or results of operations.

D.	RISKS AND UNCERTAINTIES

Certain Factors That May Affect Future Results

Teradyne’s future results of operations involve a number of risks and uncertainties. These factors include, but are not, limited to the following:

•

Teradyne’s business is impacted by worldwide economic cycles which are difficult to predict;

•

Teradyne’s business is dependent on the current and anticipated market for electronics, which historically has been highly cyclical;

•

Teradyne is subject to intense competition;

•

Teradyne’s operating results are likely to fluctuate significantly;

•

Teradyne is subject to risks of operating internationally;

•

If Teradyne fails to develop new technologies to adapt to its customers’ needs and if its customers fail to accept its new products, its revenues will be adversely affected;

•

If Teradyne’s suppliers do not meet product or delivery requirements, it could have reduced revenues and earnings;

•

Teradyne’s operations may be adversely impacted if its outsourced service providers fail to perform;

•

Teradyne may not fully recognize the benefits of its acquisitions of Nextest Systems Corporation and Eagle Test Systems and other businesses that Teradyne acquires or strategic alliances that Teradyne forms in the future;

•

Teradyne may need additional financing, which could be difficult to obtain;

•

Restrictive covenants in the agreement governing Teradyne’s senior credit facility may restrict its ability to pursue business strategies;

•

Teradyne has taken measures to address slowdowns in the market for its products, which could have long-term negative effects on its business or impact its ability to adequately address a rapid increase in customer demand;

•

Teradyne may incur significant liabilities if it fails to comply with environmental regulations;

•

Teradyne currently is and in the future may be subject to litigation that could have an adverse effect on its business;

•

Third parties may claim Teradyne is infringing their intellectual property and Teradyne could suffer significant litigation cost, licensing expenses, or be prevented from selling its products;

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

D.	RISKS AND UNCERTAINTIES—(Continued)

•

Teradyne has significant guarantees and indemnification obligations;

•

If Teradyne is unable to protect its intellectual property, it may lose a valuable asset or may incur costly litigation to protect its rights;

•

Teradyne’s business may suffer if it is unable to attract and retain key employees;

•

Acts of war, terrorist attacks and the threat of domestic and international terrorist attacks may adversely impact Teradyne’s business; and

•

Provisions of Teradyne’s charter and by-laws and Massachusetts law make a takeover of Teradyne more difficult.

E.	DISCONTINUED OPERATIONS

On August 1, 2007 Teradyne completed the sale of the Broadband Test Division to Tollgrade Communications, Inc. for $11.3 million in cash. Broadband Test Division had revenues for the seven month period ended July 31, 2007 of $11.2 million and for the year ended December 31, 2006 of $20.6 million. Loss from discontinued operations of the Broadband Test Division for the year ended December 31, 2007 and December 31, 2006 was $6.3 million and $5.6 million, respectively. In 2007, Teradyne recorded a gain on the sale of Broadband Test Division of $5.9 million, net of a tax provision of $0.4 million.

On November 30, 2005 Teradyne completed the sale of its Connection Systems segment to Amphenol Corporation. Loss from discontinued operations of Connection Systems segment for the year ended December 31, 2006 was $3.9 million, relating to a change in estimate to tax expenses from the sale. Under applicable accounting guidance, there is an offsetting tax benefit recorded in continuing operations for the same amount. This tax provision results from the finalization of the 2005 U.S. tax return.

F.	ACQUISITIONS

Business

Nextest Systems Corporation

On January 24, 2008, Teradyne completed its acquisition of Nextest Systems Corporation (“Nextest”) of San Jose, California for a total purchase price of $399.8 million, which consisted of $367.8 million of cash paid to acquire the outstanding common stock of Nextest, at a price of $20.00 per share, $25.9 million in fair value of assumed vested stock options and restricted stock units, which were converted into stock options and restricted stock units to purchase Teradyne’s common stock, and $6.1 million of acquisition related transaction costs, which primarily consisted of fees incurred for financial advisory and legal services. The fair value of stock options was estimated using the following weighted average assumptions:


Expected life		3.6 years
Expected volatility		40.6%
Risk-free interest rate		2.8%
Dividend yield		0.0%

Nextest designs, develops, manufactures, sells and services low-cost, high throughput automated test equipment systems for the semiconductor industry. Nextest competes in the flash memory, flash card, and flash memory based system-on-chip (“SOC”) markets. Nextest’s products are used to test flash memory, microcontrollers, image sensors, smart cards and field programmable logic devices. The acquisition allows Teradyne to enter the flash memory test segment. Nextest is included within Teradyne’s Semiconductor Test segment.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

F.	ACQUISITIONS—(Continued)

The Nextest acquisition was accounted for as a purchase business combination and, accordingly, the results have been included in Teradyne’s consolidated results of operation from the date of acquisition. The allocation of the total purchase price of Nextest’s net tangible and identifiable intangible assets was based on their estimated fair values as of the acquisition date. The excess of the purchase price over the identifiable intangible and net tangible assets in the amount of $170.5 million was allocated to goodwill, which is not deductible for tax purposes. The following represents the allocation of the purchase price:


	Amount
	(in thousands)
Goodwill	$	170,492
Other intangible assets		99,800
Tangible assets acquired and liabilities assumed:
Cash and cash equivalents		88,513
Other current assets		55,550
Non-current assets		16,306
Accounts payable and current liabilities		(26,448	)
Other long-term liabilities		(5,542	)
In-process research and development		1,100

Total purchase price	$	399,771

Teradyne estimated the fair value of other intangible assets using the income approach. Acquired other intangible assets will be amortized on a straight-line basis over their estimated useful lives. The following table represents components of these other intangible assets and their estimated useful lives at the acquisition date:


	Fair Value		Estimated Useful Life
	(in thousands)		(in years)
Developed technology	$	53,600	5.8
Customer relationships		45,900	6.8
Tradenames		300	1.0

Total intangible assets	$	99,800	6.2

As a result of Teradyne’s annual goodwill impairment test performed in December 2008, Teradyne has recorded an impairment charge in the amount of $333.3 million, which included the goodwill related to Nextest. See Note J “Goodwill and Intangible Assets”.

Eagle Test Systems, Inc

On November 14, 2008, Teradyne completed its acquisition of Eagle Test Systems, Inc. (“Eagle Test”) of Buffalo Grove, Illinois, for a total purchase price of $374.4 million, which consisted of $362.8 million of cash paid to acquire the outstanding common stock of Eagle Test, at a price of $15.65 per share, $6.5 million in fair value of assumed vested stock options, which were converted into stock options to purchase Teradyne’s common stock, and $5.1 million of acquisition related transaction costs, which primarily consisted of fees incurred for financial advisory and legal services. The fair value of stock options was estimated using the following weighted average assumptions:


Expected life		4.1 years
Expected volatility		42.5%
Risk-free interest rate		2.0%
Dividend yield		0.0%

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

F.	ACQUISITIONS—(Continued)

Eagle Test designs, manufactures, sells and services high-performance automated test equipment for the semiconductor industry. Their customers, including semiconductor manufacturers and assembly and test subcontractors, use their products to test analog, mixed-signal, and radio frequency semiconductors. Eagle Test proprietary SmartPin ^TM technology enables multiple semiconductor devices to be tested simultaneously, or in parallel, on an individual test system, permitting greater test throughput. Semiconductors tested by Eagle Test systems are incorporated into a wide range of products in historically high-growth markets, including digital cameras, MP3 players, cellular telephones, video/multimedia products, automotive electronics, computer peripherals, and notebook and desktop computers. Eagle Test is included within Teradyne’s Semiconductor Test segment.

The Eagle Test acquisition was accounted for as a purchase business combination and, accordingly, the results have been included in Teradyne’s consolidated results of operation from the date of acquisition. The allocation of the total purchase price of Eagle Test net tangible and identifiable intangible assets was based on their estimated fair values as of the acquisition date. The purchase price allocation is preliminary pending the final determination of the fair value of certain acquired tax assets and assumed tax liabilities and the completion of facility exit and restructuring plans. The excess of the purchase price over the identifiable intangible and net tangible assets in the amount of $93.7 million was allocated to goodwill, which is not deductible for tax purposes. The following represents the preliminary allocation of the purchase price:


	Amount
	(in thousands)
Goodwill	$	93,655
Other intangible assets		102,400
Tangible assets acquired and liabilities assumed:
Cash, cash equivalents and short term marketable securities		88,051
Other current assets		61,066
Non-current assets		45,275
Accounts payable and current liabilities		(14,487	)
Other long-term liabilities		(2,064	)
In-process research and development		500

Total purchase price	$	374,396


	Fair Value		Estimated Useful Life
	(in thousands)		(in years)
Developed technology	$	49,600	6.0
Customer relationships		41,600	10.7
Tradenames		10,900	13.0
Customer backlog		300	0.5

Total intangible assets	$	102,400	8.7

As a result of Teradyne’s annual goodwill impairment test performed in December 2008, Teradyne has recorded an impairment charge in the amount of $333.3 million, which included the goodwill related to Eagle Test. See Note J “Goodwill and Intangible Assets”.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

F.	ACQUISITIONS—(Continued)

The following pro forma information gives effect to the acquisition of Nextest and Eagle Test as if both acquisitions occurred on January 1, 2008 and 2007. The pro forma results are not necessarily indicative of what actually would have occurred had the acquisitions been in effect for the periods presented:


	For the Year Ended
	December 31, 2008			December 31, 2007
Revenue	$	1,225,441		$	1,285,560
Net (loss) income		(422,225	)		312
Net (loss) income per common share:
Basic	$	(2.48	)	$	0.00

Diluted	$	(2.48	)	$	0.00

The pro forma results above include the following non recurring expense items: in-process research and development charge of $1.6 million and acquired inventory fair value adjustment of $20.4 million, in both periods presented.

Technology

On March 7, 2007, Teradyne purchased in-process enabling test technology and hired certain engineers from MOSAID Technologies Inc. for $17.6 million, which included $0.6 million in fees directly related to the acquisition. Of the purchase price, $16.7 million was allocated to in-process research and development and therefore was immediately charged to the statement of operations. The balance of the purchase price was allocated to acquired workforce and fixed assets. In the year ended December 31, 2008, as a result of a workforce reduction, Teradyne recorded an impairment charge of $0.6 million to write-off the acquired workforce asset.

G.	FINANCIAL INSTRUMENTS

Cash Equivalents

Teradyne considers all highly liquid investments with maturities of three months or less at the date of acquisition to be cash equivalents. Included in cash and cash equivalents are time deposits of $6.0 million and $2.7 million for the years ended December 31, 2008 and 2007, respectively.

Marketable Securities

Teradyne classifies investments in marketable securities as trading, available-for-sale or held-to-maturity at the time of purchase and periodically re-evaluates such classification. There were no securities classified as held-to-maturity at December 31, 2008 or 2007. At December 31, 2008, Teradyne’s investments in auction rate securities were classified as trading securities. At December 31, 2008 and 2007, Teradyne’s investments in equity and debt mutual funds, asset backed and corporate debt securities and U.S. Treasury and government agency securities were classified as available-for-sale securities. Securities classified as available-for-sale and trading are reported at fair value. Realized gains are recorded in interest income. Realized losses and other-than-temporary unrealized losses on available-for-sale securities are included in interest expense and other. For the years ended December 31, 2008 and 2007, Teradyne recorded no realized gains on the sale of its marketable securities. For the year ended December 31, 2006, Teradyne recorded realized gains of $0.1 million on the sale of its marketable securities. For the years ended December 31, 2008, 2007, and 2006, Teradyne recorded realized losses of $5.0 million, $3.2 million and $0.3 million, respectively, on the sale of its marketable securities. Unrealized gains and losses are included in accumulated other comprehensive income (loss). The cost of securities sold is based on the specific identification method.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

G.	FINANCIAL INSTRUMENTS—(Continued)

As a result of Teradyne’s November 14, 2008 acquisition of Eagle Test, Teradyne acquired $26.5 million of auction rate securities (“ARS”) at fair value ($30.0 million par value). In addition, Teradyne acquired (1) the right (“UBS Put”) to sell its ARS back to UBS at par plus interest, at its sole discretion, during a two-year period beginning on June 30, 2010, and (2) received an option to borrow up to 75% of the fair value of the ARS at no cost.

Beginning in February 2008 and continuing through December 31, 2008, the securities in Teradyne’s acquired ARS portfolio have experienced failed auctions, resulting in inability to sell these securities. Consequently, as set forth in the trust indentures, the coupon rate resets to a contractual rate which may not equal the current market rate. A failed auction results in a lack of liquidity in the securities but does not necessarily represent a deterioration of the credit quality of the issuer. All of Teradyne’s ARS, are AAA, AA or A rated by one or more of the major credit rating agencies and are substantially guaranteed by a U.S. Department of Education agency or a third party insurer. At December 31, 2008, the underlying securities for the ARS have remaining maturities ranging from five to thirty-one years. Substantially, all of these securities are collateralized by student loans. The estimated fair value of Teradyne’s ARS investments was $26.0 million as of December 31, 2008.

Because the UBS Put is expected to allow Teradyne to sell its ARS securities at par within a relatively short time horizon and provides UBS with the ability to require Teradyne to sell the securities to them at any time between acceptance of the UBS Put through July 2012, Teradyne does not anticipate holding these investments to the earlier of maturity or redemption by the issuer. Teradyne intends to exercise the UBS Put and require UBS to repurchase our ARS at par at the earliest possible time, June 2010. As a result, as of the Eagle Test acquisition date (November 14, 2008), Teradyne classified the ARS as trading securities under SFAS No. 115. During the fourth quarter of 2008, Teradyne recorded a loss of $0.5 million in interest expense and other, net for the decrease in the ARS fair value from November 14, 2008 to December 31, 2008. Future changes in fair value of the ARS will be recorded in operating results.

In determining the fair value of our ARS and other investments Teradyne utilizes the provisions of SFAS No. 157. In determining the value of our ARS as of December 31, 2008 Teradyne utilized a discounted cash flow valuation model with the major inputs to such model based on our estimates of the assumptions that market participants would use in valuing these instruments. Teradyne used the following key inputs to its valuation model:

•

Term — Teradyne estimated a five-year expected life of the instruments, based on Teradyne’s expectations of the most likely time in which it would take for the instruments to be called by the issuer or liquidity to be restored to the market place.

•

Probability of Default — Teradyne determined the probability of default using market credit spreads.

•

Discount Rate — Teradyne determined the discount rate based on estimated yields of similar publicly traded instruments (e.g., similar collateral, terms, credit quality, etc.).

•

Liquidity Risk Premium — given the recent instability in the financial markets and the low demand for auction rate securities, it is unclear as to when these securities will become liquid again. Without the auction process functioning again, it would be extremely difficult to estimate the expected holding period for these instruments. As a result, Teradyne included a 500 to 600 basis point premium to the discount rate to reflect the illiquidity of these bonds.

Based on these key inputs, Teradyne estimated the fair value of our ARS portfolio at $26.0 million as of December 31, 2008, representing a $0.5 million decrease in fair value since November 14, 2008.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

G.	FINANCIAL INSTRUMENTS—(Continued)

On November 14, 2008, Teradyne recognized the UBS Put as an asset measured at a fair value of $2.7 million. At December 31, 2008, the fair value of the UBS Put was $3.3 million. Teradyne recorded a $0.6 million gain in interest income during the fourth quarter of 2008 for the increase in the fair value of the UBS Put since November 14, 2008. In determining the fair value of the UBS Put as of December 31, 2008, Teradyne assumed it would redeem the auction rate securities at par at the earliest possible time, June 30, 2010. Teradyne utilized a discounted cash flow model to determine the fair value of the UBS Put using the follow assumptions (1) a time period of 1.5 years, representing the period from December 31, 2008 to the earliest date we can expect to be able to redeem the UBS Put (June 30, 2010) and (2) a discount rate of 3.79%, which included a spread based on the credit default swap of UBS in order to account for the credit risk of UBS.

Teradyne has elected fair value treatment for the UBS put under SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”).

The following table sets forth by fair value hierarchy Teradyne’s financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2008.


	Year ended December 31, 2008
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Long-term marketable securities	$	6,192	$	19,453	$	25,968	$	51,613
UBS Put		—		—		3,330		3,330

Total	$	6,192	$	19,453	$	29,298	$	54,943

Liabilities:
Derivatives	$	—	$	767	$	—	$	767

Total	$	—	$	767	$	—	$	767

Changes in the fair value of Level 3 financial assets for the year ended December 31, 2008, were as follows:


	Level 3 Financial Assets
	Long-Term Auction Rate Securities			Long-Term UBS Put
	(in thousands)
Balance at December 31, 2007	$	—		$	—
Assumed from acquisition		26,467			2,710
Change in unrealized gain included in earnings		—			620
Change in unrealized loss included in earnings		(499	)		—

Balance at December 31, 2008$	$	25,968		$	3,330

On a quarterly basis Teradyne reviews its investments to identify and evaluate those that have an indication of a potential other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include:

•

The length of time and the extent to which the market value has been less than cost;

•

The financial condition and near-term prospects of the issuer; and

•

The intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

G.	FINANCIAL INSTRUMENTS—(Continued)

Teradyne has determined that it does not intend to hold certain marketable securities for a period of time sufficient to allow for recovery in market value and recognized an other-than-temporary impairment loss in the amount of $11.0 million, in the year ended December 31, 2008, primarily related to mortgage and asset backed debt securities.

Short-term available-for-sale marketable securities mature in less than one year. Long-term available-for-sale marketable securities have maturities of one to five years. At December 31, 2008 and 2007 these investments are reported as follows:


	Available-for-Sale									Fair Market Value of Investments with Unrealized Losses
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
2008
Long-term marketable securities:
Equity and debt mutual funds	$	8,910	$	589	$	(3,307	)	$	6,192	$	6,192
Asset backed and corporate debt securities		19,453		—		—			19,453		—

	$	28,363	$	589	$	(3,307	)	$	25,645	$	6,192


	Available-for-Sale									Fair Market Value of Investments with Unrealized Losses
	Cost		Unrealized Gain		Unrealized (Loss)			Fair Market Value		Fair Market Value of Investments with Unrealized Losses
	(in thousands)
2007
Short-term marketable securities:
U.S. Treasury and government agency securities	$	3,793	$	—	$	(2	)	$	3,791	$	3,791
Corporate debt securities		71,841		6		(45	)		71,802		31,989

	$	75,634	$	6	$	(47	)	$	75,593	$	35,780

Long-term marketable securities:
Asset backed and corporate debt securities	$	105,656	$	511	$	(1,189	)	$	104,978	$	75,343

As of December 31, 2008, the fair market value of investments with unrealized losses totaled $5.4 million. Of this value, $0.9 million had an unrealized loss for greater than one year and $4.5 million had an unrealized loss for less than one year. These investments are mutual funds related to employee retirement benefits. Teradyne reviews its investments to identify and evaluate investments that have an indication of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near term prospects of the investee, and Teradyne’s intent and ability to hold the investments for a period of time to allow for anticipated recovery in market value. Based on this review, Teradyne has determined that the unrealized losses related to these investments, at December 31, 2008, are temporary.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

G.	FINANCIAL INSTRUMENTS—(Continued)

Derivatives

Teradyne conducts business in a number of foreign countries, with certain transactions denominated in local currencies. The purpose of Teradyne’s foreign currency management is to minimize the effect of exchange rate fluctuations on certain foreign denominated net monetary assets and anticipated cash flows. The terms of currency instruments used for hedging purposes are consistent with the timing of the transactions being hedged. Teradyne does not use derivative financial instruments for trading or speculative purposes.

To minimize the effect of exchange rate fluctuations associated with the remeasurement of net monetary assets denominated in foreign currencies, Teradyne enters into foreign currency forward contracts. The change in fair value of these derivatives is recorded directly in earnings, and is used to offset the change in fair value of the net monetary assets denominated in foreign currencies.

At December 31, 2008 and 2007, Teradyne had the following forward currency contracts to buy and sell non-U.S. currencies for U.S. dollars and other non-U.S. currencies with the following notional amounts:


	December 31, 2008								December 31, 2007
	Buy Position			Sell Position		Net Total			Buy Position			Sell Position		Net Total
	(in millions)
Japanese Yen	$	—		$	22.2	$	22.2		$	—		$	26.5	$	26.5
Taiwan Dollar		—			7.9		7.9			—			6.6		6.6
British Pound Sterling		(14.8	)		18.5		3.7			(12.2	)		7.2		(5.0	)
European Euro		(18.9	)		17.7		(1.2	)		(15.4	)		20.9		5.5

Total	$	(33.7	)	$	66.3	$	32.6		$	(27.6	)	$	61.2	$	33.6

The fair value of the outstanding contracts was a loss of $0.8 million at December 31, 2008 and immaterial gain at December 31, 2007. In 2008, Teradyne recorded net realized losses of $8.1 million related to foreign currency forward contracts hedging net monetary positions. In 2007, Teradyne recorded net realized gains of $0.2 million related to foreign currency forward contracts hedging net monetary positions. In 2006, Teradyne recorded net realized gains of $2.2 million related to foreign currency forward contracts hedging net monetary positions. Both, the contract gains and losses, on the items being hedged are included in interest expense and other.

Concentration of Credit Risk

Financial instruments which potentially subject Teradyne to concentrations of credit risk consist principally of cash equivalents, marketable securities, forward currency contracts and accounts receivable. Teradyne maintains cash investments primarily in money market securities, U.S. Treasury and government agency securities, corporate debt securities and mortgage backed securities. Teradyne places forward currency contracts with high credit-quality financial institutions in order to minimize credit risk exposure. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of geographically dispersed customers. Teradyne performs ongoing credit evaluations of its customers’ financial condition and from time to time may require customers to provide a letter of credit from a bank to secure accounts receivable.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DEBT

Revolving Credit Facility

On November 14, 2008, in connection with the acquisition of Eagle Test, Teradyne entered into a credit agreement (the “Credit Agreement”) among Teradyne, as borrower, a syndicate of banks and certain direct and indirect domestic subsidiaries of Teradyne. The Credit Agreement provides for a senior secured revolving credit facility of $122.5 million. On November 14, 2008 and December 31, 2008, Teradyne borrowed $100 million and $22.5 million, respectively. Teradyne incurred $2.8 million in costs related to the revolving credit facility. These costs are being amortized over the three year term of the revolving credit facility.

At Teradyne’s option, loans under the Credit Agreement bear interest at a rate per annum equal to (i) the Eurodollar rate plus a margin which will vary between 3.00% and 3.50% based on Teradyne’s consolidated leverage ratio or (ii) the Base Rate, the rate of interest in effect for such day as announced by Bank of America, N.A. as its “prime rate”, plus a margin which will vary between 2.00% and 2.50% based on Teradyne’s consolidated leverage ratio. In addition, Teradyne is required to pay the Lenders a commitment fee at a rate per annum of 0.75% on the actual daily unused amount of the credit facility commitments of such Lenders during the period for which payment is made, payable quarterly in arrears. The credit facility will be available on a revolving basis until November 14, 2011. Teradyne may optionally prepay loans or reduce the credit facility commitments at any time, without penalty.

The Credit Agreement contains customary representations and warranties as well as affirmative and negative covenants. Affirmative covenants include, among others, with respect to Teradyne and its subsidiaries, maintenance of existence, financial and other reporting, payment of obligations, maintenance of properties and insurance, and an agreement to cause future material domestic subsidiaries to become parties to the Security and Pledge Agreement referred to below. Negative covenants include, among others, with respect to Teradyne and its subsidiaries, limitations on incurrence or guarantees of indebtedness, limitations on liens, sale and lease-back transactions, investments, dividends, share redemptions and other restricted payments, affiliate transactions and capital expenditures. The Credit Agreement also requires Teradyne to maintain certain financial ratios as of the end of any fiscal quarter, including a leverage ratio, fixed charge coverage ratio and an available domestic cash to total revolving borrowings ratio. The most restrictive covenant is the leverage ratio, which is a ratio of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to consolidated indebtedness, which for any period of four consecutive fiscal quarters may not exceed 2.5 to 1.0, subject to certain exceptions.

The Credit Agreement contains customary events of default, including, among others, inaccuracy of representations and warranties in any material respect, non-payment of principal, interest or other amounts, violation of covenants, cross-defaults with other material indebtedness, certain undischarged judgments, the occurrence of certain ERISA or insolvency events and the occurrence of a change of control. Upon an event of default under the Credit Agreement, the Lenders may declare the loans and all other obligations under the Credit Agreement immediately due and payable. A bankruptcy or insolvency event of default causes such obligations automatically to become immediately due and payable.

The obligations of Teradyne under the Credit Agreement are guaranteed by certain domestic subsidiaries of Teradyne (“Guarantors”). As of December 31, 2008 the only Guarantors are Nextest and Eagle Test. Pursuant to a Security and Pledge Agreement, dated November 14, 2008 (the “Security and Pledge Agreement”), among Teradyne, the Guarantors and the Agent on behalf of the Lenders, the loans and the other obligations of Teradyne and the Guarantors are secured by (i) all personal property of Teradyne and each Guarantor, (ii) all present and future shares of capital stock of (or other ownership or profit interests in) each of Teradyne’s present and future

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

H.	DEBT—(Continued)

subsidiaries (limited to 65% of the capital stock of each first-tier foreign subsidiary) and (iii) all real property of Teradyne and each Guarantor, if the ratio of consolidated EBITDA to consolidated indebtedness for any period of four consecutive fiscal quarters, exceeds 2.5 to 1.0. As of December 31, 2008, Teradyne was in compliance with all financial covenants set forth in the Credit Agreement.

Convertible Senior Notes

In 2001, Teradyne issued $400 million principal amount of 3.75% Convertible Senior Notes due in 2006 (the “Notes”) in a private placement and received net proceeds of $389 million. The Notes were convertible at the option of the holders at a rate which is equivalent to a conversion price of approximately $26.00 per share, which is equal to a conversion rate of approximately 38.4615 shares of common stock per $1,000 principal amount of Notes.

Teradyne began making annual interest payments of up to $15 million, paid semi-annually, on the Notes on April 15, 2002. During 2004 and 2005, we repurchased $100 million of the outstanding Notes pursuant to authorization from our Board of Directors. The decision to repurchase a portion of the Notes was based on the fair market value of the Notes being below the return we would earn on high grade investment securities. On January 26, 2006, management was given further authorization by our Board to repurchase up to the full $300 million of the principal amount that remained outstanding under the Notes through open market purchases, privately negotiated transactions and auctions for a price not to exceed 100% of the principal amount plus any accrued but unpaid interest thereon. During 2006, we repurchased Notes of $15.0 million in the first quarter, $24.0 million in the third quarter, and we repaid the remaining $261 million in the fourth quarter of 2006.

I.	ACCUMULATED OTHER COMPREHENSIVE LOSS

At December 31, 2008 and 2007, the accumulated other comprehensive loss balances were as follows:


	2008			2007
	(in thousands)
Retirement plans net loss, net of tax of ($3,925) and ($1,682)	$	(141,323	)	$	(41,965	)
Retirement plans prior service cost, net of tax of $0 and $0		(1,334	)		(5,507	)
Retirement plans net transition asset, net of tax of $0 and $0		—			20
Unrealized loss on investments, net of tax of $0 and $0		(2,718	)		(721	)
Foreign currency translation adjustments		(2,733	)		2,145

Total accumulated other comprehensive loss	$	(148,108	)	$	(46,028	)

J.	GOODWILL AND INTANGIBLE ASSETS

Goodwill

Teradyne performs an annual impairment test of its goodwill as required under the provisions of FAS 142 on December 31 of each fiscal year unless interim indicators of impairment exist. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value. Fair values are estimated using a discounted cash flow methodology.

Teradyne experienced a worsening in its demand outlook during the fourth quarter of 2008. This sharp decline is not expected to recover in the near term. Consequently, this has led to an impairment of our goodwill of $333.3 million as of December 31, 2008. In 2007 and 2006, the Company performed its annual impairment test for goodwill at the reporting unit level and determined that no adjustment to goodwill was necessary.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

J.	GOODWILL AND INTANGIBLE ASSETS—(Continued)

The changes in the carrying amount of goodwill by reporting units for the years ended December 31, 2008 and 2007 are as follows:


	Semiconductor Test			Systems Test			Total
	(in thousands)
Balance at December 31, 2006	$	—		$	69,134		$	69,134
No activity		—			—			—
Balance at December 31, 2007		—			69,134			69,134
Nextest acquisition		170,492			—			170,492
Eagle Test acquisition		93,655			—			93,655
Impairment		(264,147	)		(69,134	)		(333,281	)

Balance at December 31, 2008	$	—		$	—		$	—

Intangible Assets

Amortizable intangible assets consist of the following and are included in intangible and other assets on the balance sheets:


	December 31, 2008
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Useful Life
	(in thousands)
Developed technology	$	122,393	$	27,889	$	94,504	6.1 years
Customer relationships and service and software maintenance contracts		92,279		11,001		81,278	8.6 years
Tradenames and trademarks		15,000		3,784		11,216	11.5 years
Backlog		300		300		—	0.5 years

Total intangible assets	$	229,972	$	42,974	$	186,998	7.6 years


	December 31, 2007
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Useful Life
	(in thousands)
Developed technology	$	19,193	$	15,734	$	3,459	7.5 years
Customer relationships and service and software maintenance contracts		4,779		3,678		1,101	8.0 years
Tradenames and trademarks		3,800		2,929		871	8.0 years
Acquired workforce		700		139		561	4.0 years

Total intangible assets	$	28,472	$	22,480	$	5,992	7.6 years

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

K.	COMMITMENTS AND CONTINGENCIES—(Continued)

Aggregate intangible assets amortization expense was $20.6 million in the year ended December 31, 2008, $3.7 million in the year ended December 31, 2007, and $3.6 million in the year ended December 31, 2006. Estimated intangible assets amortization expense for each of the five succeeding fiscal years is as follows:


Year		Amount
		(in thousands)
2009		32,388
2010		29,717
2011		28,259
2012		26,132
2013		25,066

Teradyne determined that the worsening in its demand outlook experienced during the fourth quarter of 2008 was a significant event that indicated that the carrying amount of certain long-lived and intangible asset groups might not be recoverable. Teradyne conducted recoverability tests in accordance with SFAS No. 144. As the undiscounted future cash flows of the long-lived asset groups exceeded their carrying amount, Teradyne determined that no impairment of its long-lived assets had occurred at December 31, 2008.

K.	COMMITMENTS AND CONTINGENCIES

Lease Commitments

Rental expense for the years ended December 31, 2008, 2007 and 2006 was $21.5 million, $19.8 million and $22.4 million, respectively.

Teradyne leases portions of its office and operating facilities under various operating lease arrangements. The following table reflects Teradyne’s non-cancelable operating lease commitments:


	Non-cancelable Lease Commitments*
	(in thousands)
2009	$	20,160
2010		18,091
2011		15,729
2012		11,847
2013		6,281
Beyond 2013		9,264

Total	$	81,372

*	Minimum payments have not been reduced by minimum sublease income of $7.7 million due in the future under non-cancelable subleases.

Legal Claims

On July 11, 2008, Xyratex Technology, Ltd. (“Xyratex”) filed a complaint against Teradyne in the United States Federal District Court in Los Angeles, California alleging that certain Teradyne disk drive test products infringe one of Xyratex’s patents. The complaint was served to Teradyne on October 29, 2008. The suit seeks temporary, preliminary and permanent injunctive relief as well as unspecified monetary damages, including treble damages, for patent infringement. On December 17, 2008, we filed our answer and counterclaims, denying

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

K.	COMMITMENTS AND CONTINGENCIES—(Continued)

that our disk drive test products infringe the asserted Xyratex patent and asking the court to declare such patent invalid. The case is currently in the discovery phase and trial is scheduled to begin in November 2009. We intend to vigorously defend against the Xyratex claim and to vigorously pursue our counterclaims against Xyratex.

In 2001, Teradyne was designated as a Potentially Responsible Party (“PRP”) at a clean-up site in Los Angeles, California. This claim arose out of our acquisition of Perception Laminates in August 2000. Prior to that date, Perception Laminates had itself acquired certain assets of Alco Industries Inc. under an asset purchase agreement in 1992. Neither Teradyne nor Perception Laminates have ever conducted any operations at the Los Angeles site. We have asked the State of California to drop the PRP designation, but California has not yet agreed to do so.

In November 2008, Teradyne received a general notice letter from the California Department of Toxic Substances Control (“DTSC”) which informed Teradyne of potential liability with respect to contamination at the BKK Corporation Landfill Facility Site in West Covina, California. Similar to the PRP claim discussed above, this claim arose out of our acquisition of Perception Laminates in August 2000. Neither Teradyne nor Perception Laminates have ever conducted any operations at the West Covina site. We have asked the DTSC and the group of settling defendants to remove Teradyne as a PRP for this site.

Guarantees and Indemnification Obligations

Teradyne provides indemnification, to the extent permitted by law, to its officers, directors, employees and agents for liabilities arising from certain events or occurrences while the officer, director, employee, or agent, is or was serving, at Teradyne’s request in such capacity. Teradyne has entered into indemnification agreements with certain of its officers and directors. With respect to acquisitions, Teradyne provides indemnifications to or assumes indemnification obligations for the current and former directors, officers and employees of the acquired companies in accordance with the acquired companies’ bylaws and charter. As a matter of practice, Teradyne has maintained directors and officer liability insurance coverage including coverage for directors and officers of

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

K.	COMMITMENTS AND CONTINGENCIES—(Continued)

acquired companies. Two former executive officers of Teradyne are named defendants in a securities case pending in the Federal District Court in San Diego, California. Each of these former executive officers has invoked the indemnification provisions described herein and insurance claims have been submitted to and are being processed by Teradyne’s director and officer liability insurance provider.

Teradyne enters into agreements in the ordinary course of business with customers, resellers, distributors, integrators and suppliers. Most of these agreements require Teradyne to defend and/or indemnify the other party against intellectual property infringement claims brought by a third party with respect to Teradyne’s products. From time to time, Teradyne also indemnifies customers and business partners for damages, losses and liabilities they may suffer or incur relating to personal injury, personal property damage, product liability and environmental claims relating to the use of Teradyne’s products and services or resulting from the acts or omissions of Teradyne, its employees, authorized agents or subcontractors. On occasion, Teradyne has also provided guarantees to customers regarding the performance of its products in addition to the warranty described below.

As a matter of ordinary business course, Teradyne warrants that its products, including software products, will substantially perform in accordance with its standard published specifications in effect at the time of delivery. Most warranties have a one year duration commencing from installation. A provision is recorded upon revenue recognition to cost of revenue for estimated warranty expense upon historical experience. When Teradyne receives revenue for extended warranties beyond the standard duration, it is deferred and recognized on a straight line basis over the contract period. Related costs are expensed as incurred. As of December 31, 2008 and 2007, Teradyne had a product warranty accrual of $8.4 million and $9.3 million, respectively, included in other accrued liabilities and revenue deferrals related to extended warranties of $6.4 million and $6.6 million, respectively, included in deferred revenue.

In addition, and in the ordinary course of business, Teradyne provides minimum purchase guarantees to certain of its vendors to ensure continuity of supply against the market demand. Although some of these guarantees provide penalties for cancellations and/or modifications to the purchase commitments as the market demand decreases, most of the guarantees do not. Therefore, as the market demand decreases, Teradyne re-evaluates these guarantees and determines what charges, if any, should be recorded.

With respect to its agreements covering product, business or entity divestitures and acquisitions, Teradyne provides certain representations, warranties and covenants to purchasers and agrees to indemnify and hold such purchasers harmless against breaches of such representations, warranties and covenants. Many of the indemnification claims have a definite expiration date while some remain in force indefinitely. With respect to its acquisitions, Teradyne may, from time to time, assume the liability for certain events or occurrences that took place prior to the date of acquisition.

As a matter of ordinary business course, Teradyne occasionally guarantees certain indebtedness obligations of its subsidiary companies, limited to the borrowings from financial institutions, purchase commitments to certain vendors, and lease commitments to landlords.

Based on historical experience and information known as of December 31, 2008, except for product warranty, Teradyne has not recorded any liabilities for these guarantees and obligations as of December 31, 2008 because the amount would be immaterial.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

L.	NET (LOSS) INCOME PER COMMON SHARE

The following table sets forth the computation of basic and diluted net (loss) income per common share from continuing and discontinued operations:


	2008			2007		2006
	(in thousands, except per share amounts)
(Loss) Income from continuing operations	$	(398,602	)	$	71,883	$	208,162
Income (loss) from discontinued operations, net		768			5,828		(9,405	)
Net (loss) income for basic net income per share		(397,834	)		77,711		198,757

Income impact of assumed conversion of convertible debentures		—			—		8,346

Net (loss) income for diluted net (loss) income per share	$	(397,834	)	$	77,711	$	207,103

Shares used in income (loss) from continuing operations per common share—basic		170,593			184,020		194,729
Incremental shares from assumed conversion of convertible debentures		—			—		8,546
Employee and director stock options		—			755		699
Restricted stock units		—			520		382
Employee stock purchase rights		—			79		58
Dilutive potential common shares		—			1,354		9,685

Shares used in income (loss) from continuing operations per common share—diluted		170,593			185,374		204,414

Net (loss) income per common share—basic
Continuing operations	$	(2.34	)	$	0.39	$	1.07
Discontinued operations		0.00			0.03		(0.05	)

	$	(2.33	)	$	0.42	$	1.02

Net (loss) income per common share—diluted
Continuing operations	$	(2.34	)	$	0.39	$	1.06
Discontinued operations		0.00			0.03		(0.05	)

	$	(2.33	)	$	0.42	$	1.01

The computation of diluted net loss per common share for the year ended December 31, 2008 excludes all outstanding stock options and restricted stock units because Teradyne had a net loss.

The computation of diluted net income per common share for the years ended December 31, 2007 and 2006 excludes the effect of the potential exercise of options to purchase approximately 13.8 million and 15.3 million shares, respectively, because the exercise price of the option was greater than the average market price of the common shares, as the effect would have been ant-dilutive. The effect of Teradyne’s outstanding convertible notes on diluted net income per share for the year ended December 31, 2006 was calculated using the “if converted” method as required by SFAS No. 128, “Earnings per Share.” In using the “if converted” method, $8.3 million of interest expense related to the convertible notes for the year ended December 31, 2006, net of tax and profit sharing expenses, was added back to net income to arrive at diluted net income. Accordingly, 8.5 million incremental shares from the assumed conversion of the convertible debt are added to shares when calculating diluted net income per common share for the year ended December 31, 2006.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

M.	RESTRUCTURING AND OTHER, NET

Restructuring and Other, Net

In response to a downturn in the industry, Teradyne initiated restructuring activities across all segments to reduce costs and redundancies, principally through headcount reductions and facility consolidations. The tables below represent activity related to these actions. The remaining accrual for severance and benefits is reflected in the accrued employees’ compensation and withholdings account on the balance sheet. The remaining accrual for lease payments on vacated facilities is reflected in the other accrued liabilities account and the long-term other accrued liabilities account and is expected to be paid out over the lease terms, the latest of which expires in 2012. Teradyne expects to pay out approximately $2.4 million against the lease accruals over the next twelve months. Teradyne’s future lease commitments are net of expected sublease income of $7.7 million as of December 31, 2008. Teradyne has subleased approximately 64% of its unoccupied space as of December 31, 2008.

2008 Activities


	Facility Related			Acquisition Costs			Loss on Sale of Land and Buildings			Severance and Benefits			Long- Lived Asset Impairment			Total
	(in thousands)
2008 (credit) provision	$	13,748		$	823		$	20,883		$	24,421		$	550		$	60,425
Cash receipts (payments)		(951	)		(823	)		—			(19,079	)		—			(20,853	)
Accelerated Depreciation and other		(11,966	)		—			(20,883	)		—			(550	)		(33,399	)

Balance at December 31, 2008	$	831		$	—		$	—		$	5,342		$	—		$	6,173

Teradyne recorded the following charges related to the 2008 restructuring activities:

•

$24.4 million of severance charges across all functions and segments related to headcount reductions of approximately 470 people;

•

$20.9 million loss on sale of land and buildings, including $22.6 million loss on the sale of real estate across both segments for a manufacturing facility in North Reading, Massachusetts as a result of the transfer of manufacturing to an outsourced partner and $1.7 million gain on the sale of real estate in the Semiconductor Test segment for a facility in Agoura Hills, California;

•

$0.8 related to the acquisition financing costs; and

•

$0.6 million charge in the Semiconductor Test segment for a long-lived asset impairment related to acquired intangible assets.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

M.	RESTRUCTURING AND OTHER, NET—(Continued)

2007 Activities


	Gain on Sale of Land and Buildings			Severance and Benefits			Insurance Recovery			Total
	(in thousands)
2007 (credit) provision	$	(3,597	)	$	6,963		$	(4,326	)	$	(960	)
Cash receipts (payments)		3,597			(5,855	)		4,326			2,068

Balance at December 31, 2007		—			1,108			—			1,108

2008 credit		—			(194	)		—			(194	)
Cash payments		—			(833	)		—			(833	)

Balance at December 31, 2008	$	—		$	81		$	—		$	81

Teradyne recorded the following activity related to the 2007 restructuring activities:

•

$3.6 million gain on the sale of land and building in Deerfield, Illinois;

•

$7.0 million of severance charges related to 202 people across all functions and segments; and

•

$4.3 million of cash proceeds recovered from insurance related to a facility fire in Taiwan.

2006 Activities


	Gain on Sale of Land and Buildings			Severance and Benefits			Facility Related			Long-Lived Asset Impairment			Total
	(in thousands)
2006 (credit) provision	$	(39,098	)	$	4,292		$	1,153		$	50		$	(33,603	)
Cash receipts (payments)		39,098			(2,659	)		(528	)		—			35,911
Asset write-downs		—			—			—			(50	)		(50	)

Balance at December 31, 2006		—			1,633			25			—			2,258
2007 credit		—			(152	)		—			—			(152	)
Cash payments		—			(1,473	)		(590	)		—			(2,063	)

Balance at December 31, 2007		—			8			35			—			43
2008 (credit) provision		—			(8	)		—			—			(8	)
Cash receipts (payments)		—			—			(35	)		—			(35	)

Balance at December 31, 2008	$	—		$	—		$	—		$	—		$	—

Teradyne recorded the following activity related to the 2006 restructuring activities:

•

$39.1 million gain on the sale of real estate, including $35.8 million for two Semiconductor Test facilities in Boston, Massachusetts, $1.5 million for a Semiconductor Test parking facility in Boston, Massachusetts, $1.3 million for a Semiconductor Test facility in San Jose, California and $0.5 million for buildings in Nashua, New Hampshire;

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

M.	RESTRUCTURING AND OTHER, NET—(Continued)

•

$4.3 million of severance charges related to 179 people across all segments; and

•

$1.2 million of facility related charges for the exit of Semiconductor Test facilities in Newbury Park, California and Waltham, Massachusetts.

Pre-2006 Activities


	Severance and Benefits			Loss on Sale of Product Lines			Other Charges			Facility Related			Total
Balance at December 31, 2005	$	10,116		$	—		$	529		$	17,061		$	27,706
2006 credit		(50	)		(406	)		—			(1,974	)		(2,430	)
Cash (payments) receipts		(8,883	)		406			(529	)		(5,483	)		(14,489	)

Balance at December 31, 2006		1,183			—			—			9,604			10,787
2007 (credit) provision		(292	)		(906	)		—			1,651			453
Cash (payments) receipts		(649	)		906			—			(3,488	)		(3,231	)

Balance at December 31, 2007		242			—			—			7,767			8,009
2008 (credit) provision		(124	)		—			—			2,676			2,552
Cash (payments) receipts		(118	)		—			—			(1,971	)		(2,089	)

Balance at December 31, 2008	$	—		$	—		$	—		$	8,472		$	8,472

For pre-2006 restructuring activity, Teradyne recorded the following activity in 2008:

•

$2.7 million facility related charge in Systems Test Group segment for changes in the estimated amount and timing of sublease income on a facility in Westford, Massachusetts.

N.	RETIREMENT PLANS

Teradyne adopted the funded status recognition provision of SFAS 158 effective December 31, 2006. This standard amends SFAS 87, 88, 106, and 132(R). SFAS 158 requires an employer with defined benefit plans or other postretirement benefit plans to recognize an asset or a liability on its balance sheet for the overfunded or underfunded status of the plans as defined by SFAS 158. The pension asset or liability represents a difference between the fair value of the pension plan’s assets and the projected benefit obligation at December 31. For other postretirement benefit plans, the liability is the difference between the fair value of the plan’s assets and the accumulated postretirement benefit obligation at December 31.

Defined Benefit Pension Plans

Teradyne has defined benefit pension plans covering a majority of domestic employees and employees of certain non-U.S. subsidiaries. Benefits under these plans are based on employees’ years of service and compensation. Teradyne’s funding policy is to make contributions to the plans in accordance with local laws and to the extent that such contributions are tax deductible. The assets of these plans consist primarily of equity and fixed income securities. In addition, Teradyne has an unfunded supplemental executive defined benefit plan in the United States to provide retirement benefits in excess of levels allowed by the Employment Retirement Income Security Act (ERISA) and the Internal Revenue Code (the “IRC”), as well as unfunded foreign plans.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

N.	RETIREMENT PLANS—(Continued)

Teradyne uses a December 31 measurement date for all of its plans. The December 31 balances of these defined benefit pension plan assets and obligations are shown below:


	2008			2007
	(in thousands)
*Assets and Obligations*
Change in benefit obligation:
Projected benefit obligation:
Beginning of year	$	291,387		$	297,857
Service cost		4,800			5,664
Interest cost		17,320			16,647
Actuarial gain		14,514			(16,936	)
Benefits paid		(13,544	)		(13,467	)
Curtailment		(433	)		(498	)
Transfers		—			(810	)
Non-U.S. currency movement		(3,117	)		2,930

End of year		310,927			291,387

Change in plan assets:
Fair value of plan assets:
Beginning of year		284,201			276,945
Company contributions		4,300			4,808
Plan participants’ contributions		23			54
Actual return		(66,165	)		15,208
Benefits paid		(13,544	)		(13,467	)
Non-U.S. currency movement		(3,070	)		653

End of year		205,745			284,201

Funded status	$	(105,182	)	$	(7,186	)

The following table provides amounts recorded within the account line items of the statement of financial position as of December 31:


	2008			2007
	(in thousands)
Long-term retirement plans assets	$	—		$	46,396
Accrued employees’ compensation and withholdings		(2,347	)		(1,956	)
Long-term retirement plans liabilities		(102,835	)		(51,626	)

	$	(105,182	)	$	(7,186	)

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

N.	RETIREMENT PLANS—(Continued)

The following table provides amounts recognized in accumulated other comprehensive loss as of December 31:


	2008			2007
	(in thousands)
Net loss	$	141,290		$	39,365
Prior service cost		3,330			7,736
Net transition asset		—			(27	)
Total recognized in other comprehensive loss before tax		144,620			47,074

Deferred tax asset		(3,925	)		(1,674	)

Total recognized in other comprehensive loss, net of tax	$	140,695		$	45,400

The estimated portion of net loss and prior service cost remaining in accumulated other comprehensive loss that is expected to be recognized as a component of net periodic pension cost in 2009 is $4.7 million, and $0.8 million respectively.

The accumulated benefit obligation for all defined pension plans was $293.5 million and $271.1 million at December 31, 2008 and 2007, respectively.

Information for pension plans with an accumulated benefit obligation in excess of plan assets as of December 31:


	2008		2007
	(in millions)
Projected benefit obligation	$	298.1	$	53.6
Accumulated benefit obligation	$	282.4	$	43.7
Fair value of plan assets	$	193.2	$	0.9

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

N.	RETIREMENT PLANS—(Continued)

Expense

For the years ended December 31, 2008, 2007 and 2006, Teradyne’s net periodic pension costs were comprised of:


	2008			2007			2006
	(in thousands)
Components of Net Periodic Pension Cost:
Service cost	$	4,800		$	5,664		$	7,042
Interest cost		17,320			16,647			15,723
Expected return on plan assets		(20,400	)		(19,545	)		(17,694	)
Amortization of:
Net transition (asset)/obligation		(27	)		(68	)		66
Prior service cost		847			847			844
Net loss		1,315			3,614			5,900
Curtailment gain		(433	)		—			—

Total net periodic pension cost	$	3,422		$	7,159		$	11,881

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:
Net loss (gain)		99,812			(12,895	)
Reversal of amortization items:
Net transition asset		27			68
Prior service cost		(847	)		(847	)
Net loss		(1,315	)		(3,614	)

Total recognized in other comprehensive income		97,677			(17,288	)

Total recognized in net periodic pension cost and other comprehensive income	$	101,099		$	(10,129	)

Weighted Average Assumptions to Determine Net Periodic Pension Cost at January 1


	United States Plan						Foreign Plans
	2008		2007		2006		2008		2007		2006
Discount rate	6.5	%	6.0	%	5.5	%	4.8	%	4.1	%	4.1	%
Expected return on plan assets	7.75		7.75		7.5		4.0		4.0		4.0
Salary progression rate	4.0		4.0		4.0		3.6		3.5		3.5

Weighted Average Assumptions to Determine Pension Obligations at December 31


	United States Plan						Foreign Plans
	2008		2007		2006		2008		2007		2006
Discount rate	6.2	%	6.5	%	6.0	%	4.9	%	4.8	%	4.1	%
Salary progression rate	4.0		4.0		4.0		3.4		3.6		3.5

In developing the expected return on plan assets assumption, Teradyne evaluated input from its investment manager and pension consultants, including their review of asset class return expectations. Based on this review, Teradyne believes that 7.75% was an appropriate rate to use for fiscal 2008 for the U.S. Qualified Pension Plan.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

N.	RETIREMENT PLANS—(Continued)

Teradyne bases its determination of pension expense or benefit on a market-related valuation of assets, which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return on assets. Since the market-related value of assets recognizes gains or losses over a five-year period, the future value of assets will be impacted as previously deferred gains or losses are recognized. As of December 31, 2008, under the U.S. Qualified Pension Plan, Teradyne had cumulative losses of approximately $62.5 million, which remain to be recognized in the calculation of the market-related value of assets. The discount rate that we utilized for determining future pension obligations for the U.S. Qualified Pension Plan is based on Citigroup Pension Index adjusted for the plan’s expected cash flows and was 6.2% at December 31, 2008, down from 6.5% at December 31, 2007.

Plan Assets

Teradyne’s weighted average asset allocation at December 31, 2008 and 2007, by asset category is as follows:


	United States Plan				Foreign Plans
	2008		2007		2008		2007
Equity Securities	37.0	%	46.3	%	55.1	%	53.8	%
Debt Securities	63.0		53.7		38.9		40.3
Other	—		—		6.0		5.9

Total	100.0	%	100.0	%	100.0	%	100.0	%

Teradyne employs a total return investment approach for its pension plan assets whereby a mix of equities and fixed income investments are used to ensure the preservation of capital and to maximize the long-term return of plan assets for a prudent level of risk. The investment portfolio contains a diversified blend of equity and fixed income investments. The investment portfolio will not at any time have a direct investment in Teradyne stock. It may have an indirect investment in Teradyne stock, if one of the funds selected by the investment manager invests in Teradyne stock.

The target asset allocation and index for each asset category for the U.S. Qualified Pension Plan, per policy, for the portfolio is as follows:


Asset Category:	Policy Index:	Target
Equity (Large cap)	S&P 500 Stock Index	22	%
Equity (Small cap)	Russell 2000 Index	10
International Equity	MSCI EAFE Index (Net Dividends) and MSCI Emerging Markets Free Index	15
Passive Fixed Income	Barclays Capital Long Government Credit Index	33
High-Yield Fixed Income	Barclays Capital High Yield Index	10
Real Assets	Real Asset Custom Index	10

Teradyne’s investment manager regularly reviews Teradyne’s actual asset allocation and periodically rebalances Teradyne’s portfolio to ensure alignment to the targeted allocation. The investment return objectives are to achieve a rate of return, which exceeds the rate of inflation, as measured by the Consumer Price Index, by 3% per year, and to avoid excessive volatility and produce a rate of return that at least matches the Policy Index

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

N.	RETIREMENT PLANS—(Continued)

identified above. The manager’s investment performance is reviewed at least annually. Results for the total portfolio and for each major category of assets are evaluated in comparison with appropriate market indices, the Policy Index, other similarly managed portfolios and the Consumer Price Index. The assets of Teradyne’s foreign pension plans are invested in funds which seek to combine long-term growth potential offered through equity exposure with the relative security provided by equity, bonds and cash.

Contributions

Teradyne’s funding policy is to make contributions to the plans in accordance with local laws and to the extent that such contributions are tax deductible. During 2008, 2007 and 2006, Teradyne contributed $4.3 million, $4.8 million and $30.2 million, respectively, to the plans. Based upon the U.S. Qualified Pension Plan funded status as of December 31, 2008, Teradyne does not expect to make any contributions to this plan in 2009. Contributions that will be made in 2009 to certain Qualified Plans for non-U.S. subsidiaries are based on local statutory requirements and will be approximately $7.5 million.

Expected Future Pension Benefits Payments

The following benefit payments, which reflect future service, as appropriate, are expected to be paid as follows:


	United States		Foreign
	(in thousands)
2009	$	11,618	$	2,227
2010		12,478		1,724
2011		13,078		2,225
2012		14,261		3,012
2013		15,347		2,336
2014-2018		93,983		15,466

Post-Retirement Benefit Plans

In addition to receiving pension benefits, U.S. Teradyne employees who meet early retirement eligibility requirements as of their termination dates may participate in Teradyne’s Welfare Plan, which includes death, and medical and dental benefits up to age 65. Death benefits provide a fixed sum to retirees’ survivors and are available to all retirees. Substantially all of Teradyne’s current U.S. employees (including executive officers) could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

N.	RETIREMENT PLANS—(Continued)

Teradyne uses a December 31 measurement date for its plan. The December 31 balances of the post retirement assets and obligations are shown below:


	2008			2007
	(in thousands)
*Assets and Obligations*
Change in benefit obligation:
Projected benefit obligation:
Beginning of year	$	21,288		$	24,208
Service cost		167			254
Interest cost		1,227			1,315
Actuarial gain		(184	)		(1,385	)
Benefits paid		(2,858	)		(3,104	)

End of year		19,640			21,288

Change in plan assets:
Fair value of plan assets:
Beginning of year		—			—
Company contributions		2,858			3,102
Benefits paid		(2,858	)		(3,102	)

End of year		—			—

Funded status	$	(19,640	)	$	(21,288	)

The following table provides amounts recorded within the account line items of financial position as of December 31:


	2008			2007
	(in thousands)
Accrued employees’ compensation and withholdings	$	(2,790	)	$	(2,855	)
Long-term retirement plans liability		(16,850	)		(18,403	)

	$	(19,640	)	$	(21,258	)

The following table provides amounts recognized in accumulated other comprehensive loss as of December 31:


	2008			2007
	(in thousands)
Net loss	$	3,957		$	4,281
Prior service credit		(1,995	)		(2,229	)

Total recognized in other comprehensive loss	$	1,962		$	2,052

The estimated portion of net loss and prior service credit remaining in accumulated other comprehensive income that is expected to be recognized as a component of net periodic post-retirement benefit cost in 2009 is $0.2 million and $(0.2) million, respectively.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

N.	RETIREMENT PLANS—(Continued)

Expense

For the years ended December 31, 2008, 2007 and 2006, Teradyne’s net periodic post-retirement benefit cost were comprised of:


	2008			2007			2006
	(in thousands)
Components of Net Periodic Post-Retirement Benefit Cost:
Service cost	$	167		$	254		$	255
Interest cost		1,227			1,315			1,404
Amortization of:
Prior service credit		(234	)		(234	)		(234	)
Net loss		140			285			550

Total net periodic post-retirement benefit cost		1,300			1,620		$	1,975

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:
Net gain		(184	)		(1,385	)
Reversal of amortization items:
Prior service credit		234			234
Net loss		(140	)		(285	)

Total recognized in other comprehensive income		(90	)		(1,436	)

Total recognized in net periodic post-retirement benefit cost and other comprehensive income	$	1,210		$	184

Weighted Average Assumptions to Determine Net Periodic Post-Retirement Benefit Cost as of January 1


	2008		2007		2006
Discount rate	6.5	%	6.0	%	5.5	%
Initial Health Care Cost Trend Rate	9.0		10.0		10.0
Ultimate Health Care Cost Trend Rate	5.0		5.0		5.0
Year in which Ultimate Health Care Cost Trend Rate is reached	2018		2014		2011

Weighted Average Assumptions to Determine Post Retirement Benefit Obligation as of December 31


	2008		2007		2006
Discount rate	6.1	%	6.5	%	6.0	%
Initial Medical Trend	8.9		9.0		10.0
Ultimate Health Care Trend	5.0		5.0		5.0
Medical cost trend rate decrease to ultimate rate in year	2018		2014		2014

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

N.	RETIREMENT PLANS—(Continued)

Assumed health care trend rates could have a significant effect on the amounts reported for health care plans. A one percentage point change in the assumed health care cost trend rates for the year ended December 31, 2008 would have the following effects:


	1 Percentage Point Increase		1 Percentage Point Decrease
	(in thousands)
Effect on total service and interest cost components	$	50	$	(47	)
Effect on postretirement benefit obligations	$	819	$	(765	)

Expected Future Benefits Payments

The following benefit payments, which reflect future service, as appropriate, are expected to be paid:


		Benefits
		(in thousands)
2009		2,790
2010		2,630
2011		2,410
2012		2,170
2013		2,090
2014-2018		8,040

O.	STOCK BASED COMPENSATION

Stock Compensation Plans

Under its stock compensation plans Teradyne granted options to purchase common stock at 100% of the fair market value on the date of grant. Options granted to employees vest in equal installments over four years and have a maximum term of seven years. Options granted to non-employee directors are immediately vested, fully exercisable and have a maximum term of either five or seven years.

Restricted stock unit awards granted to employees in 2006, 2007 and 2008 (excluding executive officers) vest in equal annual installments over four years. Restricted stock unit awards granted to non-employee directors vest after a one year period, with 100% of the award vesting on the first anniversary of the grant date. Restricted stock unit awards granted to executive officers, including the CEO, in January 2006, vest over two years. Restricted stock unit awards granted to executive officers, including the CEO, in January 2008 and 2007 vest over four years. A portion of these restricted stock unit awards granted to executive officers, including the CEO, is subject to time-based vesting and a portion of the awards is subject to performance-based vesting. The percentage level of performance satisfied for performance-based grants is assessed on or near the anniversary of the grant date and, in turn, that percentage level determines the number of performance-based restricted stock units available for vesting over the vesting period; portions of the performance-based grants not available for vesting will be forfeited. The weighted-average grant-date fair value of the restricted stock units granted in 2008, 2007 and 2006 was $9.39, $15.18, and $16.53, respectively.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

O.	STOCK BASED COMPENSATION—(Continued)

Stock compensation plan activity for the years 2008, 2007 and 2006 follows:


	2008		2007		2006
	(in thousands)
Restricted Stock Units:
Non-vested at January 1	2,199		1,128		1,465
Awarded	3,453		2,101		482
Assumed from acquisitions	1,092		—		—
Vested	(1,213	)	(809	)	(680	)
Forfeited	(384	)	(221	)	(139	)

Non-vested at December 31	5,147		2,199		1,128

Stock Options:
Outstanding at January 1	17,142		19,011		22,950
Options granted	—		—		—
Assumed from acquisitions	6,920		—		—
Options exercised	(1,725	)	(691	)	(729	)
Options forfeited	(25	)	(54	)	(130	)
Options cancelled	(5,521	)	(1,124	)	(3,080	)

Outstanding at December 31	16,791		17,142		19,011

Vested and expected to vest at December 31	16,776		17,139		18,986

Exercisable at December 31	16,067		17,069		18,007

Total shares available for the years 2008, 2007 and 2006:


	2008		2007		2006
	(in thousands)
Shares available:
Available for grant at January 1	9,980		11,901		25,723
Option grants	—		—		—
Options cancellations/forfeitures	—		—		3,080
Restricted stock units granted	(3,453	)	(2,102	)	(482	)
Restricted stock units forfeited	348		181		139
Adjustment to shares available	—		—		(16,559	)

Available for grant at December 31	6,875		9,980		11,901

In May 2006, the 1991 Employee Stock Option Plan, the 1996 Non-Employee Director Stock Option Plan and the 1997 Employee Stock Option Plan were terminated and the 2006 Equity and Cash Compensation Incentive Plan was approved by Teradyne’s shareholders. As a result, the number of shares available for future issuance was reduced by 16,559,000 shares from the terminated plans.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

O.	STOCK BASED COMPENSATION—(Continued)

Weighted-average restricted stock unit award date fair value information for the years 2008, 2007 and 2006 follows:


	2008		2007		2006
	(in thousands)
Non-vested at January 1	$	15.47	$	16.00	$	15.58
Awarded		9.39		15.18		16.53
Assumed from acquisitions		10.18		—		—
Vested		10.72		15.49		15.58
Forfeited		11.93		15.36		15.62

Non-vested at December 31	$	10.55	$	15.47	$	16.00

Restricted stock unit awards aggregate intrinsic value information at December 31 for the years 2008, 2007 and 2006 follows:


	2008		2007		2006
	(in thousands)
Outstanding	$	21,719	$	23,541	$	16,149
Expected to vest	$	19,558	$	20,844	$	15,393

Restricted stock units weighted average contractual terms (in years) information at December 31, for the years 2008, 2007 and 2006 follows:


	2008	2007	2006
Outstanding	2.79	3.01	0.95
Expected to vest	2.78	3.00	0.92

Weighted average stock options exercise price information for the years 2008, 2007 and 2006 follows:


	2008		2007		2006
Outstanding at January 1	$	20.78	$	20.66	$	20.73
Assumed from acquisitions		3.21		—		—
Exercised		2.74		12.79		12.15
Forfeited		9.91		12.73		12.99
Canceled		22.91		24.08		23.44
Outstanding at December 31		14.66		20.78		20.66
Exercisable at December 31		15.09		20.81		21.15

Stock option aggregate intrinsic value information for the years ended December 31, 2008, 2007 and 2006 follows:


	2008		2007		2006
	(in thousands)
Exercised	$	10,829	$	2,104	$	2,969
Outstanding	$	5,506	$	6	$	10,412
Vested and expected to vest	$	5,493	$	6	$	10,365
Exercisable	$	5,122	$	6	$	7,952

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

O.	STOCK BASED COMPENSATION—(Continued)

Stock options weighted average contractual terms (in years) information at December 31, for the years 2008, 2007 and 2006 follows:


	2008	2007	2006
Outstanding	3.1	1.9	3.0
Vested and Expected to vest	3.1	1.9	3.0
Exercisable	2.9	1.9	2.9

Significant option groups outstanding at December 31, 2008 and related weighted average price and remaining contractual life information follow:


	Options Outstanding				Options Exercisable
Range Of Exercise Prices	Weighted- Average Remaining Contractual Life (Years)	Shares	Weighted-Average Exercise Price		Shares	Weighted-Average Exercise Price
	(options in thousands)
$ 0.01 – $4.66	6.78	4,153	$	2.99	3,824	$	2.97
$ 4.83 – $14.20	2.96	4,184		10.01	3,807		10.41
$ 14.35 – $21.91	0.90	4,241		17.66	4,223		17.67
$ 21.92 – $124.78	1.91	4,213		27.75	4,213		27.75

Total		16,791	$	14.66	16,067	$	15.09

Employee Stock Purchase Plan

Under the Teradyne 1996 Employee Stock Purchase Plan, eligible employees (including executive officers) may purchase shares of common stock through regular payroll deductions of up to 10% of their compensation. Under the plan, the price paid for the common stock is equal to 85% of the lower of the fair market value of Teradyne’s common stock on the first business day and the last business day of each six month purchase period within each year. In July 2008, 0.8 million shares of common stock were issued to employees who participated in the plan during the first half of 2008, at the weighted average price of $8.55 per share. In January 2009, Teradyne issued 1.2 million shares of common stock to employees who participated in the plan during the second half of 2008, at the weighted average price of $3.59 per share.

P.	SAVINGS PLAN

Teradyne sponsors an employee retirement Savings Plan covering substantially all U.S. employees. Under Teradyne’s Savings Plan, employees may contribute up to 20% of their compensation (subject to Internal Revenue Service limitations). On discretionary basis, Teradyne annually matches employee contributions up to 6% of such compensation at rates ranging from 50% to 100% for employees in the defined benefit plan. For all other employees, on discretionary basis, Teradyne annually matches up to 5% of such compensation at rates ranging from 100% to 150%. Teradyne’s contributions vest 25% per year for the first four years of employment, and contributions for those employees with four years of service vest immediately. Teradyne also has established an unfunded Supplemental Savings Plan to provide savings benefits in excess of those allowed by ERISA and the IRC. The provisions of this plan are the same as the Savings Plan. Under Teradyne’s savings plans, amounts charged to the statement of operations were $7.5 million in 2008, $6.2 million in 2007 and $10.7 million in 2006.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Q.	RELATED PARTY TRANSACTION

During 2007, Paul Tufano, a member of Teradyne’s Board of Directors, was Executive Vice President, Chief Financial Officer and Interim Chief Executive Officer of Solectron Corporation until it was acquired by Flextronics in October 2007. Mr. Tufano ceased being an employee of Solectron or Flextronics in October 2007. In the ordinary course of business, Teradyne has for the last ten years purchased printed circuit board assemblies from Solectron, and has also sold in-circuit testers to Solectron which Teradyne refers to as Flextronics. In August 2007, prior to the Flextronics acquisition, Teradyne expanded our contract with Solectron to have it provide additional manufacturing and test services, including areas of final configuration and test for most of Teradyne’s FLEX family of products. In the years ended December 31, 2007 and 2006, Teradyne purchased $207.8 million and $229.9 million, respectively, of printed circuit board assemblies and services from Flextronics. Sales of in-circuit testers to Flextronics for the years ended December 31, 2007 and 2006 were $4.0 million and $5.7 million, respectively. As of December 31, 2007, $19.8 million was included in accounts payable and $17.5 million was included in accounts receivable, representing amounts due to/from Flextronics.

R.	INCOME TAXES

The components of (loss) income from continuing operations before income taxes and the provision for (benefit from) income taxes of continuing operations as shown in the consolidated statements of operations were as follows:


	2008			2007			2006
	(in thousands)
(Loss) income from continuing operations before income taxes:
U.S.	$	(421,010	)	$	208,509		$	181,810
Non-U.S.		34,985			(129,266	)		54,221

	$	(386,025	)	$	79,243		$	236,031

(Benefit) provision for income taxes from continuing operations:
Current:
U.S. Federal	$	(1,574	)	$	(2,513	)	$	(6,320	)
Non-U.S.		9,246			11,180			36,239
State		(109	)		(557	)		1,958

		7,563			8,110			31,877

Deferred:
U.S. Federal		—			—			—
Non-U.S.		5,014			(750	)		(4,008	)
State		—			—			—

		5,014			(750	)		(4,008	)

Total provision for income taxes from continuing operations:	$	12,577		$	7,360		$	27,869

For the year ended December 31, 2008, income tax expense from continuing operations totaled $12.6 million, primarily related to tax provisions for foreign taxes.

For the year ended December 31, 2007, income tax expense from continuing operations totaled $7.4 million, primarily related to tax provisions for foreign taxes as well as benefits related to the utilization of foreign tax credits in the U.S.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

R.	INCOME TAXES—(Continued)

For the year ended December 31, 2006, the income tax expense from continuing operations totaled $27.9 million, primarily related to a tax provision for foreign taxes as well as benefits related to a one-time credit related to pension funding and settlement of the California income tax audit for 1998 through 2000.

The total income tax provision for the years ended December 31, 2008, 2007 and 2006 was as follows:


	2008		2007		2006
	(in thousands)
Continuing operations	$	12,577	$	7,360	$	27,869
Discontinued operations		—		518		3,769

Total income tax provision	$	12,577	$	7,878	$	31,638

Significant components of Teradyne’s deferred tax assets (liabilities) as of December 31, 2008 and 2007 were as follows:


	2008			2007
	(in thousands)
Deferred tax assets:
Tax credits	$	79,320		$	63,516
Net operating and capital loss carryforwards		77,629			42,411
Intercompany license payments		57,000			57,000
Research and development		46,105			58,864
Inventory valuations		40,864			59,440
Pension liability		40,636			4,665
Accruals		14,989			13,238
Vacation accrual		6,177			8,081
Securities impairment		4,386			—
Equity compensation		4,044			6,348
Deferred revenue		3,161			2,754
Amortization		1,220			1,088

Gross deferred tax assets		375,531			317,405

Less: valuation allowance		(290,137	)		(305,178	)

Total deferred tax assets		85,394			12,227

Deferred tax liabilities:
Intangible assets		(71,058	)		—
Excess of tax over book depreciation		(3,010	)		(2,731	)
Other		(3,068	)		—

Total deferred tax liabilities		(77,136	)		(2,731	)

Net deferred assets	$	8,258		$	9,496

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

R.	INCOME TAXES—(Continued)

At December 31, 2008 Teradyne had operating loss carryforwards that expire in the following years:


	U.S. Federal Operating Loss Carryforwards		State Net Operating Loss Carryforwards		Foreign Net Operating Loss Carryforwards
	(in thousands)
2009	$	2,077	$	—	$	—
2010		511		—		—
2013		—		12,683		—
2016		—		862		—
2017		—		2,910		—
2018		—		11,481		—
2020		50,982		—		—
2023		123,410		—		—
Beyond 2023		16,732		—		160
Non-expiring		—		—		132,112

Total	$	193,712	$	27,936	$	132,272

Of the U.S. Federal operating loss carryforwards, $53.6 million relates to the acquisition of GenRad, Inc. in 2001. The GenRad losses are limited in the amount that can be used as a result of “change in ownership” rules as defined in the Internal Revenue Code of 1986. The net operating loss carryforward of $193.7 million includes $62.5 million of loss related to stock compensation.

Teradyne has approximately $79.3 million of tax credit carryforwards. Business tax credits of approximately $19.0 million expire in the years 2020 through 2028. Foreign tax credits of approximately $24.2 million expire in the years 2012 through 2018 and alternative minimum tax credits of approximately $7.9 million, which do not expire. In addition, there are state tax credits of $28.2 million which expire beginning in 2015.

During 2008, Teradyne’s valuation allowance decreased by $15.0 million due to the increase of the deferred tax liability related to the purchased intangible assets of $71.0 million net of the increase in the deferred tax assets of $56.0 million. The increase of deferred tax assets related to the $86 million growth in tax credits, net operating losses and pension, offset by $30 million reduction in inventory and research and development. During 2007, Teradyne’s valuation allowance decreased by $46.5 million primarily as a result of the utilization of net operating loss carryforwards against current year taxable income. Due to the continued uncertainty of realization, Teradyne maintained its valuation allowance at December 31, 2008 and 2007, for deferred tax assets in the U.S. and Singapore. Teradyne does not expect to significantly reduce its valuation allowance until sufficient positive evidence exists, including sustained profitability, that realization is more likely than not. The valuation allowance includes $51.8 million for net deferred tax assets resulting from the funded status recognition provision of SFAS 158.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

R.	INCOME TAXES—(Continued)

A reconciliation of the effective tax rate for the years 2008, 2007 and 2006 follows:


	2008		2007		2006
U.S. statutory federal tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	—		(0.7	)	1.0
Foreign taxes	0.2		60.6		17.4
Extraterritorial income exclusion	—		—		(0.8	)
Federal income tax audit	—		0.4		(0.1	)
Valuation allowance	(6.9	)	(75.4	)	(38.5	)
Goodwill impairment	(30.3	)	—		—
Current year tax credits	—		(9.9	)	—
Pension	—		—		(2.6	)
Other U.S. permanent items	(1.1	)	2.8		0.8
Other, net	(0.2	)	(3.5	)	(0.1	)

	(3.3	)%	9.3	%	12.1	%

For 2007 and 2006, the foreign taxes included losses generated in Singapore that were not tax affected at the U.S. federal tax rate. A corresponding valuation allowance has been established in Singapore for these losses.

Teradyne adopted FIN 48, “Accounting for Uncertainties in Income Taxes” (“FIN 48”) effective January 1, 2007. FIN 48 applies to all income tax positions accounted for under FASB Statement No. 109, “Accounting for Income Taxes”, and addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. FIN 48 also addressed other aspects of reporting and disclosing uncertain tax positions. Upon adoption of FIN 48, there was no cumulative effect to retained earnings. It is anticipated that within the next twelve months there will be no change in unrecognized tax benefits. As of December 31, 2008, Teradyne has open tax years beginning in 2003 for major jurisdictions including the U.S., Japan, Singapore and the United Kingdom. Teradyne records all interest and penalties related to income taxes as a component of income tax expense. Accrued interest and penalties related to income tax items at December 31, 2008 were not material.

Teradyne’s unrecognized tax benefits for the years 2008 and 2007 are as follows (in thousands):


	2008			2007
Beginning balance, as of January 1	$	9,780		$	10,584
Additions:
Tax positions for current year		112			3,489
Tax positions for prior years		3,745			6,400
Reductions:
Tax positions for prior years		(2,520	)		(6,351	)
Settlements with tax authorities		—			(4,342	)

Ending Balance as of December 31	$	11,117		$	9,780

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

R.	INCOME TAXES—(Continued)

Current year and prior year additions include assessment of potential transfer pricing issues worldwide. Reductions for tax positions for prior years relate to changes in estimates regarding the limitations of foreign tax credits and acquired net operating losses. Settlements with tax authorities in 2007 relate to the closing of transfer pricing issues with local tax authorities in Europe and Asia. Of the $11.1 million of unrecognized tax benefits as of December 31, 2008, $8.4 million would impact the consolidated income tax rate if ultimately recognized. The remaining $2.7 million would impact the valuation allowance if recognized.

As of December 31, 2008, a deferred tax liability has not been established for approximately $245.7 million of cumulative undistributed earnings of non-U.S. subsidiaries, as Teradyne plans to keep these amounts permanently reinvested overseas. Beginning in 2006, Teradyne received from Singapore tax incentives for earnings from investments and related activities that began in that country in 2005. These incentives extend through 2019. From 2003 through 2006, Teradyne received tax incentives to conduct business in the People’s Republic of China.

S.	OPERATING SEGMENT AND GEOGRAPHIC INFORMATION

Teradyne’s two reportable segments are Semiconductor Test and Systems Test Group. The Semiconductor Test segment includes operations related to the design, manufacturing and marketing of semiconductor test products and services. The Systems Test Group segment includes operations related to the design, manufacturing and marketing of circuit-board test and inspection products and services, military/aerospace instrumentation test products and services, and automotive diagnostic and test products and services.

During the third quarter of 2007, the internal management reporting of Teradyne changed to better align with the company’s operational management structure, resulting in a change in Teradyne’s reportable segments. Segment reporting has been restated for all periods presented to reflect this change. Each reportable segment has one segment president who reports directly to the chief operating decision maker and the segments reporting presented reflects the information reviewed and used by the chief operating decision maker.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

S.	OPERATING SEGMENT AND GEOGRAPHIC INFORMATION—(Continued)

Teradyne evaluates performance using several factors, of which the primary financial measure is business segment income from continuing operations before taxes. The accounting policies of the business segments are the same as those described in Note B: “Accounting Policies”. Due to the sale on August 1, 2007 of Broadband Test Division, its results have been excluded from segment reporting and included in discontinued operations for all periods presented. Previously, Broadband Test Division and Diagnostic Solutions had been combined to form the Other Test Systems segment. Diagnostic Solutions and Assembly Test are now components of the Systems Test Group segment. Segment information for the years ending December 31, 2008, 2007 and 2006 is as follows (in thousands):


	Semiconductor Test			Systems Test Group			Corporate And Eliminations			Consolidated
2008
Net revenue	$	900,292		$	206,750		$	—		$	1,107,042
(Loss) income from continuing operations before taxes (1)(2)		(295,431	)		(83,640	)		(6,954	)		(386,025	)
Total assets (3)		708,736			140,262			386,249			1,235,247
Property additions (4)		75,377			6,833			4,992			87,202
Depreciation and intangible amortization expense (4)		78,934			7,807			8,019			94,760
2007
Net revenue	$	876,514		$	225,766		$	—		$	1,102,280
Income from continuing operations before taxes (1)(2)		25,093			12,042			42,108			79,243
Total assets (3)		540,939			219,724			794,625			1,555,288
Property additions (4)		75,236			7,850			3,002			86,088
Depreciation and intangible amortization expense (4)		54,080			7,655			5,760			67,495
2006
Net revenue	$	1,088,918		$	267,331		$	—		$	1,356,249
Income from continuing operations before taxes (1)(2)		183,126			24,172			28,733			236,031
Total assets—continuing operations (3)		490,319			258,771			967,628			1,716,718
Property additions (4)		97,463			5,011			7,535			110,009
Depreciation and intangible amortization expense (4)		57,376			7,130			8,576			73,082

(1)	Net interest income is included in Corporate and Eliminations.

(2)	Included in income from continuing operations before taxes are charges and credits related to restructuring and other, net, real estate gains (losses), investments, inventory provision recovery and inventory write downs.

(3)	Total business assets are directly attributable to each business. Corporate assets consist of cash and cash equivalents, marketable securities, unallocated fixed assets of support departments, common facilities and certain other assets.

(4)	Corporate property additions and depreciation and amortization expense include items attributable to the unallocated fixed assets of support departments and common facilities.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

S.	OPERATING SEGMENT AND GEOGRAPHIC INFORMATION—(Continued)

Included in the Semiconductor Test segment are charges and credits in the following accounts:


	For the Year Ended December 31,
	2008		2007			2006
	(in thousands)
Cost of revenues—inventory charge (1)	$	24,923	$	492		$	11,479
Restructuring and other, net		50,356		(382	)		(35,733	)

Total	$	75,279	$	110		$	(24,254	)

(1)	Included in the cost of revenues for the year ended December 31, 2008 are charges for excess inventory provision recorded as a result of the significant decrease in forecasted semiconductor demand coupled with a product transition.

Included in the Systems Test Group segment are charges and credits in the following accounts:


	For the Year Ended December 31,
	2008		2007		2006
	(in thousands)
Cost of revenues—inventory charge	$	4,440	$	1,343	$	1,336
Restructuring and other, net		9,756		2,723		(741	)

Total	$	14,196	$	4,066	$	595

Included in the Corporate and Eliminations segment are charges and credits in the following accounts:


	For the Year Ended December 31,
	2008		2007			2006
	(in thousands)
Restructuring and other, net charge	$	2,663	$	(3,000	)	$	441
Interest and other, net (2)		17,092		(1,832	)		—

Total	$	19,755	$	(4,832	)	$	441

(2)	Included in interest and other, net for the year ended December 31, 2008 are primarily other-than temporary-impairment charges on marketable securities and realized losses on the sale of marketable securities. The amount included for the year ended December 31, 2007 is an insurance recovery gain.

Information as to Teradyne’s revenue in different geographical areas is as follows:


	2008		2007		2006
	(in thousands)
Revenue to unaffiliated customers (1):
United States	$	236,636	$	254,379	$	315,689
South East Asia		291,861		243,088		325,597
Taiwan		198,508		145,757		190,232
Japan		119,876		131,204		164,680
Singapore		114,301		163,110		142,800
Europe		112,253		129,533		193,802
Rest of the World		33,607		35,209		23,449

	$	1,107,042	$	1,102,280	$	1,356,249

(1)	Revenues are attributable to geographic areas based on location of customer site.

Long-lived assets located outside the United States are less than 10% of total assets.

TERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

T.	STOCK REPURCHASE PROGRAM

In November 2007, Teradyne’s Board of Directors (the “Board”) authorized a $400 million stock repurchase program. For the year ended December 31, 2008, Teradyne repurchased 7.5 million shares of common stock for $91.2 million at an average price of $12.20 per share. The cumulative repurchases under this program as of December 31, 2008 total 8.5 million shares of common stock for $102.6 million at an average price of $12.14 per share. As of November 4, 2008, the Board temporarily suspended the implementation of the stock repurchase program.

SUPPLEMENTARY INFORMATION

(Unaudited)

The following sets forth certain unaudited consolidated quarterly statements of operations data for each of Teradyne’s last eight quarters. In management’s opinion, this quarterly information reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement for the periods presented. Such quarterly results are not necessarily indicative of future results of operations and should be read in conjunction with the audited consolidated financial statements of Teradyne and the notes thereto included elsewhere herein.


	2008
	1st Quarter		2nd Quarter			3rd Quarter			4th Quarter
	(1)		(2)			(3)			(4)
	(in thousands, except per share amounts)
Net Revenue:
Products	$	232,991	$	248,779		$	228,854		$	125,421
Services		64,324		68,926			68,401			69,346

Total net revenue		297,315		317,705			297,255			194,767
Cost of revenue:
Cost of products		118,307		124,925			130,105			77,889
Cost of services		40,505		38,932			39,220			38,967

Total cost of revenue		158,812		163,857			169,325			116,856

Gross profit		138,503		153,848			127,930			77,911

Operating expenses:
Engineering and development		55,149		56,154			52,969			52,189
Selling and administrative		65,221		65,463			58,614			58,491
Acquired intangible assets amortization		3,863		4,774			5,034			6,962
In-process research and development		1,100		—			—			500
Goodwill impairment		—		—			—			333,281
Restructuring and other, net		11,785		12,726			28,589			9,675

Total operating expenses		137,118		139,117			145,206			461,098

Income (loss) from operations		1,385		14,731			(17,276	)		(383,187	)
Interest income		4,612		2,932			2,740			2,274
Interest expense and other		470		(484	)		(5,851	)		(8,370	)

(Loss) income from continuing operations before taxes		6,467		17,179			(20,387	)		(389,283	)
Provision (benefit) for income taxes		4,100		6,100			3,070			(693	)

(Loss) income from continuing operations		2,367		11,079			(23,457	)		(388,590	)

Income (loss) from discontinued operations before taxes		—		—			768			—
Provision for income taxes		—		—			—			—

Income (loss) from discontinued operations		—		—			768			—

Net (loss) income	$	2,367	$	11,079		$	(22,689	)	$	(388,590	)

(Loss) income from continuing operations per common share—basic	$	0.01	$	0.06		$	(0.14	)	$	(2.26	)

(Loss) income from continuing operations per common share—diluted	$	0.01	$	0.06		$	(0.14	)	$	(2.26	)

Net (loss) income per common share—basic	$	0.01	$	0.06		$	(0.13	)	$	(2.26	)

Net (loss) income per common share—diluted	$	0.01	$	0.06		$	(0.13	)	$	(2.26	)

(1)

Restructuring and other, net includes $7.4 million of severance charges related to headcount reductions across all segments, $4.5 million of facility charges related to accelerated depreciation of a manufacturing facility in North Reading, Massachusetts, and $0.2 million of facility charges related to an early exit of a facility in Bracknell, UK.

(2)

Restructuring and other, net includes $5.5 million of severance charges related to headcount reductions across all segments, $4.5 million of facility charges related to accelerated depreciation of a manufacturing facility in North Reading, Massachusetts, $1.7 million gain on the sale of real estate in our Semiconductor Test segment for a facility in Agoura Hills, California, $0.7 million of facility charges in our Semiconductor Test segment related to the early exit of a facility in Ontario, Canada, $0.6 million charge in our Semiconductor Test segment for a long-lived asset impairment related to acquired intangible assets, and $0.2 million of facility charges related to the early exit of a facility in Bracknell, UK.

(3)

Restructuring and other, net includes $22.6 million loss on the sale of real estate across both segments for a manufacturing facility in North Reading, Massachusetts, $2.6 million of severance charges related to headcount reductions across all segments, $3.0 million of facility charges related to accelerated depreciation of a manufacturing facility in North Reading, Massachusetts, and $0.3 million of facility charges related to an early exit of a facility in Bracknell, UK.

(4)	Restructuring and other, net includes $8.9 million of severance charges related to headcount reductions across all segments, and $0.8 million charge for acquisition financing costs.


	2007
	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
	(1)			(2)			(3)			(4)
	(in thousands, except per share amounts)
Net Revenue:
Products	$	194,632		$	229,504		$	239,299		$	198,148
Services		59,061			59,206			60,162			62,268

Total net revenue		253,693			288,710			299,461			260,416
Cost of revenue:
Cost of products		99,991			112,338			117,268			100,867
Cost of services		40,305			39,152			37,947			40,979

Total cost of revenue		140,296			151,490			155,215			141,846

Gross profit		113,397			137,220			144,246			118,570

Operating expenses:
Engineering and development		49,262			52,417			52,245			50,420
Selling and administrative		62,947			62,182			62,178			60,789
Acquired intangible assets amortization		911			955			954			847
In-process research and development		16,700			—			—			—
Restructuring and other, net		2,247			568			(3,119	)		(355	)

Total operating expenses		132,067			116,122			112,258			111,701

Income (loss) from operations		(18,670	)		21,098			31,988			6,869
Interest income		10,234			10,340			9,780			8,712
Interest expense and other		2,107			(738	)		(1,853	)		(624	)

(Loss) income from continuing operations before taxes		(6,329	)		30,700			39,915			14,957
Provision (benefit) for income taxes		1,385			3,454			4,717			(2,196	)

(Loss) income from continuing operations		(7,714	)		27,246			35,198			17,153

Income (loss) from discontinued operations before taxes		93			618			6,084			(449	)
Provision for income taxes		15			210			293			—

Income (loss) from discontinued operations		78			408			5,791			(449	)

Net (loss) income	$	(7,636	)	$	27,654		$	40,989		$	16,704

(Loss) income from continuing operations per common share—basic	$	(0.04	)	$	0.14		$	0.19		$	0.10

(Loss) income from continuing operations per common share—diluted	$	(0.04	)	$	0.14		$	0.19		$	0.10

Net (loss) income per common share—basic	$	(0.04	)	$	0.15		$	0.22		$	0.10

Net (loss) income per common share—diluted	$	(0.04	)	$	0.14		$	0.22		$	0.10

(1)	Restructuring and other, net includes $2.1 million of severance charges related to headcount reductions across all segments, and $0.1 million of facility charges related to an early exit of a Systems Test Group facility in Poway, California.

(2)

Restructuring and other, net includes $0.9 million credit for earn-out payments received in the Systems Test Group from product line divestitures, $1.7 million of severance charges related to headcount reductions across all segments, and $0.2 million credit for revised estimates on severance charges.

(3)	Restructuring and other, net includes $3.6 million gain on the sale of land and building in Deerfield, Illinois, $1.8 million of cash proceeds recovered from insurance related to a facility fire in Taiwan, and $2.3 million of severance charges related to headcount reductions across all segments.

(4)

Restructuring and other, net includes $2.5 million cash proceeds recovered from insurance related to a facility fire in Taiwan, $0.4 million of severance charges related to headcount reductions across all segments, and $1.7 million facility related charge consisting of revised estimates of losses due to changes in the assumed amount and timing of sublease income on a Systems Test Group facility in Westford, Massachusetts.

Item 9:

Changes in and disagreements with accountants on accounting and financial disclosure

None.

Item 9A:

Controls and procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, our management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Exchange Act. Based upon that evaluation, our CEO and CFO concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during the fourth fiscal quarter ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework , our management concluded that our internal control over financial reporting was effective as of December 31, 2008.

The audited consolidated financial statements of Teradyne include the results of Nextest Systems Corporation and Eagle Test Systems, Inc., which Teradyne acquired in the year ended December 31, 2008. Management has excluded Nextest Systems Corporation and Eagle Test Systems from its assessment of internal control over financial reporting as of December 31, 2008 because they were acquired by Teradyne in purchase business combinations during 2008. Nextest Systems Corporation and Eagle Test Systems are wholly-owned subsidiaries whose total assets represent 4% and 6%, respectively, and total revenues represent 7% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2008.

The effectiveness of our internal control over financial reporting as of December 31, 2008 has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, as stated in their report which is included under Item 8 of this Annual Report.

Inherent Limitations on Effectiveness of Controls

Item 9B:

Other Information

None.

PART III

Item 10:

Directors, Executive Officers and Corporate Governance.

Certain information relating to our directors and executive officers, committee information, reports and charters, executive compensation, security ownership of certain beneficial owners and management and related stockholder matters, and certain relationships and related transactions is incorporated by reference herein from our definitive proxy statement in connection with our Annual Meeting of Shareholders to be held on May 28, 2009. The proxy statement will be filed with the SEC not later than 120 days after the close of the fiscal year. For this purpose, the Compensation Committee Report included in such proxy statement is specifically not incorporated herein. Also see “Item 1: Business—Our Executive Officers.”

Item 11:

Executive Compensation.

Certain information relating to our directors and executive officers, executive compensation, security ownership of certain beneficial owners and management and related stockholder matters, and certain relationships and related transactions is incorporated by reference herein from our definitive proxy statement in connection with our Annual Meeting of Shareholders to be held on May 28, 2009. The proxy statement will be filed with the SEC not later than 120 days after the close of the fiscal year. For this purpose, the Compensation Committee Report included in such proxy statement is specifically not incorporated herein.

Item 12:

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 13:

Certain Relationships and Related Transactions, and Director Independence.

Item 14:

Principal Accountant Fees and Services.

Certain information relating to audit fees and other of Teradyne’s independent registered public accounting firm is incorporated by reference herein from our definitive proxy statement in connection with our Annual Meeting of Shareholders to be held on May 28, 2009. The proxy statement will be filed with the SEC not later than 120 days after the close of the fiscal year. For this purpose, the Audit Committee Report included in such proxy statement is specifically not incorporated herein.

PART IV

Item 15:

Exhibits and Financial Statement Schedules.

15(a)(1) Financial Statements

The following consolidated financial statements are included in Item 8:


		Page
Report of Independent Registered Public Accounting Firm		42
Balance Sheets as of December 31, 2008 and 2007		43
Statements of Operations for the years ended December 31, 2008, 2007 and 2006		44
Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2008, 2007 and 2006		45
Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006		46

15(a)(2) Financial Statement Schedules

The following consolidated financial statement schedule is included in Item 15(c):

Schedule II—Valuation and Qualifying Accounts

Schedules other than those listed above have been omitted since they are either not required or information is otherwise included.

15(a)(3) Listing of Exhibits

The Exhibits which are filed with this report or which are incorporated by reference herein are set forth in the Exhibit Index.

100

15(c) Financial Statement Schedules

TERADYNE, INC.

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS


Column A	Column B		Column C		Column D		Column E		Column F
			Additions
Description	Balance at Beginning of Period		Charged to Cost and Expenses		Other		Deductions		Balance at End of Period
	(in thousands)
Valuation reserve deducted in the balance sheet from the asset to which it applies:
Accounts receivable:
2008 Allowance for doubtful accounts	$	4,493	$	52	$	531	$	364	$	4,712

2007 Allowance for doubtful accounts	$	4,964	$	—	$	—	$	471	$	4,493

2006 Allowance for doubtful accounts	$	4,737	$	227	$	—	$	—	$	4,964


Column A	Column B		Column C		Column D		Column E		Column F
			Additions
Description	Balance at Beginning of Period		Charged to Cost and Expenses		Other		Deductions		Balance at End of Period
	(in thousands)
Valuation reserve deducted in the balance sheet from the asset to which it applies:
Invnetory:
2008 Inventory reserve	$	105,620	$	29,363	$	7,862	$	17,918	$	124,927

2007 Inventory reserve	$	138,427	$	1,835	$	—	$	34,642	$	105,620

2006 Inventory reserve	$	157,888	$	12,815	$	—	$	32,276	$	138,427

101

EXHIBIT INDEX

The following designated exhibits are, as indicated below, either filed herewith or have heretofore been filed with the Securities and Exchange Commission and are referred to and incorporated by reference to such filings.


Exhibit No.	Description	SEC Document Reference
3.1	Restated Articles of Organization, as amended.	Exhibit 3.01 to Teradyne’s Quarterly Report on Form 10-Q for the quarter ended July 2, 2000.

3.2	Amended and Restated By-laws, as amended.	Exhibit 3.1 to Teradyne’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.

4.1	Credit Agreement dated as of November 14, 2008 among Teradyne, Guarantor Subsidiaries of Teradyne, Bank of America, N.A., RBS Citizens, N.A., KeyBank National Association and other Lender Parties.	Exhibit 4.1 to Teradyne’s Current Report on Form 8-K filed November 20, 2008.

4.2	Security and Pledge Agreement dated as of November 14, 2008 among Teradyne, Nextest Systems Corporation and Bank of America, N.A.	Exhibit 4.2 to Teradyne’s Current Report on Form 8-K filed November 20, 2008.

10.1†	Standard Manufacturing Agreement entered into as of November 24, 2003 by and between Teradyne and Solectron.	Exhibit 10.1 to Teradyne’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.

10.2†	Amendment 1 to Standard Manufacturing Agreement, dated as of January 18, 2007, by and between Teradyne and Solectron.	Exhibit 10.2 to Teradyne’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.

10.3†	Second Amendment to Standard Manufacturing Agreement, dated as of August 27, 2007, by and between Teradyne and Solectron.	Exhibit 10.3 to Teradyne’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.

10.4	2006 Equity and Cash Compensation Incentive Plan, as amended.*	Exhibit 10.1 to Teradyne’s Quarterly Report on Form 10-Q for the quarter ended September 28, 2008.

10.5	Form of Amended Performance-Based Restricted Stock Unit Agreement for Executive Officers under 2006 Equity and Cash Compensation Incentive Plan*.	Exhibit 10.1 to Teradyne’s Current Report on Form 8-K filed May 27, 2008.

10.5	Form of Performance-Based Restricted Stock Unit Agreement for Executive Officers under 2006 Equity and Cash Compensation Incentive Plan.*	Exhibit 10.5 to Teradyne’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

10.6	Form of Time-Based Restricted Stock Unit Agreement for Executive Officers under 2006 Equity and Cash Compensation Incentive Plan.*	Exhibit 10.15 to Teradyne’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

102


Exhibit No.	Description	SEC Document Reference
10.7	Form of Restricted Stock Unit Agreement for Directors under 2006 Equity and Cash Compensation Incentive Plan.*	Exhibit 10.1 to Teradyne’s Current Report on Form 8-K filed October 4, 2006.

10.8	1997 Employee Stock Option Plan, as amended and restated.*	Exhibit 10.2 to Teradyne’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 and Exhibit 10.5 to Teradyne’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

10.9	Form of Option Agreement under the 1997 Employee Stock Option Plan.*	Exhibit 10.47 to Teradyne’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2004.

10.10	Form of Restricted Stock Unit Agreement for Executive Officers under the 1997 Employee Stock Option Plan.*	Exhibit 10.1 to Teradyne’s Current Report on Form 8-K filed January 30, 2006.

10.11	Form of Restricted Stock Unit Agreement for Directors under the 1997 Employee Stock Option Plan.*	Exhibit 10.2 to Teradyne’s Current Report on Form 8-K filed January 30, 2006.

10.12	1996 Non-Employee Director Stock Option Plan, as amended.*	Exhibit 10.24 to Teradyne’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and Exhibit 10.4 to Teradyne’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

10.13	Form of Option Agreement under 1996 Non-Employee director Stock Option Plan.*	Exhibit 10.48 to Teradyne’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2004.

10.14	1996 Employee Stock Purchase Plan, as amended.*	Exhibit 10.14 to Teradyne’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

10.15	1991 Employee Stock Option Plan, as amended.*	Exhibit 10.1 to Teradyne’s Quarterly Report on Form 10-Q for the quarter ended June 2, 2002 and Exhibit 10.2 to Teradyne’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

10.16	Form of Option Agreement under 1991 Employee Stock Option Plan.*	Exhibit 10.46 to Teradyne’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2004.

10.17	Deferral Plan for Non-Employee Directors, as amended.*	Exhibit 10.2 to Teradyne’s Quarterly Report on form 10-Q for the quarter ended September 28, 2008.

10.18	Supplemental Savings Plan, as amended and restated.*	Filed herewith.

10.19	Supplemental Executive Retirement Plan, as restated.*	Filed herewith.

103


Exhibit No.	Description	SEC Document Reference
10.20	Amended and Restated Executive Officer Change in Control Agreement dated December 30, 2008 between Teradyne and Michael A. Bradley.*	Exhibit 99.5 to Teradyne’s Current Report on Form 8-K filed January 6, 2009.

10.21	Amended and Restated Agreement Regarding Termination Benefits between Teradyne and Michael A. Bradley.*	Exhibit 99.6 to Teradyne’s Current Report on Form 8-K filed January 6, 2009.

10.22	Employment Agreement dated July 30, 2004 between Teradyne and Michael A. Bradley.*	Exhibit 10.38 to Teradyne’s Quarterly Report on Form 10-Q for the quarter ended July 4, 2004.

10.23	Employment Agreement dated August 9, 2004 between Teradyne and Gregory R. Beecher.*	Exhibit 10.40 to Teradyne’s Quarterly Report on Form 10-Q for the quarter ended July 4, 2004.

10.24	Employment Agreement dated May 3, 2004 between Teradyne and Eileen Casal.*	Exhibit 10.35 to Teradyne’s Quarterly Report on Form 10-Q for the quarter ended July 4, 2004.

10.25	Employment Agreement dated August 9, 2004 between Teradyne and Jeffrey Hotchkiss.*	Exhibit 10.41 to Teradyne’s Quarterly Report on Form 10-Q for the quarter ended July 4, 2004.

10.26	Employment Agreement dated May 7, 2004 between Teradyne and Mark Jagiela.*	Exhibit 10.37 to Teradyne’s Quarterly Report on Form 10-Q for the quarter ended July 4, 2004.

10.27	Amended and Restated Executive Officer Change in Control Agreement dated December 30, 2008 between Teradyne and Gregory R. Beecher.*	Exhibit 99.1 to Teradyne’s Current Report on Form 8-K filed January 6, 2009.

10.28	Amended and Restated Executive Officer Change in Control Agreement dated December 30, 2008 between Teradyne and Eileen Casal*	Exhibit 99.2 to Teradyne’s Current Report on Form 8-K filed January 6, 2009.

10.29	Amended and Restated Executive Officer Change in Control Agreement dated December 30, 2008 between Teradyne and Jeffrey Hotchkiss*	Exhibit 99.3 to Teradyne’s Current Report on Form 8-K filed January 6, 2009.

10.30	Amended and Restated Executive Officer Change in Control Agreement dated December 30, 2008 between Teradyne and Mark Jagiela*	Exhibit 99.4 to Teradyne’s Current Report on Form 8-K filed January 6, 2009.

10.31	Form of Executive Officer Stock Option Agreement under 2006 Equity and Cash Compensation Incentive Plan, as amended*	Exhibit 99.4 to Teradyne’s Current Report on Form 8-K filed January 29, 2009.

10.32	Form of Indemnification Agreement.*	Exhibit 10.24 to Teradyne’s Annual Report on Form 10-K for the fiscal year ending December 31, 2006.

10.33	Nextest Systems Corporation 1998 Equity Incentive Plan, as amended	Filed herewith.

104


Exhibit No.	Description	SEC Document Reference
10.34	Nextest Systems Corporation 2006 Equity Incentive Plan	Filed herewith.

10.35	Eagle Test Systems, Inc. 2003 Stock Option and Grant Plan	Filed herewith.

10.36	Eagle Test Systems, Inc. 2006 Stock Option and Incentive Plan	Filed herewith.

14.1	Standards of Business Conduct, as amended.	Exhibit 14.1 to Teradyne’s Annual Report on Form 10-K for the fiscal year ending December 31, 2006.

21.1	Subsidiaries of Teradyne.	Filed herewith.

23.1	Consent of PricewaterhouseCoopers LLP	Filed herewith.

31.1	Rule 13a-14(a) Certification of Principal Executive Officer.	Filed herewith.

31.2	Rule 13a-14(a) Certification of Principal Financial Officer.	Filed herewith.

32.1	Section 1350 Certification of Principal Executive Officer.	Furnished herewith.

32.2	Section 1350 Certification of Principal Financial Officer.	Furnished herewith.

†	- Confidential treatment granted.

*	- Management contract or compensatory plan.

105

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 this 2 day of March, 2009.


T ERADYNE , I NC .

By:		/s/ G REGORY R. B EECHER
		Gregory R. Beecher,
		Vice President, Chief Financial Officer and Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature	Title	Date

/ S / P ATRICIA S. W OLPERT Patricia S. Wolpert	Chair of the Board	February 25, 2009

/ S / M ICHAEL A. B RADLEY Michael A. Bradley	President and Chief Executive Officer (Principal Executive Officer)	March 2, 2009

/ S / G REGORY R. B EECHER Gregory R. Beecher	Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)	March 2, 2009

/ S / J AMES W. B AGLEY James W. Bagley	Director	February 25, 2009

/ S / A LBERT C ARNESALE Albert Carnesale	Director	February 26, 2009

/ S / E DWIN J. G ILLIS Edwin J. Gillis	Director	February 26, 2009

/ S / V INCENT M. O’R EILLY Vincent M. O’Reilly	Director	February 26, 2009

/ S / P AUL J. T UFANO Paul J. Tufano	Director	February 27, 2009

/ S / R OY A. V ALLEE Roy A. Vallee	Director	February 25, 2009

106

Exhibit 10.18

Teradyne, Inc.

Supplemental Savings Plan

(Restated November 2008)

TABLE OF CONTENTS


PURPOSE AND EFFECTIVE DATE

ARTICLE 1 - DEFINITIONS		1-1
1.1	Account	1-1
1.2	Administrator	1-1
1.3	Beneficiary	1-1
1.4	Change in Control	1-1
1.5	Code	1-1
1.6	Compensation	1-1
1.7	Disability	1-1
1.8	Eligible Employee	1-2
1.9	Employer	1-2
1.10	ERISA	1-2
1.11	Grandfathered Account	1-2
1.12	Key Employee	1-2
1.13	Matchable Compensation	1-2
1.14	Matching Contribution	1-2
1.15	Participant	1-2
1.16	Plan	1-2
1.17	Plan Sponsor	1-2
1.18	Plan Year	1-2
1.19	Related Employer	1-3
1.20	Retirement	1-3
1.21	Savings Plan	1-3
1.22	Separation from Service	1-3
1.23	Unforeseeable Emergency	1-3
1.24	Valuation Date	1-3
1.25	VC Award	1-3
1.26	Vesting Service	1-3

ARTICLE 2 - PARTICIPATION		2-1
2.1	Participation	2-1
2.2	Termination of Participation	2-1

ARTICLE 3 - PARTICIPANT ELECTIONS		3-1
3.1	Deferral Agreement	3-1
3.2	Election to Defer Compensation	3-1
3.3	Election to Defer VC Award	3-1
3.4	Timing of Election to Defer	3-1
3.5	Election of Distribution Event	3-2
3.6	Transitional Rule	3-2


ARTICLE 4 - MATCHING CONTRIBUTIONS		4-1
4.1	General Rules	4-1
4.2	Rate of Matching Contributions	4-1

ARTICLE 5 - PARTICIPANT ACCOUNTS		5-1
5.1	Establishment of Account	5-1
5.2	Credits to Account	5-1
5.3	Investment Options	5-1
5.4	Adjustment of Accounts	5-1

ARTICLE 6 - RIGHT TO BENEFITS		6-1
6.1	Vesting	6-1
6.2	Death	6-1

ARTICLE 7 - DISTRIBUTION OF BENEFITS		7-1
7.1	Amount of Benefits	7-1
7.2	Method and Timing of Distributions from Account	7-1
7.3	Distributions and Withdrawals from Grandfathered Account	7-1
7.4	Cashouts of Amounts Not Exceeding $50,000	7-1
7.5	Permissible Delays in Payment	7-1
7.6	Key Employees	7-2
7.7	Unforeseeable Emergency	7-2

ARTICLE 8 - AMENDMENT AND TERMINATION		8-1
8.1	Amendment by Employer	8-1
8.2	Retroactive Amendments	8-1
8.3	Plan Termination	8-1
8.4	Distribution Upon Termination of the Plan	8-2
8.5	Change in Control	8-2

ARTICLE 9 - THE TRUST		9-1
9.1	Establishment of Trust	9-1
9.2	Investment of Trust Funds	9-1

ARTICLE 10 - PLAN ADMINISTRATION		10-1
10.1	Powers and Responsibilities of the Administrator	10-1
10.2	Claims and Review Procedures	10-1
10.3	Plan Administrative Costs	10-2


ARTICLE 11 - MISCELLANEOUS		11-1
11.1	Unsecured General Creditor of the Employer	11-1
11.2	Employer’s Liability	11-1
11.3	Limitation of Rights	11-1
11.4	Anti-alienation of Benefits	11-1
11.5	Facility of Payment	11-1
11.6	Notices	11-2
11.7	Tax Withholding	11-2
11.8	Indemnification	11-2
11.9	Permitted Acceleration of Payment	11-2
11.10	Illegality of Particular Provision	11-3
11.11	Governing Law	11-3

iii

Exhibit 10.18

PURPOSE AND EFFECTIVE DATE

Teradyne, Inc. established the Teradyne, Inc. Supplemental Savings Plan (the “Plan”) effective as of December 1, 1994 for the benefit of a select group of its highly paid employees. The Plan was subsequently amended by the First Amendment, which was generally effective as of January 1, 2002. The Plan has been operated in compliance with Code Section 409A since January 1, 2005 with respect to amounts subject to Code Section 409A. The last amendment and restatement was intended to memorialize any changes in operation in the Plan as of January 1, 2005 as required by Code Section 409A. This amendment and restatement clarifies certain provisions and makes additional changes as required or permitted by Code Section 409A, including the extension of the transition election period as described in Section 3.6.

Teradyne, Inc. adopted this written amendment and restatement of the Plan on November 3, 2008 to apply to elective and non-elective amounts deferred on or after January 1, 2005 and for amounts deferred before January 1, 2005 that were not both earned and vested on December 31, 2004. The Plan as amended and restated is intended to conform with the requirements of Code Section 409A and shall be administered in a manner consistent therewith. All amounts deferred under the Plan that are subject to Code Section 409A shall be separately accounted for and administered within each Participant’s Account. All other changes are effective as otherwise provided herein.

Amounts attributable to a Participant’s vested account under the Plan on December 31, 2004 shall be separately accounted for in each Participant’s Grandfathered Account. Elections made with respect to amounts credited to a Participant’s Grandfathered Account and amounts payable from a Participant’s Grandfathered Account shall be subject to the provisions of the Plan as in effect on October 3, 2004 and the law as in effect prior to Code Section 409A.

The purpose of the Plan is to permit eligible employees to elect to defer receipt of compensation otherwise payable currently and to enable the employer to credit eligible employees with matching contributions.

The Plan is intended to be a “plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees” within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA and shall be administered in a manner consistent therewith.

ARTICLE 1 – DEFINITIONS

Pronouns used in the Plan are in the masculine gender but include the feminine gender unless the context clearly indicates otherwise. Wherever used herein, the following terms have the meanings set forth below, unless a different meaning is clearly required by the context:

1.1

“Account” means an account established for the purpose of recording amounts credited on behalf of a Participant for periods after December 31, 2004 and unvested amounts credited for periods prior to January 1, 2005 that are subject to Code Section 409A plus any income, expenses, gains, losses or distributions included thereon. The Account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant pursuant to the Plan. Vested amounts credited on behalf of the Participant under the Plan attributable to periods prior to January 1, 2005 that are not subject to Code Section 409A are accounted for separately in the Participant’s Grandfathered Account.

1.2

“Administrator” means the Plan Sponsor, or such other person or persons formally or informally designated by the Plan Sponsor to be responsible for the administration of the Plan.

1.3

“Beneficiary” means the persons, trusts, estates or other entities entitled under Section 6.2 to receive benefits under the Plan upon the death of a Participant.

1.4

“Change in Control” means the occurrence of an event involving the Employer that is described in Section 8.5.

1.5

“Code” means the Internal Revenue Code of 1986, as amended from time to time.

1.6

“Compensation” means the general definition of ‘Compensation’ in the Savings Plan before the beginning of each calendar year except that the limitation contained in Code Section 401(a)(17) shall be disregarded and a VC Award (as well as any profit sharing award) shall not be included. Only amounts in excess of the Compensation limit announced each year during the annual enrollment period by the Plan Sponsor shall be considered.

1.7

“Disability” means “disability” as defined under the Savings Plan on the date of the Participant’s Separation from Service.

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1.8

“Eligible Employee” means an employee of the Employer who is determined by the Employer to be a member of a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA and who is designated by the Employer as an Eligible Employee for purposes of the Plan.

1.9

“Employer” means the Plan Sponsor and any other entity which is authorized by the Plan Sponsor to participate in and, in fact, does adopt the Plan. The term “Employer” shall in each instance that it appears in the Plan refer to any one of the foregoing entities and in no case shall refer to the entities collectively or to more than one such entity.

1.10

“ERISA” means the Employee Retirement Income Security Act of 1974, as from time to time amended.

1.11

“Grandfathered Account” means an account established for the purpose of recording earned and vested amounts credited on behalf of a Participant under the Plan for periods prior to January 1, 2005 and any income, expenses, gains, losses or distributions included thereon.

1.12

“Key Employee” means a ‘specified employee’ within the meaning of Treas. Reg. § 1.409A-1(i) who satisfies the conditions of Section 7.7.

1.13

“Matchable Compensation” means, for purposes of determining the Matching Contribution attributable to a VC Award deferral, the amount of the Participant’s VC Award deferral for the Plan Year. For purposes of determining the Matching Contribution attributable to a Compensation deferral, Matchable Compensation means the Participant’s Compensation in excess of the Code Section 401(a)(17) limit for the Plan Year (rather than the special Compensation limit announced for the Plan Year by the Plan Sponsor) plus the VC Award as reduced by the VC Award deferral.

1.14

“Matching Contribution” means a contribution credited by the Employer pursuant to Article 4.

1.15

“Participant” means any Eligible Employee who participates in the Plan in accordance with Article 2.

1.16

“Plan” means the Teradyne, Inc. Supplemental Savings Plan as set forth herein and as it may be amended from time to time.

1.17

“Plan Sponsor” means Teradyne, Inc.

1.18

“Plan Year” means the 12-consecutive month period beginning January 1 ^st and ending December 31 ^st .

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1.19

“Related Employer” means the Employer and (a) any corporation that is a member of a controlled group of corporations as defined in Section 414(b) of the Code that includes the Employer, and (b) any trade or business that is under common control as defined in Section 414(c) of the Code that includes the Employer.

1.20

“Retirement” means a Participant’s Separation from Service that occurs on or after the date the Participant: (a) attains age sixty-five (65) and has at least five (5) years of Vesting Service or (b) attains age fifty-five (55) with at least ten (10) years of Vesting Service.

1.21

“Savings Plan” means the Teradyne, Inc. Savings Plan as in effect on January 1, 2005 and as it may thereafter be amended from time to time.

1.22

“Separation from Service” means the date that the Participant dies, retires or otherwise has a termination of employment with respect to all entities comprising the Related Employer, provided that such termination of employment is a “separation from service” under Treas. Reg. § 1.409A-1(h). A Separation from Service does not occur if the Participant is on military leave, sick leave or other bona fide leave of absence, if the period of leave does not exceed six months or such longer period during which the Participant’s right to reemployment is provided by statute or contract. If the period of leave exceeds six months and the Participant’s right to reemployment is not provided either by statute or contract, a Separation from Service will be deemed to have occurred on the first day following the six month period.

1.23

“Unforeseeable Emergency” means a severe financial hardship of the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, or the Participant’s dependent (as defined in Code Section 152(a)); loss of the Participant’s property due to casualty; or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, which hardship meets the standards under Treas. Reg. § 1.409A-3(i)(3).

1.24

“Valuation Date” means each business day of the Plan Year and such other date(s) as designated by the Employer.

1.25

“VC Award” means the amount of incentive remuneration payable by the Employer to a Participant under the Teradyne, Inc. Variable Compensation Plan as modified and incorporated into the Teradyne, Inc. 2006 Equity and Cash Compensation Incentive Plan, each as amended from time to time.

1.26

“Vesting Service” has the meaning such term has under the Savings Plan.

1-3

ARTICLE 2 – PARTICIPATION

2.1

Participation. Participation in the Plan is limited to Eligible Employees. The Employer shall notify an employee of his status as an Eligible Employee at such time and in such manner as the Employer shall determine. Each Eligible Employee shall become a Participant in the Plan by executing a deferral agreement in accordance with the provisions of Article 3. An Eligible Employee who has become a Participant remains eligible to participate until his participation terminates in accordance with Section 2.2

2.2

Termination of Participation. The Administrator may terminate a Participant’s participation in the Plan but any such termination at the discretion of the Administrator shall not take effect until the first day of the next Plan Year. Upon any termination of participation at the discretion of the Administrator, a Participant’s deferrals shall cease but the provisions of Article 7 shall continue to apply.

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ARTICLE 3 – PARTICIPANT ELECTIONS

3.1.

Deferral Agreement. Each Eligible Employee may elect to defer amounts otherwise payable to him currently for the Plan Year by executing a deferral agreement in accordance with rules and procedures established by the Administrator and the provisions of this Article 3. The deferral agreement must separately specify for each discrete type of compensation (i.e., Compensation and VC Award) the whole number percentage that the Participant elects to defer and the timing of payment of the deferred amount.

A new deferral agreement must be timely executed for each Plan Year during which the Eligible Employee elects to defer compensation. An Eligible Employee who does not timely execute a deferral agreement shall be deemed to have elected zero deferrals for such Plan Year.

A deferral agreement may be changed or revoked at any time during the respective periods specified in Section 3.4. A deferral agreement becomes irrevocable at the close of the respective period and remains in effect throughout the applicable Plan Year even if the Eligible Employee transfers from one Employer to another Employer.

3.2

Election to Defer Compensation. An Eligible Employee may elect to defer Compensation (in 1% increments) from 1% to the maximum percentage established for the Plan Year by the Employer. The maximum percentage shall be communicated annually to Eligible Employees prior to the annual election period described in Section 3.4 for the relevant Plan Year, but in no event shall the maximum percentage under this Section 3.2 exceed 85% of the Eligible Employee’s base salary for the Plan Year.

3.3.

Election to Defer VC Award. An Eligible Employee may elect to defer (in 1% increments) from 1% to 85% of his VC Award for a Plan Year.

3.4

Timing of Election to Defer. Each Eligible Employee who desires to defer Compensation otherwise payable during a Plan Year must execute a deferral agreement within the period preceding the Plan Year specified by the Administrator. Each Eligible Employee who desires to defer a VC Award must execute a deferral agreement within the period preceding the Plan Year during which the VC Award is earned that is specified by the Administrator. Except that, only if the Administrator so decides, if the VC Award can be treated as performance based compensation” which is based upon services performed over a period of at least twelve consecutive months as set forth in Treas. Reg. § 1.409A-2(a)(8), such deferral agreement must be executed no later than the date established for this purpose by the Administrator which, in no event, shall be after the date which is six months before the end of the performance period in which the VC Award is earned.

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Except as otherwise provided below, an employee who is first classified or designated as an Eligible Employee during a Plan Year may elect to defer Compensation and/or VC Award otherwise payable during the remainder of such Plan Year in accordance with the rules of this Section 3.4 by executing a deferral agreement within the thirty (30) day beginning on the date the employee is classified or designated as an Eligible Employee. If a VC Award is based on a specific performance period that begins before the Eligible Employee executes his deferral agreement, the election will be deemed to apply to that portion of the VC Award equal to the total amount of the VC Award for the performance period multiplied by the ratio of the number of days remaining in the performance period after the election to the total number of days in the performance period. The rules of this paragraph shall not apply if the Eligible Employee has ever participated or is participating in a “an account balance plan” within the meaning of Treas. Reg. §1.409A-1(c) sponsored by the Employer.

3.5

Election of Distribution Event. At the time an Eligible Employee completes a deferral agreement, the Eligible Employee must separately elect for each type of remuneration being electively deferred (i.e., for Compensation and for VC Award), a distribution event that will trigger payment of the related deferred remuneration which will be effective unless the provisions of Section 7.4 are triggered. Matching Contributions credited to a Participant’s Account during a Plan Year shall automatically be paid following the distribution event selected by the Participant for the related deferred remuneration because of which the Matching Contribution was credited.

The permissible distribution events are Separation from Service and a specified future date, which date will only be effective as a distribution event if it is after the Eligible Employee’s Matching Contributions are vested under Article 6. Payment will occur within 90 days following the distribution event. If not election is made in accordance with this Section 3.5 the Eligible Employee will be deemed to have elected a distribution upon Separation from Service.

All distributions will be made in a single lump sum.

3.6

Transitional Rule. The following transitional rule shall apply during calendar year 2008. It will be implemented in accordance with rules and procedures established by the Administrator.

With respect to calendar year 2008, a Participant may make new distribution elections with respect to amounts subject to Code Section 409A if the elections are made no later than December 31, 2008, except that the Participant cannot in 2008 change distribution elections with respect to amounts that would otherwise have become payable in 2008 or cause payments to be made in 2008. The new distribution elections may apply to amounts deferred before the date of the election and can be made without

3-2

regard to Code Sections 409A(3) and (4) and any inconsistent provisions in the Plan to the contrary. A Participant who fails to make a new distribution election in accordance with this Section 3.6 with respect to an amount for which a valid election under Code Section 409A has not otherwise been made hereunder will be deemed to have elected a lump sum distribution upon his Separation from Service.

3-3

ARTICLE 4 – MATCHING CONTRIBUTIONS

4.1

General Rules. For each Plan Year, the Employer shall credit Matching Contributions at the rate specified in Section 4.2 to the Account of each Participant who makes deferrals during the Plan Year and otherwise satisfies the requirements of this Section 4.1. Matching Contributions shall only be made on behalf of a Participant who is employed by the Employer on the last day of the Plan Year, provided, however, that a Participant whose Separation from Service occurs before the last day of the Plan Year because of death, Disability, layoff or Retirement shall be treated, for this purpose, as if employed on the last day of the Plan Year.

4.2

Rate of Matching Contributions Each Participant who (a) was actively employed by the Employer on October 29, 1999 and (b) elected to continue accruing benefits under the Retirement Plan for Employees of Teradyne, Inc. shall be eligible to be credited with (i) Matching Contributions equal to fifty percent (50%) of the Participant’s deferrals not exceeding six percent (6%) of the Participant’s Matchable Compensation and (ii) an additional Matching Contribution, in the discretion of the Employer, of up to an additional 50% of Participant deferrals not exceeding six percent (6%) of Matchable Compensation. Each other Participant shall be eligible to be credited with (i) Matching Contributions equal to one hundred percent (100%) of the Participant’s deferrals not exceeding five percent (5%) of the Participant’s Matchable Compensation and (ii) an additional Matching Contribution, in the discretion of the Employer, of up to an additional 50% of Participant deferrals not exceeding five percent (5%) of Matchable Compensation.

The amount of Matching Contributions credited to the Account of each eligible Participant shall be calculated separately with respect to his Compensation deferrals and separately with respect to his VC Award deferrals and shall equal the sum of the amounts so determined.

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ARTICLE 5 – PARTICIPANT ACCOUNTS

5.1

Establishment of Account. For accounting and computational purposes only, the Administrator will establish and maintain an Account for each Participant which will reflect the credits made pursuant to Section 5.2 and the adjustments provided in Section 5.4. The Administrator will establish and maintain such other records and accounts, including Grandfathered Accounts, as it decides in its discretion to be reasonably required or appropriate to discharge its duties under the Plan.

5.2

Credits to Account. A Participant’s Account will be credited for each Plan Year with (a) the amount of Compensation and VC Award he elects to defer in accordance with the provisions of Article 3 at the time the amount subject to the deferral election would otherwise have been paid to him but for his election to defer; and (b) the amount of Matching Contributions the Employer credits on his behalf pursuant to Article 4 as soon as administratively possible following the Plan Year.

5.3

Investment Options. The amount in a Participant’s Account and Grandfathered Account, if any, shall be treated as invested in the investment options designated for this purpose by the Administrator. Nothing in this Article 5 requires the Employer to make any actual investments.

5.4

Adjustment of Accounts. The amount in a Participant’s Account and Grandfathered Account, if any, shall be adjusted for hypothetical investment earnings or losses in an amount equal to the gains or losses reported for the investment options selected by the Participant or Beneficiary (or by the Administrator if no selections are made by Participant or Beneficiary) from among the investment options provided in Section 5.3. A Participant may, in accordance with rules and procedures established by the Administrator and consistent with Code Section 409A, change the investments to be used for the purpose of calculating future hypothetical investment adjustments to the Participant’s Account and/or Grandfathered Account or to future credits to the Account under Section 5.2 effective as of the Valuation Date coincident with or next following notice to the Administrator. The Account and Grandfathered Account of each Participant shall be adjusted as of each Valuation Date to reflect: (a) the hypothetical investment earnings and/or losses described above; (b) amounts credited pursuant to Section 5.2; and (c) distributions or withdrawals.

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ARTICLE 6 – RIGHT TO BENEFITS

6.1

Vesting. A Participant, at all times, has a 100% nonforfeitable interest in the amounts credited to his Account attributable to Participant deferrals made in accordance with Article 3. A Participant shall fully vest in the amounts credited to his Account attributable to Matching Contributions upon his death while in the employ of the Employer, or upon Disability. Prior to January 1, 2007, a Participant shall vest in the amounts credited to his Account attributable to Matching Contributions upon the completion of five years of Vesting Service. Beginning January 1, 2007, a Participant shall vest in the amounts credited to his Account attributable to Matching Contributions at the rate of 25% per year of Vesting Service taking into account all such Vesting Service with which such Participant is credited under the Savings Plan. A Participant, at all times, has a 100% nonforfeitable interest in all amounts credited to his Grandfathered Account.

6.2

Death. The balance or remaining balance credited to a Participant’s Account at the time of his death shall be paid to his Beneficiary in the form of a single lump sum payment. If multiple Beneficiaries have been designated each shall receive his specified portion of the Account in the form of a single lump sum payment. A Participant’s Beneficiary or Beneficiaries shall be the party or parties entitled to receive benefits under the Savings Plan upon the Participant’s death. Actual payment will be made within 90 days following the date of death.

A copy of the death notice or other sufficient documentation must be filed with and approved by the Administrator. If upon the death of the Participant there is, in the opinion of the Administrator, no designated Beneficiary for part or all of the Participant’s Account, such amount will be paid to his estate in a single lump sum payment (such estate shall be deemed to be the Beneficiary for purposes of the Plan).

The balance or remaining balance credited to a Participant’s Grandfathered Account shall be paid in accordance with the provisions of the Plan as in effect on October 3, 2004.

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ARTICLE 7 – DISTRIBUTION OF BENEFITS

7.1

Amount of Benefits. The vested amount credited to a Participant’s Account as determined under Articles 5 and 6 and the amount credited to his Grandfathered Account shall determine and constitute the basis for the value of benefits payable to or on behalf of the Participant under the Plan.

7.2

Method and Timing of Distributions from Account. Subject to Sections 7.4 and 7.6, distributions under the Plan shall be made following the occurrence of the distribution event specified by the Participant in accordance with the provisions of Article 3. At least twelve months before a scheduled distribution event, a Participant may elect, in accordance with rules and procedures established by the Administrator, to delay the date of payment for a minimum period of sixty months from the originally scheduled payment date. Such election will be irrevocable after the last permissible date for making such a subsequent deferral election.

7.3

Distributions and Withdrawals from Grandfathered Account. Notwithstanding any other provision of this Article 7, distributions and withdrawals from a Participant’s Grandfathered Account shall be made only in accordance with the provisions of the Plan as in effect on October 3, 2004.

7.4

Cashouts of Small Amounts. If the aggregate amount credited to the Participant’s Account does not exceed the dollar limit under Section 402(g)(1)(B) of the Code at the time he incurs a Separation from Service, the Employer may pay such amount to the Participant in a single lump sum payment regardless of whether the Participant had made different elections of distribution events or forms of payment as to the amount credited to his Account, except as otherwise provided in this Section 7.4, provided that such payment means that the Participant will retain no benefits under any other account balance plans aggregated with the Plan under Treas. Reg. § 1.409A-1(c)(2)). Subject to Section 7.6, actual payment will occur within 90 days following Separation from Service.

7.5

Permissible Delays in Payment. The Employer may delay distributions beyond the date payment would otherwise occur in accordance with the provisions of Articles 6 and 7 in any of the following circumstances. The Employer may delay payment if it reasonably anticipates that its deduction with respect to such payment would not be permitted due to the application of Code Section 162(m). Payment must be made at the earliest date at which the Employer reasonably anticipates or should reasonably anticipate that the deduction of the payment amount will not be barred by Code Section 162(m) or, if later, during the period beginning on the day in which the Participant incurs a Separation from Service and ending on the later of the last day of the taxable year of the Employer in which the Participant separates from service

7-1

or the 15 ^th day of the third month following the Participant’s Separation from Service. Additionally, where any scheduled payment to a Participant in the Employer’s taxable year is delayed in accordance with this paragraph, all scheduled payments to a Participant that are subject to Section 409A and could be delayed in accordance with this paragraph must also be delayed. The Employer may also delay payment if it reasonably anticipates that the making of the payment will violate federal securities laws or other applicable law (not including penalties under the Code) provided payment is made at the earliest date on which the Employer reasonably anticipates that the making of the payment will not cause such violation. The Employer also reserves the right to delay payment upon such other events and conditions as the Secretary of the Treasury may prescribe in generally applicable guidance published in the Internal Revenue Bulletin. With respect to the above permissible delayed payments, the Employer will treat all payments to similarly situated Participants on a reasonably consistent basis.

7.6

Key Employees. In no event shall a distribution of a Participant’s Account be made to a Key Employee on account of his Separation from Service before the date which is six months after the date of his Separation from Service with the Employer (or the date of his death, if earlier). An employee who is determined to be a Key Employee at any time during the twelve-month period ending on date as of which the Employer annually identifies Key Employees (the ‘Identification Date’) shall be treated as a Key Employee for purposes of the six-month delay in distributions set forth in this Section 7.6 for the twelve-month period beginning on the Specified Employee Effective Date under Treas. Reg. §1.409A-1(i)(4).

7.7

Unforeseeable Emergency. A Participant may request a distribution prior to the date he or she selected in Section 3 due to an Unforeseeable Emergency. The request must be in writing and must be submitted to the Administrator along with evidence that the circumstances constitute an Unforeseeable Emergency. The Administrator has the discretion to require whatever evidence it deems necessary to determine whether a distribution is warranted. Whether a Participant has incurred an Unforeseeable Emergency will be determined by the Administrator on the basis of the relevant facts and circumstances in its sole discretion, but in no event, will an Unforeseeable Emergency be deemed to exist if the hardship can be relieved: (a) through reimbursement or compensation by insurance or otherwise, (b) by liquidation of the Participant’s assets to the extent such liquidation would not itself cause severe financial hardship, or (c) by cessation of deferrals under the Plan. A distribution due to an Unforeseeable Emergency must be limited to the amount reasonably necessary to satisfy the emergency need and may include any amounts necessary to pay any federal, state, local, or foreign income taxes or penalties reasonably anticipated to result from the distribution. The distribution will be made in the form of a single lump sum cash payment. A Participant’s deferral elections for the remainder of the Plan Year will be cancelled upon a withdrawal due to Unforeseeable Emergency.

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ARTICLE 8 – AMENDMENT AND TERMINATION

8.1

Amendment by Employer. The Plan Sponsor reserves the right to amend the Plan (for itself and each Employer) through action of its Board of Directors or any committee of the Board of Directors. An amendment must be in writing and executed by an officer authorized to take such action. Each amendment shall be effective when approved by the Board of Directors or any committee of the Board of Directors in its resolution. No amendment can directly or indirectly deprive any current or former Participant or Beneficiary of all or any portion of his Account or Grandfathered Account which had accrued and vested prior to the amendment.

8.2

Retroactive Amendments. An amendment made by the Plan Sponsor in accordance with Section 8.1 may be made effective on a date prior to the first day of the Plan Year in which it is adopted if such amendment is necessary or appropriate to enable the Plan to satisfy the applicable requirements of the Code or ERISA or to conform the Plan to any change in federal law or to any regulations or ruling thereunder. Any retroactive amendment by the Plan Sponsor shall be subject to the provisions of Section 8.1.

8.3

Plan Termination. The Plan Sponsor reserves the right to terminate the Plan and distribute all amounts credited to all Participant, accounts in a single lump sum, in such manner permitted by and subject to such conditions and limitations as imposed by Section 409A including, without limitation, the Employer’s termination and liquidation of the Plan in accordance with the following (modified as necessary to comply with Treas. Reg § 1.409A-3(j)(4)(ix)):

(a) Corporate Dissolution or Bankruptcy: within 12 months following a corporate dissolution of the Employer taxed under Section 331 of the Code or with the approval of a bankruptcy court pursuant to 11 U.S.C. §503(b)(1)(A) provided that the amounts deferred under the Plan are included in each Participant’s gross income in the latest of the following years (or, if earlier, the taxable year in which the amount is actually or constructively received): (i) the calendar year in which the Plan terminates; (ii) the first calendar year in which the amounts are no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the distribution is administratively practicable;

(b) Termination in Connection with a Change in Control Event: pursuant to irrevocable action taken by the Employer within 30 days preceding or 12 months after a change in the ownership or effective control of the Employer, or in the ownership of a substantial portion of the assets of the Employer as described in Section 409A(2)(A)(v) of the Code, provided that all distributions with respect to Participants

8-1

subject to the change in control event are made no later than 12 months following such termination of the Plan and further provided that all of the Employer’s plans and arrangements that are account balance plans for purposes of Treas. Reg. § 1.409A-1(c)(2) (and would be aggregated under such regulation) that cover Participants subject to the change in control are terminated so that the Participants are required to receive all amounts of compensation deferred under the other terminated plans and arrangements within 12 months following the irrevocable action to terminate such other plans and arrangements; or

(c) Termination of Similar Plans: if all other account balance plans (for purposes of Treas. Reg. § 1.409A-1(c)(2)) sponsored by the Employer that would be aggregated with the Plan under Treas. Reg. § 1.409A-1(c) if a Participant had participated therein are terminated; provided that (i) such action does not occur proximate to a downturn in the financial health of the Employer; (ii) all distributions are made no earlier than 12 months and no later than 24 months following such termination, and (iii) the Employer does not adopt any new account balance plans for a minimum of three years following the date of such termination.

The Plan Sponsor also reserves the right to terminate the Plan under such conditions and events as may be prescribed by the Secretary of the Treasury in generally applicable guidance published in the Internal Revenue Bulletin. Notice of such amendment or termination shall be given in writing to each Participant and Beneficiary of a deceased Participant having an interest in the Plan.

8.4

Distribution Upon Termination of the Plan. Except as provided in Section 8.3, the Plan may not be terminated before the date on which all amounts credited to all Participant accounts have been distributed in accordance with Articles 6 and 7.

8.5

Change in Control. A Change in Control will occur upon a change in the ownership of the Employer, a change in the effective control of the Employer or a change in the ownership of a substantial portion of the assets of the Employer. The Employer, for this purpose, includes any corporation identified in this Section 8.5.

Whether a Change in Control has occurred will be determined by the Plan Sponsor in accordance with the rules and definitions set forth in this Section 8.5, provided that such event also complies with Treas. Reg. § 1.409A-3(i)(5). A distribution to a Participant will be treated as occurring upon a Change in Control if the Plan Sponsor terminates the Plan and distributes the Participant’s benefits in a manner consistent with Section 8.3(b).

8-2

(a)

Relevant Corporations. To constitute a Change in Control for purposes of the Plan, the event must relate to (i) the corporation for which the Participant is performing services at the time of the Change in Control, (ii) the corporation that is liable for the payment of the Participant’s benefits under the Plan (or all corporations liable if more than one corporation is liable), or (iii) a corporation that is a majority shareholder of a corporation identified in (i) or (ii), or any corporation in a chain of corporations in which each corporation is a majority corporation of another corporation in the chain, ending in a corporation identified in (i) or (ii). A majority shareholder is defined as a shareholder owning more than fifty percent (50%) of the total fair market value and voting power of such corporation.

(b)

Stock Ownership. Code Section 318(a) applies for purposes of determining stock ownership. Stock underlying a vested option is considered owned by the individual who owns the vested option (and the stock underlying an unvested option is not considered owned by the individual who holds the unvested option). If, however, a vested option is exercisable for stock that is not substantially vested (as defined by Treasury Regulation Section 1.83-3(b) and (j)) the stock underlying the option is not treated as owned by the individual who holds the option. Mutual and cooperative corporations are treated as having stock for purposes of this Section 8.5.

(c)

Change in the Ownership of a Corporation. A change in the ownership of a corporation occurs on the date that any one person or more than one person acting as a group, acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of such corporation. If any one person or more than one person acting as a proxy is considered to own more than fifty percent (50%) of the total fair market value or total voting power of the stock of a corporation, the acquisition of additional stock by the same person or persons is not considered to cause a change in the ownership of the corporation (or to cause a change in the effective control of the corporation as discussed below in Section 8.5(d)). An increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction in which the corporation acquires its stock in exchange for property will be treated as an acquisition of stock. Section 8.5(c) applies only when there is a transfer of stock of a corporation (or issuance of stock of a corporation) and stock in such corporation remains outstanding after the transaction. For purposes of this Section 8.5(c), persons will not be considered to be acting as a group solely because they purchase or own stock of the same corporation at the same time or as a result of a public offering. Persons will, however, be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation,

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purchase or acquisition of stock, or similar business transaction with the corporation. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.

(d)

Change in the effective control of a corporation. A change in the effective control of a corporation occurs on the date that either (i) any one person, or more than one person acting as a group, acquires (or has acquired during the twelve month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the corporation possessing thirty-five percent (35%) or more of the total voting power of the stock of such corporation, or (ii) a majority of members of the corporation’s board of directors is replaced during any twelve month period by directors whose appointment or election is not endorsed by a majority of the members of the corporation’s board of directors prior to the date of the appointment or election, provided that for purposes of this paragraph (ii), the term corporation refers solely to the relevant corporation identified in Section 8.5(a) for which no other corporation is a majority shareholder for purposes of Section 8.5(a). In the absence of an event described in Section 8.5(d)(i) or (ii), a change in the effective control of a corporation will not have occurred. A change in effective control may also occur in any transaction in which either of the two corporations involved in the transaction has a change in the ownership of such corporation as described in Section 8.5(c) or a change in the ownership of a substantial portion of the assets of such corporation as described in Section 8.5(e). If any one person, or more than one person acting as a group, is considered to effectively control a corporation within the meaning of this Section 8.5(d), the acquisition of additional control of the corporation by the same person or persons is not considered to cause a change in the effective control of the corporation or to cause a change in the ownership of the corporation within the meaning of Section 8.5(c). For purposes of this Section 8.5(d), persons will or will not be considered to be acting as a group in accordance with rules similar to those set forth in Section 8.5(c) with the following exception. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation only with respect to the ownership in that corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.

(e)

Change in the ownership of a substantial portion of a corporation’s assets. A change in the ownership of a substantial portion of a

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corporation’s assets occurs on the date that any one person, or more than one person acting as a group (as determined in accordance with rules similar to those set forth in Section 8.5(d)), acquires (or has acquired during the twelve month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all of the assets of the corporation immediately prior to such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the corporation or the value of the assets being disposed of determined without regard to any liabilities associated with such assets. There is no Change in Control event under this Section 8.5(e) when there is a transfer to an entity that is controlled by the shareholders of the transferring corporation immediately after the transfer. A transfer of assets by a corporation is not treated as a change in ownership of such assets if the assets are transferred to (i) a shareholder of the corporation (immediately before the asset transfer) in exchange for or with respect to its stock, (ii) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the corporation, (iii) a person, or more than one person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the corporation, or (iv) an entity, at least fifty (50%) of the total value or voting power of which is owned, directly or indirectly, by a person described in Section 8.5(e)(iii). For purposes of the foregoing, and except as otherwise provided, a person’s status is determined immediately after the transfer of assets.

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ARTICLE 9 – THE TRUST

9.1

Establishment of Trust. The Plan Sponsor may but is not required to establish a trust to hold amounts which the Plan Sponsor may contribute from time to time to correspond to some or all of the amounts credited to Participants under Article 5. If the Plan Sponsor elects to establish a trust the provisions of Section 9.2 will become operative.

9.2

Investment of Trust Funds. Any amounts contributed to the trust by the Employer shall be invested by the trustee in accordance with the provisions of the trust and the instructions of the Administrator. Trust investments need not reflect the hypothetical investments selected by Participants under Section 5.1 for the purpose of adjusting Accounts and Grandfathered Accounts and the earnings or investment results of the trust shall not affect the hypothetical investment adjustments to Participant Accounts and Grandfathered Accounts under the Plan.

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ARTICLE 10 – PLAN ADMINISTRATION

10.1

Powers and Responsibilities of the Administrator. The Administrator has the full power and the full responsibility to administer the Plan in all of its details, subject, however, to the applicable requirements of ERISA. The Administrator’s powers and responsibilities include, but are not limited to, the following:

(a)

To make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of the Plan;

(b)

To interpret the Plan, its interpretation thereof in good faith to be final and conclusive on all persons claiming benefits under the Plan;

(c)

To decide all questions concerning the Plan and the eligibility of any person to participate in the Plan;

(d)

To administer the claims and review procedures specified in Section 10.2;

(e)

To compute the amount of benefits which will be payable to any Participant, former Participant or Beneficiary in accordance with the provisions of the Plan;

(f)

To determine the person or persons to whom such benefits will be paid;

(g)

To authorize the payment of benefits;

(h)

To comply with the reporting and disclosure requirements of Part 1 of Subtitle B of Title I of ERISA;

(i)

To appoint such agents, counsel, accountants, and consultants as may be required to assist in administering the Plan;

(j)

By written instrument, to allocate and delegate its responsibilities, including the formation of an Administrative Committee to administer the Plan.

10.2

Claims and Review Procedures.

(a)

Claims Procedure . If any person believes he is being denied any rights or benefits under the Plan, such person may file a claim in writing with the Administrator. If any such claim is wholly or partially denied, the Administrator will notify such person of its decision in writing. Such notification will contain (i) specific reasons for the denial,

10-1

(ii) specific reference to pertinent Plan provisions, (iii) a description of any additional material or information necessary for such person to perfect such claim and an explanation of why such material or information is necessary, and (iv) information as to the steps to be taken if the person wishes to submit a request for review. Such notification will be given within 90 days after the claim is received by the Administrator (or within 180 days, if special circumstances require an extension of time for processing the claim, and if written notice of such extension and circumstances is given to such person within the initial 90-day period). If such notification is not given within such period, the claim will be considered denied as of the last day of such period and such person may request a review of his claim.

(b)

Review Procedure . Within 60 days after the date on which a person receives a written notification of denial of claim (or, if written notification is not provided, within 60 days of the date denial is considered to have occurred), such person (or his duly authorized representative) may (i) file a written request with the Administrator for a review of his denied claim and of pertinent documents and (ii) submit written issues and comments to the Administrator. The Administrator will notify such person of its decision in writing. Such notification will be written in a manner calculated to be understood by such person and will contain specific reasons for the decision as well as specific references to pertinent Plan provisions. The decision on review will be made within 60 days after the request for review is received by the Administrator (or within 120 days, if special circumstances require an extension of time for processing the request, such as an election by the Administrator to hold a hearing, and if written notice of such extension and circumstances is given to such person within the initial 60-day period). If the decision on review is not made within such period, the claim will be considered denied.

10.3

Arbitration. Any controversy or claim arising under or relating to a claim for benefits under the Plan shall be resolved by binding arbitration in accordance with the rules and procedures of the American Arbitration Association. The Plan shall not be required to submit any such claim or controversy until the claimant has first exhausted the procedures described in Section 10.2 although the Administrator may voluntarily do so at any point in processing an appeal from a prior claim denial or other disputed benefit determination.

The Employer against whom the claim is brought shall bear all costs of an arbitration, except that the arbitrator shall have the power to apportion among the parties other expenses such as prehearing discovery, travel costs and attorney’s fees. The decision of the arbitrator shall be final and binding on all parties and judgment on the arbitrator’s award may be entered in any court of competent jurisdiction.

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10.4

Plan Administrative Costs. All reasonable costs and expenses (including legal, accounting, and employee communication fees) incurred by the Administrator in administering the Plan shall, unless allocable to the Accounts and Grandfathered Accounts of particular Participants, be charged against the Accounts and Grandfathered Accounts of all Participants on a pro rata basis or in such other reasonable manner as may be directed by the Administrator unless paid for by the Employer.

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ARTICLE 11 – MISCELLANEOUS

11.1

Unsecured General Creditor of the Employer. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of the Employer. For purposes of the payment of benefits under the Plan, any and all of the Employer’s assets shall be, and shall remain, the general, unpledged, unrestricted assets of the Employer. Each Employer’s obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future.

11.2

Employer’s Liability. Each Employer’s liability for the payment of benefits under the Plan shall be defined only by the Plan and by the deferral agreements entered into between a Participant and the Employer. An Employer shall have no obligation or liability to a Participant under the Plan except as provided by the Plan and a deferral agreement or agreements. An Employer shall have no liability to Participants employed by other Employers.

11.3

Limitation of Rights. Neither the establishment of the Plan, nor any amendment thereof, nor the creation of any fund or account, nor the payment of any benefits, will be construed as giving to the Participant or any other person any legal or equitable right against the Plan Sponsor, Employer or Administrator, except as provided herein; and in no event will the terms of employment or service of the Participant be modified or in any way affected hereby.

11.4

Anti-alienation of Benefits. None of the benefits or rights of a Participant or any Beneficiary of a Participant shall be subject to the claim of any creditor. In particular, to the fullest extent permitted by law, all such benefits and rights shall be free from attachment, garnishment, or any other legal or equitable process available to any creditor of the Participant and his or her Beneficiary. Neither the Participant nor his or her Beneficiary shall have the right to alienate, anticipate, commute, pledge, encumber, or assign any of the payments which he or she may expect to receive, contingently or otherwise, under this Plan, except the right to designate a Beneficiary to receive death benefits provided hereunder.

11.5

Facility of Payment. If the Administrator determines, on the basis of medical reports or other evidence satisfactory to the Administrator, that the recipient of any benefit payments under the Plan is incapable of handling his affairs by reason of minority, illness, infirmity or other incapacity, the Administrator may disburse such payments to a person or institution designated by a court which has jurisdiction over such recipient or a person or institution otherwise having the legal authority under State law for the care and control of such recipient. The receipt by such person or institution of any such payments therefore, and any such payment to the extent thereof, shall discharge the liability of the Plan for the payment of benefits hereunder to such recipient.

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11.6

Notices. Any notice or other communication in connection with the Plan shall be deemed delivered in writing if addressed to the Employer or Administrator at the address specified by the Employer and if either actually delivered at said address or, in the case or a letter, five business days shall have elapsed after the same shall have been deposited in the United States mail, first-class postage prepaid and registered or certified.

11.7

Tax Withholding. The Employer shall have the right to deduct from all payments or deferrals made under the Plan any tax required by law to be withheld. If the Employer concludes that tax is owing with respect to any deferral or payment hereunder, the Employer shall withhold such amounts from any payments due the Participant, as permitted by law, or otherwise make appropriate arrangements with the Participant or his Beneficiary for satisfaction of such obligation. Tax, for purposes of this Section 11.7 means any federal, state, local or any other governmental income tax, employment or payroll tax, excise tax, or any other tax or assessment owing with respect to amounts deferred, any earnings thereon, and any payments made to Participants under the Plan. Neither the Employer nor the Administrator shall have any obligation to any Participant or any other person if there is a failure to comply with Code Section 409A or with respect to any liability, including, without limitation, any liability for taxes, additional taxes or interest incurred by the Participant or any other person as a result of such failure.

11.8

Indemnification. To the extent permitted by law, and without limiting the applicability of any other indemnification provided by the Employer, each Employer shall indemnify and hold harmless the Plan Sponsor, the Administrator, each employee, officer, or director of the Employer to whom is delegated duties, responsibilities, and authority with respect to the Plan against all claims, liabilities, fines and penalties, and all expenses reasonably incurred by or imposed upon him (including but not limited to reasonable attorney fees) which arise as a result of his actions or failure to act in connection with the operation and administration of the Plan to the extent lawfully allowable and to the extent that such claim, liability, fine, penalty, or expense is not paid for by liability insurance purchased or paid for by an Employer. Notwithstanding the foregoing, an Employer shall not indemnify any person for any such amount incurred through any settlement or compromise of any action unless the Employer consents in writing to such settlement or compromise.

11.9

Permitted Acceleration of Payment. The Plan may permit acceleration of the time or schedule of any payment or amount scheduled to be paid pursuant to a payment under the Plan as provided in Section 8.3 and this Section 11.9. The Plan may permit acceleration of payment by and subject to such conditions and limitations as imposed by Section 409A, including,

11-2

without limitation, (i) to comply with government ethics or conflict of interest laws (per Treas. Reg. § 1.409A-3(j)(4)(iii)), (ii) to pay employment taxes under Sections 3101, 3121(a) and 3121(v)(2) of the Code on amounts accrued under this Plan, (iii) to pay income taxes under Section 3401 of the Code or corresponding state, local or foreign withholding rules triggered directly or as a result of the payments under (ii), (iv) to pay additional income tax on wages attributable to the pyramiding Section 3401 wages and taxes, (v) to comply with a “domestic relations order” (as defined in Code Section 414(p)(1)(B)) as permitted under Code Section 409A, and (vi) to pay any amount due as a result of some amount under this Plan being included in income as a result of a failure to comply with Section 409A.

11.10

Illegality of Particular Provision. The illegality any particular provision of the Plan shall not affect the other provisions, and the document shall be construed in all respects as if such invalid provisions were omitted.

11.11

Governing Law. The Plan will be construed, administered and enforced according to ERISA, and to the extent not preempted thereby, the laws of the Commonwealth of Massachusetts.

Approved by the Teradyne, Inc. Compensation Committee of the Board of Directors November 3, 2008.

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Exhibit 10.19

TERADYNE, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

(Restated as of January 1, 2005)

TERADYNE, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

(Restated as of January 1, 2005)

TABLE OF CONTENTS


Article I. Establishment and Purpose		1

1.1	Establishment	1
1.2	Applicability	1
1.3	Purpose	1
1.4	Invalidity of Particular Provision	2

Article II. Definitions		3

2.1	Definitions	3
2.2	Gender and Number	8

Article III. Eligibility and Participation		9

Article IV. Retirement Benefits		10

4.1	Retirement Benefits.	10
4.2	Commencement of Benefits.	11
4.3	Preretirement Death Benefit	12
4.4	Form of Payment	13
4.5	Payment of Small Amounts	16
4.6	Separation from Service Prior to Vesting	17
4.7	Non-Competition	17
4.8	Delay of Payments	17

Article V. Rights of Members		19

5.1	Vesting	19
5.2	Unsecured Interest	19
5.3	Employment	19
5.4	Member’s Rights	19

Article VI. Administration and Financing		20

6.1	Administration	20
6.2	Finality of Determination	20
6.3	Indemnification	20
6.4	Expenses	21
6.5	Financing	21

Article VII. Claims Procedure		22

7.1	Claims Procedure.	22

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Article VIII. Amendment and Termination		24

8.1	Amendment and Termination	24
8.2	409A	26

Article IX. Miscellaneous		27

9.1	Nontransferability	27
9.2	Withholding	27
9.3	Permitted Distributions	27
9.4	Applicable Law	28

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TERADYNE, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

(Restated as of January 1, 2005)

Article I. Establishment and Purpose

1.1 Establishment . Teradyne, Inc. and certain Affiliates (the “Employer”) established a supplemental retirement plan known as the “TERADYNE, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN” (the “Prior Plan”), effective as of January 1, 1993 and thereafter amended from time to time. Since January 1, 2005, benefits accrued or vested under the Prior Plan have been administered in accordance with Section 409A (“Section 409A”) of the Internal Revenue Code of 1986, as amended (the “Code”), and the guidance issued thereunder from time to time. This restatement (the “Plan”), is intended to memorialize the terms applicable to such benefits and is intended to comply with Section 409A. The terms of the Prior Plan, as amended from time to time, remain applicable to Grandfathered Benefits but no additional benefits shall be accrued or vested under its terms.

1.2 Applicability . The provisions of this Plan are applicable only to Eligible Employees who were Members of the Prior Plan on December 31, 2004 and continue to be Eligible Employees of an Employer thereafter or who become Eligible Employees of the Plan after December 31, 2004.

1.3 Purpose . The purpose of this Plan is to provide Members with retirement benefits they could be unable to receive under the Retirement Plan due to certain restrictions on the Retirement Plan imposed by Code Sections 401(a) (17) and 415 and to supplement the benefits payable to such Members from the Retirement Plan (in addition to those benefits accrued and vested under the Prior Plan). The Plan is intended to be unfunded and maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees as described in the Employee Retirement Income Security Act of 1974, as amended.

1.4 Invalidity of Particular Provision . The invalidity of any particular provision of this Plan shall not affect the other provisions, and the Plan shall be construed in all respects as if such invalid provision were omitted.

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Article II. Definitions

2.1 Definitions . Whenever used herein, the following terms shall have the respective meanings set forth below.

(a)

Accrued Benefit has the same meaning as such term has in the Retirement Plan after December 31, 2004, but calculated under the terms of the Plan. If Retirement Benefits commence prior to Social Security Retirement Age, the factors in Appendix A, Column B of the Retirement Plan will be used for this calculation.

(b)

Actuarial Equivalent has the same meaning as such term has in the Retirement Plan.

(c)

Affiliate shall mean—

(1)

any corporation other than the Company which together with the Company is a member of a “controlled group” of corporations (as defined in Code Section 414(b));

(2)

any organization which together with the Company is under “common control” (as defined in Code Section 414(c));

(3)

any organization which together with the Company is an “affiliated service group” (as defined in Code Section 414(m)); or

(4)

any other entity required to be aggregated with the Company pursuant to regulations under Code Section 414(o).

(d)

Annual Compensation has the same meaning such term has under the Retirement Plan without the limitations of Section 401(a)(17) of the Code.

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(e)

Beneficiary shall mean the person or persons last designated by a Member, in such manner as the Plan Administrator deems appropriate, to receive any benefits for which a Beneficiary is eligible under this Plan, or if there is no living Beneficiary the Member’s Spouse, and if no living Spouse, then the Member’s estate.

(f)

Code shall mean the Internal Revenue Code of 1986, as the same shall from time to time be amended, and the guidance issued thereunder.

(g)

Committee shall mean any Committee of the Board of Directors of the Company designated by the Board to have any responsibility with respect to the Plan.

(h)

Company shall mean Teradyne, Inc.

(i)

Compensation :

(1)

for those Members who became Members under the Plan before January 1, 2003, shall mean for each Plan Year,

(A)

an amount equal to the Annual Compensation minus

(B)

actual payments to the Member under the Variable Compensation Plan for such Plan Year, plus

(C)

target variable portions of the Member’s Model Compensation for the Plan Year as of the most recent effective date as of when the Model Compensation is fixed for the Member.

(2)

for Members who became Members after January 1, 2003 (or hereafter become Members), shall mean for each Plan Year, an amount equal to Annual Compensation, but only to the extent it exceeds the limit under Section 401(a)(17) of the Code during such Plan Year.

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(j)

Covered Compensation shall mean the Breakpoint for each Plan Year after 1988 as defined in Section 2.1(g)(3) of the Retirement Plan.

(k)

Credited Service has the same meaning as such term has in the Retirement Plan.

(l)

Disability has the same meaning as such term has in the Retirement Plan.

(m)

Earliest Retirement Date has the same meaning as such term has in the Retirement Plan as of January 1, 2005.

(n)

Eligible Employee shall mean an Employee who is an “Eligible Employee” as defined in the Retirement Plan (and who had elected to continue to accrue benefits under the Retirement Plan after October 29, 1999), and who was a Member of the Prior Plan on December 31, 2004, or, thereafter is eligible for Model Compensation in excess of the Section 401(a)(17) limit in any Plan Year in which he is employed by Employer, and has been notified that he or she is an Eligible Employee under this Plan by the Plan Administrator. No Employee shall be considered an Eligible Employee after October 29, 1999 if such Employee experiences a Break in Service under the Retirement Plan and any Retirement Benefits shall be based on the terms of this Plan (and the Prior Plan) prior to such Break in Service and such Member’s service and compensation at that time.

(o)

Employee shall mean an individual who is employed by the Employer as a regular employee or an expatriate employee on the U.S. payroll and who is regularly scheduled for 20 or more hours of service per week taking into account Hours of Service as defined in the Retirement Plan.

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(p)

Employer shall mean the Company and any Affiliate that has been included in the Prior Plan (or is hereafter included in this Plan) with respect to some or all of its Eligible Employees.

(q)

Final Average Compensation shall mean the sum of the Employee’s Monthly Compensation for the 5 Plan Years during which the Employee’s aggregate Monthly Compensation was the highest, divided by five; provided, however, that if the Employee terminated employment on any day other than the last business day of the Plan Year, then, if higher, Final Average Compensation shall mean the sum of the Member’s Monthly Compensation during the 60 consecutive months ending with the month prior to the Member’s termination date, if higher; and provided further that if the Employee has fewer than sixty consecutive months of employment with the Employer or his or her termination date, Final Average Compensation shall mean the Employee’s average Monthly Compensation during the period of his or her employment with the Employer.

(r)

Grandfathered Benefits shall mean the accrued and vested benefits under the terms of the Prior Plan as of December 31, 2004 as defined for purposes of Section 409A and subject to the terms of the Prior Plan as in effect on October 3, 2004 and as amended thereafter consistent with Section 409A.

(s)

Member shall mean an Employee who has satisfied the requirements of Article III.

(t)

Model Compensation is Employee’s base salary plus target variable payout under the terms of the Variable Compensation Plan.

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(u)

Monthly Compensation shall mean Compensation divided by 12 except that, for the year in which a Member terminates employment, Compensation shall be determined with respect to the period of service completed in such year, divided by the number of such months (including any partial months).

(v)

Normal Retirement Date is the date the Member reaches Social Security Retirement Age.

(w)

Plan Administrator shall mean the Retirement Plan Committee, as described in the Retirement Plan, or any other person designated as Plan Administrator by the Board of Directors or a Committee.

(x)

Plan Year shall mean the calendar year.

(y)

Retirement Benefits shall mean the benefits provided under Section 4.1 of this Plan.

(z)

Retirement Plan shall mean the Retirement Plan for Employees of Teradyne, Inc., as amended from time to time.

(aa)

Separation from Service shall mean a Member’s termination of employment with an Employer within the meaning of Section 409A.

(bb)

Social Security Retirement Age has the same meaning as such term has under the Retirement Plan as of January 1, 2005.

(cc)

Spouse , Surviving Spouse and the term “ married ” shall be interpreted under the law of the jurisdiction in which the Member was married.

(dd)

Variable Compensation Plan shall mean the Teradyne, Inc. Variable Compensation Plan as modified and incorporated into the Teradyne, Inc. 2006 Equity and Cash Compensation Incentive Plan, each as amended from time to time.

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2.2 Gender and Number . Except where otherwise indicated by the context, any masculine terminology used herein shall also include the feminine gender, the definition of any term herein in the singular shall also include the plural, and the definition of any term herein in the plural shall also include the singular.

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Article III. Eligibility and Participation

Each Eligible Employee who was a Member prior to January 1, 2005 shall continue to be a Member under this Plan as of that date. However, amounts accrued and vested for such Member within the meaning of Section 409A prior to January 1, 2005 shall be subject only to the terms of the Prior Plan and no additional benefits shall be accrued or vested under the Prior Plan after December 31, 2004. Amounts accrued or vested on or after January 1, 2005 within the meaning of Section 409A shall be subject to the terms of this restated Plan and Section 409A. Each other Employee who becomes an Eligible Employee on or after January 1, 2005 shall become a Member on the day after becoming an Eligible Employee.

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Article IV. Retirement Benefits

4.1 Retirement Benefits .

(a)

Entitlement to Retirement Benefits . Except as provided in Section 4.7, a Member who Separates from Service after December 31, 2004 and who is vested under the terms of Article V is entitled to the receipt of Retirement Benefits determined in Section 4.2, payable in the manner provided in the Member’s election under Section 4.4 of Plan with respect to all amounts accrued or vested after December 31, 2004.

(b)

Amount of Retirement Benefits . A Member who,

first became a Member prior to January 1, 2003, shall be entitled to a monthly Retirement Benefit equal to one-twelfth of the result of (1) minus (2) minus (3) where—

(1)

is an amount payable in a straight life annuity form equal to the product of (i) the Member’s Credited Service and (ii) the sum of (A) and (B) as follows:

(A)

0.75 percent of the Member’s Final Average Compensation up to the Covered Compensation,

(B)

1.50 percent of the Member’s Final Average Compensation above the Covered Compensation,

(2)

is the Member’s Accrued Benefit payable in a straight life annuity form from the Retirement Plan; and

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(3)

is the Member’s Accrued Benefit payable in a straight life annuity form under the Prior Plan with respect to amounts accrued and vested within the meaning of Section 409A prior to January 1, 2005; or

II.

first became a Member on or after January 1, 2003, shall be entitled to a monthly Retirement Benefit equal to one-twelfth of (1) minus (2) when

(1) is a straight life annuity form equal to the total of 1.5% of the Member’s Compensation for each Plan Year beginning January 1, 2003 in which the Member participated in the Plan; provided that 1% shall be substituted for 1.5% for any Plan Year (or fraction thereof) in which the Member had completed more than 35 years of Credited Service; and

(2) is the Member’s Accrued Benefit payable in a straight life annuity form under the Prior Plan with respect to amounts accrued and vested within the meaning of Section 409A prior to January 1, 2005.

4.2 Commencement of Benefits .

(a)

Retirement Benefits under this Article IV shall commence as of the month coincident with or next following the later of:

(1)

the Member’s Separation from Service, or

(2)

the date on which such Member attains his or her Social Security Retirement Age;

provided that the Board of Directors or a Committee, in its sole discretion, may instruct the Plan Administrator to commence or advance such payments on an earlier date to satisfy an unforeseeable emergency as permitted and to the extent limited under Treas. Reg. § 1.409A-3(i)(3).

(b)

Notwithstanding the provisions of the preceding paragraph, but acting in accordance with Section 409A(a)(2)(B) of the Code, distributions upon Separation from Service of any specified employee, as defined in Section 409A,

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may not commence earlier than the date 6 months and one day after the date of such separation (or the date of death, if earlier). Any distributions which would have been made prior to the actual commencement of benefits but for the delay required by Section 409A(a)(2)(B) of the Code under Section 409A shall be accumulated and paid in a lump sum once benefits may commence, without interest, to the Member or his or her Beneficiary as the case may be.

4.3 Preretirement Death Benefit . Benefits accrued or vested after December 31, 2004 shall be provided under this Section if the Member is married on the date of such Member’s death and if such Member dies before Retirement Benefits commence under the Plan, and in accordance with Section 4.3(a) or (b).

(a)

On or After Vesting .

(1)

Timing . If a Member dies after becoming vested (other than as a result of such death) under Article V and (a) such Member is married on the date of death, and (b) the Member has not yet begun to receive benefits, then in lieu of any other benefit herein, the Surviving Spouse shall be entitled to receive as a death benefit a monthly payment beginning during the month following the Member’s death and ending with the month in which the Spouse dies.

(2)

Amount . The monthly benefit under this subsection (a) shall equal 50 percent of the Retirement Benefit which would have been payable under Section 4.1(b) to the Member if the Member had retired the day before death and benefit payments had commenced on that date in the form of a joint and 50 percent survivor annuity with the Surviving Spouse as the contingent annuitant.

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(b)

Prior to Earliest Retirement Date .

(1)

Timing . If a Member dies while employed by an Employer prior to a Member’s Earliest Retirement Date (without taking such death into account) under the Retirement Plan and such Member is married on the date of death, then the Surviving Spouse shall be entitled to receive as a death benefit a monthly payment beginning during the month following the earlier of—

(A)

the date that would have been the Member’s Earliest Retirement Date under the Retirement Plan, or

(B)

the date the Member would have attained age 65, and ending with the month in which the death of the Spouse occurs.

(2)

Amount . The monthly benefit under this subsection (b) shall equal the amount determined as if the Member:

(A)

Separated from Service with the Employer on the day before the date of death,

(B)

began receiving Retirement Benefits in the form of a joint and 50 percent survivor annuity on the date of the Member’s Separation from Service,

(C)

died the day thereafter.

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4.4 Form of Payment . Retirement Benefits under the Plan shall be paid as provided in this Section 4.4.

(a)

Life annuity . The annual amount of Retirement Benefits payable to any Member who does not have a Spouse on the date his or her Retirement Benefits commence or who is married but has made a valid election to receive his or her Retirement Benefits in the form specified in this Section 4.4(a) rather than in the form specified in Section 4.4(b) shall be payable for the life of the Member only, unless another optional form of payment has been elected pursuant to Section 4.4(c) below.

(b)

Automatic Joint and Survivor Annuity for Married Members . Except as otherwise provided herein, Retirement Benefits payable hereunder to any Member who is married on the date his or her Retirement Benefits are to commence will be automatically paid to the Member and his or her Spouse in the form of a joint and survivor annuity. The joint and survivor annuity shall provide for retirement income to the Member and the Member’s Spouse in the same amount and the same manner as if the Member had elected Option 2 in Section 4.4(c) below, providing for 50 percent of the Member’s reduced Retirement Benefit to be continued to his or her Spouse as the contingent annuitant.

(c)

Optional Forms . Notwithstanding the provisions of Sections 4.4(a) and (b), prior to the date with respect to which payments shall be made, the Member may elect the form in which his or her Retirement Benefits are to be made either by electing a life annuity under Section 4.4(a) or from among the choices in this Section 4.4(c), provided that such election then complies with Section 409A.

(1)

Option 1 – Period Certain and Life Option . A reduced rate of Retirement Benefits payable to the member during his or her retired life, but

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guaranteed for a period of 5, 10, or 20 years, at the election of the Member, from the date Retirement Benefits commence. If the Member dies before expiration of the period certain, payments shall be continued to the Member’s Beneficiary for the remainder of the period certain. If the Member’s Beneficiary dies while further payments are due, such further payments shall be made to any one or more persons designated by the Member as alternate Beneficiaries which designation can be made at any time during the Member’s life. In the absence of the designation of an alternate Beneficiary, the value of such payments shall be paid to the Member’s Surviving Spouse, and if none, to the Member’s estate. If the Member dies after this Option 1 has gone into effect, but has failed to designate a Beneficiary, the payments shall be made to the Member’s Surviving Spouse, or if none, to the Member’s estate.

(2)

Option 2 – Contingent Annuitant Option . A reduced rate of Retirement Benefits payable during the lifetime of the Member with a percentage, either 50 percent, 75 percent, or 100 percent, designated by the Member, of said Retirement Benefits payable after the Member’s death to his or her designated contingent annuitant for such contingent annuitant’s lifetime.

(3)

If either the Beneficiary under Option 1 or the contingent annuitant under Option 2 dies before the retirement commencement date, the election shall be deemed null and void, but the Member shall be entitled to make another election or designate a Beneficiary under Option 1 and a new contingent annuitant under Option 2 to the extent consistent with Section 409A, and if not, the benefit will be paid as an annuity under Section 4.4(a) or Section 4.4(b) as applicable.

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(4)

If the contingent annuitant under Option 2 dies after the option has become effective, the option shall continue in effect, the annual amount of Retirement Benefits payable to the Member at the time of the contingent annuitant’s death shall remain unchanged, and no further Retirement Benefits shall be payable upon the subsequent death of the Member. If the Beneficiary under Option 1 dies at any time prior to the Member’s death, the option shall remain effective and the Member may designate a new Beneficiary. In the event the Beneficiary under Option 1 dies after benefit payments have begun to the Member and the Member designates a new Beneficiary, the period of time over which the benefits are to be paid shall not be changed.

(5)

Elections shall be made in accordance with a procedure established by the Plan Administrator from time to time. Each form of payment hereunder shall be the Actuarial Equivalent of the Retirement Benefit calculated under Section 4.1(b) and payable under the Plan.

4.5 Payment of Small Amounts . Notwithstanding the foregoing, if the value of the Retirement Benefits payable under Section 4.1 or 4.3 is no more than the dollar limit under Section 402(g)(1)(B) of the Code when calculated as if payable in a lump sum, which is the Actuarial Equivalent of the Retirement Benefit, at the time of Separation from Service or death, as applicable, under the terms of the Plan, then on the Member’s Separation from Service or death, the Plan Administrator may direct that such lump sum be paid to the Member (or the

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Member’s Beneficiary) within 90 days following such Separation from Service or death, provided that the payment means that the Member will retain no benefits under any other non-account balance plans aggregated with the Plan under Treas. Reg. § 1.409A-1(c)(2)). Should a Member receive a benefit under this Section and be reemployed by an Employer, any Retirement Benefits payable under this Plan after his or her reemployment shall be reduced by the Actuarial Equivalent of the benefits such Member received under this Section.

4.6 Separation from Service Prior to Vesting . Notwithstanding any provision herein to the contrary, a Member who Separates from Service with the Employer prior to vesting under Section 5.1 shall not be entitled to any Retirement Benefits (or death benefits) under the Plan.

4.7 Non-Competition . The Member shall forfeit any Retirement Benefits that would otherwise be payable under this Plan if he or she, for any reason whatsoever, directly or indirectly, accepts employment or renders services, with or without compensation, by or for any person, firm, or organization engaged in the sale, servicing, developing, manufacturing, or merchandising of products or services in competition with any product or service of the Company—

(a)

in the event of voluntary termination of employment for a period of three years immediately following such termination, or

(b)

in the event of involuntary termination of employment, for a period of one year immediately following such termination.

4.8 Delay of Payments . Notwithstanding the foregoing, any payment due under this Article IV, may be delayed in a manner that will not constitute a subsequent deferral under Section 409A and in such manner permitted by and subject to such conditions and limitations as imposed under Section 409A, including, without limitation, (a) if the Employer reasonably

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anticipates that its federal income tax deduction with respect to such payment will be limited or eliminated by application of Section 162(m) of the Code; provided that any payment so delayed will be paid at the earliest date at which the Employer reasonably anticipates that the federal income tax deduction will not be limited or eliminated by application of Section 162(m) of the Code, or, if later, the calendar year in which a Member has a Separation from Service, and (b) if the Employer reasonably anticipates the payments will violate federal securities law or other applicable law; provided that the payments delayed will be made at the earliest date at which the Employer reasonably anticipates that the making of such payments will not cause a violation.

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Article V. Rights of Members

5.1 Vesting . A Member shall have a nonforfeitable right to Retirement Benefits payable pursuant to Article IV upon the earliest to occur of the following:

(a)

the Member’s Normal Retirement Date under the Retirement Plan,

(b)

the Member’s Earliest Retirement Date under the Retirement Plan,

(c)

the date the Member retires on account of Disability under the Retirement Plan, and

(d)

the Member’s death.

If the Member Separates from Service prior to having a nonforfeitable right under this Section 5.1 no Retirement Benefits will be paid hereunder.

5.2 Unsecured Interest . No Member or Surviving Spouse shall have any interest whatsoever in any specific asset of the Employer. To the extent any person acquires a right to receive payments under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Employer.

5.3 Employment . Nothing in this Plan shall interfere with or limit in any way the right of the Employer to terminate any Member’s employment at any time, nor confer upon any Member any right to continue in the employ of the Employer.

5.4 Member’s Rights . Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create a fiduciary relationship between the Employer or the Plan Administrator and any Member or Surviving Spouse or any other person. Members and Surviving Spouses have the status of general unsecured creditors of the Employer. The Plan constitutes a mere promise by the Employer to make benefit payments in the future. Neither Members nor Surviving Spouses (nor any other person) shall have any claim to any specific assets of the Employer, including any assets transferred to any trust described in Section 6.5 and all such assets shall remain owned by the Employer at all times.

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Article VI. Administration and Financing

6.1 Administration . The Plan will be administered by the Plan Administrator, which shall have the exclusive right and full discretion subject to the provisions of 409A—

(a)

to interpret the Plan,

(b)

to decide any and all matters arising hereunder (including the right to remedy possible ambiguities, inconsistencies, or admissions),

(c)

to require information and documents from any person who may be helpful to the fulfillment of the Plan Administrator’s responsibilities.

(d)

to make, amend, and rescind such rules as it deems necessary for the proper administration of the Plan, including the adoption of written administrative procedures which may modify or eliminate provisions of this Plan in order to conform them more closely to Section 409A.

(e)

to make all other determinations necessary or advisable for the administration of the Plan, including determinations regarding eligibility for benefits under the Plan and the amount of benefits payable under the Plan.

6.2 Finality of Determination . The determination of the Plan Administrator as to any disputed questions arising under this Plan, including questions of fact and construction and interpretation of such facts and all applicable documents, shall be final, binding, and conclusive upon all persons.

6.3 Indemnification . To the extent permitted by law, and without limiting the applicability of any other indemnification provided by the Employer, the Plan Administrator, and all agents and representatives of the Plan Administrator, shall be indemnified by the Employer against any claims, and the expenses of defending against such claims, resulting from any action or conduct (or failure to act) relating to the administration of the Plan except claims arising from a finding of gross negligence, willful neglect, or willful misconduct.

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6.4 Expenses . The cost of payment from this Plan and the expenses of administering the Plan shall be borne by the Employer.

6.5 Financing . The Employer may pay benefits under this Plan from its general assets or it may establish a trust and transfer to that trust such assets as it determines to assist the Employer in payment of such benefits under this Plan. To the extent distributions from any trust are not sufficient to make any benefit payment, the balance of such payment shall be made by the Employer.

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Article VII. Claims Procedure

7.1 Claims Procedure .

(a)

Submission of Claims . Claims for benefits under the Plan shall be submitted in writing to the Plan Administrator or to an individual designated by the Plan Administrator for this purpose.

(b)

Denial of Claim . If any claim for benefits is wholly or partially denied, the claimant shall be given written notice within 90 days following the date on which the claim is filed, which notice shall set forth—

(1)

the specific reason or reasons for the denial,

(2)

specific references to pertinent Plan provisions on which the denial is based,

(3)

a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary, and

(4)

an explanation of the Plan’s claim review procedure.

If special circumstances require an extension of time for processing the claim, written notice of an extension shall be furnished to the claimant prior to the end of the initial period of 90 days following the date on which the claim is filed. Such an extension may not exceed a period of 90 days beyond the end of said initial period.

If the claim has not been granted, and if written notice of the denial of the claim is not furnished within 90 days following the date on which the claim is filed, the claim shall be deemed denied for the purpose of proceeding to the claim review procedure.

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(c)

Claim Review Procedure . The claimant or his or her authorized representative shall have 60 days after receipt of written notification of denial of a claim to request a review of the denial by making written request to the Plan Administrator, and may review pertinent documents and submit issues and comments in writing within such 60-day period.

Not later than 60 days after receipt of the request for review, the Plan Administrator shall render and furnish to the claimant a written decision, which shall include specific reasons for the decision, and shall make specific references to pertinent Prior Plan provisions on which it is based. If special circumstances require an extension of time for processing, the decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review, provided that written notice and explanation of the delay are given to the claimant prior to commencement of the extension. Such decision by the Prior Plan Administrator shall not be subject to further review. If a decision on review is not furnished to a claimant within the specified time period, the claim shall be deemed to have been denied on review.

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Article VIII. Amendment and Termination

8.1 Amendment and Termination . The Employer expects the Plan to be permanent but since future conditions affecting the Employer cannot be anticipated or foreseen, the Employer necessarily must and does hereby reserve the right to amend, modify, or terminate the Plan (in all circumstances as permitted by Section 409A) at any time, by action of the Board of Directors or a Committee. Any such amendment, modification, or termination shall not reduce or diminish the value of the benefit to be paid hereunder prior to the date of such amendment. The Employer may distribute the Actuarial Equivalent of the Retirement Benefits determined under Section 4.4, in a single lump sum, on termination of the Plan in such manner permitted by and subject to such conditions and limitations as imposed by Section 409A including, without limitation, the Employer’s termination and liquidation of the Plan in accordance with the following (modified as necessary to comply with Treas. Reg § 1.409A-3(j)(4)(ix)):

(a)

Corporate Dissolution or Bankruptcy : within 12 months following a corporate dissolution of the Employer taxed under Section 331 of the Code or with the approval of a bankruptcy court pursuant to 11 U.S.C. §503(b)(1)(A) provided that the amounts deferred under the Plan are included in each Member’s gross income in the latest of the following years (or, if earlier, the taxable year in which the amount is actually or constructively received): (i) the calendar year in which the Plan terminates; (ii) the first calendar year in which the amounts are no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the distribution is administratively practicable;

(b)

Termination in Connection with a Change in Control Event : pursuant to irrevocable action taken by the Employer within 30 days preceding or 12 months

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after a change in the ownership or effective control of the Employer, or in the ownership of a substantial portion of the assets of the Employer as described in Section 409A(2)(A)(v) of the Code, provided that all distributions with respect to Members subject to the change in control event are made no later than 12 months following such termination of the Plan and further provided that all of the Employer’s plans and arrangements that are non-account balance plans for purposes of Treas. Reg. § 1.409A-1(c)(2) (and would be aggregated under such regulation) that cover Members subject to the change in control are terminated so that the Members are required to receive all amounts of compensation deferred under the other terminated plans and arrangements within 12 months following the irrevocable action to terminate such other plans and arrangements; or

(c)

Termination of Similar Plans : if all other non-account balance plans (for purposes of Treas. Reg. § 1.409A-1(c)(2)) sponsored by the Employer that would be aggregated with the Plan under Treas. Reg. § 1.409A-1(c) if a Member had participated are terminated; provided that (i) such action does not occur proximate to a downturn in the financial health of the Employer; (ii) all distributions are made no earlier than 12 months and no later than 24 months following such termination, and (iii) the Employer does not adopt any new non-account balance plans for a minimum of three years following the date of such termination.

Notice of such amendment or termination shall be given in writing to each Member and Beneficiary of a deceased Member having an interest in the Plan. The Employer may, at any time, provide for the cessation of the accrual of benefits under the Plan for some or all of the Members.

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8.2 409A . It is the intention of the Company and any other Employer that the terms of this Plan shall be consistent with the provisions of Section 409A including rights that are grandfathered and the administration and interpretation of this Plan shall be consistent with such intention; provided that the Company, any other Employer and the Plan Administrator or its agents shall have no obligation to any Member or any other person if there is any failure to comply with said Section 409A or with respect to any liability, including, without limitation, any liability for taxes, additional taxes or interest incurred by the Member or any other person as a result of such failure.

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Article IX. Miscellaneous

9.1 Nontransferability . In no event shall the Employer make any payment under this Plan to any assignee or creditor of a Member, a Surviving Spouse or a Beneficiary except to the extent consistent with any court order to make payments to someone other than a Member in connection with a domestic relations order as defined in Section 414(p)(1)(B). Prior to the time of payment hereunder, a Member, a Surviving Spouse or Beneficiary shall have no rights by way of anticipation or alienation nor shall such rights be assigned or transferred by operation of law.

9.2 Withholding . The Employer shall have the right to deduct from all payments made from the Plan any applicable withholding required by law to be withheld with respect to such payments.

9.3 Permitted Distributions . In addition to the provisions of Section 9.1, distribution may be made in such manner permitted by and subject to such conditions and limitations as imposed by Section 409A, including, without limitation, (i) to comply with government ethics or conflict of interest laws (per Treas. Reg. § 1.409A-3(j)(4)(iii)), (ii) to pay employment taxes under Sections 3101, 3121(a) and 3121(v)(2) of the Code on amounts accrued under this Plan, (iii) to pay income taxes under Section 3401 of the Code or corresponding state, local or foreign withholding rules triggered directly or as a result of the payments under (ii), (iv) to pay additional income tax on wages attributable to the pyramiding Section 3401 wages and taxes, (v) to comply with a “domestic relations order” (as defined in Code Section 414(p)(1)(B)) as permitted under Code Section 409A, and (vi) to pay any amount due as a result of some amount under this Plan being included in income as a result of a failure to comply with Section 409A.

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9.4 Applicable Law . This Plan shall be governed and construed in accordance with the Employee Retirement Income Security Act of 1974, as amended, and to the extent not pre-exempted, the laws of the Commonwealth of Massachusetts.

* * * * * * * * * *

IN WITNESS WHEREOF, TERADYNE, INC. has caused this instrument to be executed, effective as of January 1, 2005, on this day of , 2008.


TERADYNE, INC.

By:


ATTEST

By:

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Exhibit 10.33

NEXTEST SYSTEMS CORPORATION

1998 EQUITY INCENTIVE PLAN

AS AMENDED

1. Purposes of the Plan . The purposes of this Equity Incentive Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives to Employees, Directors and Consultants of the Company and its Subsidiaries, and to promote the success of the Company’s business. Options granted hereunder may be either Incentive Stock Options or Nonstatutory Stock Options at the discretion of the Committee. This is intended to be a stock purchase plan and stock option plan for purposes of Section 408 of the California General Corporation Law and is intended to comply with the provisions of Section 25102(o) of the California Corporate Securities Law of 1968, as amended.

2. Definitions . As used herein, and in any Option granted hereunder, the following definitions shall apply:

(a) “ Award ” shall mean, individually or collectively, a grant under the Plan of Nonstatutory Stock Options, Incentive Stock Options or rights to purchase Restricted Stock.

(b) “ Award Agreement ” shall mean the written agreement between the Company and the Participant setting forth the terms and conditions applicable to each Award granted under the Plan, as determined by the Committee pursuant to the Plan.

(d) “ Code ” shall mean the Internal Revenue Code of 1986, as amended.

(e) “ Common Stock ” shall mean the Common Stock of the Company.

(f) “ Company ” shall mean Nextest Systems Corporation.

(g) “ Committee ” shall mean the Committee appointed by the Board in accordance with Section 4(a) of the Plan. If the Board does not appoint or ceases to maintain a Committee, the term “Committee” shall refer to the Board.

(h) “ Consultant ” shall mean any independent contractor retained to perform services for the Company.

(i) “ Continuous Employment ” shall mean the absence of any interruption or termination of service as an Employee, Director or Consultant by the Company or any Subsidiary. Continuous Employment shall not be considered interrupted during any period of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company and any Parent, Subsidiary or successor of the Company. A leave of absence approved by the Company shall include sick leave, military leave or any other personal leave approved by an authorized representative of the Company. For purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon expiration of such leave is guaranteed by statute or contract.

(j) “ Covered Employee ” shall mean any individual whose compensation is subject to the limitations on tax deductibility provided by Section 162(m) of the Code and any Treasury Regulations promulgated thereunder in effect at the close of the taxable year of the Company in which an Option has been granted to such individual.

(k) “ Director ” shall mean a director of the Company.

(l) “ Effective Date ” shall mean the date on which the Plan is initially approved by the shareholders of the Company in accordance with Section 19 of the Plan.

(m) “ Employee ” shall mean any person, including officers (whether or not they are directors), employed by the Company or any Subsidiary.

(n) “ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended.

(o) “ Fair Market Value ” means (i) the closing price of a Share on the national securities exchange on which the Shares are traded, or (ii) if the Shares are not traded on a national securities exchange but are quoted on the Nasdaq SmallCap Market or on a national stock

exchange or an automated quotation system or over-the-counter market, the closing price on the Nasdaq SmallCap Market or such national stock exchange or automated quotation system or over-the-counter market, or (iii) if the Shares are not traded on a national securities exchange or quoted on the Nasdaq SmallCap Market or an automated quotation system, the fair market value of a Share as determined by the Company’s Board of Directors in good faith, based upon such factors as they deem relevant. Notwithstanding the preceding, for federal, state, and local income tax reporting purposes, fair market value shall be determined by the Committee in accordance with uniform and nondiscriminatory standards adopted by it from time to time. Such determination shall be conclusive and binding on all persons.

(p) “ Fiscal Year ” means the fiscal year of the Company.

(q) “ Grant Date ” means, with respect to an Award, the date that the Award is granted by the Committee.

(r) “ Incentive Stock Option ” shall mean any option granted under this Plan and any other option granted to an Employee in accordance with the provisions of Section 422 of the Code, and the Treasury Regulations promulgated thereunder.

(s) “ Non-Employee Director ” shall mean a director of the Company who qualifies as a Non-Employee Director as such term is defined in Section 240.16b-3(b)(3) of the General Rules and Regulations promulgated under the Exchange Act (the “General Rules and Regulations”).

(t) “ Nonstatutory Stock Option ” shall mean an Option granted under the Plan that is subject to the provisions of Section 1.83-7 of the Treasury Regulations promulgated under Section 83 of the Code.

(u) “ Option ” shall mean a stock option granted pursuant to the Plan.

(v) “ Optioned Shares ” shall mean the Common Stock subject to an Option.

(w) “ Optionee ” shall mean an Employee, Non-Employee Director or Consultant who receives an Option.

(x) “ Outside Director ” shall mean a director of the Company who qualifies as an Outside Director as such term is used in Section 162(m) of the Code and defined in any applicable Treasury Regulations promulgated thereunder.

(y) “ Parent ” shall mean a “parent corporation,” whether now or hereafter existing, as defined by Section 424(e) of the Code.

(z) “ Participant ” shall mean an Employee, Consultant or Non-Employee Director who has an outstanding Award.

(aa) “ Plan ” shall mean this 1998 Equity Incentive Plan.

(bb) “ Registration Date ” shall mean the effective date of the first registration of any class of the Company’s equity securities pursuant to Section 12 of the Exchange Act.

(cc) “ Restricted Stock” shall mean an Award granted to a Participant pursuant to Section 10.

(dd) “ Section 16 Person ” shall mean a person who, with respect to the Shares, is subject to Section 16 of the Exchange Act.

(ee) “ Section 162(m) Effective Date ” shall mean the first date as of which the limitations on the tax deductibility of certain compensation provided by Section 162(m) of the Code and any Treasury Regulations promulgated thereunder are applicable to Options granted under the Plan.

(ff) “ Securities Act ” shall mean the Securities Act of 1933, as amended.

(gg) “ Share ” shall mean a share of the Common Stock subject to an Award, as adjusted in accordance with Section 12 of the Plan.

(hh) “ Subsidiary ” shall mean a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.

(ii) “ Termination of Service ” means (a) in the case of an Employee, a cessation of the employee-employer relationship between an employee and the Company or an Affiliate for any reason, including, but not by way of limitation, a termination by resignation, discharge, death, disability, or the disaffiliation of an Affiliate, but excluding any such termination where there is a simultaneous reemployment by the Company or an Affiliate; and (b) in the case of a

Consultant, a cessation of the service relationship between a Consultant and the Company or an Affiliate for any reason, including, but not by way of limitation, a termination by resignation, discharge, death, disability, or the disaffiliation of an Affiliate, but excluding any such termination where there is a simultaneous re-engagement of the Consultant by the Company or an Affiliate.

3. Shares Subject to the Plan . Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 12,000,000 Shares. The Shares may be authorized but unissued or reacquired shares of Common Stock. If an Option expires or becomes unexercisable for any reason without having been exercised in full, or is surrendered pursuant to an Option exchange program, or if any unissued Shares are retained by the Company upon exercise of an Option in order to satisfy the exercise price for such Option or any withholding taxes due with respect to such Option, such unissued or retained Shares shall become available for other Option grants under the Plan, unless the Plan shall have been terminated.

Notwithstanding the foregoing, the total number of shares subject to the Plan shall not exceed the applicable percentage of total outstanding shares of capital stock of the Company as calculated in accordance with the conditions and exclusions of Section 260.140.45 of the Rules of the California Corporations Commissioner based on the shares of the Company that are outstanding at the time the calculation is made, unless a higher percentage is approved by at least two-thirds (2/3) of the total outstanding shares of capital stock of the Company entitled to vote on the matter. The foregoing limitation shall cease to apply to the Plan at such time as, in the opinion of legal counsel to the Company, such rule is no longer deemed to apply to the offer or sale of Shares subject to the Plan by the Company.

4. Administration of the Plan .

(a) Procedure . The Plan shall be administered either by (i) the full Board; or (ii) a Committee consisting of not less than two (2) members of the Board. Once appointed, the Committee shall continue to serve until otherwise directed by the Board. From time to time, the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and, thereafter, directly administer the Plan. Members of the Board or Committee who are either eligible for Awards or have been granted Awards may vote on any matters affecting the administration of the Plan or the grant of Awards pursuant to the Plan, except that no such member shall act upon the granting of an Award to himself, but any such member may be counted in determining the existence of a quorum at any meeting of the Board or the Committee during which action is taken with respect to the granting of an Award to him or her.

The Committee shall meet at such times and places and upon such notice as the chairperson determines. A majority of the Committee shall constitute a quorum. Any acts by the Committee may be taken at any meeting at which a quorum is present and shall be by majority vote of those members entitled to vote. Additionally, any acts reduced to writing or approved in writing by all of the members of the Committee shall be valid acts of the Committee.

(b) Procedure After Registration Date . Notwithstanding subsection (a) above, after the Registration Date, the Plan shall be administered either by: (i) the full Board; or (ii) a Committee of two (2) or more directors, each of whom is a Non-Employee Director. After such date, the Board shall take all action necessary to administer the Plan so that all transactions involving Awards and Shares issued pursuant to the Plan shall be exempt from Section 16(b) of the Exchange Act in accordance with the then effective provisions of Section 240.16b-3 et. seq. of the General Rules and Regulations; provided that any amendment to the Plan required for compliance with such provisions shall be made consistent with the provisions of Section 14 of the Plan and the General Rules and Regulations.

(c) Procedure After Section 162(m) Effective Date . Notwithstanding subsections (a) and (b) above, after the Section 162(m) Effective Date, the Plan and all Awards shall be administered and approved by a Committee comprised solely of two or more Outside Directors.

(d) Powers of the Committee . Subject to the provisions of the Plan, and except as otherwise provided by the Board, the Committee shall have the authority: (i) to determine, upon review of relevant information, the Fair Market Value of the Common Stock; (ii) to determine the purchase price of Awards to be granted, the Employees, Directors or Consultants to whom and the time or times at which Awards shall be granted, and the number of Shares to be represented by each Award; (iii) to interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations relating to the Plan; (v) to determine the terms and provisions of each Award granted under the Plan (which need not be identical) and, with the consent of the holder thereof, to modify or amend any Award; (vi) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Award previously granted by the Committee; (vii) to accelerate or (with the consent of the Optionee) defer an exercise date of any Option, subject to the provisions of Section 9(a) of the Plan; (viii) to determine whether Options granted under the Plan will be Incentive Stock Options or Nonstatutory Stock Options; (ix) to make all other determinations deemed necessary or advisable for the administration of the Plan.

(e) Non-Employee Director Options . Notwithstanding any contrary provision of this Section 4, the Board shall administer grants of Awards to Non-Employee Directors, and the Committee shall exercise no discretion with respect to grants of Awards to Non-Employee Directors. In the Board’s administration of Awards granted to Non-Employee Directors, the Board shall have all of the authority and discretion otherwise granted to the Committee with respect to the administration of the Plan.

(f) Effect of Committee’s Decision . All decisions, determinations and interpretations of the Committee shall be final, conclusive and binding on all persons.

5. Eligibility .

(a) Persons Eligible for Options . Nonstatutory Stock Options under the Plan may be granted to Employees, Directors or Consultants whom the Committee, in its sole discretion, may designate from time to time. Incentive Stock Options may be granted only to Employees. An Employee, Director or Consultant who has been granted an Option, if he or she is otherwise eligible, may be granted an additional Option or Options. However, the aggregate Fair Market Value of the Shares subject to one or more Incentive Stock Options that are exercisable for the first time by an Optionee during any calendar year (under all stock option plans of the Company and its Parents and Subsidiaries) shall not exceed $100,000 (determined as of the grant date). As of the Section 162(m) Effective Date, Options under the Plan shall be granted to Covered employees upon satisfaction of the conditions to such grants provided pursuant to Section 162(m) and any Treasury Regulations promulgated thereunder. In addition, after the Section 162(m) Effective Date, the maximum number of Shares with respect to which Options may be granted during any calendar year to any Employee shall not exceed 500,000 Shares.

(b) No Right to Continuing Employment, Consulting or Director Relationship . Neither the establishment nor the operation of the Plan shall confer upon any Optionee or any other person any right with respect to continuation of employment or other service with the Company or any Subsidiary, nor shall the Plan interfere in any way with the right of the Optionee or the right of the Company (or any Parent or Subsidiary) to terminate such employment or service at any time.

6. Term of Plan . The Plan shall become effective upon its adoption by the Board or its approval by vote of the holders of the outstanding shares of the Company entitled to vote on the adoption of the Plan (in accordance with the provisions of Section 19 hereof), whichever is earlier. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 14 of the Plan.

7. Term of Option . Unless the Committee determines otherwise, the term of each Option granted under the Plan shall be ten (10) years from the Grant Date. The term of the Option shall be set forth in the Option Agreement. In any event, no Option shall be exercisable after the expiration of ten (10) years from the Grant Date, provided that no Incentive Stock Option granted to any Employee who, at the date such Option is granted, owns (within the meaning of Section 424(d) of the Code) more than ten percent (10%) of the total combined voting power of all classes of the stock of the Company or any Parent or Subsidiary shall be exercisable after the expiration of five (5) years from the Grant Date.

8. Option Exercise Price and Consideration .

(a) Option Price . Except as provided in subsections (b) and (c) below, the exercise price for the Shares to be issued pursuant to any Option shall be such price as is determined by the Committee, which shall in no event be less than: (i) in the case of Incentive Stock Options, the Fair Market Value of such Shares on the Grant Date; or (ii) in the case of Nonstatutory Stock Options, 85% of such Fair Market Value.

(b) Ten Percent Shareholders . No Option shall be granted to any Employee who, at the date such Option is granted, owns (within the meaning of Section 424(d) of the Code) more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, unless the exercise price for the Shares to be issued pursuant to such Option is at least equal to 110% of the Fair Market Value of such Shares on the Grant Date.

(c) Section 162(m) Limitations . After the Section 162(m) Effective Date, the exercise price of any Option granted to a Covered Employee shall be at least equal to the Fair Market Value of the Shares as of the Grant Date.

(d) Consideration . The consideration to be paid for the Optioned Shares shall be payment by check, unless payment in some other manner, including by promissory note, other shares of the Company’s Common Stock or such other consideration and method of payment for the issuance of Optioned Shares as may be permitted under Sections 408 and 409 of the California General Corporation Law, is authorized by the Committee at the time of the grant of the Option. Any cash or other property received by the Company from the sale of Shares pursuant to the Plan shall constitute part of the general assets of the Company.

9. Exercise of Option .

(a) Vesting Period . Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Committee and as shall be permissible under the terms of the Plan, which shall be specified in the Option Agreement evidencing the Option. Unless the Committee specifically determines otherwise at the time of the grant of the Option, each Option shall vest and become exercisable, cumulatively, as to twenty percent (20%) of the Optioned Shares on each anniversary of the Grant Date until all of the Optioned Shares have vested, subject to the Optionee’s Continuous Employment. An Option may not be exercised for fractional shares or for less than ten (10) Shares.

(b) Exercise Procedures . An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by

the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. After the Registration Date, in lieu of delivery of a cash payment for the purchase price of the Optioned Shares with respect to which the Option is exercised, the Optionee may deliver to the Company a sell order to a broker for the Shares being purchased and an agreement to pay (or have the broker remit payment for) the purchase price for the Shares being purchased on or before the settlement date for the sale of such shares to the broker. As soon as practicable following the exercise of an Option in the manner set forth above, the Company shall issue or cause its transfer agent to issue stock certificates representing the Shares purchased. Until the issuance of such stock certificates (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Shares notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other rights for which the record date is prior to the date of the transfer by the Optionee of the consideration for the purchase of the Shares, except as provided in Section 12 of the Plan.

(c) Exercise of Option With Stock . If an Optionee is permitted to exercise an Option by delivering shares of the Company’s Common Stock, the Option Agreement covering such Option may include provisions authorizing the Optionee to exercise the Option, in whole or in part, by (i) delivering whole shares of the Company’s Common Stock previously owned by such Optionee (whether or not acquired through the prior exercise of a stock option) having a fair market value equal to the Option price; or (ii) directing the Company to withhold from the Shares that would otherwise be issued upon exercise of the Option that number of whole Shares having a fair market value equal to the Option price. Shares of the Company’s Common Stock so delivered or withheld shall be valued at their fair market value at the close of the last business day immediately preceding the date of exercise of the Option, as determined by the Committee. Any balance of the Option price shall be paid in cash. Any Shares delivered or withheld in accordance with this provision shall again become available for purposes of the Plan and for Options subsequently granted thereunder. After the Registration Date, any exercise of an Option under Section 9(c)(i) or 9(c)(ii) above by a Section 16 Person shall comply with the relevant requirements of Section 240.16b-1 et. seq. of the General Rules and Regulations.

(d) Termination of Status as Employee, Director or Consultant . If an Optionee shall cease to be in Continuous Employment as an Employee, Director or Consultant for any reason other than disability or death, he or she may, but only within thirty (30) days (or such other period of time as is determined by the Committee) after the date of Termination of Service, exercise his or her Option to the extent that he or she was entitled to exercise it at the date of Termination of Service, subject to the condition that no Option shall be exercised after the expiration of the Option period.

(e) Disability of Optionee . If an Optionee shall cease to be in Continuous Employment as an Employee, Director or Consultant due to disability, and such Optionee was in Continuous Employment as an Employee, Director or Consultant from the Grant Date until the date of Termination of Service, the Option may be exercised at any time within six (6) months following the date of Termination of Service, but only to the extent of the accrued right to exercise at the time of Termination of Service, subject to the condition that no option shall be exercised after the expiration of the Option period.

(f) Death of Optionee . In the event of the death during the Option period of an Optionee who is at the time of his or her death, an Employee, Non-Employee Director or Consultant and who was in Continuous Employment as such from the Grant Date until the date of death, the Option may be exercised at any time within six (6) months following the date of death by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest,

inheritance or otherwise as a result of the Optionee’s death, but only to the extent of the accrued right to exercise at the time of death, subject to the condition that no option shall be exercised after the expiration of the Option period.

(g) Tax Withholding . After the Registration Date, when an Optionee is required to pay to the Company an amount with respect to tax withholding obligations in connection with the exercise of an Option granted under the Plan, the Optionee may elect prior to the date the amount of such withholding tax is determined (the “Tax Date”) to make such payment, or such increased payment as the Optionee elects to make up to the maximum federal, state and local marginal tax rates, including any related FICA obligation, applicable to the Optionee and the particular transaction, by: (i) delivering cash; (ii) delivering part or all of the payment in previously owned shares of Common Stock (whether or not acquired through the prior exercise of an Option); and/or (iii) irrevocably directing the Company to withhold from the Shares that would otherwise be issued upon exercise of the Option that number of whole Shares having a fair market value equal to the amount of tax required or elected to be withheld (a “Withholding Election”). If an Optionee’s Tax Date is deferred beyond the date of exercise and the Optionee makes a Withholding Election, the Optionee will initially receive the full amount of Optioned Shares otherwise issuable upon exercise of the Option, but will be unconditionally obligated to surrender to the Company on the Tax Date the number of Shares necessary to satisfy his or her minimum withholding requirements, or such higher payment as he or she may have elected to make, with adjustments to be made in cash after the Tax Date.

After the Registration Date, notwithstanding anything in the preceding paragraph to the contrary, any withholding of Shares with respect to taxes arising in connection with the exercise of an Option by any Section 16 Person shall satisfy the conditions for exemption therefrom set forth in Section 240.16b-1 et. seq. of the General Rules and Regulations.

Any adverse consequences incurred by the Optionee with respect to the use of shares of Common Stock to pay any part of the Option Price or of any tax in connection with the exercise of an Option, including, without limitation, any adverse tax consequences arising as a result of a disqualifying disposition within the meaning of Section 422 of the Code, shall be the sole responsibility of the Optionee.

10. Restricted Stock Purchase Awards .

(a) Grant of the Right to Purchase Restricted Stock . Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant the right to purchase Shares of Restricted Stock to Employees, Non-Employee Directors, and Consultants in such amounts as the Committee, in its sole discretion, shall determine.

(b) Restricted Stock Agreement . Each Award of the right to purchase Restricted Stock shall be evidenced by an Award Agreement that shall specify the Period of Restriction, the number of Shares purchased, and such other terms and conditions as the Committee, in its sole discretion, shall determine. Unless the Committee determines otherwise, Shares of Restricted Stock shall be held by the Company as escrow agent until the restrictions on such Shares have lapsed.

(c) Transferability . Except as provided in this Section 10, Shares of Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction. However, in no event may the restrictions on Restricted Stock purchased by a Section 16 Person lapse prior to six (6) months following the purchase date (or such shorter period as may be permissible while maintaining compliance with Rule 16b-3).

(d) Purchase Price . The purchase price for the Restricted Stock shall be (i) at least eighty five percent (85%) of the Fair Market Value of such stock at the time the purchase right is granted, or at the time the purchase is consummated; or (ii) in the case of any person who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the issuing corporation or its parent or subsidiary corporations, one hundred percent (100%) of the Fair Market value of such stock either at the time the person is granted the right to purchase shares under the Plan or at the time the purchase is consummated.

(e) Other Restrictions . The Committee, in its sole discretion, may impose such other restrictions on Shares of Restricted Stock as it may deem advisable or appropriate, in accordance with this Section 10(d):

(i) General Restrictions . The Committee may set restrictions based upon the achievement of specific performance objectives (Company-wide, divisional, or individual), applicable Federal or state securities laws, or any other basis determined by the Committee in its discretion.

(ii) Section 162(m) Performance Restrictions . For purposes of qualifying grants of rights to purchase of Restricted Stock as “performance-based compensation” under Section 162(m) of the Code, the Committee, in its discretion, may set restrictions based upon the achievement of performance objectives established by the Committee. The performance objectives shall be set by the Committee on or before the latest date permissible to enable the Restricted Stock to qualify as “performance-based compensation” under Section 162(m) of the Code. In granting the right to purchase Restricted Stock which is intended to qualify under Section 162(m), the Committee shall follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Restricted Stock under Code Section 162(m) (e.g., in determining the performance objectives).

(iii) Legend on Certificates . The Committee, in its discretion, may legend the certificates representing Restricted Stock to give appropriate notice of such restrictions. For example, the Committee may determine that some or all certificates representing Shares of Restricted Stock shall bear the following legend:

“THE SALE OR OTHER TRANSFER OF THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE, WHETHER VOLUNTARY, INVOLUNTARY OR BY OPERATION OF LAW, IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AS SET FORTH IN THE NEXTEST SYSTEMS CORPORATION 1998 EQUITY INCENTIVE PLAN AND IN A RESTRICTED STOCK PURCHASE AGREEMENT. A COPY OF THE PLAN AND SUCH RESTRICTED STOCK PURCHASE AGREEMENT MAY BE OBTAINED FROM THE SECRETARY OF NEXTEST SYSTEMS CORPORATION.”

(f) Removal of Restrictions . Except as otherwise provided in this Section 10, Shares of Restricted Stock covered by each Restricted Stock purchase under the Plan shall be released from escrow as soon as practicable after the last day of the Period of Restriction. The Committee, in its discretion, may accelerate the time at which any restrictions shall lapse, and remove any restrictions; provided, however, that the Period of Restriction on Shares purchased by a Section 16 Person may not lapse until at least six (6) months after the Purchase Date (or such shorter period as may be permissible while maintaining compliance with Rule 16b-3). After the

restrictions have lapsed, the Participant shall be entitled to have any legend or legends under Section 10(d)(iii) removed from his or her Share certificate, and the Shares shall be freely transferable by the Participant.

(g) Voting Rights . During the Period of Restriction, Participants holding Shares of Restricted Stock purchased hereunder may exercise full voting rights with respect to those Shares, unless the Committee determines otherwise.

(h) Dividends and Other Distributions . During the Period of Restriction, Participants holding Shares of Restricted Stock shall be entitled to receive all dividends and other distributions paid with respect to such Shares unless otherwise provided in the Award Agreement. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid.

(i) Return of Restricted Stock to Company . On the date set forth in the Award Agreement, the Restricted Stock for which restrictions have not lapsed shall revert to the Company and again shall become available for purchase under the Plan.

11. Non-Transferability of Awards . An Award may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or the laws of descent and distribution. An Option may be exercised, during the lifetime of the Optionee, only by the Optionee.

12. Adjustments Upon Changes in Capitalization . Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Award, and the number of Shares which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan, and the per share purchase price of each such Award, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, combination, reclassification, the payment of a stock dividend on the Common Stock or any other increase or decrease in the number of such shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration”. Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Award.

The Committee may, if it so determines in the exercise of its sole discretion, also make provision for proportionately adjusting the number or class of securities covered by any Award, as well as the price to be paid therefor, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings, or other increases or reductions of its outstanding shares of Common Stock, and in the event of the Company being consolidated with or merged into any other corporation.

Unless otherwise determined by the Board, upon the dissolution or liquidation of the Company the Options granted under the Plan shall terminate and thereupon become null and void. Upon any merger or consolidation, if the Company is not the surviving corporation, or if the Company is the surviving corporation in a “triangular merger” transaction with a subsidiary of a “parent corporation” (as such term is defined and used in Section 175 and Section 1101 of the California General Corporation Law), the Options granted under the Plan shall be assumed by either the new entity or the parent corporation.

13. Time of Granting Options . Unless otherwise specified by the Committee, the date of grant of an Award under the Plan shall be the Grant Date. Notice of the determination shall be given to each Participant to whom an Award is so granted within a reasonable time after the date of such grant.

14. Amendment and Termination of the Plan . The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable. Any such amendment or termination of the Plan shall not affect Awards already granted, and such Awards shall remain in full force and effect as if the Plan had not been amended or terminated. After the Section 162(m) Effective Date, the modification or addition of a material term of the Plan (as determined under Section 162(m) and any applicable Treasury Regulations promulgated thereunder) shall be approved by the shareholders in the manner provided in Section 19 of the Plan.

15. Conditions Upon Issuance of Shares . Shares shall not be issued with respect to an Award granted under the Plan unless the exercise of such Award and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law.

16. Reservation of Shares . During the term of this Plan the Company will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the nonissuance or sale of such Shares as to which such requisite authority shall not have been obtained.

17. Information to Participant. During the term of any Award granted under the Plan, the Company shall provide or otherwise make available to each Participant a copy of such financial information that is provided to its shareholders in accordance with the provisions of the Company’s Bylaws and applicable law.

18. Award Agreement . Awards granted under the Plan shall be evidenced by Award Agreements.

19. Shareholder Approval . The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the Plan is adopted. Any amendments to the Plan requiring shareholder approval must be approved by the affirmative vote of the holders of a majority of the outstanding shares of voting stock present or represented and entitled to vote at a duly held meeting at which a quorum is present, or by the written consent of the shareholders in the manner provided by California law.

Exhibit 10.34

2006 EQUITY INCENTIVE PLAN

NEXTEST SYSTEMS CORPORATION

1. Purpose of this Plan

The purpose of this 2006 Equity Incentive Plan is to enhance the long-term stockholder value of Nextest Systems Corporation by offering opportunities to eligible individuals to participate in the growth in value of the equity of Nextest Systems Corporation.

2. Definitions and Rules of Interpretation

2.1 Definitions.

This Plan uses the following defined terms:

(a) “Administrator” means the Board or the Committee, or any officer or employee of the Company to whom the Board or the Committee delegates authority to administer this Plan.

(b) “Affiliate” means a “parent” or “subsidiary” (as each is defined in Section 424 of the Code) of the Company and any other entity that the Board or Committee designates as an “Affiliate” for purposes of this Plan.

(c) “Applicable Law” means any and all laws of whatever jurisdiction, within or without the United States, and the rules of any stock exchange or quotation system on which Shares are listed or quoted, applicable to the taking or refraining from taking of any action under this Plan, including the administration of this Plan and the issuance or transfer of Awards or Award Shares.

(d) “Award ” means a Stock Award, SAR, Cash Award, or Option granted in accordance with the terms of this Plan.

(e) “Award Agreement” means the document evidencing the grant of an Award.

(f) “Award Shares” means Shares covered by an outstanding Award or purchased under an Award.

(g) “Awardee” means: (i) a person to whom an Award has been granted, including a holder of a Substitute Award, (ii) a person to whom an Award has been transferred in accordance with all applicable requirements of Sections 6.5, 7(h), and 17.

(h) “Board” means the Board of Directors of the Company.

(i) “Cash Award” means the right to receive cash as described in Section 8.3.

(j) “Change in Control” means any transaction or event that the Board specifies as a Change in Control under Section 10.4.

(k) “Code” means the Internal Revenue Code of 1986.

(l) “Committee ” means a committee composed of Company Directors appointed in accordance with the Company’s charter documents and Section 4.

(m) “Company” means Nextest Systems Corporation, a Delaware corporation.

(n) “Company Director” means a member of the Board.

(o) “Consultant” means an individual who, or an employee of any entity that, provides bona fide services to the Company or an Affiliate not in connection with the offer or sale of securities in a capital-raising transaction, but who is not an Employee.

(p) “Director” means a member of the Board of Directors of the Company or an Affiliate.

(q) “Divestiture” means any transaction or event that the Board specifies as a Divestiture under Section 10.5.

(r) “ Domestic Relations Order ” means a “domestic relations order” as defined in, and otherwise meeting the requirements of, Section 414(p) of the Code, except that reference to a “plan” in that definition shall be to this Plan.

(s) “ E ffective Date” means the first date of the sale by the Company of shares of its capital stock in an initial public offering pursuant to a registration statement on Form S-1 filed with the SEC.

(t) “Employee” means a regular employee of the Company or an Affiliate, including an officer or Director, who is treated as an employee in the personnel records of the Company or an Affiliate, but not individuals who are classified by the Company or an Affiliate as: (i) leased from or otherwise employed by a third party, (ii) independent contractors, or (iii) intermittent or temporary workers. The Company’s or an Affiliate’s classification of an individual as an “Employee” (or as not an “Employee”) for purposes of this Plan shall not be altered retroactively even if that classification is changed retroactively for another purpose as a result of an audit, litigation or otherwise. An Awardee shall not cease to be an Employee due to transfers between locations of the Company, or between the Company and an Affiliate, or to any successor to the Company or an Affiliate that assumes the Awardee’s Options under Section 10. Neither service as a Director nor receipt of a director’s fee shall be sufficient to make a Director an “Employee.”

(u) “Exchange Act” means the Securities Exchange Act of 1934.

(v) “Executive” means, if the Company has any class of any equity security registered under Section 12 of the Exchange Act, an individual who is subject to Section 16 of the Exchange Act or who is a “covered employee” under Section 162(m) of the Code, in either case because of the individual’s relationship with the Company or an Affiliate. If the Company does not have any class of any equity security registered under Section 12 of the Exchange Act, “Executive” means any (i) Director, (ii) officer elected or appointed by the Board, or (iii) beneficial owner of more than 10% of any class of the Company’s equity securities.

(w) “Expiration Date” means, with respect to an Award, the date stated in the Award Agreement as the expiration date of the Award or, if no such date is stated in the Award Agreement, then the last day of the maximum exercise period for the Award, disregarding the effect of an Awardee’s Termination or any other event that would shorten that period.

(x) “Fair Market Value” means the value of Shares as determined under Section 18.2.

(y) “Fundamental Transaction” means any transaction or event described in Section 10.3.

(z) “Grant Date” means the date the Administrator approves the grant of an Award. However, if the Administrator specifies that an Award’s Grant Date is a future date or the date on which a condition is satisfied, the Grant Date for such Award is that future date or the date that the condition is satisfied.

(aa) “Incentive Stock Option” means an Option intended to qualify as an incentive stock option under Section 422 of the Code and designated as an Incentive Stock Option in the Award Agreement for that Option.

(bb) “Nonstatutory Option” means any Option other than an Incentive Stock Option.

(cc) “Non-Employee Director” means any person who is a member of the Board but is not an Employee of the Company or any Affiliate of the Company and has not been an Employee of the Company or any Affiliate of the Company at any time during the preceding twelve months. Service as a Director does not in itself constitute employment for purposes of this definition.

(dd) “ Objectively Determinable Performance Condition ” shall mean a performance condition (i) that is established (A) at the time an Award is granted or (B) no later than the earlier of (1) 90 days after the beginning of the period of service to which it relates, or (2) before the elapse of 25% of the period of service to which it relates, (ii) that is uncertain of achievement at the time it is established, and (iii) the achievement of which is determinable by a third party with knowledge of the relevant facts. Examples of measures that may be used in Objectively Determinable Performance Conditions include net order dollars, net profit dollars, net profit growth, net revenue dollars, revenue growth, individual performance, earnings per share, return on assets, return on equity, and other financial objectives, objective customer satisfaction indicators and efficiency measures, each with respect to the Company and/or an Affiliate or individual business unit.

(ee) “Officer” means an officer of the Company as defined in Rule 16a-1 adopted under the Exchange Act.

(ff) “Option” means a right to purchase Shares of the Company granted under this Plan.

(gg) “Option Price” means the price payable under an Option for Shares, not including any amount payable in respect of withholding or other taxes.

(hh) “Option Shares” means Shares covered by an outstanding Option or purchased under an Option.

(ii) “Plan” means this 2006 Equity Incentive Plan of Nextest Systems Corporation.

(jj) “ Prior Plans ” means the Company’s 1998 Equity Incentive Plan.

(kk) “Purchase Price” means the price payable under a Stock Award for Shares, not including any amount payable in respect of withholding or other taxes.

(ll) “Rule 16b-3” means Rule 16b-3 adopted under Section 16(b) of the Exchange Act.

(mm) “SAR” or “Stock Appreciation Right” means a right to receive cash based on a change in the Fair Market Value of a specific number of Shares pursuant to an Award Agreement, as described in Section 8.1.

(nn) “Securities Act” means the Securities Act of 1933.

(oo) “Share” means a share of the common stock of the Company or other securities substituted for the common stock under Section 10.

(pp) “Stock Award” means an offer by the Company to sell shares subject to certain restrictions pursuant to the Award Agreement as described in Section 8.2 or, as determined by the Committee, a notional account representing the right to be paid an amount based on Shares. Types of Awards which may be granted as Stock Awards include such awards as are commonly known as restricted stock, deferred stock, restricted stock units, performance shares, phantom stock or similar types of awards as determined by the Administrator.

(qq) “Substitute Award” means a Substitute Option, Substitute SAR or Substitute Stock Award granted in accordance with the terms of this Plan.

(rr) “Substitute Option” means an Option granted in substitution for, or upon the conversion of, an option granted by another entity to purchase equity securities in the granting entity.

(ss) “Substitute SAR” means a SAR granted in substitution for, or upon the conversion of, a stock appreciation right granted by another entity with respect to equity securities in the granting entity.

(tt) “Substitute Stock Award” means a Stock Award granted in substitution for, or upon the conversion of, a stock award granted by another entity to purchase equity securities in the granting entity.

(uu) “Termination” means that the Awardee has ceased to be, with or without any cause or reason, an Employee, Director or Consultant. However, unless so determined by the Administrator, or otherwise provided in this Plan, “Termination” shall not include a change in status from an Employee, Consultant or Director to another such status. An event that causes an Affiliate to cease being an Affiliate shall be treated as the “Termination” of that Affiliate’s Employees, Directors, and Consultants.

2.2 Rules of Interpretation. Any reference to a “Section,” without more, is to a Section of this Plan. Captions and titles are used for convenience in this Plan and shall not, by themselves, determine the meaning of this Plan. Except when otherwise indicated by the context, the singular includes the plural and vice versa. Any reference to a statute is also a reference to the applicable rules and regulations adopted under that statute. Any reference to a statute, rule or regulation, or to a section of a statute, rule or regulation, is a reference to that statute, rule, regulation, or section as amended from time to time, both before and after the Effective Date and including any successor provisions.

3. Shares Subject to this Plan; Term of this Plan

3.1 Number of Award Shares. The Shares issuable under this Plan shall be authorized but unissued or reacquired Shares, including Shares repurchased by the Company on the open market. The number of Shares initially reserved for issuance over the term of this Plan shall be 1,000,000. Notwithstanding the foregoing, the number of Shares reserved for issuance under the Plan shall be increased by (i) the number of Shares available for issuance, as of the Effective Date, under the Prior Plans as last approved by the Company’s stockholders, (ii) those Shares issued under the Prior Plans that are forfeited or repurchased by the Company or that are issuable upon exercise of awards granted pursuant to the Prior Plans that expire or become unexercisable for any reason without having been exercised in full after the Effective Date and (iii) any Shares withheld on a net basis to pay either the exercise price or withholding obligation. The maximum number of Shares shall be cumulatively increased on the first January 1 after the Effective Date and each January 1 thereafter for nine more years, by a number of Shares equal to the lesser of (a) the number of Shares required to replenish the remaining pool to one million shares, or (b) if specifically addressed by the Board, a number of Shares set by the Board. When an Award is granted, the maximum number of Shares that may be issued under this Plan shall be reduced by the number of Shares covered by that Award or estimated by the Board to be issued under the Award. However, if an Award later terminates or expires without having been exercised in full, the maximum number of Shares that may be issued under this Plan shall be increased by the number of Shares that were covered by, but not purchased under, that Award.

3.2 Source of Shares. Award Shares may be: (a) Shares that have never been issued, (b) Shares that have been issued but are no longer outstanding, or (c) Shares that are outstanding and are acquired to discharge the Company’s obligation to deliver Award Shares.

3.3 Term of this Plan

(a) This Plan shall be effective on, and Awards may be granted under this Plan on and after, the earliest the date on which the Plan has been both adopted by the Board and approved by the Company’s stockholders. Upon effectiveness of this Plan, no additional awards will be made under the Prior Plans.

(b) Subject to the provisions of Section 14, Awards may be granted under this Plan for a period of ten years from the earlier of the date on which the Board approves this Plan and the date the Company’s stockholders approve this Plan. Accordingly, Awards may not be granted under this Plan after the 10th anniversary of the date determined in the preceding sentence.

4. Administration

4.1 General

(a) The Board shall have ultimate responsibility for administering this Plan. To the extent permitted by Applicable Law, the Board may delegate certain of its responsibilities to a Committee, which shall consist of at least two members of the Board. In addition, to the extent permitted by Applicable Law, the Board or the Committee may further delegate its responsibilities to any Employee of the Company or any Affiliate. Where this Plan specifies that an action is to be taken or a determination made by the Board, only the Board may take that action or make that determination. Where this Plan specifies that an action is to be taken or a determination made by the Committee, only the Committee may take that action or make that determination. Where this Plan references the “Administrator,” the action may be taken or determination made by the Board, the Committee, or other Administrator. However, only the Board or the Committee may approve grants of Awards to Executives, and an Administrator other than the Board or the Committee may grant Awards only within the guidelines established by the Board or Committee. Moreover, all actions and determinations by any Administrator are subject to the provisions of this Plan.

(b) So long as the Company has registered and outstanding a class of equity securities under Section 12 of the Exchange Act and to the extent necessary or helpful to comply with Applicable Law with respect to officers and directors subject to Section 16 of the Exchange Act and/or others, the Committee shall consist of Company Directors who are “Non-Employee Directors” as defined in Rule 16b-3 and, after the expiration of any transition period permitted by Treasury Regulations Section 1.162-27(h)(3), who are “outside directors” as defined in Section 162(m) of the Code.

4.2 Authority of the Board or the Committee. Subject to the other provisions of this Plan, the Board or the Committee shall have the authority to:

(a) grant Awards, including Substitute Awards;

(b) determine the Fair Market Value of Shares;

(d) select the Awardees;

(e) determine the times Awards are granted;

(f) determine the number of Shares subject to each Award;

(g) determine the methods of payment that may be used to purchase Award Shares;

(h) determine the methods of payment that may be used to satisfy withholding tax obligations;

(i) determine the other terms of each Award, including but not limited to the time or times at which Awards may be exercised, whether and under what conditions an Award is assignable, and whether an Option is a Nonstatutory Option or an Incentive Stock Option;

(j) modify or amend any Award;

(k) authorize any person to sign any Award Agreement or other document related to this Plan on behalf of the Company;

(l) determine the form of any Award Agreement or other document related to this Plan, and whether that document, including signatures, may be in electronic form;

(m) interpret this Plan and any Award Agreement or document related to this Plan;

(n) correct any defect, remedy any omission, or reconcile any inconsistency in this Plan, any Award Agreement or any other document related to this Plan;

(o) adopt, amend, and revoke rules and regulations under this Plan, including rules and regulations relating to sub-plans and Plan addenda;

(p) adopt, amend, and revoke special rules and procedures which may be inconsistent with the terms of this Plan, set forth (if the Administrator so chooses) in sub-plans regarding (for example) the operation and administration of this Plan and the terms of Awards, if and to the extent necessary or useful to accommodate non-U.S. Applicable Laws and practices as they apply to Awards and Award Shares held by, or granted or issued to, persons working or resident outside of the United States or employed by Affiliates incorporated outside the United States;

(q) determine whether a transaction or event should be treated as a Change in Control, a Divestiture or neither;

(r) determine the effect of a Fundamental Transaction and, if the Board determines that a transaction or event should be treated as a Change in Control or a Divestiture, then the effect of that Change in Control or Divestiture; and

(s) make all other determinations the Administrator deems necessary or advisable for the administration of this Plan.

4.3 Scope of Discretion. Subject to the provisions of this Section 4.3, on all matters for which this Plan confers the authority, right or power on the Board, the Committee, or other Administrator to make decisions, that body may make those decisions in its sole and absolute discretion. Those

decisions will be final, binding and conclusive. In making its decisions, the Board, Committee or other Administrator need not treat all persons eligible to receive Awards, all Awardees, all Awards or all Award Shares the same way. Notwithstanding anything herein to the contrary, and except as provided in Section 14.3, the discretion of the Board, Committee or other Administrator is subject to the specific provisions and specific limitations of this Plan, as well as all rights conferred on specific Awardees by Award Agreements and other agreements.

5. Persons Eligible to Receive Awards

5.1 Eligible Individuals. Awards (including Substitute Awards) may be granted to, and only to, Employees, Directors and Consultants, including to prospective Employees, Directors and Consultants conditioned on the beginning of their service for the Company or an Affiliate. However, Incentive Stock Options may only be granted to Employees, as provided in Section 7(g).

5.2 Section 162(m) Limitation.

(a) Options and SARs. Subject to the provisions of this Section 5.2, for so long as the Company is a “publicly held corporation” within the meaning of Section 162(m) of the Code: (i) no Employee may be granted one or more SARs and Options within any fiscal year of the Company under this Plan to purchase more than 1,500,000 Shares under Options or to receive compensation calculated with reference to more than that number of Shares under SARs, subject to adjustment pursuant to Section 10, (ii) Options and SARs may be granted to an Executive only by the Committee (and, notwithstanding anything to the contrary in Section 4.1(a), not by the Board). If an Option or SAR is cancelled without being exercised or if the Option Price of an Option is reduced, that cancelled or repriced Option or SAR shall continue to be counted against the limit on Awards that may be granted to any individual under this Section 5.2.

(b) Cash Awards and Stock Awards. Any Cash Award or Stock Award intended as “qualified performance-based compensation” within the meaning of Section 162(m) of the Code must vest or become exercisable contingent on the achievement of one or more Objectively Determinable Performance Conditions. The Committee shall have the discretion to determine the time and manner of compliance with Section 162(m) of the Code.

6. Terms and Conditions of Options

The following rules apply to all Options:

6.1 Price. Except as specifically permitted by the Committee, after taking into account the accounting, disclosure and other ramifications, including the restrictions applicable to discounted stock options under Code Section 409A, no Option may have an Option Price less than 100% of the Fair Market Value of the Shares on the Grant Date. In no event will the Option Price of any Option be less than the par value of the Shares issuable under the Option if that is required by Applicable Law. The Option Price of an Incentive Stock Option shall be subject to Section 7(f).

6.2 Term. No Option shall be exercisable after its Expiration Date. No Option may have an Expiration Date that is more than ten years after its Grant Date. Additional provisions regarding the term of Incentive Stock Options are provided in Sections 7(a) and 7(e).

6.3 Vesting. Options shall be exercisable: (a) on the Grant Date, or (b) in accordance with a schedule related to the Grant Date, the date the Awardee’s directorship, employment or consultancy begins, or a different date specified in the Award Agreement. Additional provisions regarding the vesting of Incentive Stock Options are provided in Section 7(c). No Option granted to an individual who is subject to the overtime pay provisions of the Fair Labor Standards Act may be exercised before the expiration of six months after the Grant Date.

6.4 Form and Method of Payment.

(a) The Board or Committee shall determine the acceptable form and method of payment for exercising an Option. So long as variable accounting pursuant to “APB 25” does not apply and the Board or Committee otherwise determines there is no material adverse accounting

consequence at the time of exercise, the Board or Committee may require the delivery in Shares for the value of the net appreciation of the Shares at the time of exercise over the exercise price. The difference between the full number of Shares covered by the exercised portion of the Award and the number of Shares actually delivered shall be restored to the amount of Shares reserved for issuance under Section 3.1.

(b) Acceptable forms of payment for all Option Shares are cash, check or wire transfer, denominated in U.S. dollars except as specified by the Administrator for non-U.S. Employees or non-U.S. sub-plans.

(i) other Shares, or the designation of other Shares, which (A) if required to avoid variable accounting or other adverse accounting consequences are “mature” shares for such purposes (generally mature shares are those that have been owned by the Awardee for more than six months on the date of surrender), and (B) have a Fair Market Value on the date of surrender equal to the Option Price of the Shares as to which the Option is being exercised;

(ii) provided that a public market exists for the Shares and only as permitted under Applicable Law, consideration received by the Company under a procedure under which a licensed broker-dealer advances funds on behalf of an Awardee or sells Option Shares on behalf of an Awardee (a “ Cashless Exercise Procedure ”), provided that if the Company extends or arranges for the extension of credit to an Awardee under any Cashless Exercise Procedure, no Officer or Director may participate in that Cashless Exercise Procedure;

(iii) cancellation of any debt owed by the Company or any Affiliate to the Awardee by the Company including without limitation waiver of compensation due or accrued for services previously rendered to the Company; and

(iv) any combination of the methods of payment permitted by any paragraph of this Section 6.4.

(d) The Administrator may also permit any other form or method of payment for Option Shares permitted by Applicable Law.

6.5 Nonassignability of Options. Except as determined by the Administrator, no Option shall be assignable or otherwise transferable by the Awardee except by will or by the laws of descent and distribution. However, Options may be transferred and exercised in accordance with a Domestic Relations Order and may be exercised by a guardian or conservator appointed to act for the Awardee. Incentive Stock Options may only be assigned in compliance with Section 7(h).

6.6 Substitute Options. The Board may cause the Company to grant Substitute Options in connection with the acquisition by the Company or an Affiliate of equity securities of any entity (including by merger, tender offer, or other similar transaction) or of all or a portion of the assets of any entity. Any such substitution shall be effective on the effective date of the acquisition. Substitute Options may be Nonstatutory Options or Incentive Stock Options. Unless and to the extent specified otherwise by the Board, Substitute Options shall have the same terms and conditions as the options they replace, except that (subject to the provisions of Section 10) Substitute Options shall be Options to purchase Shares rather than equity securities of the granting entity, shall have an Option Price determined by the Board and shall be on terms that, as determined by the Board in its sole and absolute discretion, properly reflect the substitution.

6.7 Repricings. In furtherance of, and not in limitation of the provisions of Section 10, Options may not be repriced, replaced or regranted through cancellation or modification without approval of the stockholders.

7. Incentive Stock Options.

The following rules apply only to Incentive Stock Options and only to the extent these rules are more restrictive than the rules that would otherwise apply under this Plan. With the consent of the Awardee, or where this Plan provides that an action may be taken notwithstanding any other provision of this Plan, the Administrator may deviate from the requirements of this Section, notwithstanding that any Incentive Stock Option modified by the Administrator will thereafter be treated as a Nonstatutory Option.

(a) The Expiration Date of an Incentive Stock Option shall not be later than ten years from its Grant Date, with the result that no Incentive Stock Option may be exercised after the expiration of ten years from its Grant Date.

(b) No Incentive Stock Option may be granted more than ten years from the date this Plan was approved by the Board.

(c) Options intended to be incentive stock options under Section 422 of the Code that are granted to any single Awardee under all incentive stock option plans of the Company and its Affiliates, including incentive stock options granted under this Plan, may not vest at a rate of more than $100,000 in Fair Market Value of stock (measured on the grant dates of the options) during any calendar year. For this purpose, an option vests with respect to a given share of stock the first time its holder may purchase that share, notwithstanding any right of the Company to repurchase that share. Unless the administrator of that option plan specifies otherwise in the related agreement governing the option, this vesting limitation shall be applied by, to the extent necessary to satisfy this $ 100,000 rule, treating certain stock options that were intended to be incentive stock options under Section 422 of the Code as Nonstatutory Options. The stock options or portions of stock options to be reclassified as Nonstatutory Options are those with the highest option prices, whether granted under this Plan or any other equity compensation plan of the Company or any Affiliate that permits that treatment. This Section 7(c) shall not cause an Incentive Stock Option to vest before its original vesting date or cause an Incentive Stock Option that has already vested to cease to be vested.

(d) In order for an Incentive Stock Option to be exercised for any form of payment other than those described in Section 6.4(b), that right must be stated at the time of grant in the Award Agreement relating to that Incentive Stock Option.

(e) Any Incentive Stock Option granted to a Ten Percent Stockholder, must have an Expiration Date that is not later than five years from its Grant Date, with the result that no such Option may be exercised after the expiration of five years from the Grant Date. A “ Ten Percent Stockholder ” is any person who, directly or by attribution under Section 424(d) of the Code, owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or of any Affiliate on the Grant Date.

(f) The Option Price of an Incentive Stock Option shall never be less than the Fair Market Value of the Shares at the Grant Date. The Option Price for the Shares covered by an Incentive Stock Option granted to a Ten Percent Stockholder shall never be less than 110% of the Fair Market Value of the Shares at the Grant Date.

(g) Incentive Stock Options may be granted only to Employees. If an Awardee changes status from an Employee to a Consultant, that Awardee’s Incentive Stock Options become Nonstatutory Options if not exercised within the time period described in Section 7(i) (determined by treating that change in status as a Termination solely for purposes of this Section 7(g)).

(h) No rights under an Incentive Stock Option may be transferred by the Awardee, other than by will or the laws of descent and distribution. During the life of the Awardee, an Incentive Stock Option may be exercised only by the Optionee. The Company’s compliance with a Domestic Relations Order, or the exercise of an Incentive Stock Option by a guardian or conservator appointed to act for the Awardee, shall not violate this Section 7(h).

(i) An Incentive Stock Option shall be treated as a Nonstatutory Option if it remains exercisable after, and is not exercised within, the three-month period beginning with the

Awardee’s Termination for any reason other than the Awardee’s death or disability (as defined in Section 22(e) of the Code). In the case of Termination due to death, an Incentive Stock Option shall continue to be treated as an Incentive Stock Option if it remains exercisable after, and is not exercised within, the three-month period after the Awardee’s Termination provided it is exercised before the Expiration Date. In the case of Termination due to disability, an Incentive Stock Option shall be treated as a Nonstatutory Option if it remains exercisable after, and is not exercised within, one year after the Awardee’s Termination.

(j) An Incentive Stock Option may only be modified by the Board.

8. Stock Appreciation Rights, Stock Awards and Cash Awards

8.1 Stock Appreciation Rights. The following rules apply to SARs:

(a) General. SARs may be granted either alone, in addition to, or in tandem with other Awards granted under this Plan. The Administrator may grant SARs to eligible participants subject to terms and conditions not inconsistent with this Plan and determined by the Administrator. The specific terms and conditions applicable to the Awardee shall be provided for in the Award Agreement. SARs shall be exercisable, in whole or in part, at such times as the Administrator shall specify in the Award Agreement. The grant or vesting of a SAR may be made contingent on the achievement of Objectively Determinable Performance Conditions.

(b) Exercise of SARs. Upon the exercise of a SAR, in whole or in part, an Awardee shall be entitled to a payment in an amount equal to the excess of the Fair Market Value of a fixed number of Shares covered by the exercised portion of the SAR on the date of exercise, over the Fair Market Value of the Shares covered by the exercised portion of the SAR on the Grant Date. The amount due to the Awardee upon the exercise of a SAR shall be paid in cash, Shares or a combination thereof, over the period or periods specified in the Award Agreement. An Award Agreement may place limits on the amount that may be paid over any specified period or periods upon the exercise of a SAR, on an aggregate basis or as to any Awardee. A SAR shall be considered exercised when the Company receives written notice of exercise in accordance with the terms of the Award Agreement from the person entitled to exercise the SAR. If a SAR has been granted in tandem with an Option, upon the exercise of the SAR, the number of shares that may be purchased pursuant to the Option shall be reduced by the number of shares with respect to which the SAR is exercised.

(c) Nonassignability of SARs. Except as determined by the Administrator, no SAR shall be assignable or otherwise transferable by the Awardee except by will or by the laws of descent and distribution. Notwithstanding anything herein to the contrary, SARs may be transferred and exercised in accordance with a Domestic Relations Order.

(d) Substitute SARs. The Board may cause the Company to grant Substitute SARs in connection with the acquisition by the Company or an Affiliate of equity securities of any entity (including by merger) or all or a portion of the assets of any entity. Any such substitution shall be effective on the effective date of the acquisition. Unless and to the extent specified otherwise by the Board, Substitute SARs shall have the same terms and conditions as the SARS they replace, except that (subject to the provisions of Section 9) Substitute SARs shall be exercisable with respect to the Fair Market Value of Shares rather than equity securities of the granting entity and shall be on terms that, as determined by the Board in its sole and absolute discretion, properly reflects the substitution.

(e) Repricings. A SAR may not be repriced, replaced or regranted, through cancellation or modification without the approval of the stockholders.

8.2 Stock Awards. The following rules apply to all Stock Awards:

(a) General. The specific terms and conditions of a Stock Award applicable to the Awardee shall be provided for in the Award Agreement. The Award Agreement shall state the number of Shares that the Awardee shall be entitled to receive or purchase, the terms and conditions on which the Shares shall vest, the price, if any, to be paid, whether Shares are to be

delivered at the time of grant or at some deferred date specified in the Award Agreement, whether the Award is payable solely in Shares, cash or either and, if applicable, the time within which the Awardee must accept such offer.

The offer shall be accepted by execution of the Award Agreement. The Administrator may require that all Shares subject to a right of repurchase or risk of forfeiture be held in escrow until such repurchase right or risk of forfeiture lapses. The grant or vesting of a Stock Award may be made contingent on the achievement of Objectively Determinable Performance Conditions.

(b) Right of Repurchase. If so provided in the Award Agreement, Award Shares acquired pursuant to a Stock Award may be subject to repurchase by the Company or an Affiliate if not vested in accordance with the Award Agreement.

(c) Form of Payment. The Administrator shall determine the acceptable form and method of payment for exercising a Stock Award. Acceptable forms of payment for all Award Shares are cash, check or wire transfer, denominated in U.S. dollars except as specified by the Administrator for non-U.S. sub-plans. In addition, the Administrator may permit payment to be made by any of the methods permitted with respect to the exercise of Options pursuant to Section 6.4.

(d) Nonassignability of Stock Awards . Except as determined by the Administrator, no Stock Award shall be assignable or otherwise transferable by the Awardee except by will or by the laws of descent and distribution. Notwithstanding anything to the contrary herein, Stock Awards may be transferred and exercised in accordance with a Domestic Relations Order.

(e) Substitute Stock Award. The Board may cause the Company to grant Substitute Stock Awards in connection with the acquisition by the Company or an Affiliate of equity securities of any entity (including by merger) or all or a portion of the assets of any entity. Unless and to the extent specified otherwise by the Board, Substitute Stock Awards shall have the same terms and conditions as the stock awards they replace, except that (subject to the provisions of Section 10) Substitute Stock Awards shall be Stock Awards to purchase Shares rather than equity securities of the granting entity and shall have a Purchase Price and other terms that, as determined by the Board in its sole and absolute discretion, properly reflects the substitution. Any such Substitute Stock Award shall be effective on the effective date of the acquisition.

8.3 Cash Awards. Cash Awards may be granted either alone, in addition to, or in tandem with other Awards granted under this Plan. After the Administrator determines that it will offer a Cash Award, it shall advise the Awardee, by means of an Award Agreement, of the terms, conditions and restrictions related to the Cash Award. The grant or vesting of a Cash Award may be made contingent on the achievement of Objectively Determinable Performance Conditions.

9. Exercise of Awards

9.1 In General. An Award shall be exercisable in accordance with this Plan and the Award Agreement under which it is granted.

9.2 Time of Exercise. Options and Stock Awards shall be considered exercised when the Company receives: (a) written notice of exercise from the person entitled to exercise the Option or Stock Award, (b) full payment, or provision for payment, in a form and method approved by the Administrator, for the Shares for which the Option or Stock Award is being exercised, and (c) with respect to Nonstatutory Options, payment, or provision for payment, in a form approved by the Administrator, of all applicable withholding taxes due upon exercise. An Award may not be exercised for a fraction of a Share. SARs shall be considered exercised when the Company receives written notice (in a form approved by the Administrator) of the exercise from the person entitled to exercise the SAR.

9.3 Issuance of Award Shares. The Company shall issue Award Shares in the name of the person properly exercising the Award. If the Awardee is that person and so requests, the Award Shares shall be issued in the name of the Awardee and the Awardee’s spouse. The Company shall

endeavor to issue Award Shares promptly after an Award is exercised or after the Grant Date of a Stock Award, as applicable. Until Award Shares are actually issued, as evidenced by the appropriate entry on the stock register of the Company or its transfer agent, the Awardee will not have the rights of a stockholder with respect to those Award Shares, even though the Awardee has completed all the steps necessary to exercise the Award. No adjustment shall be made for any dividend, distribution, or other right for which the record date precedes the date the Award Shares are issued, except as provided in Section 10.

9.4 Termination

(a) In General. Except as provided in an Award Agreement or in writing by the Administrator, including in an Award Agreement, and as otherwise provided in Sections 9.4(b), (c), (d) and (e) after an Awardee’s Termination, the Awardee’s Awards shall be exercisable to the extent (but only to the extent) they are vested and exercisable on the date of that Termination and only during the 30 days after the Termination, but in no event after the Expiration Date. To the extent the Awardee does not exercise an Award within the time specified for exercise, the Award shall automatically terminate.

(b) Leaves of Absence. Unless otherwise provided in the Award Agreement, no Award may be exercised more than three months after the beginning of a leave of absence, other than a personal or medical leave approved by the Administrator. Awards shall not continue to vest during a leave of absence, unless otherwise determined by the Administrator with respect to an approved personal or medical leave with employment guaranteed upon return.

(c) Death or Disability. Unless otherwise provided by the Administrator, if an Awardee’s Termination is due to death or disability (as determined by the Administrator with respect to all Awards other than Incentive Stock Options and as defined by Section 22(e) of the Code with respect to Incentive Stock Options), all Awards of that Awardee to the extent vested and exercisable at the date of that Termination may be exercised for six months after that Termination, but in no event after the Expiration Date. In the case of Termination due to death, an Award may be exercised as provided in Section 17. In the case of Termination due to disability, if a guardian or conservator has been appointed to act for the Awardee and been granted this authority as part of that appointment, that guardian or conservator may exercise the Award on behalf of the Awardee. Death or disability occurring after an Awardee’s Termination shall not cause the Termination to be treated as having occurred due to death or disability. To the extent an Award is not so exercised within the time specified for its exercise, the Award shall automatically terminate.

(d) Divestiture. If an Awardee’s Termination is due to a Divestiture, the Board may take any one or more of the actions described in Section 10.3 or 10.4 with respect to the Awardee’s Awards.

(e) Administrator Discretion. Notwithstanding the provisions of Section 9.4 (a)-(e), the Plan Administrator shall have complete discretion, exercisable either at the time an Award is granted or at any time while the Award remains outstanding, to:

(i) Extend the period of time for which the Award is to remain exercisable, following the Awardee’s Termination, from the limited exercise period otherwise in effect for that Award to such greater period of time as the Administrator shall deem appropriate, but in no event beyond the Expiration Date; and/or

(ii) Permit the Award to be exercised, during the applicable post-Termination exercise period, not only with respect to the number of vested Shares for which such Award may be exercisable at the time of the Awardee’s Termination but also with respect to one or more additional installments in which the Awardee would have vested had the Awardee not been subject to Termination.

(f) Consulting or Employment Relationship. Nothing in this Plan or in any Award Agreement, and no Award or the fact that Award Shares remain subject to repurchase rights, shall: (A) interfere with or limit the right of the Company or any Affiliate to terminate the

employment or consultancy of any Awardee at any time, whether with or without cause or reason, and with or without the payment of severance or any other compensation or payment, or (B) interfere with the application of any provision in any of the Company’s or any Affiliate’s charter documents or Applicable Law relating to the election, appointment, term of office, or removal of a Director.

10.	Certain Transactions and Events

10.1 In General. Except as provided in this Section 10, no change in the capital structure of the Company, merger, sale or other disposition of assets or a subsidiary, change in control, issuance by the Company of shares of any class of securities or securities convertible into shares of any class of securities, exchange or conversion of securities, or other transaction or event shall require or be the occasion for any adjustments of the type described in this Section 10. Additional provisions with respect to the foregoing transactions are set forth in Section 14.3.

10.2 Changes in Capital Structure. In the event of any stock split, reverse stock split, recapitalization, combination or reclassification of stock, stock dividend, spin-off, or similar change to the capital structure of the Company (not including a Fundamental Transaction or Change in Control), the Board shall make whatever adjustments it concludes are appropriate to: (a) the number and type of Awards that may be granted under this Plan, (b) the number and type of Options that may be granted to any individual under this Plan, (c) the terms of any SAR, (d) the Purchase Price of any Stock Award, (e) the Option Price and number and class of securities issuable under each outstanding Option, and (f) the repurchase price of any securities substituted for Award Shares that are subject to repurchase rights. The specific adjustments shall be determined by the Board. Unless the Board specifies otherwise, any securities issuable as a result of any such adjustment shall be rounded down to the next lower whole security. The Board need not adopt the same rules for each Award or each Awardee.

10.3 Fundamental Transactions. Except for grants to Non-Employee Directors pursuant to Section 11 herein, in the event of (a) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor corporation, which assumption shall be binding on all participants), (b) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, (c) the sale of all or substantially all of the assets of the Company, or (d) the acquisition, sale, or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction (each, a “ Fundamental Transaction ”), any or all outstanding Awards may be assumed, converted or replaced by the successor corporation (if any), which assumption, conversion or replacement shall be binding on all participants under this Plan. In the alternative, the successor corporation may substitute equivalent Awards or provide substantially similar consideration to participants as was provided to stockholders (after taking into account the existing provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares held by the participants, substantially similar shares or other property subject to repurchase restrictions no less favorable to the participant. In the event such successor corporation (if any) does not assume or substitute Awards, as provided above, pursuant to a transaction described in this Subsection 10.3, the vesting with respect to such Awards shall fully and immediately accelerate or the repurchase rights of the Company shall fully and immediately terminate, as the case may be, so that the Awards may be exercised or the repurchase rights shall terminate before, or otherwise in connection with the closing or completion of the Fundamental Transaction or event, but then terminate. Notwithstanding anything in this Plan to the contrary, the Committee may, in its sole discretion, provide that the vesting of any or all Award Shares subject to vesting or right of repurchase shall accelerate or lapse, as the case may be, upon a transaction described in this Section 10.3. If the Committee exercises such discretion with respect to

Options, such Options shall become exercisable in full prior to the consummation of such event at such time and on such conditions as the Committee determines, and if such Options are not exercised prior to the consummation of the Fundamental Transaction, they shall terminate at such time as determined by the Committee. Subject to any greater rights granted to participants under the foregoing provisions of this Section 10.3, in the event of the occurrence of any Fundamental Transaction, any outstanding Awards shall be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, or sale of assets.

10.4 Changes of Control. The Board may also, but need not, specify that other transactions or events constitute a “ Change in Control ”. The Board may do that either before or after the transaction or event occurs. Examples of transactions or events that the Board may treat as Changes of Control are: (a) any person or entity, including a “group” as contemplated by Section 13(d)(3) of the Exchange Act, acquires securities holding 30% or more of the total combined voting power or value of the Company, or (b) as a result of or in connection with a contested election of Company Directors, the persons who were Company Directors immediately before the election cease to constitute a majority of the Board. In connection with a Change in Control, notwithstanding any other provision of this Plan, the Board may, but need not, take any one or more of the actions described in Section 10.3. In addition, the Board may extend the date for the exercise of Awards (but not beyond their original Expiration Date). The Board need not adopt the same rules for each Award or each Awardee.

10.5 Divestiture. If the Company or an Affiliate sells or otherwise transfers equity securities of an Affiliate to a person or entity other than the Company or an Affiliate, or leases, exchanges or transfers all or any portion of its assets to such a person or entity, then the Board may specify that such transaction or event constitutes a “ Divestiture ”. In connection with a Divestiture, notwithstanding any other provision of this Plan, the Board may, but need not, take one or more of the actions described in Section 10.3 or 10.4 with respect to Awards of Award Shares held by, for example, Employees, Directors or Consultants for whom that transaction or event results in a Termination. The Board need not adopt the same rules for each Award or Awardee.

10.6 Dissolution. If the Company adopts a plan of dissolution, the Board may cause Awards to be fully vested and exercisable (but not after their Expiration Date) before the dissolution is completed but contingent on its completion and may cause the Company’s repurchase rights on Award Shares to lapse upon completion of the dissolution. The Board need not adopt the same rules for each Award or each Awardee. Notwithstanding anything herein to the contrary, in the event of a dissolution of the Company, to the extent not exercised before the earlier of the completion of the dissolution or their Expiration Date, Awards shall terminate immediately prior to the dissolution.

11. Automatic Option Grants to Non-Employee Directors

11.1 Automatic Option Grants to Non-Employee Directors

(a) Grant Dates. Option grants to Non-Employee Directors shall be made on the dates specified below:

(i) Each Non-Employee Director who is first elected or appointed to the Board at any time after the effective date of this Plan shall automatically be granted, on the date of such initial election or appointment, an Option to purchase 10,000 Shares (the “ Initial Grant ”).

(ii) Commencing in 2007, on the date of each annual stockholders meeting, each individual who is to continue to serve as a Non-Employee Director shall automatically be granted an Option to purchase 5,000 Shares (the “ Annual Grant ”).

(b) Exercise Price.

(i) The Option Price shall be equal to one hundred percent (100%) of the Fair Market Value of the Shares on the Option grant date.

(ii) The Option Price shall be payable in one or more of the alternative forms authorized pursuant to Section 6.4. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the Option Price must be made on the date of exercise.

(d) Exercise and Vesting of Options. Except as otherwise determined by the whole Board, the Shares underlying each Option granted pursuant to Section 11.1 shall vest and be exercisable as set forth below.

(i) Initial Grant. The Shares underlying each Option issued pursuant to the Initial Grant shall vest and be exercisable as to 25% of the Shares at the end of each full succeeding year from the date of grant, rounded down to the nearest whole Share, for so long as the Non-Employee Director continuously remains a Director of, or a Consultant to, the Company.

(ii) Annual Grant. The Shares underlying each Option issued pursuant to the Annual Grant shall vest and be exercisable as to 100% of the Shares at the earlier of (i) the first anniversary of the date of grant and (ii) the date immediately preceding the date of the annual stockholders meeting for the year following the year of grant of the Option, so long as the Non-Employee Director continuously remains a Director of, or a Consultant to, the Company through such date.

(e) Termination of Service. The following provisions shall govern the exercise of any Options held by the Awardee at the time the Awardee ceases to serve as a Non-Employee Director, Employee or Consultant:

(i) In General. Except as otherwise provided in Section 10.3, after cessation of service (the “ Cessation Date ”), the Awardee’s Options shall be exercisable to the extent (but only to the extent) they are vested on the Cessation Date and only during the 30 days after such Cessation Date, but in no event after the Expiration Date. To the extent the Awardee does not exercise an Option within the time specified for exercise, the Option shall automatically terminate.

(ii) Death or Disability. If an Awardee’s cessation of service is due to death or disability (as determined by the Board), all Options of that Awardee, to the extent exercisable upon such Cessation Date, may be exercised for one year after the Cessation Date, but in no event after the Expiration Date. In the case of a cessation of service due to death, an Option may be exercised as provided in Section 16. In the case of a cessation of service due to disability, if a guardian or conservator has been appointed to act for the Awardee and been granted this authority as part of that appointment, that guardian or conservator may exercise the Option on behalf of the Awardee. Death or disability occurring after an Awardee’s cessation of service shall not cause the cessation of service to be treated as having occurred due to death or disability. To the extent an Option is not so exercised within the time specified for its exercise, the Option shall automatically terminate.

(f) Board Discretion. The Awards under this Section 11.1 are not intended as the exclusive Awards that may be made to Non-Employee Directors under this Plan. The Board may, in its discretion, amend the Plan with respect to the terms of the Awards herein, may add or substitute other types of Awards or may temporarily or permanently suspend Awards hereunder, all without approval of the Company’s stockholders.

11.2 Certain Transactions and Events

(a) In the event of a Fundamental Transaction while the Awardee remains a Non-Employee Director, the Shares at the time subject to each outstanding Option held by such Awardee pursuant to Section 11, but not otherwise vested, shall automatically vest in full so that each such Option shall, immediately prior to the effective date of the Fundamental Transaction, become exercisable for all the Shares as fully vested Shares and may be exercised for any or all

of those vested Shares. Immediately following the consummation of the Fundamental Transaction, each Option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or Affiliate thereof).

(b) In the event of a Change in Control while the Awardee remains a Non-Employee Director, the Shares at the time subject to each outstanding Option held by such Awardee pursuant to Section 11, but not otherwise vested, shall automatically vest in full so that each such Option shall, immediately prior to the effective date of the Change in Control, become exercisable for all the Shares as fully vested Shares and may be exercised for any or all of those vested Shares. Each such Option shall remain exercisable for such fully vested Shares until the expiration or sooner termination of the Option term in connection with a Change in Control.

(c) Each Option which is assumed in connection with a Fundamental Transaction shall be appropriately adjusted, immediately after such Fundamental Transaction, to apply to the number and class of securities which would have been issuable to the Awardee in consummation of such Fundamental Transaction had the Option been exercised immediately prior to such Fundamental Transaction. Appropriate adjustments shall also be made to the Option Price payable per share under each outstanding Option, provided the aggregate Option Price payable for such securities shall remain the same. To the extent the actual holders of the Company’s outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Fundamental Transaction, the successor corporation may, in connection with the assumption of the outstanding Options granted pursuant to Section 11, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Fundamental Transaction.

(d) The grant of Options pursuant to Section 11 shall in no way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

(e) The remaining terms of each Option granted pursuant to Section 11 shall, as applicable, be the same as terms in effect for Awards granted under this Plan. Notwithstanding the foregoing, the provisions of Section 9.4 and Section 10 shall not apply to Options granted pursuant to Section 11.

11.3 Limited Transferability of Options. Each Option granted pursuant to Section 11 may be assigned in whole or in part during the Awardee’s lifetime to one or more members of the Awardee’s family or to a trust established exclusively for one or more such family members or to an entity in which the Awardee is majority owner or to the Awardee’s former spouse, to the extent such assignment is in connection with the Awardee’s estate or financial plan or pursuant to a Domestic Relations Order. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the Option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the Option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Administrator may deem appropriate. The Awardee may also designate one or more persons as the beneficiary or beneficiaries of his or her outstanding Options under Section 11, and those Options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Awardee’s death while holding those Options. Such beneficiary or beneficiaries shall take the transferred Options subject to all the terms and conditions of the applicable Award Agreement evidencing each such transferred Option, including (without limitation) the limited time period during which the Option may be exercised following the Awardee’s death.

12. Withholding and Tax Reporting

12.1 Tax Withholding Alternatives

(a) General. Whenever Award Shares are issued or become free of restrictions, the Company may require the Awardee to remit to the Company an amount sufficient to satisfy any

applicable tax withholding requirement, whether the related tax is imposed on the Awardee or the Company. The Company shall have no obligation to deliver Award Shares or release Award Shares from an escrow or permit a transfer of Award Shares until the Awardee has satisfied those tax withholding obligations. Whenever payment in satisfaction of Awards is made in cash, the payment will be reduced by an amount sufficient to satisfy all tax withholding requirements.

(b) Method of Payment. The Awardee shall pay any required withholding using the forms of consideration described in Section 6.4(b), except that, in the discretion of the Administrator, the Company may also permit the Awardee to use any of the forms of payment described in Section 6.4(c). The Administrator, in its sole discretion, may also permit Award Shares to be withheld to pay required withholding. If the Administrator permits Award Shares to be withheld, the Fair Market Value of the Award Shares withheld, as determined as of the date of withholding, shall not exceed the amount determined by the applicable minimum statutory withholding rates to the extent the Administrator determines such limit is necessary or advisable in light of generally accepted accounting principles.

12.2 Reporting of Dispositions. Any holder of Option Shares acquired under an Incentive Stock Option shall promptly notify the Administrator, following such procedures as the Administrator may require, of the sale or other disposition of any of those Option Shares if the disposition occurs during: (a) the longer of two years after the Grant Date of the Incentive Stock Option and one year after the date the Incentive Stock Option was exercised, or (b) such other period as the Administrator has established.

13. Compliance with Law

The grant of Awards and the issuance and subsequent transfer of Award Shares shall be subject to compliance with all Applicable Law, including all applicable securities laws. Awards may not be exercised, and Award Shares may not be transferred, in violation of Applicable Law. Thus, for example, Awards may not be exercised unless: (a) a registration statement under the Securities Act is then in effect with respect to the related Award Shares, or (b) in the opinion of legal counsel to the Company, those Award Shares may be issued in accordance with an applicable exemption from the registration requirements of the Securities Act and any other applicable securities laws. The failure or inability of the Company to obtain from any regulatory body the authority considered by the Company’s legal counsel to be necessary or useful for the lawful issuance of any Award Shares or their subsequent transfer shall relieve the Company of any liability for failing to issue those Award Shares or permitting their transfer. As a condition to the exercise of any Award or the transfer of any Award Shares, the Company may require the Awardee to satisfy any requirements or qualifications that may be necessary or appropriate to comply with or evidence compliance with any Applicable Law.

14. Amendment or Termination of this Plan or Outstanding Awards

14.1 Amendment and Termination. The Board may at any time amend, suspend, or terminate this Plan.

14.2 Stockholder Approval. The Company shall obtain the approval of the Company’s stockholders for any amendment to this Plan if stockholder approval is necessary or desirable to comply with any Applicable Law or with the requirements applicable to the grant of Awards intended to be Incentive Stock Options. The Board may also, but need not, require that the Company’s stockholders approve any other amendments to this Plan. In order for Awards to be exempt from the rules of Code Section 162(m), the Board should consider seeking, but is not required to seek, shareholder approval of the Plan or any plan which awards shares from the Plan at least every five years.

14.3 Effect. No amendment, suspension, or termination of this Plan, and no modification of any Award even in the absence of an amendment, suspension, or termination of this Plan, shall impair any existing contractual rights of any Awardee unless the affected Awardee consents to the amendment, suspension, termination, or modification. Notwithstanding anything herein to the contrary, no such

consent shall be required if the Board determines, in its sole and absolute discretion, that the amendment, suspension, termination, or modification: (a) is required or advisable in order for the Company, this Plan or the Award to satisfy Applicable Law, to meet the requirements of any accounting standard or to avoid any adverse accounting treatment, or (b) in connection with any transaction or event described in Section 10, is in the best interests of the Company or its stockholders. The Board may, but need not, take the tax or accounting consequences to affected Awardees into consideration in acting under the preceding sentence. Those decisions shall be final, binding and conclusive. Termination of this Plan shall not affect the Administrator’s ability to exercise the powers granted to it under this Plan with respect to Awards granted before the termination of Award Shares issued under such Awards even if those Award Shares are issued after the termination.

15. Reserved Rights

15.1 Nonexclusivity of this Plan. This Plan shall not limit the power of the Company or any Affiliate to adopt other incentive arrangements including, for example, the grant or issuance of stock options, stock, or other equity-based rights under other plans.

15.2 Unfunded Plan. This Plan shall be unfunded. Although bookkeeping accounts may be established with respect to Awardees, any such accounts will be used merely as a convenience. The Company shall not be required to segregate any assets on account of this Plan, the grant of Awards, or the issuance of Award Shares. The Company and the Administrator shall not be deemed to be a trustee of stock or cash to be awarded under this Plan. Any obligations of the Company to any Awardee shall be based solely upon contracts entered into under this Plan, such as Award Agreements. No such obligations shall be deemed to be secured by any pledge or other encumbrance on any assets of the Company. Neither the Company nor the Administrator shall be required to give any security or bond for the performance of any such obligations.

16. Special Arrangements Regarding Award Shares

16.1 Escrow of Stock Certificates. To enforce any restrictions on Award Shares, the Administrator may require their holder to deposit the certificates representing Award Shares, with stock powers or other transfer instruments approved by the Administrator endorsed in blank, with the Company or an agent of the Company to hold in escrow until the restrictions have lapsed or terminated. The Administrator may also cause a legend or legends referencing the restrictions to be placed on the certificates.

16.2 Repurchase Rights

(a) General. If a Stock Award is subject to vesting conditions, the Company shall have the right, during the seven months after the Awardee’s Termination, to repurchase any or all of the Award Shares that were unvested as of the date of that Termination. The repurchase price shall be determined by the Administrator in accordance with this Section 16.2 which shall be either (i) the Purchase Price for the Award Shares (minus the amount of any cash dividends paid or payable with respect to the Award Shares for which the record date precedes the repurchase) or (ii) the lower of (A) the Purchase Price for the Shares or (B) the Fair Market Value of those Award Shares as of the date of the Termination. The repurchase price shall be paid in cash. The Company may assign this right of repurchase.

(b) Procedure. The Company or its assignee may choose to give the Awardee a written notice of exercise of its repurchase rights under this Section 16.2. However, the Company’s failure to give such a notice shall not affect its rights to repurchase Award Shares. The Company must, however, tender the repurchase price during the period specified in this Section 16.2 for exercising its repurchase rights in order to exercise such rights.

16.3 Market Standoff. Awardees shall be prohibited from selling any Shares for a period of 180 days (but subject to such extension or extensions as may be required by the underwriters in order to publish research reports while complying with Rule 2711 of the National Association of Securities Dealers, Inc.) after the effective date of the registration statement filed under the Securities Act with

respect to the initial public offering of the Company’s stock. In addition, if requested by the Company or a representative of its underwriters, Awardees shall be prohibited from selling some or all of their Shares during a period not to exceed 180 days (but subject to such extension or extensions as may be required by the underwriters in order to publish research reports while complying with Rule 2711 of the National Association of Securities Dealers, Inc.) after the effective date of any other registration statement of the Company (other than a registration statement on Form S-8 or S-4 or an equivalent).

17. Beneficiaries

An Awardee may file a written designation of one or more beneficiaries who are to receive the Awardee’s rights under the Awardee’s Awards after the Awardee’s death. An Awardee may change such a designation at any time by written notice. If an Awardee designates a beneficiary, the beneficiary may exercise the Awardee’s Awards after the Awardee’s death. If an Awardee dies when the Awardee has no living beneficiary designated under this Plan, the Company shall allow the executor or administrator of the Awardee’s estate to exercise the Award or, if there is none, the person entitled to exercise the Option under the Awardee’s will or the laws of descent and distribution. In any case, no Award may be exercised after its Expiration Date.

18. Miscellaneous

18.1 Governing Law. This Plan, the Award Agreements and all other agreements entered into under this Plan, and all actions taken under this Plan or in connection with Awards or Award Shares, shall be governed by the laws of the State of Delaware.

18.2 Determination of Value. Fair Market Value shall be determined as follows:

(a) Listed Stock. If the Shares are traded on any established stock exchange or quoted on a national market system, Fair Market Value shall be the closing sales price for the Shares as quoted on that stock exchange or system for the date the value is to be determined (the “ Value Date ”) as reported in The Wall Street Journal or a similar publication. If no sales are reported as having occurred on the Value Date, Fair Market Value shall be that closing sales price for the last preceding trading day on which sales of Shares are reported as having occurred. If no sales are reported as having occurred during the five trading days before the Value Date, Fair Market Value shall be the closing bid for Shares on the Value Date. If Shares are listed on multiple exchanges or systems, Fair Market Value shall be based on sales or bid prices on the primary exchange or system on which Shares are traded or quoted.

(b) Stock Quoted by Securities Dealer. If Shares are regularly quoted by a recognized securities dealer but selling prices are not reported on any established stock exchange or quoted on a national market system, Fair Market Value shall be the mean between the high bid and low asked prices on the Value Date. If no prices are quoted for the Value Date, Fair Market Value shall be the mean between the high bid and low asked prices on the last preceding trading day on which any bid and asked prices were quoted.

(c) No Established Market. If Shares are not traded on any established stock exchange or quoted on a national market system and are not quoted by a recognized securities dealer, the Administrator (following guidelines established by the Board or Committee) will determine Fair Market Value in good faith. The Administrator will consider the following factors, and any others it considers significant, in determining Fair Market Value: (i) the price at which other securities of the Company have been issued to purchasers other than Employees, Directors, or Consultants, (ii) the Company’s stockholder’s equity, prospective earning power, dividend-paying capacity, and non-operating assets, if any, and (iii) any other relevant factors, including the economic outlook for the Company and the Company’s industry, the Company’s position in that industry, the Company’s goodwill and other intellectual property, and the values of securities of other businesses in the same industry.

18.3 Reservation of Shares. During the term of this Plan, the Company shall at all times reserve and keep available such number of Shares as are still issuable under this Plan.

18.4 Electronic Communications. Any Award Agreement, notice of exercise of an Award, or other document required or permitted by this Plan may be delivered in writing or, to the extent determined by the Administrator, electronically. Signatures may also be electronic if permitted by the Administrator.

18.5 Notices. Unless the Administrator specifies otherwise, any notice to the Company under any Option Agreement or with respect to any Awards or Award Shares shall be in writing (or, if so authorized by Section 18.4, communicated electronically), shall be addressed to the Secretary of the Company, and shall only be effective when received by the Secretary of the Company.

18.6 Conflict. In the event of any conflict between the terms of this Plan and any Award agreement or other document under this Plan, the terms of the Plan shall prevail. Notwithstanding the foregoing, in connection with documents prepared for Awardees who are residents outside the United States, any terms of an Award Agreement which are necessary or desirable to comply with the foreign jurisdiction of residence shall prevail even if they conflict with the terms of the Plan.

Exhibit 10.35

EAGLE TEST SYSTEMS, INC.

2003 STOCK OPTION AND GRANT PLAN

SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS

The name of the plan is the Eagle Test Systems, Inc. 2003 Stock Option and Grant Plan (the “Plan”). The purpose of the Plan is to encourage and enable the officers, employees, directors, consultants and other key persons of Eagle Test Systems, Inc., an Illinois corporation (the “Company”) and its Subsidiaries, upon whose judgment, initiative and efforts the Company largely depends for the successful conduct of its business to acquire a proprietary interest in the Company. It is anticipated that providing such persons with a direct stake in the Company’s welfare will assure a closer identification of their interests with those of the Company, thereby stimulating their efforts on the Company’s behalf and strengthening their desire to remain with the Company.

The following terms shall be defined as set forth below:

“Act” means the Securities Act of 1933, as amended, and the rules and regulations thereunder.

“Award” or “Awards,” except where referring to a particular category of grant under the Plan, shall include Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock Awards, Unrestricted Stock Awards, or any combination of the foregoing.

“Board” means the Board of Directors of the Company or its successor entity.

“Cause” means a vote of the Board resolving that the grantee should be dismissed as a result of (i) the commission of any act by a grantee constituting financial dishonesty against the Company (which act would be chargeable as a crime under applicable law); (ii) a grantee’s engaging in any other act of dishonesty, fraud, intentional misrepresentation, moral turpitude, illegality or harassment which, as determined in good faith by the Board, would: (A) materially adversely affect the business or the reputation of the Company with its current or prospective customers, suppliers, lenders and/or other third parties with whom it does or might do business; or (B) expose the Company to a risk of civil or criminal legal damages, liabilities or penalties; (iii) the repeated failure by a grantee to follow the directives of the Company’s chief executive officer or Board or (iv) any material misconduct, violation of the Company’s policies, or willful and deliberate non-performance of duty by the grantee in connection with the business affairs of the Company.

“Code” means the Internal Revenue Code of 1986, as amended, and any successor Code, and related rules, regulations and interpretations.

“Committee” has the meaning specified in Section 2.

“Effective Date” means the date on which the Plan is approved by shareholders as set forth at the end of this Plan.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.

“Fair Market Value” of the Stock on any given date means the fair market value of the Stock determined in good faith by the Committee; provided, however, that (i) if the Stock trades on a national securities exchange, the Fair Market Value on any given date is the closing sale price on such date; (ii) if the Stock does not trade on any national securities exchange but is admitted to trading on the National Association of Securities Dealers, Inc. Automated Quotation System (“NASDAQ”), the Fair Market Value on any given date is the closing sale price as reported by NASDAQ on such date; or if no such closing sale price information is available, the average of the highest bid and lowest asked prices for the Stock reported on such date. For any date that is not a trading day, the Fair Market Value of the Stock for such date will be determined by using the closing sale price or the average of the highest bid and lowest asked prices, as appropriate, for the immediately preceding trading day. The Committee can substitute a particular time of day or other measure of closing sale price if appropriate because of changes in exchange or market procedures. Notwithstanding the foregoing, if the date for which Fair Market Value is determined is the first day when trading prices for the Stock are reported on NASDAQ or trading on a national securities exchange, the Fair Market Value shall be the “Price to the Public” (or equivalent) set forth on the cover page for the final prospectus relating to the Company’s Initial Public Offering.

“Good Reason” means the occurrence of any of the following events: (i) a substantial adverse change in the nature or scope of the grantee’s responsibilities, authorities, powers, functions or duties; (ii) a reduction in the grantee’s annual base salary except for across-the-board salary reductions similarly affecting all or substantially all management employees; or (iii) the relocation of the offices at which the grantee is principally employed to a location more than 50 miles from such offices.

“Incentive Stock Option” means any Stock Option designated and qualified as an “incentive stock option” as defined in Section 422 of the Code.

“Initial Public Offering” means the consummation of the first fully underwritten, firm commitment public offering pursuant to an effective registration statement under the Act covering the offer and sale by the Company of its equity securities, as a result of or following which the shares of Stock shall be publicly held.

“Non-Qualified Stock Option” means any Stock Option that is not an Incentive Stock Option.

“Option” or “Stock Option” means any option to purchase shares of Stock granted pursuant to Section 5.

“Restricted Stock Award” means Awards granted pursuant to Section 6.

“Stock” means the Common Stock, no par value, of the Company, subject to adjustments pursuant to Section 3.

“Subsidiary” means any corporation or other entity (other than the Company) in any unbroken chain of corporations or other entities beginning with the Company if each of the corporations or entities (other than the last corporation or entity in the unbroken chain) owns stock or other interests possessing 50 percent or more of the economic interest or 50 percent or more of the total combined voting power of all classes of stock or other interests in one of the other corporations or entities in the chain.

“Unrestricted Stock Award” means any Award granted pursuant to Section 7.

SECTION 2. ADMINISTRATION OF PLAN; COMMITTEE AUTHORITY TO SELECT GRANTEES AND DETERMINE AWARDS

(a) Administration of Plan. The Plan shall be administered by the Board, or at the discretion of the Board, by a committee of the Board, comprised, except as contemplated by Section 2(c), of not less than two Directors. All references herein to the Committee shall be deemed to refer to the group then responsible for administration of the Plan at the relevant time (i.e., either the Board of Directors or a committee or committees of the Board, as applicable).

(b) Powers of Committee. The Committee shall have the power and authority to grant Awards consistent with the terms of the Plan, including the power and authority:

(i) to select the individuals to whom Awards may from time to time be granted;

(ii) to determine the time or times of grant, and the extent, if any, of Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock Awards, Unrestricted Stock Awards, or any combination of the foregoing, granted to any one or more grantees;

(iii) to determine the number of shares of Stock to be covered by any Award;

(iv) to determine and modify from time to time the terms and conditions, including restrictions, not inconsistent with the terms of the Plan, of any Award, which terms and conditions may differ among individual Awards and grantees, and to approve the form of written instruments evidencing the Awards;

(v) to accelerate at any time the exercisability or vesting of all or any portion of any Award;

(vi) to impose any limitations on Awards granted under the Plan, including limitations on transfers, repurchase provisions and the like and to exercise repurchase rights or obligations;

(vii) subject to the provisions of Section 5(a)(ii), to extend at any time the period in which Stock Options may be exercised;

(viii) to determine at any time whether, to what extent, and under what circumstances distribution or the receipt of Stock and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the grantee and whether and to what extent the Company shall pay or credit amounts constituting interest (at rates determined by the Committee) or dividends or deemed dividends on such deferrals; and

(ix) at any time to adopt, alter and repeal such rules, guidelines and practices for administration of the Plan and for its own acts and proceedings as it shall deem advisable; to interpret the terms and provisions of the Plan and any Award (including related written instruments); to make all determinations it deems advisable for the administration of the Plan; to decide all disputes arising in connection with the Plan; and to otherwise supervise the administration of the Plan.

All decisions and interpretations of the Committee shall be binding on all persons, including the Company and Plan grantees.

(c) Delegation of Authority to Grant Awards. The Committee, in its discretion, may delegate to the Chief Executive Officer of the Company all or part of the Committee’s authority and duties with respect to the granting of Awards at Fair Market Value, and in the event of such delegation, such Chief Executive Officer shall be deemed a one-person Committee of the Board. Any such delegation by the Committee shall include a limitation as to the amount of Awards that may be granted during the period of the delegation and shall contain guidelines as to the determination of the exercise price of any Option, the conversion ratio or price of other Awards and the vesting criteria. The Committee may revoke or amend the terms of a delegation at any time but such action shall not invalidate any prior actions of the Committee’s delegate or delegates that were consistent with the terms of the Plan.

(d) Indemnification. Neither the Board nor the Committee, nor any member of either or any delegatee thereof, shall be liable for any act, omission, interpretation, construction or determination made in good faith in connection with the Plan, and the members of the Board and the Committee (and any delegate thereof) shall be entitled in all cases to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including, without limitation, reasonable attorneys’ fees) arising or resulting therefrom to the fullest extent permitted by law and/or under any directors’ and officers’ liability insurance coverage which may be in effect from time to time.

SECTION 3. STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION

(a) Stock Issuable. The maximum number of shares of Stock reserved and available for issuance under the Plan shall be 273,516 shares of Common Stock, subject to adjustment as provided in Section 3(b). For purposes of this limitation, the shares of Stock underlying any Awards that are forfeited, canceled, reacquired by the Company, satisfied without the issuance of Stock or otherwise terminated (other than by exercise) shall be added back to the shares of Stock available for issuance under the Plan. Subject to such overall limitation, shares of Stock may be issued up to such maximum number pursuant to any type or types of Award; provided, however, that from and after the date the Company becomes subject to the deduction limit imposed by Section 162(m) of the Code, Stock Options with respect to no more than the number of shares of Stock allowed thereunder may be granted to any one individual grantee during any one calendar year period. The shares available for issuance under the Plan may be authorized but unissued shares of Stock or shares of Stock reacquired by the Company and held in its treasury.

which such Stock Options remain exercisable. The adjustment by the Committee shall be final, binding and conclusive. No fractional shares of Stock shall be issued under the Plan resulting from any such adjustment, but the Committee in its discretion may make a cash payment in lieu of fractional shares.

The Committee may also adjust the number of shares subject to outstanding Awards and the exercise price and the terms of outstanding Awards to take into consideration material changes in accounting practices or principles, extraordinary dividends, acquisitions or dispositions of stock or property or any other event if it is determined by the Committee that such adjustment is appropriate to avoid distortion in the operation of the Plan, provided that no such adjustment shall be made in the case of an Incentive Stock Option, without the consent of the grantee, if it would constitute a modification, extension or renewal of the Option within the meaning of Section 424(h) of the Code.

(c) Mergers and Other Sale Events. In the case of and subject to the consummation of (i) the dissolution or liquidation of the Company, (ii) the sale of all or substantially all of the assets of the Company on a consolidated basis to an unrelated person or entity, (iii) a merger, reorganization or consolidation in which the outstanding shares of Stock are converted into or exchanged for securities of the successor entity and the holders of the Company’s outstanding voting power immediately prior to such transaction do not own a majority of the outstanding voting power of the successor entity immediately upon completion of such transaction, (iv) the sale of all or a majority of the outstanding capital stock of the Company to an unrelated person or entity or (v) any other transaction in which, the owners of the Company’s outstanding voting power prior to such transaction do not own at least a majority of the outstanding voting power of the successor entity immediately upon completion of the transaction (in each case, regardless of the form thereof, a “Sale Event”), unless otherwise provided in the Award agreement, the Plan and all outstanding Options issued hereunder shall terminate upon the effective time of any such Sale Event, unless provision is made in connection with such transaction in the sole discretion of the parties thereto for the assumption or continuation of Options theretofore granted (after taking into account any acceleration hereunder) by the successor entity, or the substitution of such Options with new Options of the successor entity or a parent or subsidiary thereof, with such adjustment as to the number and kind of shares and the per share exercise prices as such parties shall agree (after taking into account any acceleration if any, hereunder). In the event of such termination, each grantee shall be permitted, within a specified period of time prior to the consummation of the Sale Event as determined by the Committee, to exercise all outstanding Options held by such grantee that are then exercisable or will become exercisable as of the effective time of the Sale Event; provided, however, that the exercise of Options not exercisable prior to the Sale Event shall be subject to the consummation of the Sale Event. (The treatment of Restricted Stock Award in connection with any such transaction shall be as specified in the relevant Award agreement.) Notwithstanding anything herein to the contrary, in the event that provision is made in connection with the Sale Event for the assumption or continuation of Awards, or the substitution of such Awards with new Awards of the successor entity or parent thereof, then, except as the Committee may otherwise determine with respect to particular Awards, any Award so assumed or continued or substituted therefor shall be deemed vested and exercisable in full upon the date on which the grantee’s employment or service relationship with the Company and its subsidiaries or successor entity, as the case may be, terminates if such termination occurs (i) within 18 months after such Sale Event and (ii) such termination is by the Company or its Subsidiaries or successor entity without Cause or by the grantee for Good Reason. Notwithstanding anything to the contrary in this Plan or in any Award, in the event of a Sale Event pursuant to which holders of the Stock of the Company will receive upon consummation thereof a cash payment for each share surrendered in the Sale Event, the Company shall have the

right, but not the obligation, to make or provide for a cash payment to the grantees holding vested Options, in exchange for the cancellation thereof, in an amount equal to the difference between (A) the value as determined by the Committee of the consideration payable per share of Stock pursuant to the Sale Event (the “Sale Price”) times the number of shares of Stock subject to such outstanding Options (to the extent then exercisable at prices not in excess of the Sale Price) and (B) the aggregate exercise price of all such outstanding Options.

(d) Substitute Awards . The Committee may grant Awards under the Plan in substitution for stock and stock based awards held by employees, directors or other key persons of another corporation in connection with a merger or consolidation of the employing corporation with the Company or a Subsidiary or the acquisition by the Company or a Subsidiary of property or stock of the employing corporation. The Committee may direct that the substitute awards be granted on such terms and conditions as the Committee considers appropriate in the circumstances. Any substitute Awards granted under the Plan shall not count against the share limitation set forth in Section 3(a).

(e) The terms of any Award approved by the Committee shall govern such Award to the extent of any inconsistency between the Plan, such Award being deemed an amendment to the Plan with respect to such Award only.

SECTION 4. ELIGIBILITY

Grantees in the Plan will be such full or part-time officers, employees, directors, consultants and other key persons (including prospective employees) of the Company and its Subsidiaries who are responsible for, or contribute to, the management, growth or profitability of the Company and its Subsidiaries as are selected from time to time by the Committee in its sole discretion.

SECTION 5. STOCK OPTIONS

Any Stock Option granted under the Plan shall be pursuant to a Stock Option Agreement which shall be in such form as the Committee may from time to time approve. Option agreements need not be identical.

Stock Options granted under the Plan may be either Incentive Stock Options or Non-Qualified Stock Options. Incentive Stock Options may be granted only to employees of the Company or any Subsidiary that is a “subsidiary corporation” within the meaning of Section 424(f) of the Code. To the extent that any Option does not qualify as an Incentive Stock Option, it shall be deemed a Non-Qualified Stock Option.

No Incentive Stock Option shall be granted under the Plan after the date which is ten years from the date the Plan is approved by the Board.

(a) Terms of Stock Options. Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable. If the Committee so determines, Stock Options may be granted in lieu of cash compensation at the grantee’s election, subject to such terms and conditions as the Committee may establish, as well as in addition to other compensation.

(i) Exercise Price . The exercise price per share for the Stock covered by a Stock Option shall be determined by the Committee at the time of grant but shall not be less than 100 percent of the Fair Market Value on the date of grant in the case of Incentive Stock Options. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10 percent of the combined voting power of all classes of stock of the Company or any parent or subsidiary corporation and an Incentive Stock Option is granted to such employee, the option price of such Incentive Stock Option shall be not less than 110 percent of the Fair Market Value on the grant date.

(ii) Option Term . The term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than ten years after the date the Stock Option is granted. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10 percent of the combined voting power of all classes of stock of the Company or any parent or subsidiary corporation and an Incentive Stock Option is granted to such employee, the term of such Stock Option shall be no more than five years from the date of grant.

(iii) Exercisability; Rights of a Stockholder. Stock Options shall become exercisable at such time or times, whether or not in installments, as shall be determined by the Committee at or after the grant date. The Committee may at any time accelerate the exercisability of all or any portion of any Stock Option. An grantee shall have the rights of a shareholder only as to shares acquired upon the exercise of a Stock Option and not as to unexercised Stock Options.

(iv) Method of Exercise . Stock Options may be exercised in whole or in part, by giving written notice of exercise to the Company, specifying the number of shares to be purchased. Payment of the purchase price may be made by one or more of the following methods to the extent provided in the Award agreement or as otherwise provided by the Committee:

(A) In cash, by certified or bank check, or other instrument acceptable to the Committee in U.S. funds payable to the order of the Company in an amount equal to the purchase price of such Option Shares;

(B) If permitted by the Committee, through the delivery (or attestation to the ownership) of shares of Stock that have been purchased by the grantee on the open market or have been beneficially owned by the grantee for at least six months and are not then subject to restrictions under any Company plan. Such surrendered shares shall be valued at Fair Market Value on the exercise date;

(C) If permitted by the Committee, by the grantee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the purchase price; provided that in the event the grantee chooses to pay the purchase price as so provided, the grantee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Committee shall prescribe as a condition of such payment procedure.

Payment instruments will be received subject to collection. No certificates for shares of Stock so purchased will be issued to grantee until the Company has completed all steps required by law to be taken in connection with the issuance and sale of the shares, including without limitation (i) receipt of a representation from the grantee at the time of exercise of the Option that the grantee is purchasing the shares for the grantee’s own account and not with a view to any sale or distribution

thereof, (ii) the legending of any certificate representing the shares to evidence the foregoing representations and restrictions, and (iii) obtaining from grantee payment or provision for all withholding taxes due as a result of the exercise of the Option. The delivery of certificates representing the shares of Stock to be purchased pursuant to the exercise of a Stock Option will be contingent upon receipt from the grantee (or a purchaser acting in his or her stead in accordance with the provisions of the Stock Option) by the Company of the full purchase price for such shares and the fulfillment of any other requirements contained in the Option Award agreement or applicable provisions of laws. In the event an grantee chooses to pay the purchase price by previously-owned shares of Stock through the attestation method, the shares of Stock transferred to the grantee upon the exercise of the Stock Option shall be net of the number of shares attested to.

(b) Annual Limit on Incentive Stock Options. To the extent required for “incentive stock option” treatment under Section 422 of the Code, the aggregate Fair Market Value (determined as of the time of grant) of the shares of Stock with respect to which Incentive Stock Options granted under this Plan and any other plan of the Company or its parent and subsidiary corporations become exercisable for the first time by an grantee during any calendar year shall not exceed $100,000. To the extent that any Stock Option exceeds this limit, it shall constitute a Non-Qualified Stock Option.

(c) Non-transferability of Options. No Stock Option shall be transferable by the grantee otherwise than by will or by the laws of descent and distribution and all Stock Options shall be exercisable, during the grantee’s lifetime, only by the grantee, or by the grantee’s legal representative or guardian in the event of the grantee’s incapacity. Notwithstanding the foregoing, the Committee, in its sole discretion, may provide in the Award agreement regarding a given Option that the grantee may transfer, without consideration for the transfer, his or her Non-Qualified Stock Options to members of his or her immediate family, to trusts for the benefit of such family members, or to partnerships in which such family members are the only partners, provided that the transferee agrees in writing with the Company to be bound by all of the terms and conditions of this Plan and the applicable Option.

SECTION 6. RESTRICTED STOCK AWARDS

(a) Nature of Restricted Stock Awards. A Restricted Stock Award is an Award pursuant to which the Company may, in its sole discretion, grant or sell, at such purchase price as determined by the Committee, in its sole discretion, shares of Stock subject to such restrictions and conditions as the Committee may determine at the time of grant (“Restricted Stock”), which purchase price shall be payable in cash or other form of consideration acceptable to the Committee. Conditions may be based on continuing employment (or other service relationship) and/or achievement of pre-established performance goals and objectives. The terms and conditions of each such agreement shall be determined by the Committee, and such terms and conditions may differ among individual Awards and grantees.

(b) Rights as a Stockholder. Upon execution of a written instrument setting forth the Restricted Stock Award and payment of any applicable purchase price, a grantee shall have the rights of a stockholder with respect to the voting of the Restricted Stock, subject to such conditions contained in the written instrument evidencing the Restricted Stock Award. Unless the Committee shall otherwise determine, certificates evidencing the Restricted Stock shall remain in the possession of the Company until such Restricted Stock is vested as provided in subsection (d) below of this Section, and the grantee shall be required, as a condition of the grant, to deliver to the Company a stock power endorsed in blank.

(c) Restrictions. Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as specifically provided herein or in the Restricted Stock Award agreement. If a grantee’s employment (or other service relationship) with the Company and its Subsidiaries terminates under the conditions specified in the relevant instrument relating to the Award, or upon such other event or events as may be stated in the instrument evidencing the Award, the Company or its assigns shall have the right or shall agree, as may be specified in the relevant instrument, to repurchase some or all of the shares of Stock subject to the Award at such purchase price as is set forth in such instrument.

(d) Vesting of Restricted Stock. The Committee at the time of grant shall specify the date or dates and/or the attainment of pre-established performance goals, objectives and other conditions on which Restricted Stock shall become vested, subject to such further rights of the Company or its assigns as may be specified in the instrument evidencing the Restricted Stock Award.

(e) Waiver, Deferral and Reinvestment of Dividends . The Restricted Stock Award agreement may require or permit the immediate payment, waiver, deferral or investment of dividends paid on the Restricted Stock.

SECTION 7. UNRESTRICTED STOCK AWARDS

(a) Grant or Sale of Unrestricted Stock . The Committee may, in its sole discretion, grant (or sell at par value or such higher purchase price determined by the Committee) an Unrestricted Stock Award to any grantee, pursuant to which such grantee may receive shares of Stock free of any vesting restrictions (“Unrestricted Stock”) under the Plan. Unrestricted Stock Awards may be granted or sold as described in the preceding sentence in respect of past services or other valid consideration, or in lieu of any cash compensation due to such individual.

(b) Elections to Receive Unrestricted Stock In Lieu of Compensation . Upon the request of a grantee and with the consent of the Committee, each such grantee may, pursuant to an advance written election delivered to the Company no later than the date specified by the Committee, receive a portion of the cash compensation otherwise due to such grantee in the form of shares of Unrestricted Stock either currently or on a deferred basis.

(c) Restrictions on Transfers. The right to receive shares of Unrestricted Stock on a deferred basis may not be sold, assigned, transferred, pledged or otherwise encumbered, other than by will or the laws of descent and distribution.

SECTION 8. TAX WITHHOLDING

(a) Payment by Grantee. Each grantee shall, no later than the date as of which the value of an Award or of any Stock or other amounts received thereunder first becomes includable in the gross income of the grantee for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any federal, state, or local taxes of any kind required by law to be withheld with respect to such income. The Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the grantee. The Company’s obligation to deliver stock certificates to any grantee is subject to and conditioned on tax obligations being satisfied by the grantee.

(b) Payment in Stock . Subject to approval by the Committee, a grantee may elect to have the minimum required tax withholding obligation satisfied, in whole or in part, by (i) authorizing the Company to withhold from shares of Stock to be issued pursuant to any Award a number of shares with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding amount due, or (ii) transferring to the Company shares of Stock owned by the grantee with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the minimum withholding amount due.

SECTION 9. TRANSFER, LEAVE OF ABSENCE, ETC.

For purposes of the Plan, the following events shall not be deemed a termination of employment:

(a) a transfer to the employment of the Company from a Subsidiary or from the Company to a Subsidiary, or from one Subsidiary to another; or

(b) an approved leave of absence for military service or sickness, or for any other purpose approved by the Company, if the employee’s right to re-employment is guaranteed either by a statute or by contract or under the policy pursuant to which the leave of absence was granted or if the Committee otherwise so provides in writing.

SECTION 10. AMENDMENTS AND TERMINATION

The Board may, at any time, amend or discontinue the Plan and the Committee may, at any time, amend or cancel any outstanding Award (or provide substitute Awards at the same or reduced exercise or purchase price or with no exercise or purchase price in a manner not inconsistent with the terms of the Plan), but such price, if any, must satisfy the requirements that would apply to the substitute or amended Award if it were then initially granted under this Plan for the purpose of satisfying changes in law or for any other lawful purpose, but no such action shall adversely affect rights under any outstanding Award without the holder’s consent. If and to the extent determined by the Committee to be required by the Code to ensure that Incentive Stock Options granted under the Plan are qualified under Section 422 of the Code, Plan amendments shall be subject to approval by the Company’s shareholders who would be eligible to vote at a meeting of shareholders on such matter. Nothing in this Section 10 shall limit the Board’s or Committee’s authority to take any action permitted pursuant to Section 3(c).

SECTION 11. STATUS OF PLAN

With respect to the portion of any Award that has not been exercised and any payments in cash, Stock or other consideration not received by a grantee, a grantee shall have no rights greater than those of a general creditor of the Company unless the Committee shall otherwise expressly determine in connection with any Award or Awards. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the Company’s obligations to deliver Stock or make payments with respect to Awards hereunder, provided that the existence of such trusts or other arrangements is consistent with the foregoing sentence.

SECTION 12. GENERAL PROVISIONS

(a) No Distribution; Compliance with Legal Requirements . The Committee may require each person acquiring Stock pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof. No shares

of Stock shall be issued pursuant to an Award until all applicable securities law and other legal and stock exchange or similar requirements have been satisfied. The Committee may require the placing of such stop-orders and restrictive legends on certificates for Stock and Awards as it deems appropriate.

(c) Other Compensation Arrangements; No Employment Rights . Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, including trusts, and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of this Plan and the grant of Awards do not confer upon any employee any right to continued employment with the Company or any Subsidiary.

(d) Trading Policy Restrictions . Option exercises and other Awards under the Plan shall be subject to such Company’s insider-trading-policy-related restrictions, terms and conditions as may be established by the Committee, or in accordance with policies set by the Committee, from time to time.

(e ) Loans to Award Recipients . The Company shall have the authority to make loans to recipients of Awards hereunder (including to facilitate the purchase of shares) and shall further have the authority to issue shares for promissory notes hereunder.

(f) Designation of Beneficiary . Each grantee to whom an Award has been made under the Plan may designate a beneficiary or beneficiaries to exercise any Award or receive any payment under any Award payable on or after the grantee’s death. Any such designation shall be on a form provided for that purpose by the Committee and shall not be effective until received by the Committee. If no beneficiary has been designated by a deceased grantee, or if the designated beneficiaries have predeceased the grantee, the beneficiary shall be the grantee’s estate.

SECTION 13. EFFECTIVE DATE OF PLAN

This Plan shall become effective upon approval by the shareholders in accordance with applicable law. Subject to such approval by the shareholders and to the requirement that no Stock may be issued hereunder prior to such approval, Stock Options and other Awards may be granted hereunder on and after adoption of this Plan by the Board.

SECTION 14. GOVERNING LAW

This Plan and all Awards and actions taken thereunder shall be governed by Illinois law, applied without regard to conflict of law principles.

ADOPTED BY BOARD OF DIRECTORS: September 29, 2003

APPROVED BY SHAREHOLDERS: September 29, 2003

Exhibit 10.36

EAGLE TEST SYSTEMS, INC.

2006 STOCK OPTION AND INCENTIVE PLAN

SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS

The name of the plan is the Eagle Test Systems, Inc. 2006 Stock Option and Incentive Plan (the “Plan”). The purpose of the Plan is to encourage and enable the officers, employees, Non-Employee Directors and other key persons (including consultants and prospective employees) of Eagle Test Systems, Inc. (the “Company”) and its Subsidiaries upon whose judgment, initiative and efforts the Company largely depends for the successful conduct of its business to acquire a proprietary interest in the Company. It is anticipated that providing such persons with a direct stake in the Company’s welfare will assure a closer identification of their interests with those of the Company and its stockholders, thereby stimulating their efforts on the Company’s behalf and strengthening their desire to remain with the Company.

The following terms shall be defined as set forth below:

“Act” means the Securities Act of 1933, as amended, and the rules and regulations thereunder.

“Administrator” is defined in Section 2(a).

“Award” or “Awards,” except where referring to a particular category of grant under the Plan, shall include Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Deferred Stock Awards, Restricted Stock Awards, Unrestricted Stock Awards and Dividend Equivalent Rights.

“Board” means the Board of Directors of the Company.

“Code” means the Internal Revenue Code of 1986, as amended, and any successor Code, and related rules, regulations and interpretations.

“Committee” means the compensation committee of the Board or a similar committee performing the functions of the compensation committee and which is comprised of not less than two Non-Employee Directors who are independent.

“Covered Employee” means an employee who is a “Covered Employee” within the meaning of Section 162(m) of the Code.

“Deferred Stock Award” means Awards granted pursuant to Section 8.

“Dividend Equivalent Right” means Awards granted pursuant to Section 11.

“Effective Date” means the date on which the Plan is approved by stockholders as set forth in Section 19.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.

“Fair Market Value” of the Stock on any given date means the fair market value of the Stock determined in good faith by the Administrator; provided, however, that if the Stock is admitted to quotation on the National Association of Securities Dealers Automated Quotation System

(“NASDAQ”), NASDAQ National System or a national securities exchange, the determination shall be made by reference to market quotations. If there are no market quotations for such date, the determination shall be made by reference to the last date preceding such date for which there are market quotations; provided further, however, that if the date for which Fair Market Value is determined is the first day when trading prices for the Stock are reported on NASDAQ or on a national securities exchange, the Fair Market Value shall be the “Price to the Public” (or equivalent) set forth on the cover page for the final prospectus relating to the Company’s Initial Public Offering.

“Incentive Stock Option” means any Stock Option designated and qualified as an “incentive stock option” as defined in Section 422 of the Code.

“Initial Public Offering” means the consummation of the first fully underwritten, firm commitment public offering pursuant to an effective registration statement under the Act covering the offer and sale by the Company of its equity securities, or such other event as a result of or following which the Stock shall be publicly held.

“Non-Employee Director” means a member of the Board who is not also an employee of the Company or any Subsidiary.

“Non-Qualified Stock Option” means any Stock Option that is not an Incentive Stock Option.

“Option” or “Stock Option” means any option to purchase shares of Stock granted pursuant to Section 5.

“Performance Cycle” means one or more periods of time, which may be of varying and overlapping durations, as the Administrator may select, over which the attainment of one or more performance criteria will be measured for the purpose of determining a grantee’s right to and the payment of a Restricted Stock Award or Deferred Stock Award.

“Restricted Stock Award” means Awards granted pursuant to Section 7.

“Section 409A” means Section 409A of the Code and the regulations and other guidance promulgated thereunder.

“Stock” means the Common Stock, par value $0.01 per share, of the Company, subject to adjustments pursuant to Section 3.

“Stock Appreciation Right” means any Award granted pursuant to Section 6.

“Subsidiary” means any corporation or other entity (other than the Company) in which the Company has a controlling interest, either directly or indirectly.

“Ten Percent Owner” means an employee who owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10 percent of the combined voting power of all classes of stock of the Company or any parent or subsidiary corporation.

“Unrestricted Stock Award” means any Award granted pursuant to Section 9.

SECTION 2. ADMINISTRATION OF PLAN; ADMINISTRATOR AUTHORITY TO SELECT GRANTEES AND DETERMINE AWARDS

(a) Committee . The Plan shall be administered by either the Board or the Committee (the “Administrator”).

(b) Powers of Administrator . The Administrator shall have the power and authority to grant Awards consistent with the terms of the Plan, including the power and authority:

(i) to select the individuals to whom Awards may from time to time be granted;

(ii) to determine the time or times of grant, and the extent, if any, of Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Deferred Stock Awards, Unrestricted Stock Awards and Dividend Equivalent Rights, or any combination of the foregoing, granted to any one or more grantees;

(iii) to determine the number of shares of Stock to be covered by any Award;

(v) to accelerate at any time the exercisability or vesting of all or any portion of any Award;

(vi) subject to the provisions of Section 5(a)(ii), to extend at any time the period in which Stock Options may be exercised; and

(vii) at any time to adopt, alter and repeal such rules, guidelines and practices for administration of the Plan and for its own acts and proceedings as it shall deem advisable; to interpret the terms and provisions of the Plan and any Award (including related written instruments); to make all determinations it deems advisable for the administration of the Plan; to decide all disputes arising in connection with the Plan; and to otherwise supervise the administration of the Plan. All decisions and interpretations of the Administrator shall be binding on all persons, including the Company and Plan grantees.

(c) Delegation of Authority to Grant Awards . The Administrator, in its discretion, may delegate to the Chief Executive Officer of the Company all or part of the Administrator’s authority and duties with respect to the granting of Awards, to individuals who are not subject to the reporting and other provisions of Section 16 of the Exchange Act or Covered Employees. Any such delegation by the Administrator shall include a limitation as to the amount of Awards that may be granted during the period of the delegation and shall contain guidelines as to the determination of the exercise price of any Stock Option or Stock Appreciation Right, the conversion ratio or price of other Awards and the vesting criteria. The Administrator may revoke or amend the terms of a delegation at any time but such action shall not invalidate any prior actions of the Administrator’s delegate or delegates that were consistent with the terms of the Plan.

(d) Indemnification . Neither the Board nor the Committee, nor any member of either or any delegate thereof, shall be liable for any act, omission, interpretation, construction or determination made in good faith in connection with the Plan, and the members of the Board and

the Committee (and any delegate thereof) shall be entitled in all cases to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including, without limitation, reasonable attorneys’ fees) arising or resulting therefrom to the fullest extent permitted by law and/or under any directors’ and officers’ liability insurance coverage which may be in effect from time to time and/or any indemnification agreement between such individual and the Company.

SECTION 3. STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION

(a) Stock Issuable . The maximum number of shares of Stock reserved and available for issuance under the Plan shall be 2,600,000 shares, subject to adjustment as provided in Section 3(b); provided that not more than 2,600,000 shares shall be issued in the form of Incentive Stock Options. For purposes of this limitation, the shares of Stock underlying any Awards that are forfeited, canceled, held back upon exercise of an Option or settlement of an Award to cover the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of Stock or otherwise terminated (other than by exercise) shall be added back to the shares of Stock available for issuance under the Plan. Subject to such overall limitations, shares of Stock may be issued up to such maximum number pursuant to any type or types of Award; provided, however, that Stock Options or Stock Appreciation Rights with respect to no more than 1,100,000 shares of Stock may be granted to any one individual grantee during any one calendar year period. The shares available for issuance under the Plan may be authorized but unissued shares of Stock or shares of Stock reacquired by the Company.

(b) Changes in Stock . Subject to Section 3(c) hereof, if, as a result of any reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar change in the Company’s capital stock, the outstanding shares of Stock are increased or decreased or are exchanged for a different number or kind of shares or other securities of the Company, or additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to such shares of Stock or other securities, or, if, as a result of any merger or consolidation, sale of all or substantially all of the assets of the Company, the outstanding shares of Stock are converted into or exchanged for a different number or kind of securities of the Company or any successor entity (or a parent or subsidiary thereof), the Administrator shall make an appropriate or proportionate adjustment in (i) the maximum number of shares reserved for issuance under the Plan, including the maximum number of shares that may be issued in the form of Unrestricted Stock Awards, Restricted Stock Awards or Deferred Stock Awards, (ii) the number of Stock Options or Stock Appreciation Rights that can be granted to any one individual grantee and the maximum number of shares that may be granted under a Performance-based Award, (iii) the number and kind of shares or other securities subject to any then outstanding Awards under the Plan, (iv) the repurchase price, if any, per share subject to each outstanding Restricted Stock Award, (v) the number of Stock Options automatically granted to Non-Employee Directors, and (vi) the price for each share subject to any then outstanding Stock Options and Stock Appreciation Rights under the Plan, without changing the aggregate exercise price (i.e., the exercise price multiplied by the number of Stock Options and Stock Appreciation Rights) as to which such Stock Options and Stock Appreciation Rights remain exercisable. The adjustment by the Administrator shall be final, binding and conclusive. No fractional shares of Stock shall be issued under the Plan resulting from any such adjustment, but the Administrator in its discretion may make a cash payment in lieu of fractional shares.

The Administrator may also adjust the number of shares subject to outstanding Awards and the exercise price and the terms of outstanding Awards to take into consideration material changes in accounting practices or principles, extraordinary dividends, acquisitions or

dispositions of stock or property or any other event if it is determined by the Administrator that such adjustment is appropriate to avoid distortion in the operation of the Plan, provided that no such adjustment shall be made in the case of a Stock Option or Stock Appreciation Right, without the consent of the grantee, if it would constitute a modification, extension or renewal of the Option within the meaning of Section 424(h) of the Code.

(c) Mergers and Other Transactions . In the case of and subject to the consummation of (i) the dissolution or liquidation of the Company, (ii) the sale of all or substantially all of the assets of the Company on a consolidated basis to an unrelated person or entity, (iii) a merger, reorganization or consolidation in which the outstanding shares of Stock are converted into or exchanged for a different kind of securities of the successor entity and the holders of the Company’s outstanding voting power immediately prior to such transaction do not own a majority of the outstanding voting power of the successor entity immediately upon completion of such transaction, or (iv) the sale of all of the Stock of the Company to an unrelated person or entity (in each case, a “Sale Event”), all Options and Stock Appreciation Rights that are not exercisable immediately prior to the effective time of the Sale Event shall become fully exercisable as of the effective time of the Sale Event and all other Awards shall become fully vested and nonforfeitable as of the effective time of the Sale Event, except as the Administrator may otherwise specify with respect to particular Awards in the relevant Award documentation, and Awards with conditions and restrictions relating to the attainment of performance goals may become vested and nonforfeitable in connection with a Sale Event in the Administrator’s discretion. Upon the effective time of the Sale Event, the Plan and all outstanding Awards granted hereunder shall terminate, unless provision is made in connection with the Sale Event in the sole discretion of the parties thereto for the assumption or continuation of Awards theretofore granted by the successor entity, or the substitution of such Awards with new Awards of the successor entity or parent thereof, with appropriate adjustment as to the number and kind of shares and, if appropriate, the per share exercise prices, as such parties shall agree (after taking into account any acceleration hereunder). In the event of such termination, each grantee shall be permitted, within a specified period of time prior to the consummation of the Sale Event as determined by the Administrator, to exercise all outstanding Options and Stock Appreciation Rights held by such grantee, including those that will become exercisable upon the consummation of the Sale Event; provided, however, that the exercise of Options and Stock Appreciation Rights not exercisable prior to the Sale Event shall be subject to the consummation of the Sale Event.

Notwithstanding anything to the contrary in this Section 3(c), in the event of a Sale Event pursuant to which holders of the Stock of the Company will receive upon consummation thereof a cash payment for each share surrendered in the Sale Event, the Company shall have the right, but not the obligation, to make or provide for a cash payment to the grantees holding Options and Stock Appreciation Rights, in exchange for the cancellation thereof, in an amount equal to the difference between (A) the value as determined by the Administrator of the consideration payable per share of Stock pursuant to the Sale Event (the “Sale Price”) times the number of shares of Stock subject to outstanding Options and Stock Appreciation Rights (to the extent then exercisable at prices not in excess of the Sale Price) and (B) the aggregate exercise price of all such outstanding Options and Stock Appreciation Rights.

(d) Substitute Awards . The Administrator may grant Awards under the Plan in substitution for stock and stock based awards held by employees, directors or other key persons of another corporation in connection with the merger or consolidation of the employing corporation with the Company or a Subsidiary or the acquisition by the Company or a Subsidiary of property or stock of the employing corporation. The Administrator may direct that the substitute awards be granted on such terms and conditions as the Administrator considers appropriate in the circumstances. Any substitute Awards granted under the Plan shall not count against the share limitation set forth in Section 3(a).

SECTION 4. ELIGIBILITY

Grantees under the Plan will be such full or part-time officers and other employees, Non-Employee Directors and key persons (including consultants and prospective employees) of the Company and its Subsidiaries as are selected from time to time by the Administrator in its sole discretion.

SECTION 5. STOCK OPTIONS

Any Stock Option granted under the Plan shall be in such form as the Administrator may from time to time approve.

(a) Stock Options Granted to Employees and Key Persons . The Administrator in its discretion may grant Stock Options to eligible employees and key persons of the Company or any Subsidiary. Stock Options granted pursuant to this Section 5(a) shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Administrator shall deem desirable. If the Administrator so determines, Stock Options may be granted in lieu of cash compensation at the optionee’s election, subject to such terms and conditions as the Administrator may establish.

(i) Exercise Price . The exercise price per share for the Stock covered by a Stock Option granted pursuant to this Section 5(a) shall be determined by the Administrator at the time of grant but shall not be less than 100 percent of the Fair Market Value on the date of grant. In the case of an Incentive Stock Option that is granted to a Ten Percent Owner, the option price of such Incentive Stock Option shall be not less than 110 percent of the Fair Market Value on the grant date.

(ii) Option Term . The term of each Stock Option shall be fixed by the Administrator, but no Stock Option shall be exercisable more than ten years after the date the Stock Option is granted. In the case of an Incentive Stock Option that is granted to a Ten Percent Owner, the term of such Stock Option shall be no more than five years from the date of grant.

(iii) Exercisability; Rights of a Stockholder. Stock Options shall become exercisable at such time or times, whether or not in installments, as shall be determined by the Administrator at or after the grant date. The Administrator may at any time accelerate the exercisability of all or any portion of any Stock Option. An optionee shall have the rights of a stockholder only as to shares acquired upon the exercise of a Stock Option and not as to unexercised Stock Options.

(A) In cash, by certified or bank check or other instrument acceptable to the Administrator;

(B) Through the delivery (or attestation to the ownership) of shares of Stock that have been purchased by the optionee on the open market or that are beneficially owned by the optionee and are not then subject to restrictions under any Company plan. Such surrendered shares shall be valued at Fair Market Value on the exercise date. To the extent required to avoid variable accounting treatment under FAS 123R or other applicable accounting rules, such surrendered shares shall have been owned by the optionee for at least six months; or

(C) By the optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company for the purchase price; provided that in the event the optionee chooses to pay the purchase price as so provided, the optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Administrator shall prescribe as a condition of such payment procedure. Payment instruments will be received subject to collection. The transfer to the optionee on the records of the Company or of the transfer agent of the shares of Stock to be purchased pursuant to the exercise of a Stock Option will be contingent upon receipt from the optionee (or a purchaser acting in his stead in accordance with the provisions of the Stock Option) by the Company of the full purchase price for such shares and the fulfillment of any other requirements contained in the Option Award agreement or applicable provisions of laws (including the satisfaction of any withholding taxes that the Company is obligated to withhold with respect to the optionee). In the event an optionee chooses to pay the purchase price by previously-owned shares of Stock through the attestation method, the number of shares of Stock transferred to the optionee upon the exercise of the Stock Option shall be net of the number of shares attested to.

(v) Annual Limit on Incentive Stock Options . To the extent required for “incentive stock option” treatment under Section 422 of the Code, the aggregate Fair Market Value (determined as of the time of grant) of the shares of Stock with respect to which Incentive Stock Options granted under this Plan and any other plan of the Company or its parent and subsidiary corporations become exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. To the extent that any Stock Option exceeds this limit, it shall constitute a Non-Qualified Stock Option.

(b) Stock Options Granted to Non-Employee Directors .

(i) Automatic Grant of Options .

(A) Each Non-Employee Director shall be granted, upon his initial election, a Non-Qualified Stock Option to acquire 20,000 shares of Stock, 10,000 of which shall immediately vest in full upon grant and 10,000 of which shall vest in equal monthly installments over the next thirty-six months.

(B) Each Non-Employee Director who is serving as a Director of the Company on the fifth business day after each annual meeting of shareholders, beginning with the 2007 annual meeting, shall automatically be granted on such day a Non-Qualified Stock Option to acquire 5,000 shares of Stock, which shall vest in equal monthly installments over the next forty-eight months.

(C) The exercise price per share for the Stock covered by a Stock Option granted under this Section 5(b) shall be equal to the Fair Market Value of the Stock on the date the Stock Option is granted.

(D) The Administrator, in its discretion, may grant additional Non-Qualified Stock Options to Non-Employee Directors. Any such grant may vary among individual Non-Employee Directors.

(ii) Exercise; Termination .

(A) An Option issued under this Section 5(b) shall not be exercisable after the expiration of ten years from the date of grant.

(B) Options granted under this Section 5(b) may be exercised only by written notice to the Company specifying the number of shares to be purchased. Payment of the full purchase price of the shares to be purchased may be made by one or more of the methods specified in Section 5(a)(iv). An optionee shall have the rights of a stockholder only as to shares acquired upon the exercise of a Stock Option and not as to unexercised Stock Options.

SECTION 6. STOCK APPRECIATION RIGHTS

(a) Nature of Stock Appreciation Rights . A Stock Appreciation Right is an Award entitling the recipient to receive shares of Stock having a value equal to the excess of the Fair Market Value of the Stock on the date of exercise over the exercise price of the Stock Appreciation Right, which price shall not be less than 100 percent of the Fair Market Value of the Stock on the date of grant (or more than the option exercise price per share, if the Stock Appreciation Right was granted in tandem with a Stock Option) multiplied by the number of shares of Stock with respect to which the Stock Appreciation Right shall have been exercised.

(b) Grant and Exercise of Stock Appreciation Rights . Stock Appreciation Rights may be granted by the Administrator in tandem with, or independently of, any Stock Option granted pursuant to Section 5 of the Plan. In the case of a Stock Appreciation Right granted in tandem with a Non-Qualified Stock Option, such Stock Appreciation Right may be granted either at or after the time of the grant of such Option. In the case of a Stock Appreciation Right granted in tandem with an Incentive Stock Option, such Stock Appreciation Right may be granted only at the time of the grant of the Option.

A Stock Appreciation Right or applicable portion thereof granted in tandem with a Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Option.

(c) Terms and Conditions of Stock Appreciation Rights . Stock Appreciation Rights shall be subject to such terms and conditions as shall be determined from time to time by the Administrator, subject to the following:

(i) Stock Appreciation Rights granted in tandem with Options shall be exercisable at such time or times and to the extent that the related Stock Options shall be exercisable.

(ii) Upon exercise of a Stock Appreciation Right, the applicable portion of any related Option shall be surrendered.

SECTION 7. RESTRICTED STOCK AWARDS

(a) Nature of Restricted Stock Awards . A Restricted Stock Award is an Award entitling the recipient to acquire, at such purchase price (which may be zero) as determined by the Administrator, shares of Stock subject to such restrictions and conditions as the Administrator may determine at the time of grant (“Restricted Stock”). Conditions may be based on continuing employment (or other service relationship) and/or achievement of pre-established performance goals and objectives. The grant of a Restricted Stock Award is contingent on the grantee executing the Restricted Stock Award agreement. The terms and conditions of each such agreement shall be determined by the Administrator, and such terms and conditions may differ among individual Awards and grantees.

(b) Rights as a Stockholder . Upon execution of a written instrument setting forth the Restricted Stock Award and payment of any applicable purchase price, a grantee shall have the rights of a stockholder with respect to the voting of the Restricted Stock, subject to such conditions contained in the written instrument evidencing the Restricted Stock Award. Unless the Administrator shall otherwise determine, (i) uncertificated Restricted Stock shall be accompanied by a notation on the records of the Company or the transfer agent to the effect that they are subject to forfeiture until such Restricted Stock are vested as provided in Section 7(d) below, and (ii) certificated Restricted Stock shall remain in the possession of the Company until such Restricted Stock is vested as provided in Section 7(d) below, and the grantee shall be required, as a condition of the grant, to deliver to the Company such instruments of transfer as the Administrator may prescribe.

(c) Restrictions . Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as specifically provided herein or in the Restricted Stock Award agreement. Except as may otherwise be provided by the Administrator either in the Award agreement or, subject to Section 16 below, in writing after the Award agreement is issued, if any, if a grantee’s employment (or other service relationship) with the Company and its Subsidiaries terminates for any reason, any Restricted Stock that has not vested at the time of termination shall automatically and without any requirement of notice to such grantee from or other action by or on behalf of, the Company be deemed to have been reacquired by the Company at its original purchase price from such grantee or such grantee’s legal representative simultaneously with such termination of employment (or other service relationship), and thereafter shall cease to represent any ownership of the Company by the grantee or rights of the grantee as a stockholder. Following such deemed reacquisition of unvested Restricted Stock that are represented by physical certificates, a grantee shall surrender such certificates to the Company upon request without consideration.

(d) Vesting of Restricted Stock . The Administrator at the time of grant shall specify the date or dates and/or the attainment of pre-established performance goals, objectives and other conditions on which the non-transferability of the Restricted Stock and the Company’s right of repurchase or forfeiture shall lapse. Notwithstanding the foregoing, in the event that any such Restricted Stock shall have a performance-based goal, the restriction period with respect to such shares shall not be less than one year, and in the event any such Restricted Stock shall have a time-based restriction, the total restriction period with respect to such shares shall not be less than three years; provided, however, that Restricted Stock with a time-based restriction may become vested incrementally over such three-year period. Subsequent to such date or dates and/or the attainment of such pre-established performance goals, objectives and other conditions, the shares on which all restrictions have lapsed shall no longer be Restricted Stock and shall be deemed “vested.” Except as may otherwise be provided by the Administrator either in the Award agreement or, subject to

Section 16 below, in writing after the Award agreement is issued, a grantee’s rights in any shares of Restricted Stock that have not vested shall automatically terminate upon the grantee’s termination of employment (or other service relationship) with the Company and its Subsidiaries and such shares shall be subject to the provisions of Section 7(c) above.

SECTION 8. DEFERRED STOCK AWARDS

(a) Nature of Deferred Stock Awards . A Deferred Stock Award is an Award of phantom stock units to a grantee, subject to restrictions and conditions as the Administrator may determine at the time of grant. Conditions may be based on continuing employment (or other service relationship) and/or achievement of pre-established performance goals and objectives. The grant of a Deferred Stock Award is contingent on the grantee executing the Deferred Stock Award agreement. The terms and conditions of each such agreement shall be determined by the Administrator, and such terms and conditions may differ among individual Awards and grantees. Notwithstanding the foregoing, in the event that any such Deferred Stock Award shall have a performance-based goal, the restriction period with respect to such award shall not be less than one year, and in the event any such Deferred Stock Award shall have a time-based restriction, the total restriction period with respect to such award shall not be less than three years; provided, however, that any Deferred Stock Award with a time-based restriction may become vested incrementally over such three-year period. At the end of the deferral period, the Deferred Stock Award, to the extent vested, shall be paid to the grantee in the form of shares of Stock.

(b) Election to Receive Deferred Stock Awards in Lieu of Compensation . The Administrator may, in its sole discretion, permit a grantee to elect to receive a portion of future cash compensation otherwise due to such grantee in the form of a Deferred Stock Award. Any such election shall be made in writing and shall be delivered to the Company no later than the date specified by the Administrator and in accordance with Section 409A and such other rules and procedures established by the Administrator. The Administrator shall have the sole right to determine whether and under what circumstances to permit such elections and to impose such limitations and other terms and conditions thereon as the Administrator deems appropriate. Any such deferred compensation shall be converted to a fixed number of phantom stock units based on the Fair Market Value of Stock on the date the compensation would otherwise have been paid to the grantee but for the deferral.

(c) Rights as a Stockholder . During the deferral period, a grantee shall have no rights as a stockholder; provided, however, that the grantee may be credited with Dividend Equivalent Rights with respect to the phantom stock units underlying his Deferred Stock Award, subject to such terms and conditions as the Administrator may determine.

(d) Termination . Except as may otherwise be provided by the Administrator either in the Award agreement or, subject to Section 16 below, in writing after the Award agreement is issued, a grantee’s right in all Deferred Stock Awards that have not vested shall automatically terminate upon the grantee’s termination of employment (or cessation of service relationship) with the Company and its Subsidiaries for any reason.

SECTION 9. UNRESTRICTED STOCK AWARDS

Grant or Sale of Unrestricted Stock . The Administrator may, in its sole discretion, grant (or sell at par value or such higher purchase price determined by the Administrator) an Unrestricted Stock Award to any grantee pursuant to which such grantee may receive shares of Stock free of any restrictions (“Unrestricted Stock”) under the Plan. Unrestricted Stock Awards may be granted in respect of past services or other valid consideration, or in lieu of cash compensation due to such grantee.

SECTION 10. PERFORMANCE-BASED AWARDS TO COVERED EMPLOYEES

Notwithstanding anything to the contrary contained herein, if any Restricted Stock Award or Deferred Stock Award granted to a Covered Employee is intended to qualify as “Performance-based Compensation” under Section 162(m) of the Code and the regulations promulgated thereunder (a “Performance-based Award”), such Award shall comply with the provisions set forth below:

(a) Performance Criteria . The performance criteria used in performance goals governing Performance-based Awards granted to Covered Employees may include any or all of the following: (i) the Company’s return on equity, assets, capital or investment: (ii) pre-tax or after-tax profit levels of the Company or any Subsidiary, a division, an operating unit or a business segment of the Company, or any combination of the foregoing; (iii) cash flow, funds from operations or similar measure; (iv) total stockholder return; (v) changes in the market price of the Stock; (vi) sales or market share; or (vii) earnings per share.

(b) Grant of Performance-based Awards . With respect to each Performance-based Award granted to a Covered Employee, the Committee shall select, within the first 90 days of a Performance Cycle (or, if shorter, within the maximum period allowed under Section 162(m) of the Code) the performance criteria for such grant, and the achievement targets with respect to each performance criterion (including a threshold level of performance below which no amount will become payable with respect to such Award). Each Performance-based Award will specify the amount payable, or the formula for determining the amount payable, upon achievement of the various applicable performance targets. The performance criteria established by the Committee may be (but need not be) different for each Performance Cycle and different goals may be applicable to Performance-based Awards to different Covered Employees.

(c) Payment of Performance-based Awards . Following the completion of a Performance Cycle, the Committee shall meet to review and certify in writing whether, and to what extent, the performance criteria for the Performance Cycle have been achieved and, if so, to also calculate and certify in writing the amount of the Performance-based Awards earned for the Performance Cycle. The Committee shall then determine the actual size of each Covered Employee’s Performance-based Award, and, in doing so, may reduce or eliminate the amount of the Performance-based Award for a Covered Employee if, in its sole judgment, such reduction or elimination is appropriate.

(d) Maximum Award Payable . The maximum Performance-based Award payable to any one Covered Employee under the Plan for a Performance Cycle is 1,100,000 Shares (subject to adjustment as provided in Section 3(b) hereof).

SECTION 11. DIVIDEND EQUIVALENT RIGHTS

(a) Dividend Equivalent Rights . A Dividend Equivalent Right is an Award entitling the grantee to receive credits based on cash dividends that would have been paid on the shares of Stock specified in the Dividend Equivalent Right (or other award to which it relates) if such shares had been issued to and held by the grantee. A Dividend Equivalent Right may be granted hereunder to any grantee as a component of another Award or as a freestanding award. The terms and conditions of Dividend Equivalent Rights shall be specified in the Award agreement.

Dividend equivalents credited to the holder of a Dividend Equivalent Right may be paid currently or may be deemed to be reinvested in additional shares of Stock, which may thereafter accrue additional equivalents. Any such reinvestment shall be at Fair Market Value on the date of reinvestment or such other price as may then apply under a dividend reinvestment plan sponsored by the Company, if any. Dividend Equivalent Rights may be settled in cash or shares of Stock or a combination thereof, in a single installment or installments. A Dividend Equivalent Right granted as a component of another Award may provide that such Dividend Equivalent Right shall be settled upon exercise, settlement, or payment of, or lapse of restrictions on, such other award, and that such Dividend Equivalent Right shall expire or be forfeited or annulled under the same conditions as such other award. A Dividend Equivalent Right granted as a component of another Award may also contain terms and conditions different from such other award.

(b) Interest Equivalents . Any Award under this Plan that is settled in whole or in part in cash on a deferred basis may provide in the grant for interest equivalents to be credited with respect to such cash payment. Interest equivalents may be compounded and shall be paid upon such terms and conditions as may be specified by the grant.

(c) Termination . Except as may otherwise be provided by the Administrator either in the Award agreement or, subject to Section 16 below, in writing after the Award agreement is issued, a grantee’s rights in all Dividend Equivalent Rights or interest equivalents granted as a component of another Award that has not vested shall automatically terminate upon the grantee’s termination of employment (or cessation of service relationship) with the Company and its Subsidiaries for any reason.

SECTION 12. TRANSFERABILITY OF AWARDS

(a) Transferability . Except as provided in Section 12(b) below, during a grantee’s lifetime, his or her Awards shall be exercisable only by the grantee, or by the grantee’s legal representative or guardian in the event of the grantee’s incapacity. No Awards shall be sold, assigned, transferred or otherwise encumbered or disposed of by a grantee other than by will or by the laws of descent and distribution. No Awards shall be subject, in whole or in part, to attachment, execution, or levy of any kind, and any purported transfer in violation hereof shall be null and void.

(b) Committee Action . Notwithstanding Section 12(a), the Administrator, in its discretion, may provide either in the Award agreement regarding a given Award or by subsequent written approval that the grantee (who is an employee or director) may transfer his or her Awards (other than any Incentive Stock Options) to his or her immediate family members, to trusts for the benefit of such family members, or to partnerships in which such family members are the only partners, provided that the transferee agrees in writing with the Company to be bound by all of the terms and conditions of this Plan and the applicable Award.

(c) Family Member . For purposes of Section 12(b), “family member” shall mean a grantee’s child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the grantee’s household (other than a tenant of the grantee), a trust in which these persons (or the grantee) have more than 50 percent of the beneficial interest, a foundation in which these persons (or the grantee) control the management of assets, and any other entity in which these persons (or the grantee) own more than 50 percent of the voting interests.

(d) Designation of Beneficiary . Each grantee to whom an Award has been made under the Plan may designate a beneficiary or beneficiaries to exercise any Award or receive any payment under any Award payable on or after the grantee’s death. Any such designation shall be on a form provided for that purpose by the Administrator and shall not be effective until received by the Administrator. If no beneficiary has been designated by a deceased grantee, or if the designated beneficiaries have predeceased the grantee, the beneficiary shall be the grantee’s estate.

SECTION 13. TAX WITHHOLDING

(a) Payment by Grantee . Each grantee shall, no later than the date as of which the value of an Award or of any Stock or other amounts received thereunder first becomes includable in the gross income of the grantee for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Administrator regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld by the Company with respect to such income. The Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the grantee. The Company’s obligation to deliver evidence of book entry (or stock certificates) to any grantee is subject to and conditioned on tax withholding obligations being satisfied by the grantee.

(b) Payment in Stock . Subject to approval by the Administrator, a grantee may elect to have the Company’s minimum required tax withholding obligation satisfied, in whole or in part, by (i) authorizing the Company to withhold from shares of Stock to be issued pursuant to any Award a number of shares with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding amount due, or (ii) transferring to the Company shares of Stock owned by the grantee with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding amount due.

SECTION 14. ADDITIONAL CONDITIONS APPLICABLE TO NONQUALIFIED DEFERRED COMPENSATION UNDER SECTION 409A.

In the event any Stock Option or Stock Appreciation Right under the Plan is granted with an exercise price of less than 100 percent of the Fair Market Value on the date of grant (regardless of whether or not such exercise price is intentionally or unintentionally priced at less than Fair Market Value), or such grant is materially modified and deemed a new grant at a time when the Fair Market Value exceeds the exercise price, or any other Award is otherwise determined to constitute “nonqualified deferred compensation” within the meaning of Section 409A (a “409A Award”), the following additional conditions shall apply and shall supersede any contrary provisions of this Plan or the terms of any agreement relating to such 409A Award.

(a) Exercise and Distribution . Except as provided in Section 14(b) hereof, no 409A Award shall be exercisable or distributable earlier than upon one of the following:

(i) Specified Time . A specified time or a fixed schedule set forth in the written instrument evidencing the 409A Award.

(ii) Separation from Service . Separation from service (within the meaning of Section 409A) by the 409A Award grantee; provided, however, that if the 409A Award grantee is a “key employee” (as defined in Section 416(i) of the Code without regard to paragraph (5) thereof) and any of the Company’s Stock is publicly traded on an established securities market or otherwise, exercise or distribution under this Section 14(a)(ii) may not be made before the date that is six months after the date of separation from service.

(iii) Death . The date of death of the 409A Award grantee.

(iv) Disability . The date the 409A Award grantee becomes disabled (within the meaning of Section 14(c)(ii) hereof).

(v) Unforeseeable Emergency . The occurrence of an unforeseeable emergency (within the meaning of Section 14(c)(iii) hereof), but only if the net value (after payment of the exercise price) of the number of shares of Stock that become issuable does not exceed the amounts necessary to satisfy such emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the exercise, after taking into account the extent to which the emergency is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the grantee’s other assets (to the extent such liquidation would not itself cause severe financial hardship).

(vi) Change in Control Event . The occurrence of a Change in Control Event (within the meaning of Section 14(c)(i) hereof), including the Company’s discretionary exercise of the right to accelerate vesting of such grant upon a Change in Control Event or to terminate the Plan or any 409A Award granted hereunder within 12 months of the Change in Control Event.

(b) No Acceleration . A 409A Award may not be accelerated or exercised prior to the time specified in Section 14(a) hereof, except in the case of one of the following events:

(i) Domestic Relations Order . The 409A Award may permit the acceleration of the exercise or distribution time or schedule to an individual other than the grantee as may be necessary to comply with the terms of a domestic relations order (as defined in Section 414(p)(1)(B) of the Code).

(ii) Conflicts of Interest . The 409A Award may permit the acceleration of the exercise or distribution time or schedule as may be necessary to comply with the terms of a certificate of divestiture (as defined in Section 1043(b)(2) of the Code).

(iii) Change in Control Event . The Administrator may exercise the discretionary right to accelerate the vesting of such 409A Award upon a Change in Control Event or to terminate the Plan or any 409A Award granted thereunder within 12 months of the Change in Control Event and cancel the 409A Award for compensation.

(c) Definitions . Solely for purposes of this Section 14 and not for other purposes of the Plan, the following terms shall be defined as set forth below:

(i) “Change in Control Event” means the occurrence of a change in the ownership of the Company, a change in effective control of the Company, or a change in the ownership of a substantial portion of the assets of the Company (as defined in Section 1.409A-3(g) of the proposed regulations promulgated under Section 409A by the Department of the Treasury on September 29, 2005 or any subsequent guidance).

(ii) “Disabled” means a grantee who (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Company or its Subsidiaries.

(iii) “Unforeseeable Emergency” means a severe financial hardship to the grantee resulting from an illness or accident of the grantee, the grantee’s spouse, or a dependent (as defined in Section 152(a) of the Code) of the grantee, loss of the grantee’s property due to casualty, or similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the grantee.

SECTION 15. TRANSFER, LEAVE OF ABSENCE, ETC.

For purposes of the Plan, the following events shall not be deemed a termination of employment:

(a) a transfer to the employment of the Company from a Subsidiary or from the Company to a Subsidiary, or from one Subsidiary to another; or

SECTION 16. AMENDMENTS AND TERMINATION

The Board may, at any time, amend or discontinue the Plan and the Administrator may, at any time, amend or cancel any outstanding Award for the purpose of satisfying changes in law or for any other lawful purpose, but no such action shall adversely affect rights under any outstanding Award without the holder’s consent. Except as provided in Section 3(b) or 3(c), in no event may the Administrator exercise its discretion to reduce the exercise price of outstanding Stock Options or Stock Appreciation Rights or effect repricing through cancellation and re-grants. Any material Plan amendments (other than amendments that curtail the scope of the Plan), including any Plan amendments that (i) increase the number of shares reserved for issuance under the Plan, (ii) expand the type of Awards available under, materially expand the eligibility to participate in, or materially extend the term of, the Plan, or (iii) materially change the method of determining Fair Market Value, shall be subject to approval by the Company stockholders entitled to vote at a meeting of stockholders. In addition, to the extent determined by the Administrator to be required by the Code to ensure that Incentive Stock Options granted under the Plan are qualified under Section 422 of the Code or to ensure that compensation earned under Awards qualifies as performance-based compensation under Section 162(m) of the Code, Plan amendments shall be subject to approval by the Company stockholders entitled to vote at a meeting of stockholders. Nothing in this Section 16 shall limit the Administrator’s authority to take any action permitted pursuant to Section 3(c).

SECTION 17. STATUS OF PLAN

With respect to the portion of any Award that has not been exercised and any payments in cash, Stock or other consideration not received by a grantee, a grantee shall have no rights greater than those of a general creditor of the Company unless the Administrator shall otherwise expressly determine in connection with any Award or Awards. In its sole discretion, the Administrator may authorize the creation of trusts or other arrangements to meet the Company’s obligations to deliver Stock or make payments with respect to Awards hereunder, provided that the existence of such trusts or other arrangements is consistent with the foregoing sentence.

SECTION 18. GENERAL PROVISIONS

(a) No Distribution; Compliance with Legal Requirements . The Administrator may require each person acquiring Stock pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof.

No shares of Stock shall be issued pursuant to an Award until all applicable securities law and other legal and stock exchange or similar requirements have been satisfied. The Administrator may require the placing of such stop-orders and restrictive legends on certificates for Stock and Awards as it deems appropriate.

(b) Delivery of Stock Certificates . Stock certificates to grantees under this Plan shall be deemed delivered for all purposes when the Company or a stock transfer agent of the Company shall have mailed such certificates in the United States mail, addressed to the grantee, at the grantee’s last known address on file with the Company. Uncertificated Stock shall be deemed delivered for all purposes when the Company or a Stock transfer agent of the Company shall have given to the grantee by electronic mail (with proof of receipt) or by United States mail, addressed to the grantee, at the grantee’s last known address on file with the Company, notice of issuance and recorded the issuance in its records (which may include electronic “book entry” records).

(d) Trading Policy Restrictions . Option exercises and other Awards under the Plan shall be subject to such Company’s insider trading policy and procedures, as in effect from time to time.

(e) Forfeiture of Awards under Sarbanes-Oxley Act . If the Company is required to prepare an accounting restatement due to the material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement under the securities laws, then any grantee who is one of the individuals subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002 shall reimburse the Company for the amount of any Award received by such individual under the Plan during the 12-month period following the first public issuance or filing with the United States Securities and Exchange Commission, as the case may be, of the financial document embodying such financial reporting requirement.

SECTION 19. EFFECTIVE DATE OF PLAN

This Plan shall become effective upon approval by the holders of a majority of the votes cast at a meeting of stockholders at which a quorum is present. No grants of Stock Options and other Awards may be made hereunder after the tenth (10) anniversary of the Effective Date and no grants of Incentive Stock Options may be made hereunder after the tenth (10) anniversary of the date the Plan is approved by the Board.

SECTION 20. GOVERNING LAW

This Plan and all Awards and actions taken thereunder shall be governed by, and construed in accordance with, the laws of the State of Delaware, applied without regard to conflict of law principles.


DATE APPROVED BY BOARD OF DIRECTORS:		February, 2006

DATE APPROVED BY STOCKHOLDERS:		February, 2006

Exhibit 21.1

Present Subsidiaries


Entity Name:	State or Jurisdiction Of Incorporation	Percentage of Voting Securities Owned
Teradyne (Asia) Pte., Ltd.	Singapore	100	%*
Teradyne Canada Limited	Canada	100	%
Teradyne de Costa Rica S.A.	Costa Rica	100	%
Teradyne Diagnostic Solutions Ltd.	United Kingdom	100	%*
Teradyne Diagnostic Solutions Inc.	Delaware	100	%
Teradyne Diagnostic Solutions GmbH	Germany	100	%*
Teradyne GmbH	Germany	100	%*
Teradyne Hong Kong Ltd.	Delaware	100	%
Teradyne (India) Engineering Private Ltd.	India	100	%*
Teradyne International Holdings B.V.	The Netherlands	100	%
Teradyne Italia SrL	Italy	100	%*
Teradyne K.K.	Japan	100	%
Teradyne Korea Ltd.	Delaware	100	%
Teradyne Limited	United Kingdom	100	%*
Teradyne Malaysia, Ltd	Delaware	100	%
Teradyne de Mexico S.A. de C.V.	Mexico	100	%
Teradyne Netherlands Ltd.	Delaware	100	%
Teradyne Philippines Limited	Delaware	100	%
Teradyne STD Korea Ltd.	Korea	100	%
Teradyne SAS	France	100	%
Teradyne (Shanghai) Co., Ltd	Peoples Republic of China	100	%*
Teradyne Taiwan Ltd.	Delaware	100	%
Teradyne Thailand Ltd.	Delaware	100	%
GenRad, Inc.	Massachusetts	100	%
GenRad A.B.	Sweden	100	%*
Herco Technology Corp.	California	100	%
P.L.S.T., Inc. (f/k/a Perception Laminates, Inc.)	California	100	%
Eagle Test Systems, Inc.	Delaware	100	%
Eagle Test Systems – Malaysia, Inc.	Delaware	100	%*
Eagle Test Systems (Philippines) LLC	Delaware	100	%*
Eagle Test Systems (Taiwan) LLC	Delaware	100	%*
Eagle Test Systems GmbH	Germany	100	%*
Eagle Test Systems Italy S.r.l.	Italy	100	%*
Eagle Test Systems (Suzhou) Co., Ltd.	Peoples Republic of China	100	%*
Eagle Test Systems, YH	Korea	100	%*
Eagle Test Systems Pte. Ltd.	Singapore	100	%*
Nextest Systems Corporation	Delaware	100	%
Nextest Systems Europe SrL	Italy	100	%*
Nextest Systems France SARL	France	100	%*
Nextest Systems Japan K.K.	Japan	100	%*
Nextest Systems Korea Co. Ltd.	Korea	100	%*
Nextest Systems (Philippines) Corp.	Philippines	100	%*
Nextest Systems (Thailand) Ltd.	Thailand	100	%*
Nextest Systems UK Ltd.	United Kingdom	100	%*

*	Indirect subsidiaries whose voting securities are 100% controlled by Teradyne, Inc.

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-75632 and 333-47564) and Form S-8 (Nos. 333-155564; 333-149017; 333-143231; 333-134519; 333-116632; 333-101983; 333-73700; 333-68074; 333-56373; 333-32547; 333-26045; 333-07177; 033-55123; and 33-42352) of Teradyne, Inc. of our report dated March 2, 2009 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K .

/s/PricewaterhouseCoopers LLP

Boston, Massachusetts

March 2, 2009

EXHIBIT 31.1

CERTIFICATIONS

I, Michael A. Bradley, certify that:

1. I have reviewed this annual report on Form 10-K of Teradyne, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 2, 2009


By:		/ S / M ICHAEL A. B RADLEY
		Michael A. Bradley
		Chief Executive Officer

EXHIBIT 31.2

I, Gregory R. Beecher, certify that:

1. I have reviewed this annual report on Form 10-K of Teradyne, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 2, 2009


By:		/ S / G REGORY R. B EECHER
		Gregory R. Beecher
		Chief Financial Officer

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Teradyne, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael A. Bradley, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/ S / M ICHAEL A. B RADLEY

Michael A. Bradley

Chief Executive Officer

March 2, 2009

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Teradyne, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory R. Beecher, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/ S / G REGORY R. B EECHER

Gregory R. Beecher

Chief Financial Officer

March 2, 2009