10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 29, 2003

OR

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

For the transition period from             to             

Commission File No. 1-6462

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 No.)

321 Harrison Avenue, Boston, Massachusetts	02118
(Address of Principal Executive Offices)	(Zip Code)

617-482-2700

(Registrant’s Telephone Number, Including Area Code)

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 the filing requirements for the past 90 days.    Yes x    No ¨

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

The number of shares outstanding of the registrant’s only class of Common Stock as of July 25, 2003 was 188,694,178 shares.

TERADYNE, INC.

INDEX

	Page No.
PART I.    FINANCIAL INFORMATION
Item 1.    Financial Statements:
Condensed Consolidated Balance Sheets as of June 29, 2003 and December 31, 2002	3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 29, 2003 and June 30, 2002	4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 29, 2003 and June 30, 2002	5
Notes to Condensed Consolidated Financial Statements	6-18
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations	19-39
Item 3.    Quantitative and Qualitative Disclosures about Market Risk	39
Item 4.    Controls and Procedures	39
PART II.    OTHER INFORMATION
Item 1.    Legal Proceedings	40-42
Item 4.    Submission of Matters to a Vote of Security Holders	42
Item 6.    Exhibits and Reports on Form 8-K	43
Exhibit Index	43

2

TERADYNE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 29, 2003			December 31, 2002
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	237,904		$	251,521
Marketable securities		53,673			73,833
Accounts receivable, less allowance for doubtful accounts of $6,459 and $5,749 on June 29, 2003 and December 31, 2002, respectively		220,575			174,838
Inventories:
Parts		120,932			165,149
Assemblies in process		111,633			106,156
Finished goods		1,747			8,245
		234,312			279,550
Prepayments and other current assets		35,004			29,531
Total current assets		781,468			809,273
Property, plant, and equipment, at cost:		1,366,837			1,420,480
Less: accumulated depreciation.		(742,574	)		(735,214	)
Net property, plant, and equipment		624,263			685,266
Marketable securities		240,135			215,703
Goodwill		118,203			118,203
Intangible and other assets		72,229			76,620
Total assets	$	1,836,298		$	1,905,065
LIABILITIES
Current liabilities:
Notes payable—banks	$	6,745		$	6,704
Current portion of long-term debt		1,408			1,365
Accounts payable		89,787			63,328
Accrued employees’ compensation and withholdings		78,028			96,848
Deferred revenue and customer advances		29,146			27,615
Other accrued liabilities		72,196			73,918
Income taxes payable		7,100			9,587
Total current liabilities		284,410			279,365
Pension liability		107,264			106,390
Long-term other accrued liabilities		45,547			40,276
Long-term debt		449,888			450,561
Total liabilities		887,109			876,592
Commitments and contingencies (Note J)
SHAREHOLDERS’ EQUITY
Common stock, $0.125 par value, 1,000,000 shares authorized, 213,732 and 209,851 shares issued at June 29, 2003 and December 31, 2002, respectively, and 187,077 and 183,196 shares outstanding at June 29, 2003 and December 31, 2002, respectively		26,717			26,231
Additional paid-in capital		1,237,815			1,195,246
Accumulated other comprehensive loss		(59,775	)		(66,423	)
Retained earnings		301,489			430,476
Treasury shares, at cost, 26,655 shares at June 29, 2003 and December 31, 2002		(557,057	)		(557,057	)
Total shareholders’ equity		949,189			1,028,473
Total liabilities and shareholders’ equity	$	1,836,298		$	1,905,065

The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2002 are an integral part of the condensed consolidated financial statements.

3

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months Ended						For the Six Months Ended
	June 29, 2003			June 30, 2002			June 29, 2003			June 30, 2002
	(In thousands, except per share amounts)
Net revenue:
Products	$	271,523		$	251,907		$	548,754		$	444,979
Services		60,006			57,991			117,351			112,927
Net revenues		331,529			309,898			666,105			557,906
Expenses:
Cost of products		203,781			199,818			414,708			377,014
Cost of services		39,140			39,376			78,683			78,908
Cost of revenues		242,921			239,194			493,391			455,922
Engineering and development		63,804			72,371			132,389			141,624
Selling and administrative		61,512			75,390			128,914			150,439
Restructuring and other charges		13,378			219			32,864			6,085
		381,615			387,174			787,558			754,070
Loss from operations		(50,086	)		(77,276	)		(121,453	)		(196,164	)
Interest income		3,299			4,526			7,478			8,730
Interest expense		(5,402	)		(5,390	)		(10,813	)		(10,724	)
Other income and expense, net		1,400			(1,124	)		(1,299	)		(1,637	)
Loss before income taxes		(50,789	)		(79,264	)		(126,087	)		(199,795	)
Provision for (benefit from) income taxes		1,700			(28,535	)		2,900			(71,926	)
Net loss	$	(52,489	)	$	(50,729	)	$	(128,987	)	$	(127,869	)
Net loss per common share—basic and diluted	$	(0.28	)	$	(0.28	)	$	(0.70	)	$	(0.70	)
Shares used in calculations of net loss per common share—basic and diluted		185,465			182,934			185,177			182,633

The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2002 are an integral part of the condensed consolidated financial statements.

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TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Six Months Ended
	June 29, 2003			June 30, 2002
	(In thousands)
Cash flows from operating activities:
Net loss	$	(128,987	)	$	(127,869	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation		76,069			74,512
Amortization		2,895			4,004
Impairment of long-lived assets		13,988			824
Loss on sale of product lines		8,048			—
Provision for doubtful accounts		842			1,206
Deferred income tax benefit		—			(87,602	)
Other non-cash items, net		4,856			7,670
Changes in operating assets and liabilities, net of product lines sold:
Accounts receivable		(49,143	)		(38,744	)
Inventories		40,701			64,535
Other assets		(17,640	)		85,847
Accounts payable, deferred revenue and accruals		24,494			(5,496	)
Income taxes payable		(2,487	)		15,085
Net cash used for operating activities		(26,364	)		(6,028	)
Cash flows from investing activities:
Additions to property, plant and equipment		(13,753	)		(30,708	)
Increase in equipment manufactured by Teradyne		(23,318	)		(8,973	)
Proceeds from asset disposals		5,964			—
Proceeds from the sale of product lines		2,114			—
Purchases of available-for-sale marketable securities		(106,619	)		(169,875	)
Maturities of available-for-sale marketable securities		75,989			139,893
Purchases of held-to-maturity marketable securities		—			(109,811	)
Maturities of held-to-maturity marketable securities		29,905			139,587
Net cash used for investing activities		(29,718	)		(39,887	)
Cash flows from financing activities:
(Payments of) proceeds from long term debt		(590	)		174
Issuance of common stock under employee stock option and stock purchase plans		43,055			40,435
Net cash flows provided by financing activities		42,465			40,609
Decrease in cash and cash equivalents		(13,617	)		(5,306	)
Cash and cash equivalents at beginning of period		251,521			317,591
Cash and cash equivalents at end of period	$	237,904		$	312,285
Supplementary disclosure of cash flow information:
Cash paid (received) during the period for:
Interest	$	10,661		$	10,327
Income taxes	$	2,696		$	(86,736	)

The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2002 are an integral part of the condensed consolidated financial statements.

5

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. The Company

Teradyne, Inc. is a leading supplier of automatic test equipment, a leading provider of high performance interconnection systems and a provider of electronic manufacturing services.

Teradyne’s automatic test equipment products include systems that:

• test semiconductors (“Semiconductor Test Systems”);

• test and inspect circuit-boards (“Circuit Board Test and Inspection Systems”);

• diagnose and test automotive electronics systems (“Diagnostic Solutions”); and

• test high speed voice and data communication (“Broadband Test Systems”).

Teradyne’s interconnection systems products and services (“Connection Systems”) include:

• high bandwidth backplane assemblies and associated connectors used in electronic systems; and

• electronic manufacturing services of assemblies that include Teradyne backplanes and connectors.

Broadband Test Systems and Diagnostic Solutions have been combined into “Other Test Systems” for purposes of disclosing Teradyne’s reportable segments.

B. Accounting Policies

Basis of Presentation

The condensed consolidated interim financial statements include the accounts of Teradyne and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain prior years’ amounts were reclassified to conform to the current year presentation. The year-end condensed consolidated balance sheet data were derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles.

Preparation of Financial Statements

The accompanying condensed consolidated interim financial statements are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring accrual entries) necessary for a fair statement of the results for the interim periods have been made. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates.

Product Warranty

Teradyne generally provides a one year warranty on its products commencing upon installation. A provision is recorded upon revenue recognition to cost of sales 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, 2002	$	9,087
Accruals for warranties issued during the period		8,416
Accruals related to pre-existing warranties (including changes in estimates)		971
Settlements made during the period		(7,833	)
Balance at June 29, 2003	$	10,641

6

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(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 other accrued liabilities.

	Balance
	(in thousands)
Balance at December 31, 2002	$	2,134
Deferral of new extended warranty revenue		563
Recognition of extended warranty deferred revenue		(1,205	)
Balance at June 29, 2003	$	1,492

Employee Stock Option Plans and Employee Stock Purchase Plan

Teradyne has stock-based employee compensation plans. Teradyne accounts for its stock option plans and stock purchase plan under the provisions of Accounting Principles Board Opinion No. 25 “Accounting For Stock Issued to Employees” (“APB 25”) and makes pro forma footnote disclosures as though the fair value method under Statement of Financial Accounting Standard No. 123, “Accounting For Stock-Based Compensation” (“FAS 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” was followed. Teradyne’s employee stock purchase plan is a non-compensatory plan and its stock option plans are accounted for using the intrinsic value method under the provisions of APB 25. Had compensation for Teradyne’s stock based compensation plans been accounted for at fair value the amounts reported in the Statement of Operations for the three and six months ended June 29, 2003 and June 30, 2002 would have been (in millions, except per share amounts):

	For the Three Months Ended						For The Six Months Ended
	June 29, 2003			June 30, 2002			June 29, 2003			June 30, 2002
Net loss, as reported	$	(52.5	)	$	(50.7	)	$	(129.0	)	$	(127.9	)
Deduct: Total stock-based employee compensation expense determined under fair value method, net of related tax effects(1)		(27.7	)		(16.8	)		(48.4	)		(33.8	)
Pro forma net loss		(80.2	)		(67.5	)		(177.4	)		(161.7	)
Net loss per common share—basic and diluted as reported		(0.28	)		(0.28	)		(0.70	)		(0.70	)
Net loss per common share—basic and diluted pro forma		(0.43	)		(0.37	)		(0.96	)		(0.89	)

(1) As a result of the review undertaken at December 31, 2002, Teradyne concluded under applicable accounting criteria that it was appropriate to establish a full valuation allowance for its net deferred tax assets. For the three and six months ended June 29, 2003, total stock based compensation expense has not been tax effected. For the three and six months ended June 30, 2002, total stock based compensation expense has been tax effected.

The weighted average grant date fair value for options granted during the three and six month periods ending June 29, 2003 was $6.42 and $6.40, respectively, per option and for the three and six month periods ending June 30, 2002, was $18.68 and $17.73, respectively, per option. The fair value of options at date of grant was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

	For the Three Months Ended				For The Six Months Ended
	June 29, 2003		June 30, 2002		June 29, 2003		June 30, 2002
Expected life (years)	4.4		4.3		4.4		4.3
Interest rate	2.5	%	4.3	%	2.5	%	4.1	%
Volatility	68.2	%	67.1	%	68.2	%	67.1	%
Dividend yield	0.0	%	0.0	%	0.0	%	0.0	%

7

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The weighted-average fair value of employee stock purchase rights granted was $5.74 during the three and six months ended June 29, 2003 and was $9.04 during the three and six months ended June 30, 2002. The fair value of the employees’ purchase rights was estimated using the Black-Scholes option pricing model with the following assumptions:

	For the Three and Six Months Ended
	June 29, 2003		June 30, 2002
Expected life (years)	1.0		1.0
Interest rate	1.1	%	2.1	%
Volatility	65.4	%	58.5	%
Dividend yield	0.0	%	0.0	%

Other Comprehensive Loss

The components of comprehensive loss are as follows (in thousands):

	For the Three Months Ended
	June 29, 2003			June 30, 2002
Net loss	$	(52,489	)	$	(50,729	)
Foreign currency translation adjustments		1,151			—
Unrealized gain (loss) on investments, net of applicable tax of $0 and $(1,073) for the three months ended June 29, 2003 and June 30, 2002, respectively		4,411			(1,907	)
Comprehensive loss	$	(46,927	)	$	(52,636	)
	For the Six Months Ended
	June 29, 2003			June 30, 2002
Net loss	$	(128,987	)	$	(127,869	)
Foreign currency translation adjustments		(48	)		—
Unrealized gain (loss) on investments, net of applicable tax of $0 and $(1,716) for the six months ended June 29, 2003 and June 30, 2002, respectively		6,696			(3,057	)
Comprehensive loss	$	(122,339	)	$	(130,926	)

C. Risks and Uncertainties

Teradyne’s future results of operations involve a number of risks and uncertainties. These factors include, but are not limited to, the slowdown in economies worldwide, current geopolitical turmoil, the continuing threat of domestic and international terrorist attacks, the current and anticipated market for electronics, risks associated with any measures Teradyne takes to address the current slowdown in the market, failure to adequately protect Teradyne’s intellectual property rights, failure to develop new technologies and customers’ failure to accept new products, risks associated with acquisitions and divestitures, securities class action litigation due to past or future stock activity, competition, including new product introductions from Teradyne’s competitors and competitive pricing pressures, risks of operating internationally including the impact of the severe acute respiratory syndrome (SARs) epidemic, risks associated with attracting and retaining key employees, a possible requirement to expense stock options, risks associated with Teradyne’s suppliers’ failure to meet Teradyne’s product or delivery requirements, risks associated with, among other things, obligations and potential liabilities under environmental laws and regulations, Teradyne’s debt service obligations with respect to its issuance in 2001 of convertible

8

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

senior notes and a mortgage financing completed in 2001 with respect to certain of its owned real estate assets, provisions of Teradyne’s charter and by-laws and Massachusetts law that make a takeover of Teradyne more difficult, timing of customer orders and any deferral or cancellation of orders previously received, reliance on sole source suppliers, potential retrofit costs, and the timing of investments in engineering and development.

At present, Teradyne can predict neither the duration of the current economic recession nor when or if the situation is likely to materially improve. In the absence of significant improvement, orders could remain low or decline further, and the amount of Teradyne’s inventory and certain long-lived assets considered realizable could be significantly reduced.

D. Recently Issued Accounting Pronouncements

In May 2003, FASB issued Statement of Financial Accounting Standards 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability. For all financial instruments entered into or modified after May 31, 2003, SFAS 150 is effective immediately. For all other instruments, SFAS 150 goes into effect at the beginning of the first interim period beginning after June 15, 2003. Teradyne does not expect that the adoption of SFAS 150 will have a material impact on its financial position or results of operations.

In April 2003, FASB issued Statement of Financial Accounting Standards 149 (“SFAS 149”), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS 149 amends and clarifies accounting and reporting of derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. Teradyne does not expect that the adoption of SFAS 149 will have a material impact on its financial position or results of operations.

In February 2003, FASB issued Emerging Issues Task Force 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 requires revenue arrangements with multiple deliverables to be divided into separate units of accounting. If the deliverables in the arrangement meet certain criteria, arrangement consideration should be allocated among the separate units of accounting based on their relative fair values. Applicable revenue recognition criteria should be considered separately for separate units of accounting. The guidance in EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Teradyne does not expect that the adoption of EITF 00-21 will have a material impact on its financial position or results of operations.

In January 2003, FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which addresses consolidation by a business of variable interest entities in which it is the primary beneficiary. The Interpretation is effective immediately for certain disclosure requirements and variable interest entities created after January 31, 2003, and periods beginning after June 15, 2003 for variable interest entities created before February 1, 2003. Teradyne does not expect that the adoption of FIN 46 will have a material impact on its financial position or results of operations.

9

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

E. Intangible Assets

Amortizable intangible assets consist of the following:

	June 29, 2003
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Useful Life
	(in thousands)
Completed technology	$	25,030	$	7,382	$	17,648	7.5 years
Service and software maintenance contracts and customer relationships		8,435		4,633		3,802	5.7 years
Tradenames and trademarks		3,800		792		3,008	8.0 years
Total intangible assets	$	37,265	$	12,807	$	24,458	7.1 years
	December 31, 2002
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Useful Life
	(in thousands)
Completed technology	$	28,649	$	5,790	$	22,859	7.5 years
Service and software maintenance contracts and customer relationships		8,633		3,944		4,689	5.7 years
Tradenames and trademarks		3,800		554		3,246	8.0 years
Total intangible assets	$	41,082	$	10,288	$	30,794	7.2 years

In the first quarter of 2003, Circuit Board Test and Inspection Systems sold its manufacturing software product line and manual x-ray inspection and rework product line for total cash proceeds of $2.1 million. These transactions resulted in a loss of $5.8 million which has been recorded in restructuring and other charges. Included in the $5.8 million loss is an intangible asset impairment charge of $3.7 million.

Aggregate amortization expense for the three months ended June 29, 2003 and June 30, 2002 was $1.2 million and $1.9 million, respectively. Aggregate amortization expense for the six months ended June 29, 2003 and June 30, 2002 was $2.5 million and $3.8 million, respectively. Estimated amortization expense for each of the five succeeding fiscal years is as follows (in thousands):

Year	Amount
2003 (remainder)	$	2,038
2004		4,077
2005		4,077
2006		4,077
2007		3,963

10

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

F. Net Loss per Common Share

The following table sets forth the computation of basic and diluted net loss per common share (in thousands, except per share amounts):

	For the Three Months Ended						For the Six Months Ended
	June 29, 2003			June 30, 2002			June 29, 2003			June 30, 2002
Net loss	$	(52,489	)	$	(50,729	)	$	(128,987	)	$	(127,869	)
Shares used in net loss per common share—basic and diluted		185,465			182,934			185,177			182,633
Net loss per common share—basic and diluted	$	(0.28	)	$	(0.28	)	$	(0.70	)	$	(0.70	)

All options and equivalent shares related to the convertible notes outstanding in the three and six months ended June 29, 2003 and June 30, 2002 were excluded from the calculation of diluted net loss per share because the effect would have been antidilutive. As of June 29, 2003, and June 30, 2002, there were 36.1 million and 28.1 million options outstanding, respectively. As of June 29, 2003, and June 30, 2002, there were 15.4 million equivalent shares related to the convertible notes outstanding.

G. Restructuring and Other Charges

The table below summarizes the liability and activity for the three months ended June 29, 2003, relating to restructuring and other charges:

	Long-lived Asset Impairment			Severance and Benefits			Loss on Sale of Product Lines			Facility Related			Total
	(in thousands)
Balance at March 30, 2003	$	—		$	9,039		$	—		$	24,271		$	33,310
Second quarter 2003 provision		6,494			3,407			1,055			2,422			13,378
Cash payments		—			(4,470	)		—			(2,412	)		(6,882	)
Asset write-downs		(6,494	)		—			(1,055	)		—			(7,549	)
Balance at June 29, 2003	$	—		$	7,976		$	—		$	24,281		$	32,257

The table below summarizes the liability and activity for the six months ended June 29, 2003, relating to restructuring and other charges:

	Long-lived Asset Impairment			Severance and Benefits			Loss on Sale of Product Lines			Facility Related			Total
	(in thousands)
Balance at December 31, 2002	$	—		$	8,242		$	—		$	25,240		$	33,482
First six months of 2003 provision		13,988			9,563			6,891			2,422			32,864
Cash payments		—			(9,829	)		—			(3,381	)		(13,210	)
Asset write-downs		(13,988	)		—			(6,891	)		—			(20,879	)
Balance at June 29, 2003	$	—		$	7,976		$	—		$	24,281		$	32,257

11

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The table below summarizes the liability and activity for the three months ended June 30, 2002, relating to restructuring and other charges:

	Long-lived Asset Impairment		Severance and Benefits			Loss on Sale of Product Lines		Facility Related			Total
	(in thousands)
Balance at March 31, 2002	$	—	$	7,129		$	—	$	1,496		$	8,625
Second quarter 2002 provision		—		219			—		—			219
Cash payments		—		(3,668	)		—		(180	)		(3,848	)
Balance at June 30, 2002	$	—	$	3,680		$	—	$	1,316		$	4,996

The table below summarizes the liability and activity for the six months ended June 30, 2002, relating to restructuring and other charges:

	Long-lived Asset Impairment			Severance and Benefits			Loss on Sale of Product Lines		Facility Related			Total
	(in thousands)
Balance at December 31, 2001	$	—		$	8,471		$	—	$	1,676		$	10,147
First six months of 2002 provision		824			5,261			—		—			6,085
Cash payments		—			(10,052	)		—		(360	)		(10,412	)
Asset write-downs		(824	)		—			—		—			(824	)
Balance at June 30, 2002	$	—		$	3,680		$	—	$	1,316		$	4,996

The accrual for severance and benefits is reflected in accrued employees’ compensation and withholdings and the accrual for lease payments on vacated facilities is reflected in other accrued liabilities. The lease accruals are expected to be paid out over the lease terms, the latest of which expires in 2012. Teradyne expects to pay out $7.2 million against the lease accruals over the next twelve months.

During the three months ended June 29, 2003, Teradyne recorded charges of $6.5 million primarily for certain long-lived assets held for sale that were impaired as the estimated fair value was less than the carrying value of these assets. The charge for the Connection Systems segment of $3.8 million includes $2.5 million related to the decision to sell a facility in Laverne, CA, $1.1 million for the impairment of manufacturing assets held for sale, and $0.2 million for a reduction in the fair value of a property held for sale in Nashua, NH. The charge for the Semiconductor Test Systems segment of $2.4 million includes $1.9 million which relates to a reduction in the fair value of properties held for sale in Agoura Hills, CA and $0.5 million for the impairment of manufacturing assets held for sale. The charge for the Circuit Board Test and Inspection Systems segment of $0.3 million relates to the impairment of manufacturing assets held for sale. The charge for the properties held for sale resulted from a deterioration in real estate market conditions.

During six months ended June 29, 2003, Teradyne recorded charges of $14.0 million primarily for certain long-lived assets held for sale that were impaired as the estimated fair value was less than the carrying value of these assets. The charge for the Connection Systems segment of $8.2 million includes $3.3 million for a reduction in the fair value of properties held for sale in Nashua, NH and San Diego, CA, $2.5 million related to the decision to sell a facility in Laverne, CA, and $2.4 million for the impairment of manufacturing assets held for sale. The charge for the Semiconductor Test Systems segment of $5.5 million relates primarily to a reduction in the fair value of properties held for sale in Agoura Hills, CA. The charge for the properties held for sale resulted from a deterioration in real estate market conditions. The charge for the Circuit Board Test and

12

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Inspection Systems segment of $0.3 million relates to the impairment of manufacturing assets held for sale. During the six months ended June 30, 2002, certain Semiconductor Test Systems long-lived assets were impaired as the estimated fair value was less than the carrying value of these assets. The charge for the impaired assets was $0.8 million and the assets were sold in the second quarter of 2002. The carrying value of Teradyne’s assets held for sale is $30.9 million as of June 29, 2003. These assets are included in Property, Plant and Equipment.

Teradyne recorded a charge for severance and related benefits during the three and six months ended June 29, 2003 of $3.4 million and $9.6 million, respectively. There were approximately 120 employees terminated in the second quarter of 2003 and 460 employees terminated in the first six months of 2003 across Teradyne. All remaining severance benefits payable to these employees are expected to be paid by the end of the first quarter of 2005. Teradyne recorded a charge for severance and related benefits during the three and six months ended June 30, 2002 of $0.2 million and $5.3 million, respectively. There were approximately 22 employees terminated in selling and administrative during the second quarter of 2002 and 240 employees terminated across Teradyne in the first six months of 2002. As of June 29, 2003 Teradyne has paid all severance benefits relating to employee terminations in the first six months of 2002.

During the three and six months ended June 29, 2003, Teradyne recorded a charge of $2.3 million and $8.1 million, respectively for the loss on sale of product lines, of which $1.1 million and $6.9 million, respectively, has been recorded in restructuring and other charges and $1.2 million in each period has been recorded in cost of sales. The product lines sold were in the Circuit Board Test and Inspection segment and the Other Test Systems segment. In the first quarter of 2003, the Circuit Board Test and Inspection Systems segment sold its manufacturing software product line and manual x-ray inspection and rework product line for total cash proceeds of $2.1 million. These transactions resulted in a loss of $0.9 million during the three months ended June 29, 2003 and $6.7 million for the first six months ended June 29, 2003 of which $0.4 million and $6.2 million, respectively, has been recorded in restructuring and other charges and $0.5 million has been recorded in cost of sales for the three and six months ended June 29, 2003. In the three and six months ended June 29, 2003, the Other Test Systems segment recorded a charge of $1.4 million to writedown its net assets relating to the sale of the Autodiagnos automotive after market product line of which $0.7 million has been recorded in restructuring and other charges and $0.7 million has been recorded in cost of sales.

In the second quarter of 2003, Teradyne recorded a charge of $2.4 million consisting primarily of revised estimates of losses due to changes in the assumed amount and timing of sublease income on facilities that have been exited prior to the end of the lease term. The Connection Systems segment recorded $1.4 million of this charge and $1.0 million was recorded in the Circuit Board Test and Inspection Systems segment.

H. Other Charges

The table below reflects certain operating statement activity for the three and six months ended June 29, 2003:

	For the Three Months Ended June 29, 2003				For the Six Months Ended June 29, 2003
	(in thousands)
	Accelerated Depreciation		Inventory Writedown		Accelerated Depreciation		Inventory Writedown
Cost of sales	$	1,142	$	1,436	$	4,711	$	1,436
Engineering and development		455		—		1,486		—
Selling and administrative		725		—		2,555		—
Total charges	$	2,322	$	1,436	$	8,752	$	1,436

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the second quarter of 2003, Teradyne recorded a $2.3 million charge for accelerated depreciation which relates to the incremental depreciation over the normal depreciation expense for long-lived assets as a result of the decision to consolidate locations and therefore shorten the service period. The charge includes $2.2 million at the Circuit Board Test and Inspection Systems segment related to the Westford, MA move to North Reading, MA, and $0.1 million at the Semiconductor Test Systems segment related to the Bedford, MA facility.

During the three and six months ended June 29, 2003, Teradyne recorded a $1.4 million charge for a writedown of inventory which was recorded in cost of sales. The charge includes $0.7 million at the Other Test Systems segment relating to the sale of the Autodiagnos automotive after market product line, $0.5 million at the Circuit Board Test and Inspection Systems segment relating to the sale of the manufacturing software product line and manual x-ray inspection and rework product line, and $0.2 million relating to the Connections Systems segment decision to sell a facility at Laverne, CA.

During the first six months of 2003, Teradyne recorded an $8.8 million charge for accelerated depreciation which relates to the incremental depreciation over the normal depreciation expense for long-lived assets as a result of the decision to consolidate locations and therefore shorten the service period. The charge includes $5.7 million at the Circuit Board Test and Inspection Systems segment related to the Westford, MA move to North Reading, MA; $1.8 million at the Connection Systems segment related to the Hudson, NH and Cavan, Ireland facilities; $0.7 million at the Semiconductor Test Systems segment related to the Bedford, MA facility; and $0.6 million at Corporate related to a Boston facility.

Other income and expense, net for the three months ended June 29, 2003 and June 30, 2002 includes the following:

(Loss)/Income	June 29, 2003		June 30, 2002
	(in thousands)
Gain on sale of investment	$	1,250		—
Fair value adjustment on warrants		150	$	(1,124	)
Total	$	1,400	$	(1,124	)

Other income and expense, net for the six months ended June 29, 2003 and June 30, 2002 includes the following:

(Loss)/Income	June 29, 2003			June 30, 2002
	(in thousands)
Other than temporary impairment of investments	$	(2,592	)		—
Gain on sale of investment		1,250			—
Fair value adjustment on warrants		43		$	(1,637	)
Total	$	(1,299	)	$	(1,637	)

I. Operating Segment Information

Teradyne has four principal operating segments which are the design, manufacturing and marketing of Semiconductor Test Systems, Connection Systems, Circuit Board Test and Inspection Systems, and Other Test Systems. These operating segments were determined based upon the nature of the products and services offered. The Other Test Systems segment is comprised of Broadband Test Systems and Diagnostic Solutions.

14

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income before taxes. The accounting policies of the business segments are the same as those described in “Note B: Accounting Policies” in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2002. Intersegment sales are accounted for at fair value as if sales were to third parties. Operating segment information for the three and six month periods ended June 29, 2003 and June 30, 2002 follows (in thousands):

	Semiconductor Test Systems Segment			Connection Systems Segment			Circuit Board Test & Inspection Systems Segment			Other Test Systems Segment			Corporate and Eliminations			Consolidated
Three months ended June 29, 2003:
Sales to unaffiliated customers	$	174,656		$	91,585		$	38,389		$	26,899			—		$	331,529
Intersegment sales		—			13,106			—			—		$	(13,106	)		—
Net sales		174,656			104,691			38,389			26,899			(13,106	)		331,529
Loss before taxes (1)(2)	$	(23,199	)	$	(7,779	)	$	(18,573	)	$	(1,156	)	$	(82	)	$	(50,789	)
Three months ended June 30, 2002:
Sales to unaffiliated customers	$	144,624		$	102,554		$	40,239		$	22,481			—		$	309,898
Intersegment sales		—			2,626			—			—		$	(2,626	)		—
Net sales		144,624			105,180			40,239			22,481			(2,626	)		309,898
(Loss) income before taxes (1)(2)	$	(52,228	)	$	749		$	(22,746	)	$	1,106		$	(6,145	)	$	(79,264	)
Six months ended June 29, 2003:
Sales to unaffiliated customers	$	342,208		$	183,454		$	82,353		$	58,090			—		$	666,105
Intersegment sales		—			17,489			—			—		$	(17,489	)		—
Net sales		342,208			200,943			82,353			58,090			(17,489	)		666,105
(Loss) income before taxes (1)(2)		(60,275	)		(19,604	)		(38,870	)		192			(7,530	)		(126,087	)
Total assets	$	715,511		$	282,351		$	173,766		$	68,157		$	596,513		$	1,836,298
Six months ended June 30, 2002:
Sales to unaffiliated customers	$	232,150		$	198,341		$	79,202		$	48,213			—		$	557,906
Intersegment sales		—			2,685			—			—		$	(2,685	)		—
Net sales		232,150			201,026			79,202			48,213			(2,685	)		557,906
(Loss) income before taxes (1)(2)	$	(133,266	)	$	(1,874	)	$	(56,346	)	$	3,953		$	(12,262	)	$	(199,795	)

(1) (Loss) income before taxes of the principal businesses excludes the effects of employee profit sharing, management incentive compensation, other unallocated expenses, and net interest and other expense which are included in Corporate and Eliminations.

(2) Included in (loss) income before taxes for the following segments are charges that include restructuring and other charges, accelerated depreciation, impairment of investments and inventory writedowns:

	For the Three Months Ended				For the Six Months Ended
	June 29, 2003		June 30, 2002		June 29, 2003		June 30, 2002
Semiconductor Test Systems Segment	$	3,666	$	141	$	10,582	$	2,649
Connections Systems Segment		6,171		37		13,318		180
Circuit Board Test and Inspection Systems Segment		5,654		—		16,027		2,791
Other Test Systems Segment		1,550		—		2,035		27
Corporate and Eliminations		95		41		3,682		438
Consolidated	$	17,136	$	219	$	45,644	$	6,085

15

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

J. Commitments and Contingencies

After the August 2000 acquisition of Herco Technology Corp. and Perception Laminates, Inc. the former owners of those companies filed a complaint on September 5, 2001 against Teradyne and two of its executive officers. The case is now pending in Federal District Court, San Diego, California. Teradyne and the two individual defendants filed a motion to dismiss the complaint in its entirety. The court granted the motion in part, and the only remaining claims were that the sale of Teradyne’s common stock to the former owners violated certain California securities statutes and common law and that Teradyne breached certain contractual obligations in the agreements relating to the acquisitions. Teradyne’s subsequent motion for partial summary judgment with respect to the breach of contract claims was granted on November 7, 2002. On December 9, 2002, the plaintiffs filed a motion asking the court to reconsider its summary judgment ruling or, alternatively, for certification under Rule 54(b) which would grant the plaintiffs leave to appeal both the Court’s ruling regarding dismissal of claims and its ruling granting summary judgment to the Ninth Circuit Court of Appeals. Teradyne opposed these motions. On April 22, 2003, the Court denied the plaintiffs motion for reconsideration and the plaintiffs request for certification under Rule 54(b). A small portion of the original complaint relating to alleged fraud in connection with setting the transaction price remains pending before the District Court. Teradyne has answered and denied all liability. On April 1, 2003, Teradyne filed a motion to compel production of documents and asked the District Court to grant sanctions for the plaintiff’s failure. On May 14, 2003, the plaintiffs filed an opposition to Teradyne’s motion to compel and request for sanctions. On June 11, 2003, the District Court granted Teradyne’s motion to compel and awarded Teradyne a portion of its attorney’s fees and costs associated with the motion to compel. Discovery proceedings are continuing. Management does not believe that the outcomes of these claims will have a material adverse effect on Teradyne’s financial position or results of operations but there can be no assurance that any such claims would not have a material adverse effect on Teradyne’s financial position or results of operations.

Also arising out of the August 2000 acquisition of Herco Technology Corp. and Perception Laminates, Inc. is a demand for arbitration, made on or about October 19, 2001, by the former owners of those companies, which was filed with the American Arbitration Association. The arbitration is with respect to environmental indemnification claims initially asserted by Teradyne under the respective acquisition agreements. These claims arose in connection with environmental matters related to Herco Technology Corp. and Perception Laminates, Inc. facilities in California. The arbitration demand by the former owners seeks release of certain shares of Teradyne’s common stock being held in escrow pursuant to the terms of the acquisition agreements and damages related to failure to release the escrow. Teradyne has counterclaimed for enforcement of the environmental indemnity provisions of the acquisition agreements. Hearings in connection with the arbitration have been completed and the parties have submitted post-hearing briefs to the arbitrators. On May 29, 2003, the arbitrators issued a Preliminary Award designating Teradyne as the substantially prevailing party in the arbitration, awarding Teradyne indemnification damages in the form of 18,256 shares of escrowed stock and entitling Teradyne to seek attorney’s fees and costs from the former owners. Following the Preliminary Award, Teradyne and the former owners filed briefs on the subject of attorneys fees and costs. On July 10, 2003, the arbitrators issued the Final Award which confirmed the Preliminary Award findings and also awarded Teradyne indemnification of attorneys’ fees and costs in the form of 15,374 shares of escrowed stock. Pursuant to the Final Award, Teradyne shall receive a total of 33,630 shares of escrowed stock. Execution of the Final Award will result in distribution of all shares held in escrow except 2,000 shares which shall be retained in escrow for future environmental expenditures.

Teradyne and two of its executive officers were named as defendants in three purported class action complaints that were filed in Federal District Court, Boston, Massachusetts, in October and November 2001. The court consolidated the cases and has appointed three lead plaintiffs. On November 8, 2002, plaintiffs filed and served a consolidated amended class action complaint. The complaint alleges, among other things, that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by making, during the

16

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

period from July 14, 2000 until October 17, 2000, material misrepresentations and omissions to the investing public regarding Teradyne’s business operations and future prospects. The complaint seeks unspecified damages, including compensatory damages and recovery of reasonable attorneys’ fees and costs. Teradyne filed a motion to dismiss all claims asserted in the complaint on February 7, 2003. On April 9, 2003, the lead plaintiffs filed a memorandum in opposition to Teradyne’s motion to dismiss. On May 28, 2003, Teradyne filed a reply memorandum in support of its motion to dismiss all claims asserted in the complaint. Oral arguments in connection with Teradyne’s motion to dismiss were presented to the District Court on June 26, 2003. Claims asserted in this case are similar to the claims asserted in the case discussed above, which is pending in the Federal District Court in San Diego, California. Teradyne believes it has meritorious defenses to the claims and will defend itself vigorously. Management does not believe that the outcomes of these claims will have a material adverse effect on Teradyne’s financial position or results of operations but there can be no assurance that any such claims would not have a material adverse effect on Teradyne’s financial position or results of operations.

By letter dated October 22, 2002, counsel for Electro Mechanical Solutions, Inc., (“EMS”) and several affiliated debtors including PRECISMetals in Chapter 11 bankruptcy cases pending in the United States Bankruptcy Court for the Northern District of California (collectively, the “Debtors”), asserted that Teradyne received payments in 2001 totaling $12.4 million from PRECISMetals in the 90 days prior to the bankruptcy filing and that those payments constitute avoidable preferential transfers. On May 23, 2003, the Debtors filed a complaint against Teradyne in the U.S. Bankruptcy Court for the Northern District of California alleging that Teradyne received preferential transfers totaling $12.7 million from EMS and PRECISMetals in the 90 days prior to the bankruptcy filing and that those payments constitute avoidable preferential transfers. On June 30, 2003, Teradyne filed its answer and denied all liability. Teradyne believes that it has good faith defenses to the alleged preferential transfers and intends to contest the claims vigorously. Management does not believe that the outcomes of these claims will have a material adverse effect on Teradyne’s financial position or results of operations but there can be no assurance that any such claims would not have a material adverse effect on Teradyne’s financial position or results of operations.

In 2001, Teradyne was designated as a “potentially responsible party” (“PRP”) at a clean-up site in Los Angeles, California. This claim arises out of Teradyne’s acquisition of Perception Laminates, Inc. in August 2000. Prior to that date, Perception Laminates had itself acquired certain assets of Alco Industries Inc. under an asset purchase agreement dated July 30, 1992. Neither Teradyne nor Perception Laminates have ever conducted any operations at the Los Angeles site. Teradyne has asked the State of California to drop the PRP designation, but California has not yet agreed to do so. Management does not believe that the outcome of this matter will have a material adverse effect on Teradyne’s financial position or results of operations but there can be no assurance that any such outcome would not have a material adverse effect on Teradyne’s financial position or results of operations.

In August 2002, Teradyne was designated as a PRP at a site in Whittier, California. Teradyne was identified as a PRP based on shipments from its Woodland Hills, California and Agoura Hills, California sites during 1983 and 1984. Based upon review of the shipping documents, Teradyne considered any potential liability to be limited to that of a de minimus contributor to the site. On April 18, 2003, Teradyne entered into an agreement to settle any potential liability related to the site and pursuant to that agreement paid a de minimus amount as full and final settlement of any potential liability.

In October 1998, a former employee of GenRad, Inc., which Teradyne acquired on October 26, 2001, instituted an arbitration proceeding against GenRad alleging breach of his severance agreement. The last arbitration hearing was conducted on October 28, 2002. On June 2, 2003, the arbitrator issued an award in favor of Genrad, finding that Genrad had not breached the severance agreement and that the former employee had resigned from Genrad without reason, and as such, was not entitled to any severance benefits.

17

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In August of 2003, Teradyne was notified by one of its suppliers of potential claims and liabilities relating to a supply agreement and course of dealings between the supplier and Teradyne. Simultaneously, the supplier’s investors and majority shareholders informed Teradyne of a potential claim involving misrepresentations allegedly made by Teradyne with respect to the supplier’s existing business operations and future business prospects with Teradyne. No formal complaint has been filed against Teradyne as of August 13, 2003. Teradyne is currently investigating these matters. Based on the unspecified nature of the claims, Teradyne is not presently able to reasonably estimate potential losses, if any, related to these potential claims and therefore, as of August 13, 2003, has not accrued for any potential losses from these unasserted claims.

Teradyne disputes all of the claims above and believes they are without merit, and intends to defend vigorously against them. However, an adverse resolution of any of the claims could have a material adverse effect on Teradyne’s financial position or results of operations. Teradyne is not presently able to reasonably estimate potential losses, if any, related to any of the claims and therefore as of June 29, 2003 has not accrued for any potential losses from the claims.

In addition, Teradyne is subject to legal proceedings, claims and investigations that arise in the ordinary course of business such as but not limited to patent, commercial and environmental matters. There are no such matters pending that Teradyne expects to be material with respect to its business, financial position or results of operation but there can be no assurance that any such matters would not have a material adverse effect on Teradyne’s business, financial position or results of operations.

Guarantees and Indemnification Obligations

For “Guarantees and Indemnification Obligations” of Teradyne see Note J: “Commitments and Contingencies” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2003. There were no material changes in Teradyne’s guarantee and indemnification obligations from those set forth in our Annual Report for the year ended December 31, 2002.

K. Subsequent Events

In July of 2003, Teradyne announced a reduction in workforce totaling approximately 50 people in the Connections Systems and Circuit Board Test and Inspection Systems segments. The estimated severance charge from these reductions in personnel totals approximately $1.1 million.

18

Item 2:    Management’s Discussion and Analysis of Financial Condition and Results of Operations

SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS

	For the Three Months Ended						For the Six Months Ended
	June 29, 2003			June 30, 2002			June 29, 2003			June 30, 2002
	(In thousands)						(In thousands)
Net revenue	$	331,529		$	309,898		$	666,105		$	557,906
Net loss	$	(52,489	)	$	(50,729	)	$	(128,987	)	$	(127,869	)
Percentage of net revenue:
Products		81.9	%		81.3	%		82.4	%		79.8	%
Services		18.1			18.7			17.6			20.2
Net revenue		100.0			100.0			100.0			100.0
Expenses:
Cost of products		61.5			64.5			62.3			67.6
Cost of services		11.8			12.7			11.8			14.1
Cost of revenue		73.3			77.2			74.1			81.7
Engineering and development		19.2			23.4			19.9			25.4
Selling and administrative		18.6			24.3			19.4			27.0
Restructuring and other charges		4.0			0.1			4.9			1.1
Other and interest, net		0.2			0.6			0.7			0.6
		115.3			125.6			119.0			135.8
Loss before income taxes		(15.3	)		(25.6	)		(19.0	)		(35.8	)
Provision for (benefit from) income taxes		0.5			(9.2	)		0.4			(12.9	)
Net loss		(15.8	)%		(16.4	)%		(19.4	)%		(22.9	)%
Provision for (benefit from) income taxes as a percentage of loss before income taxes		3.3	%		(36.0	)%		2.3	%		(36.0	)%

Results of Operations

Business Overview

Revenues remained relatively flat for the third consecutive quarter. Uncertainty continues in the general business environment and the electronics industry in particular. During the second quarter of 2003, Teradyne saw customers continue to delay buying decisions until the last possible moment.

Until Teradyne’s customers see significant and sustained increases in their business levels, Teradyne’s orders could remain low or see a further decline. If Teradyne experiences further declines in its own order rates, the amount of Teradyne’s inventory and certain long-lived assets considered realizable could be significantly reduced.

19

Second Quarter 2003 Compared to Second Quarter 2002

Bookings

Net orders increased 33% to $304.6 million in the second quarter of 2003 from $228.3 million in the second quarter of 2002. The increase in incoming net orders was led by a 169% increase in Connection Systems, a 34% increase in Semiconductor Test Systems and a 19% increase in Other Test Systems. Circuit Board Test and Inspection Systems net orders decreased by 33%. The increase in Semiconductor Test Systems orders was due to an increase of approximately 268% in orders from subcontractor (Subcon) customers which was partially offset by a decrease in orders from Integrated Device Manufacturer (IDM) customers. The majority of the increase from Subcon customers was spread across South East Asia and Taiwan. The increase in Connection Systems orders was from a significant reduction in cancellations from major customers in the telecommunications and information technology infrastructure industries. The decrease in Circuit Board Test and Inspection Systems orders can be attributed to excess customer capacity.

Teradyne experienced cancellations of $8.4 million and $44.4 million during second quarter of 2003 and 2002, respectively. For the second quarter of 2003, cancellations of $4.3 million and $3.5 million occurred in the Semiconductor Test Systems and Connection System businesses, respectively.

Teradyne’s net orders for its four principal operating segments were as follows:

	Three Months Ended
	June 29, 2003		June 30, 2002		% Change
	(in millions)
Semiconductor Test Systems	$	186.4	$	138.9	34.2	%
Connection Systems		64.6		24.0	169.2
Circuit Board Test and Inspection Systems		31.8		47.1	(32.5	)
Other Test Systems		21.8		18.3	19.1
	$	304.6	$	228.3	33.4

Teradyne’s net orders by region as a percentage of total net orders were as follows:

	Three Months Ended
	June 29, 2003		June 30, 2002
South East Asia	33	%	27	%
United States	31		35
Europe	13		17
Taiwan	11		8
Japan	9		10
Korea	0		2
Rest of the World	3		1
	100	%	100	%

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, Teradyne’s 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 Teradyne’s business and results of operations.

Revenue

Teradyne’s revenue from its four principal operating segments was as follows:

	Three Months Ended
	June 29, 2003		June 30, 2002		% Change
	(in millions)
Semiconductor Test Systems	$	174.7	$	144.6	20.8	%
Connection Systems		91.5		102.6	(10.8	)
Circuit Board Test and Inspection Systems		38.4		40.2	(4.5	)
Other Test Systems		26.9		22.5	19.6
	$	331.5	$	309.9	7.0

20

Teradyne’s revenue by region as a percentage of total revenue was as follows:

	Three Months Ended
	June 29, 2003		June 30, 2002
United States	37	%	45	%
South East Asia	24		21
Europe	19		17
Japan	9		5
Taiwan	8		9
Korea	1		1
Rest of the World	2		2
	100	%	100	%

The increase in Semiconductor Test Systems revenue was due to increased shipments to major IDM and Subcon customer sites across Korea, South East Asia, and Europe. More than half of the decrease in Connection Systems revenue was from reduced shipments in its assembly business, while the remaining decrease was primarily in its connector business. The increase in Other Test Systems was driven by a 69% revenue increase in Diagnostic Solutions as a result of increased business from a leading automotive manufacturer. The increase in Diagnostic Solutions was partially offset by a decrease of 44% in Broadband Test Systems revenue.

Product revenue increased 8% in the second quarter of 2003 to $271.5 million from $251.9 million in the second quarter of 2002. Service revenue increased 3% in the second quarter of 2003 to $60.0 million from $58.0 million in second quarter of 2002.

Gross Margin

Gross margin increased to 27% of total revenue in the second quarter of 2003 from 23% of total revenue in the second quarter of 2002. Product gross margin increased to 25% of product revenue in the second quarter of 2003 from 21% of product revenue in the second quarter of 2002. The improved product gross margin percentage is a result of product revenue growth of 8% and an approximate 14% reduction in fixed and semi-fixed manufacturing costs. Included in the gross margin percentage of 27% in the second quarter of 2003, is approximately $1.4 million charge for a writedown of inventory and $1.1 million of incremental accelerated depreciation. The charge of $1.4 million for a writedown of inventory includes $0.7 million at the Other Test Systems segment relating to the sale of the Autodiagnos automotive after market product line, $0.5 million at the Circuit Board Test and Inspection Systems segment relating to the sale of the manufacturing software product line and manual x-ray inspection and rework product line, and $0.2 million relating to the Connections Systems segment decision to sell a facility at Laverne, CA. Service gross margin increased to 35% of service revenue in the second quarter of 2003 from 32% of service revenue in the second quarter of 2002. The improved service gross margin percentage largely results from reduced fixed costs in the Semiconductor Test Systems parts and field service business.

Engineering and Development

Engineering and development expenses, as a percentage of revenue, decreased to 19% in the second quarter of 2003 from 23% in the second quarter of 2002, with net spending decreasing by $8.6 million. Gross expense reductions of approximately $14.3 million were offset by increases of approximately $5.2 million from the elimination of company wide pay cuts and the granting of previously frozen salary increases in the third quarter of 2002, as well as incremental accelerated depreciation described below.

Half of the gross expense reduction was a result of a downsized workforce, with a bulk of the remainder coming from a reduction in outsourced engineering and consulting spending. Teradyne recorded a charge for

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incremental accelerated depreciation of $0.5 million in the second quarter of 2003 which is classified in Engineering and Development.

Selling and Administrative

Selling and administrative expenses decreased to 19% of revenue in the second quarter of 2003 from 24% of revenue in the second quarter of 2002 with net spending decreasing by $13.9 million. Gross expense reductions of approximately $17.5 million were offset by increases of approximately $2.9 million from the elimination of company wide pay cuts and the granting of previously frozen salary increases in the third quarter of 2002, as well as incremental accelerated depreciation described below.

Of the gross expense reduction, about 19% was a result of a downsized workforce, with the bulk of the remainder coming from a combination of reduced fixed costs, such as facilities costs and depreciation, excluding the incremental accelerated depreciation charge discussed below, and reduced travel and promotional spending. Teradyne recorded a charge for incremental accelerated depreciation of $0.7 million in the second quarter of 2003 which is classified in Selling and Administrative.

Restructuring and Other Charges

The table below summarizes the liability and activity for the three months ended June 29, 2003, relating to restructuring and other charges:

	Long-lived Asset Impairment			Severance and Benefits			Loss on Sale of Product Lines			Facility Related			Total
	(in thousands)
Balance at March 30, 2003	$	—		$	9,039		$	—		$	24,271		$	33,310
Second quarter 2003 provision		6,494			3,407			1,055			2,422			13,378
Cash payments		—			(4,470	)		—			(2,412	)		(6,882	)
Asset write-downs		(6,494	)		—			(1,055	)		—			(7,549	)
Balance at June 29, 2003	$	—		$	7,976		$	—		$	24,281		$	32,257

The table below summarizes the liability and activity for the three months ended June 30, 2002, relating to restructuring and other charges:

	Long-lived Asset Impairment		Severance and Benefits			Loss on Sale of Product Lines		Facility Related			Total
	(in thousands)
Balance at March 31, 2002	$	—	$	7,129		$	—	$	1,496		$	8,625
Second quarter 2002 provision		—		219			—		—			219
Cash payments		—		(3,668	)		—		(180	)		(3,848	)
Balance at June 30, 2002	$	—	$	3,680		$	—	$	1,316		$	4,996

The accrual for severance and benefits is reflected in accrued employees’ compensation and withholdings and the accrual for lease payments on vacated facilities is reflected in other accrued liabilities. The lease accruals are expected to be paid out over the lease terms, the latest of which expires in 2012. Teradyne expects to pay out $7.2 million against the lease accruals over the next twelve months.

During the three months ended June 29, 2003, Teradyne recorded charges of $6.5 million primarily for certain long-lived assets held for sale that were impaired as the estimated fair value was less than the carrying

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value of these assets. The charge for the Connection Systems segment of $3.8 million includes $2.5 million which relates to the decision to sell a facility in Laverne, CA, $1.1 million for the impairment of manufacturing assets held for sale, and $0.2 million for a reduction in the fair value of a property held for sale in Nashua, NH. The charge for the Semiconductor Test Systems segment of $2.4 million includes $1.9 million which relates to a reduction in the fair value of properties held for sale in Agoura Hills, CA and $0.5 million for the impairment of manufacturing assets held for sale. The charge for the Circuit Board Test and Inspection Systems segment of $0.3 million relates to the impairment of manufacturing assets held for sale. The charge for the properties held for sale resulted from a deterioration in real estate market conditions.

Teradyne recorded a charge for severance and related benefits during the three months ended June 29, 2003 of $3.4 million. There were approximately 120 employees terminated in the second quarter of 2003 across Teradyne. All remaining severance benefits payable to these employees are expected to be paid by the end of the first quarter of 2005. Teradyne recorded a charge for severance and related benefits during the three months ended June 30, 2002 of $0.2 million. There were approximately 22 employees terminated in selling and administrative during the second quarter of 2002. As of June 29, 2003 Teradyne has paid all severance benefits relating to employee terminations in the second quarter of 2002.

During the three months ended June 29, 2003, Teradyne recorded a charge of $2.3 million for the loss on sale of product lines, of which $1.1 million has been recorded in restructuring and other charges and $1.2 million has been recorded in cost of sales. The product lines sold were in the Circuit Board Test and Inspection segment and the Other Test Systems segment. In the first quarter of 2003, the Circuit Board Test and Inspection Systems segment sold its manufacturing software product line and manual x-ray inspection and rework product line for total cash proceeds of $2.1 million. These transactions resulted in a loss of $0.9 million during the three months ended June 29, 2003 of which $0.4 million has been recorded in restructuring and other charges and $0.5 million has been recorded in cost of sales for the three months ended June 29, 2003. In the three months ended June 29, 2003, the Other Test Systems segment recorded a charge of $1.4 million to writedown its net assets relating to the sale of the Autodiagnos automotive after market product line of which $0.7 million has been recorded in restructuring and other charges and $0.7 million has been recorded in cost of sales.

In the second quarter of 2003, Teradyne recorded a charge of $2.4 million consisting primarily of revised estimates of losses due to changes in the assumed amount and timing of sublease income on facilities that have been exited prior to the end of the lease term. The Connection Systems segment recorded $1.4 million of this charge and $1.0 million was recorded in the Circuit Board Test and Inspection Systems segment.

The restructuring actions described above during the second quarter of 2003 are expected to generate cost savings of approximately $8.9 million annually across all areas of operations.

In July of 2003, Teradyne announced a reduction in workforce totaling approximately 50 people in the Connections Systems and Circuit Board Test and Inspection Systems segments. The estimated severance charge from these reductions in personnel totals approximately $1.1 million. Teradyne anticipates further restructuring activities.

Interest Income and Expense

Interest income decreased by $1.2 million in the second quarter of 2003 from $4.5 million for the second quarter of 2002 compared to $3.3 million for the second quarter of 2003 primarily due to decreased cash and marketable securities balances. Interest expense remained flat at $5.4 million in both the second quarter of 2003 and the second quarter of 2002.

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Other Income and Expense, Net

Other income and expense, net for the three months ended June 29, 2003 and June 30, 2002 includes the following:

(Loss)/Income	June 29, 2003		June 30, 2002
	(in thousands)
Gain on sale of investment	$	1,250		—
Fair value adjustment on warrants		150	$	(1,124	)
Total	$	1,400	$	(1,124	)

Income Taxes

In the fourth quarter of 2002, Teradyne recorded a tax provision to establish a full valuation allowance against its net deferred tax assets. As a result of its review undertaken at December 31, 2002, Teradyne concluded under applicable accounting criteria that it was more likely than not that its deferred tax assets would not be realized. Until an appropriate level of profitability is reached, Teradyne will not record tax benefits on operating losses in future results of operations. The second quarter of 2003 tax expense relates primarily to a tax provision for foreign taxes. In the second quarter of 2002, Teradyne was recording tax benefits for losses at an effective tax rate of 36%.

Six Months of 2003 Compared to Six Months of 2002

Bookings

Net orders increased 35% to $593.6 million in the first six months of 2003 from $438.7 million in the first six months of 2002. The increase in incoming net orders was led by a 93% increase in Connection Systems and a 48% increase in Semiconductor Test Systems. These increases were offset by decreases in net orders of 15% in Circuit Board Test and Inspection Systems and 14% in Other Test Systems. The increase in Semiconductor Test Systems orders was driven by Subcon customers, which accounted for 74% of the increase, and was spread across South East Asia and Taiwan. The increase in Connection Systems orders was from an 11% increase in gross bookings due to increased demand from major customers in the telecommunications and information technology infrastructure industries, and a 76% reduction in cancellations. Circuit Board Test and Inspection Systems orders decreased due to excess customer capacity.

Teradyne experienced cancellations of $22.9 million and $71.6 million during first six months of 2003 and 2002, respectively. For the first six months of 2003, cancellations of $15.8 million and $6.6 million occurred in the Connection Systems and Semiconductor Test Systems businesses, respectively.

Teradyne’s net orders for its four principal operating segments were as follows:

	Six Months Ended
	June 29, 2003		June 30, 2002		% Change
	(in millions)
Semiconductor Test Systems	$	338.3	$	228.6	48.0	%
Connection Systems		135.5		70.4	92.5
Circuit Board Test and Inspection Systems		71.0		83.2	(14.7	)
Other Test Systems		48.8		56.5	(13.6	)
	$	593.6	$	438.7	35.3

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Teradyne’s net orders by region as a percentage of total net orders were as follows:

	Six Months Ended
	June 29, 2003		June 30, 2002
United States	34	%	43	%
South East Asia	26		23
Europe	18		16
Japan	11		8
Taiwan	8		6
Korea	0		2
Rest of the World	3		2
	100	%	100	%

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, Teradyne’s 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 Teradyne’s business and results of operations.

Revenue

Teradyne’s revenue from its four principal operating segments was as follows:

	Six Months Ended
	June 29, 2003		June 30, 2002		% Change
	(in millions)
Semiconductor Test Systems	$	342.2	$	232.2	47.4	%
Connection Systems		183.4		198.3	(7.5	)
Circuit Board Test and Inspection Systems		82.4		79.2	4.0
Other Test Systems		58.1		48.2	20.5
	$	666.1	$	557.9	19.4

Teradyne’s revenue by region as a percentage of total revenue was as follows:

	Six Months Ended
	June 29, 2003		June 30, 2002
United States	38	%	49	%
South East Asia	22		18
Europe	19		18
Taiwan	9		8
Japan	9		4
Korea	1		1
Rest of the World	2		2
	100	%	100	%

The increase in Semiconductor Test Systems revenue was due to increased shipments to major IDM and Subcon customer sites across Korea, South East Asia, Taiwan, and Europe. Connection Systems revenue decreased primarily due to a decrease in shipments from its assembly business. The increase in Other Test Systems was driven by a 79% revenue increase in Diagnostic Solutions as a result of increased business from a leading automotive manufacturer. The increase in Diagnostic Solutions was partially offset by a decrease of 47% in Broadband Test revenue.

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Product revenue increased 23% in the first six months of 2003 to $548.8 million from $445.0 million in the first six months of 2002. Service revenue increased 4% in the first six months of 2003 to $117.4 million from $112.9 million in first six months of 2002.

Gross Margin

Gross margin increased to 26% of total revenue in the first six months of 2003 from 18% of total revenue in the first six months of 2002. Product gross margin increased to 24% of product revenue in the first six months of 2003 from 15% of product revenue in the first six months of 2002. The improved product gross margin percentage is a result of product revenue growth of 23% and an approximate 11% reduction in fixed & semi-fixed manufacturing costs. Included in the gross margin percentage of 26% for the first six months of 2003, is approximately $4.7 million of incremental accelerated depreciation and a $1.4 million charge for a writedown of inventory. The charge of $1.4 million for a writedown of inventory includes $.0.7 million at the Other Test Systems segment relating to the sale of the Autodiagnos automotive after market product line, $0.5 million at the Circuit Board Test and Inspection Systems segment relating to the sale of the manufacturing software product line and manual x-ray inspection and rework product line, and $0.2 million relating to the Connections Systems segment decision to sell a facility at Laverne, CA. Service gross margin increased to 33% of service revenue in the first six months of 2003 from 30% of service revenue in the first six months of 2002. The improved service gross margin percentage largely results from reduced fixed costs in the Semiconductor Test Systems parts and field service business.

Engineering and Development

Engineering and development expenses, as a percentage of revenue, decreased to 20% in the first six months of 2003 from 25% in the first six months of 2002, with net spending decreasing by $9.2 million. Gross expense reductions of approximately $21.1 million were offset by increases of approximately $10.4 million from the elimination of company wide pay cuts and the granting of previously frozen salary increases in the third quarter of 2002, as well as incremental accelerated depreciation described below.

Approximately 40% of the gross expense reduction was a result of a downsized workforce, with a bulk of the remainder coming from a reduction in outsourced engineering, consulting, and travel spending. Teradyne recorded a charge for incremental accelerated depreciation of $1.5 million in the first six months of 2003 which is classified in Engineering and Development.

Selling and Administrative

Selling and administrative expenses decreased to 19% of revenue in the first six months of 2003 from 27% of revenue in the first six months of 2002 with net spending decreasing by $21.5 million. Gross expense reductions of approximately $29.9 million were offset by increases of approximately $5.8 million from the elimination of company wide pay cuts and the granting of previously frozen salary increases in the third quarter of 2002, as well as incremental accelerated depreciation described below.

Of the gross expense reduction, approximately 25% was a result of a downsized workforce, with the bulk of the remainder coming from a combination of reduced fixed costs, such as facilities costs and depreciation, excluding the incremental accelerated depreciation charge discussed below, and reduced travel, promotional, and consulting spending. Teradyne recorded a charge for incremental accelerated depreciation of $2.6 million in the first six months of 2003 which is classified in Selling and Administrative.

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Restructuring and Other Charges

The table below summarizes the liability and activity for the six months ended June 29, 2003, relating to restructuring and other charges:

	Long-lived Asset Impairment			Severance and Benefits			Loss on Sale of Product Lines			Facility Related			Total
	(in thousands)
Balance at December 31, 2002	$	—		$	8,242		$	—		$	25,240		$	33,482
First six months of 2003 provision		13,988			9,563			6,891			2,422			32,864
Cash payments		—			(9,829	)		—			(3,381	)		(13,210	)
Asset write-downs		(13,988	)		—			(6,891	)		—			(20,879	)
Balance at June 29, 2003	$	—		$	7,976		$	—		$	24,281		$	32,257

The table below summarizes the liability and activity for the six months ended June 30, 2002, relating to restructuring and other charges:

	Long-lived Asset Impairment			Severance and Benefits			Loss on Sale of Product Lines		Facility Related			Total
	(in thousands)
Balance at December 31, 2001	$	—		$	8,471		$	—	$	1,676		$	10,147
First six months of 2002 provision		824			5,261			—		—			6,085
Cash payments		—			(10,052	)		—		(360	)		(10,412	)
Asset write-downs		(824	)		—			—		—			(824	)
Balance at June 30, 2002	$	—		$	3,680		$	—	$	1,316		$	4,996

The accrual for severance and benefits is reflected in accrued employees’ compensation and withholdings and the accrual for lease payments on vacated facilities is reflected in other accrued liabilities. The lease accruals are expected to be paid out over the lease terms, the latest of which expires in 2012. Teradyne expects to pay out $7.2 million against the lease accruals over the next twelve months.

During six months ended June 29, 2003, Teradyne recorded charges of $14.0 million primarily for certain long-lived assets held for sale that were impaired as the estimated fair value was less than the carrying value of these assets. The charge for the Connection Systems segment of $8.2 million includes $3.3 million for a reduction in the fair value of properties held for sale in Nashua, NH and San Diego, CA, $2.5 million relates to the decision to sell a facility in Laverne, CA, and $2.4 million for the impairment of manufacturing assets held for sale. The charge for the Semiconductor Test Systems segment of $5.5 million relates primarily to a reduction in the fair value of properties held for sale in Agoura Hills, CA. The charge for the properties held for sale resulted from a deterioration in real estate market conditions. The charge for the Circuit Board Test and Inspection Systems segment of $0.3 million relates to the impairment of manufacturing assets held for sale. During the first quarter of 2002, certain Semiconductor Test Systems long-lived assets were impaired as the estimated fair value was less than the carrying value of these assets. The charge for the impaired assets was $0.8 million and the assets were sold in the second quarter of 2002. The carrying value of Teradyne’s assets held for sale is $30.9 million as of June 29, 2003. These assets are included in Property, Plant and Equipment.

Teradyne recorded a $9.6 million charge for severance and related benefits during the six months ended June 29, 2003. There were approximately 460 employees terminated in the first six months of 2003 across Teradyne. All remaining severance benefits payable to these employees are expected to be paid by the end of the

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first quarter of 2005. Teradyne recorded a charge for severance and related benefits during the six months ended June 30, 2002 of $5.3 million. There were approximately 240 employees terminated across Teradyne in the first six months of 2002. As of June 29, 2003 Teradyne has paid all severance benefits relating to employee terminations in the first six months of 2002.

During the six months ended June 29, 2003, Teradyne recorded a charge of $8.1 million for the loss on sale of product lines, of which $6.9 million has been recorded in restructuring and other charges and $1.2 million for inventory writedowns has been recorded in cost of sales. The product lines sold were in the Circuit Board Test and Inspection segment and the Other Test Systems segment. In the first quarter of 2003, the Circuit Board Test and Inspection Systems segment sold its manufacturing software product line and manual x-ray inspection and rework product line for total cash proceeds of $2.1 million. These transactions resulted in a loss of $6.7 million for the first six months ended June 29, 2003 of which $6.2 million has been recorded in restructuring and other charges and $0.5 million has been recorded in cost of sales for the six months ended June 29, 2003. In the six months ended June 29, 2003, the Other Test Systems segment recorded a charge of $1.4 million to writedown its net assets relating to the sale of the Autodiagnos automotive after market product line of which $0.7 million has been recorded in restructuring and other charges and $0.7 million has been recorded in cost of sales.

In the first six months of 2003, Teradyne recorded a charge of $2.4 million consisting primarily of revised estimates of losses due to changes in the assumed amount and timing of sublease income on facilities that have been exited prior to the end of the lease term. The Connection Systems segment recorded $1.4 million of this charge and $1.0 million was recorded in the Circuit Board Test and Inspection Systems segment.

The restructuring actions taken during the first six months of 2003 are expected to generate cost savings of approximately $36.3 million annually across all areas of operations.

In July of 2003, Teradyne announced a reduction in workforce totaling approximately 50 people in the Connections Systems and Circuit Board Test and Inspection Systems segments. The estimated severance charge from these reductions in personnel totals approximately $1.1 million. Teradyne anticipates further restructuring activities.

Interest Income and Expense

Interest income decreased by $1.2 million in the first six months of 2003 from $8.7 million for the first six months of 2002 compared to $7.5 million for the first six months of 2003 primarily due to decreased cash and marketable securities balances. Interest expense remained flat at $10.8 million in the second quarter of 2003 compared to $10.7 million in the second quarter of 2002.

Other Income and Expense, Net

Other income and expense, net for the six months ended June 29, 2003 and June 30, 2002 includes the following:

(Loss)/Income	June 29, 2003			June 30, 2002
	(in thousands)
Other than temporary impairment of investment	$	(2,592	)		—
Gain on sale of investment		1,250			—
Fair value adjustment on warrants		43		$	(1,637	)
Total	$	(1,299	)	$	(1,637	)

Income Taxes

In the fourth quarter of 2002, Teradyne recorded a tax provision to establish a full valuation allowance against its net deferred tax assets. As a result of its review undertaken at December 31, 2002, Teradyne concluded under applicable accounting criteria that it was more likely than not that its deferred tax assets would not be realized. Until an appropriate level of profitability is reached, Teradyne will not record tax benefits on

28

operating losses in future results of operations. The first six months of 2003 tax expense relates primarily to a tax provision for foreign taxes. In the first six months of 2002, Teradyne was recording tax benefits for losses at an effective tax rate of 36%.

Liquidity and Capital Resources

Teradyne’s cash, cash equivalents and marketable securities balance decreased by $9.3 million in the first six months of 2003, to $531.7 million. Teradyne used cash from operating activities of $26.4 million and $6.0 million in the first six months of 2003 and the first six months of 2002, respectively. Cash used from net loss, excluding the effects of non-cash items, consisted of $22.3 million in the first six months of 2003 and $127.3 million for the first six months of 2002. Changes in operating assets and liabilities, net of product lines sold, used cash of $4.1 million in the first six months of 2003 as accounts receivable balances increased primarily due to higher shipments in the last month of the quarter which was partially offset by decreased inventory balances. In the first six months of 2002, changes in operating assets and liabilities generated cash of $121.2 million due to the receipt of a tax refund of $85.2 million in March 2002 and decreased inventory balances.

Teradyne used $29.7 million of cash for investing activities in the first six months of 2003 and $39.9 million in the first six months of 2002. Investing activities consist of purchases, sales, and maturities of marketable securities, proceeds from the sale of asset disposals, proceeds from the sale of product lines and purchases of capital assets to support long-term growth. Capital expenditures were $37.1 million in the first six months of 2003 and $39.7 million in the first six months of 2002. The decrease in capital expenditures was due to actions taken by Teradyne beginning in 2001 to reduce planned capital expenditures due to current market conditions.

Financing activities provided $42.5 million and $40.6 million of cash during the first six months of 2003 and 2002, respectively. Financing activities include issuance of Teradyne’s common stock through employee stock option and stock purchase plans and repayments of debt. During the first six months of 2003 and 2002, common stock activity provided cash of $43.1 million and $40.4 million, respectively.

Teradyne believes its cash, cash equivalents, and marketable securities balance of $531.7 million will be sufficient to meet working capital and expenditure needs for at least the next twelve months. Teradyne’s United States defined benefit pension plan is currently under funded. Teradyne plans to contribute approximately $10 million during the remainder of fiscal 2003 and approximately $25 million in the first three quarters of 2004 to this plan. Teradyne may pre-pay its mortgage on its California properties in the near future, which would result in a payment of approximately $46 million. Inflation has not had a significant long-term impact on earnings.

Employee Stock Options

Teradyne’s equity compensation program is a broad-based, long-term retention program that is intended to attract and retain talented employees and align stockholder and employee interests. Teradyne considers its equity compensation program critical to Teradyne’s operation and productivity. Approximately 80% of Teradyne’s employees participated in its equity compensation program during 2002. Of the stock options Teradyne granted in first six months of 2003, 88% went to employees other than the Chief Executive Officer and the five other most highly compensated executive officers.

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Stock option plan activity for the first six months of 2003, and fiscal years ended December 31, 2002 and 2001 follows (in thousands):

	Six Months Ended June 29, 2003		Year Ended December 31, 2002		Year Ended December 31, 2001
Outstanding at beginning of period	33,421		29,750		22,745
Options granted	6,489		7,205		10,289
Options exercised	(2,221	)	(1,152	)	(2,766	)
Options canceled	(1,620	)	(2,382	)	(518	)
Outstanding at end of period	36,069		33,421		29,750
Exercisable at the end of the period	17,650		19,296		13,545
Available for grant at beginning of period	25,018		29,841		4,612
Grants	(6,489	)	(7,205	)	(10,289	)
Cancellations	1,620		2,382		518
Additional shares reserved	—		—		35,000
Available for grant at end of period	20,149		25,018		29,841

Employee and Executive Option Grants

	Six Months Ended June 30, 2003		Year Ended December 31
			2002		2001
Net grants during the period as a percentage of outstanding shares at the end of such period	2.60	%	2.63	%	5.39	%
Grants to Named Executive Officers* during the period as a percentage of outstanding shares at the end of such period	0.43	%	0.44	%	0.63	%
Grants to Named Executive Officers* during the period as a percentage of total options granted during such period	12.48	%	11.42	%	11.16	%
Cumulative options held by Named Executive Officers* as a percentage of total options outstanding at the end of such period	11.76	%	10.33	%	8.88	%

* The term “Named Executive Officers” as used in these notes, includes the Chief Executive Officer and the five other most highly compensated executive officers.

Summary of in-the-money and out-of the-money option information at June 29, 2003:

	Exercisable			Unexercisable			Total
March 30, 2003	Shares	Weighted- Average Exercise Price		Shares	Weighted- Average Exercise Price		Shares	Weighted- Average Exercise Price
	(Shares in thousands)
In-the-Money	5,404	$	10.77	5,488	$	11.78	10,892	$	11.28
Out-of-the-Money(1)	12,246		29.56	12,931		23.11	25,177		26.25
Total Options Outstanding	17,650	$	23.81	18,419	$	19.73	36,069	$	21.73

(1) Out-of-the-money options are those options with an exercise price equal to or above $17.32, the closing price of Teradyne’s common stock on June 29, 2003.

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Executive Options

Options granted to Named Executive Officers, during the six months ended June 29, 2003:

	Individual Grants
	Number of Securities Underlying Options	Percent of Total Options Granted to Employees(1)		Exercise Price Per Share		Expiration Date	5%(2)		10%(2)
George W. Chamillard	300,000	4.62	%	$	11.66	4/28/10	$	1,424,037	$	3,318,612
Gregory R. Beecher	100,000	1.54			11.66	4/28/10		474,679		1,106,204
Michael A. Bradley	115,000	1.77			11.66	4/28/10		545,881		1,272,135
John M. Casey	80,000	1.23			11.66	4/28/10		379,743		884,963
Edward Rogas, Jr.	115,000	1.77			11.66	4/28/10		545,881		1,272,135
Richard E. Schneider	100,000	1.54			11.66	4/28/10		474,679		1,106,204

(1) Based on a June 29, 2003 total of 6,488,950 shares subject to options granted in the six months ended June 29, 2003 to employees under Teradyne’s option plans.

(2) Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term. Amounts reported in these columns represent amounts that may be realized upon exercise of the options immediately prior to the expiration of their term assuming the specified compounded rates of appreciation (5% and 10%) of Teradyne’s common stock over the term of the options. These numbers are calculated based on rules promulgated by the Securities and Exchange Commission and do not reflect Teradyne’s estimate of future stock price increases. Actual gains, if any, on stock option exercises and common stock holdings are dependent on the timing of such exercise and the future performance of Teradyne’s common stock. There can be no assurance that the rates of appreciation assumed in this table can be achieved or that the amounts reflected will be received by the individuals.

Option exercises and aggregate remaining option holdings and option values of Named Executive Officers during the first six months of 2003 and as of June 29, 2003:

Name	Shares Acquired During First Six Months of 2003	Value Realized		Number of Securities Underlying Unexercised Options at June 29, 2003		Values of Unexercised In-the Money Options at June 29, 2003(1)
				Exercisable	Unexercisable	Exercisable		Unexercisable
George W. Chamillard	0	$	0	845,714	921,855	$	2,450,017	$	1,389,600
Gregory R. Beecher	0		0	110,641	245,320		115,800		463,200
Michael A. Bradley	0		0	351,922	294,459		1,291,228		532,680
John M. Casey	0		0	237,215	200,856		787,475		370,560
Edward Rogas, Jr.	0		0	375,922	295,459		1,426,165		532,680
Richard E. Schneider	20,000		123,750	132,841	229,120		241,499		463,200

(1) Option values based on stock price of $17.32, the closing price of Teradyne’s common stock on June 29, 2003

Equity Compensation Plans

In addition to Teradyne’s 1996 Employee Stock Purchase Plan discussed in Note B: “Accounting Policies,” in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2002, Teradyne maintains three equity compensation plans under which its equity securities are authorized for issuance to the Corporation’s employees, directors and/or consultants:

1)    1991 Employee Stock Option Plan;

2)    1997 Employee Stock Option Plan; and

3)    1996 Non-Employee Director Stock Option Plan

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The purpose of these plans is to promote the interests of Teradyne by attracting and retaining the services of qualified and talented persons to serve as employees, directors and/or consultants of Teradyne. Except for the 1997 Employee Stock Option Plan, each of the foregoing plans was approved by Teradyne’s shareholders.

The following table presents information about these plans as of June 29, 2003:

	(1)	(2)		(3)
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 stock option compensation plans (excluding securities reflected in column(1))
	(Shares in thousands)
Stock option plans approved by shareholders	7,140	$	20.80	2,890
Stock option plans not approved by shareholders(1)	28,492	$	21.17	17,259
Total	35,632	$	21.10	20,149

(1) In connection with the acquisition of GenRad, Inc. in October 2001 (the “Acquisition”), Teradyne 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 Teradyne common stock based on an exchange ratio of 0.1733 shares of Teradyne common stock for each share of GenRad common stock. No additional options will be granted pursuant to the GenRad Plans. As of June 29, 2003, there were outstanding options exercisable for an aggregate of 437 shares of Teradyne common stock pursuant to the GenRad Plans, with a weighted average exercise price of $73.13 per share.

For further information on Teradyne’s stock option plans see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2003.

Certain Factors That May Affect Future Results

From time to time, information provided by Teradyne, statements made by its employees or information included in its filings with the Securities and Exchange Commission (including this Form 10-Q) contain statements that are not purely historical, but are forward looking statements, made under Section 21E of the Securities Exchange Act of 1934, which involve risks and uncertainties. In particular, forward looking statements made herein include projections, plans, and objectives for Teradyne’s business, financial condition, operating results, future operations, or future economic performance, statements relating to the sufficiency of capital to meet working capital requirements, capital expenditures, expectations as to customer orders and demand for Teradyne’s products and statements relating to existing or planned restructuring activities, backlog, bookings and cancellations, gross margins and pricing considerations. These statements are neither promises nor guarantees but involve risks and uncertainties, both known and unknown, which could cause Teradyne’s actual future results to differ materially from those stated in any forward looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed below. These factors, and others, are discussed from time to time in Teradyne’s filings with the Securities and Exchange Commission, including in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2002.

Teradyne’s Business Is Impacted by the Slowdown in Economies Worldwide.

Teradyne’s business has been negatively impacted by the slowdown in the global economies that began in the second half of 2000. The uncertainty regarding the growth rate of the worldwide economies has caused

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companies to reduce capital investments and may cause further reduction of such investments. These reductions have been particularly severe in the electronics and semiconductor industry which Teradyne serves and have contributed to Teradyne incurring losses. Teradyne cannot predict if or when the growth rate of worldwide economies will rebound, whether the growth rate of its business will rebound when the worldwide economies begin to grow, or if or when Teradyne will return to profitability. The effects of the economic decline are being felt across all of Teradyne’s business segments and continue to result in significantly reduced customer orders.

Current Geopolitical Turmoil and the Continuing Threat of Domestic and International Terrorist Attacks May Adversely Impact Teradyne’s Revenues.

International turmoil, exacerbated by the war in Iraq, and the escalating tensions in North Korea have contributed to an uncertain political and economic climate, both in the United States and globally, which may affect Teradyne’s ability to generate revenue on a predictable basis. In addition, terrorist attacks internationally and the threat of future terrorist attacks both domestically and internationally have negatively impacted an already weakened worldwide economy. As Teradyne sells products both in the United States and internationally, the threat of future terrorist attacks may adversely affect Teradyne’s business. These conditions make it difficult for Teradyne, and its customers, to accurately forecast and plan future business activities and could have a material adverse effect on Teradyne’s business, financial condition and results of operations.

Teradyne’s Business is Dependent on the Current and Anticipated Market for Electronics.

Teradyne’s 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. The current and anticipated market demand for electronics has been impacted by the economic slowdown that began in the latter portions of 2000 and the effects of the hostilities begun in September 2001. 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 manufactured and marketed by Teradyne. Teradyne believes that the markets for newer generations of electronic products such as those that Teradyne manufactures and markets will also be subject to similar fluctuations. Teradyne is dependent on the timing of customer orders and the deferral or cancellation of previous customer orders could have an adverse effect on its results of operations. Teradyne cannot assure that the continued downturn in new orders will turn around in the future or that any increase in sales or new orders for a calendar year will be sustained in subsequent years. In addition, any factor adversely affecting the electronics industry or particular segments within the electronics industry may adversely affect Teradyne’s business, financial condition and operating results.

Teradyne Has Taken and Expects to Continue to Take Measures to Address the Current Slowdown in the Market for Its Products Which Could Have Long-term Negative Effects on Teradyne ‘s Business.

Teradyne has taken and expects to continue to take measures to address the current slowdown in the market for its products. In particular, Teradyne has reduced its workforce, closed facilities, reduced the pay of certain employees, implemented furloughs, discontinued certain of its product lines, implemented material cost reduction programs, reduced its planned capital expenditures and expense budgets. These measures have reduced expenses in the face of decreased revenues due to decreased or cancelled customer orders. However, each measure Teradyne has taken and any additional measures taken in the future to contain expenditures could have long-term negative effects on Teradyne’s business by reducing its pool of technical talent, decreasing or slowing improvements in its products, increasing Teradyne’s debt, and making it more difficult for Teradyne to respond to customers or competitors.

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Teradyne’s Business May Be Adversely Impacted by Acquisitions Which May Affect Its Ability to Manage and Maintain Its Business.

Since Teradyne’s inception, it has acquired a number of businesses. In the future, Teradyne may undertake additional acquisitions of businesses that complement its existing operations. Such past or future acquisitions could involve a number of risks, including:

• the diversion of the attention of management and other key personnel;

• the inability to effectively integrate an acquired business into Teradyne’s culture, product and service delivery methodology and other standards, controls, procedures and policies;

• the inability to retain the management, key personnel and other employees of an acquired business;

• the inability to retain the customers of an acquired business;

• the possibility that Teradyne’s reputation will be adversely affected by customer satisfaction problems of an acquired business;

• potential known or unknown liabilities associated with an acquired business, including but not limited to regulatory, environmental and tax liabilities;

• the amortization of acquired identifiable intangibles, which may adversely affect Teradyne’s reported results of operations; and

• litigation which has or which may arise in the future in connection with such acquisitions.

For example, in connection with the August 2000 acquisition of each of Herco Technology Corp., a California company, and Perception Laminates, Inc., a California company, a complaint was filed on or about September 5, 2001 and is now pending in Federal District Court, San Diego, California, by the former owners of those companies naming as defendants Teradyne and two of its executive officers. This case is further described in “Part II, Item 1: Legal Proceedings” in this Form 10-Q.

Additionally, in 2001, Teradyne was designated as a “potentially responsible party” (“PRP”) at a clean-up site in Los Angeles, California. This claim arises out of Teradyne’s acquisition of Perception Laminates, Inc. in August 2000. Prior to that date, Perception Laminates had itself acquired certain assets of Alco Industries Inc. under an asset purchase agreement dated July 30, 1992. Neither Teradyne nor Perception Laminates have ever conducted any operations at the Los Angeles site. Teradyne has asked the State of California to drop the PRP designation, but California has not yet agreed to do so. This case is further described in “Part II, Item 1: Legal Proceedings” in this Form 10-Q.

In addition to the foregoing, any acquired business could significantly underperform relative to Teradyne’s expectations.

Teradyne Currently Faces, and in the Future May Be the Subject of, Securities Class Action Litigation Due to Past or Future Stock Price Volatility.

Teradyne and two of its executive officers were named as defendants in three purported class action complaints that were filed in Federal District Court, Boston, Massachusetts, in October and November 2001. The court consolidated the cases and has appointed three lead plaintiffs. On November 8, 2002, plaintiffs filed and served a consolidated amended class action complaint. The complaint alleges, among other things, that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by making, during the period from July 14, 2000 until October 17, 2000, material misrepresentations and omissions to the investing public regarding Teradyne’s business operations and future prospects. The complaint seeks unspecified damages, including compensatory damages and recovery of reasonable attorneys’ fees and costs. Teradyne filed a motion to dismiss all claims asserted in the complaint on February 7, 2003. On April 9, 2003, the lead plaintiffs filed a

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memorandum in opposition to Teradyne’s motion to dismiss. On May 28, 2003, Teradyne filed a reply memorandum in support of its motion to dismiss all claims asserted in the complaint. Oral arguments in connection with Teradyne’s motion to dismiss were presented to the District Court on June 26, 2003. Claims asserted in this case are similar to the claims asserted in the case discussed in “Part II, Item 1:Legal Proceedings,” which is pending in the Federal District Court in San Diego, California. Teradyne believes it has meritorious defenses to the claims and will defend itself vigorously. Management does not believe that the outcome of these claims will have a material adverse effect on Teradyne’s financial position or results of operations but there can be no assurance that any such claims would not have a material adverse effect on Teradyne’s financial position or results of operations.

Teradyne’s Business May be Adversely Impacted by Divestitures of Lines of Business Which May Affect Its Ability to Manage and Maintain Its Business.

Since Teradyne’s inception, it has divested itself of certain lines of business. In the future, Teradyne may undertake additional such divestitures. Such past or future divestitures could involve a number of risks, including:

• the diversion of the attention of management and other key personnel;

• disruptions and other effects caused by the divestiture of a line of business on Teradyne’s culture, product and service delivery methodology and other standards, controls, procedures and policies;

• customer satisfaction problems caused by the loss of a divested line of business; and

• the decreased diversification of Teradyne’s product lines caused by the divestiture of a line of business which may make Teradyne’s operating results subject to increased market fluctuations.

If Teradyne Is Unable to Protect Its Intellectual Property, Teradyne May Lose a Valuable Asset or May Incur Costly Litigation to Protect Its Rights.

Teradyne’s products incorporate technology that it protects in several ways, including patents, copyrights and trade secrets. While Teradyne believes that its patents, copyrights and trade secrets have value in general, no single one is in itself essential. At times, Teradyne has been notified that it may be in violation of patents held by others. An assertion of patent infringement against Teradyne, if successful, could have a material adverse effect on its ability to sell its products, or could require a lengthy and expensive defense which could adversely affect its operating results.

If Teradyne Fails to Develop New Technologies to Adapt to Its Customers’ Needs and if Its Customers Fail to Accept Its New Products, Teradyne’s Revenues Will Be Adversely Affected.

Teradyne believes that its technological position depends primarily on the technical competence and creative ability of its engineers. Teradyne’s development of new technologies, commercialization of those technologies into products, and market acceptance and customer demand for those products are critical to Teradyne’s success. Successful product development and introduction depends upon a number of factors, including:

• new product selection;

• development of competitive products by competitors;

• timely and efficient completion of product design;

• timely and efficient implementation of manufacturing; and

• assembly processes and product performance at customer locations.

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Teradyne Is Subject to Intense Competition.

Teradyne faces significant competition throughout the world in each of its operating segments. Some of Teradyne’s competitors have substantial financial and other resources to pursue engineering, manufacturing, marketing and distribution of their products. Teradyne also faces competition from internal suppliers at several of its customers. Some of Teradyne’s competitors have introduced or announced new products with certain performance characteristics which may be considered equal or superior to those Teradyne currently offers. Teradyne expects its 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 sales or loss of market acceptance of Teradyne’s products. Moreover, increased competitive pressure could lead to intensified price based competition, which could materially adversely affect Teradyne’s business, financial condition and results of operations.

Teradyne Is Subject to Risks of Operating Internationally.

Teradyne derives a significant portion of its total revenue from customers outside the United States. Teradyne’s international sales and operations are subject to significant risks and difficulties, including:

• unexpected changes in legal and regulatory requirements and in policy changes affecting international markets;

• compliance with customs regulations;

• changes in tariffs and exchange rates;

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

• difficulties in accounts receivable collection;

• difficulties in staffing and managing international operations;

• potentially adverse tax consequences; and

• the uncertain impact of the severe acute respiratory syndrome (SARs) epidemic.

Teradyne’s Business May Suffer if it is Unable to Attract and Retain Key Employees.

Competition for certain employees with skills required by Teradyne is intense in the high technology industry. Teradyne’s success will depend on its ability to attract and retain key technical employees in this business segment. The loss of one or more key or other employees, Teradyne’s inability to attract additional qualified employees, or the delay in hiring key personnel could each have a material adverse effect on Teradyne’s business, results of operations or financial condition.

If Teradyne’s Suppliers do not Meet Teradyne’s Product or Delivery Requirements, Teradyne 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 Teradyne’s quality or delivery requirements. If any of Teradyne’s suppliers were to cancel contracts or commitments with Teradyne or fail to meet the quality or delivery requirements needed to satisfy customer orders for Teradyne’s products, Teradyne could lose time-sensitive customer orders and have significantly decreased quarterly revenues and earnings, which would have a material adverse effect on Teradyne’s business, results of operations and financial condition. In addition, Teradyne relies upon third-party contract manufacturers for certain subsystems used in its products, and Teradyne’s ability to meet customer orders for those products depends upon the timeliness and quality of the work performed by these subcontractors, over whom Teradyne does not exercise any control.

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Teradyne May Incur Significant Liabilities if It Fails to Comply With Environmental Regulations.

Teradyne is subject to environmental regulations and statutory strict liability relating to the use, storage, discharge, site cleanup, and disposal of hazardous chemicals used in its manufacturing processes. If Teradyne fails to comply with present and future regulations, or is required to perform site remediation, Teradyne could be subject to future liabilities or the suspension of production. Present and future regulations may also:

• restrict Teradyne’s ability to expand its facilities;

• require Teradyne to acquire costly equipment; or

• require Teradyne to incur other significant costs and expenses.

Teradyne Has Substantially Increased Its Indebtedness.

On October 24, 2001, Teradyne completed a private placement of $400 million principal amount of 3.75% Convertible Senior Notes (the “Notes”) due 2006 and received net proceeds of $389 million. On December 19, 2001, Teradyne obtained a loan of approximately $45 million in the form of a 7.5% mortgage loan maturing on January 1, 2007 (the “Mortgage”). As a result, Teradyne has incurred approximately $445 million principal amount of additional indebtedness, substantially increasing its ratio of debt to total capitalization. The level of Teradyne’s indebtedness, among other things, could:

• make it difficult for Teradyne to make payments on its debt and other obligations;

• make it difficult for Teradyne to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;

• require the dedication of a substantial portion of any cash flow from operations to service for indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures;

• limit Teradyne’s flexibility in planning for, or reacting to changes in, its business and the industries in which Teradyne competes;

• place Teradyne at a possible competitive disadvantage with respect to less leveraged competitors and competitors that have better access to capital resources; and

• make Teradyne more vulnerable in the event of a further downturn in its business.

There can be no assurance that Teradyne will be able to meet its debt service obligations, including its obligations under the Notes and the Mortgage.

Teradyne May Not Be Able to Satisfy Certain Obligations in the Event of a Change in Control.

The indenture governing the Notes contains provisions that apply to a change in control of Teradyne. If a change in control as defined in the indenture is triggered, Teradyne may be required to offer to purchase the Notes with cash. If Teradyne has to make that offer, Teradyne cannot be sure that it will have enough funds to pay for all the Notes that the holders could tender.

In the event of a change in control of Teradyne, the Mortgage lender may elect to declare all amounts due under the Mortgage to be immediately due and payable, and may elect to take possession of or sell the property subject to the Mortgage.

As a result, a change of control of Teradyne could have a material adverse effect on its business, results of operations or financial condition.

Teradyne May Not Be Able to Pay Its Debt and Other Obligations.

If Teradyne’s cash flow is inadequate to meet its obligations, Teradyne could face substantial liquidity problems. If Teradyne sustains continued losses or is unable to generate sufficient cash flow or otherwise obtain

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funds necessary to make required payments on the Notes, the Mortgage, or certain of its other obligations, Teradyne would be in default under the terms thereof, which would permit the holders of those obligations to accelerate their maturity and also could cause defaults under future indebtedness Teradyne may incur. Any such default could have a material adverse effect on Teradyne’s business, prospects, financial position and operating results. In addition, Teradyne cannot assure that it would be able to repay amounts due in respect of the Notes or the Mortgage if payment of those obligations were to be accelerated following the occurrence of any other event of default as defined in the instruments creating those obligations. Moreover, Teradyne cannot assure that it will have sufficient funds or will be able to arrange for financing to pay the principal amount due on the Notes or the Mortgage at their respective maturities.

Teradyne May Need Additional Financing, Which Could Be Difficult to Obtain.

Teradyne expects that its existing cash and marketable securities, cash generated from operations, the proceeds of the Notes offering in October 2001 and the proceeds from the Mortgage financing in December 2001, will be sufficient to meet Teradyne’s cash requirements to fund operations and expected capital expenditures for the next twenty-four months. However, Teradyne has a finite amount of cash and in the event Teradyne may need to raise additional funds, due to on-going losses or other reasons, Teradyne cannot be certain that it will be able to obtain such additional financing on favorable terms, if at all, particularly in light of Teradyne’s continued quarterly losses. Further, if Teradyne issues additional equity securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. Future financings may place restrictions on how Teradyne operates its business. If Teradyne cannot raise funds on acceptable terms, if and when needed, Teradyne may not be able to develop or enhance its products and services, take advantage of future opportunities, grow its business or respond to competitive pressures, which could seriously harm Teradyne’s business.

If Teradyne is Required to Account for Options Under Its Employee Stock Plans as a Compensation Expense, Teradyne’s Compensation Expense Would Be Increased.

There has been an increasing public debate about the proper accounting treatment for employee stock options. Teradyne currently discloses pro forma compensation expense quarterly by calculating the grants’ fair value and disclosing the impact on net loss and net loss per share in a footnote to the consolidated financial statements. It is possible that future laws and regulations will require Teradyne to record the fair value of all stock options as compensation expense in its consolidated statement of operations. Note B, “Accounting Policies,” of the consolidated financial statements reflects the impact that such a change in accounting treatment would have had on Teradyne’s net loss and net loss per share if it had been in effect during the three and six months ended June 29, 2003 and June 30, 2002. Also included in Item 2: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Teradyne has included additional stock-based compensation disclosures.

Provisions of Teradyne’s Charter and By-Laws and Massachusetts Law Make a Takeover of Teradyne More Difficult.

Teradyne’s basic corporate documents, its stockholder rights plan, and Massachusetts law contain provisions that could discourage, delay or prevent a change in the control of Teradyne, even if a change of control might be regarded as beneficial to some or all of Teradyne’s stockholders.

Teradyne’s Operating Results Are Likely to Fluctuate Significantly.

Teradyne’s quarterly and annual operating results are affected by a wide variety of factors that could materially adversely affect revenues and profitability, including:

• competitive pressures on selling prices;

• the timing of customer orders and the deferral or cancellation of orders previously received;

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• provisions for excess and obsolete inventory;

• charges for certain long-lived assets, including goodwill;

• changes in product mix;

• Teradyne’s ability to introduce new products and technologies on a timely basis;

• the introduction of products and technologies by Teradyne’s competitors;

• market acceptance of Teradyne’s and its competitors’ products;

• fulfilling backlog on a timely basis;

• reliance on sole source suppliers;

• potential retrofit costs;

• the level of orders received which can be shipped in a quarter; and

• the timing of investments in engineering and development.

In particular, due to Teradyne’s introduction of a number of new, complex test systems in 2002 and the planned introduction of other systems in 2003, there can be no assurance that Teradyne will not experience delays in shipment of its products or that its products will achieve customer acceptance.

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

Item 3:    Quantitative and Qualitative Disclosures about Market Risk

For “Quantitative and Qualitative Disclosures about Market Risk” affecting Teradyne, see Item 7a. “Quantitative and Qualitative Disclosures About Market Risks,” in our Annual Report on Form 10-K filed with the SEC on March 28, 2003. There were no material changes in Teradyne’s exposure to market risk from those set forth in our Annual Report for the fiscal year ending December 31, 2002.

Item 4:    Controls and procedures.

As of the end of the period covered by this report, Teradyne’s management, with the participation of Teradyne’s Chief Executive Officer and Teradyne’s Chief Financial Officer, evaluated the effectiveness of Teradyne’s disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, Teradyne’s Chief Executive Officer and Teradyne’s Chief Financial Officer concluded that, as of the end of the period covered by this report, Teradyne’s disclosure controls and procedures were effective in ensuring that material information required to be disclosed by Teradyne in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to Teradyne’s management, including Teradyne’s Chief Executive Officer and Teradyne’s Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

During the period covered by this report, there have been no changes in Teradyne’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Teradyne’s internal control over financial reporting.

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PART II.    OTHER INFORMATION

Item 1:    Legal Proceedings

After the August 2000 acquisition of Herco Technology Corp. and Perception Laminates, Inc. the former owners of those companies filed a complaint on September 5, 2001 against Teradyne and two of its executive officers. The case is now pending in Federal District Court, San Diego, California. Teradyne and the two individual defendants filed a motion to dismiss the complaint in its entirety. The court granted the motion in part, and the only remaining claims were that the sale of Teradyne’s common stock to the former owners violated certain California securities statutes and common law and that Teradyne breached certain contractual obligations in the agreements relating to the acquisitions. Teradyne’s subsequent motion for partial summary judgment with respect to the breach of contract claims was granted on November 7, 2002. On December 9, 2002, the plaintiffs filed a motion asking the court to reconsider its summary judgment ruling or, alternatively, for certification under Rule 54(b) which would grant the plaintiffs leave to appeal both the Court’s ruling regarding dismissal of claims and its ruling granting summary judgment to the Ninth Circuit Court of Appeals. Teradyne opposed these motions. On April 22, 2003, the Court denied the plaintiffs’ motion for reconsideration and the plaintiffs’ request for certification under Rule 54(b). A small portion of the original complaint relating to alleged fraud in connection with setting the transaction price remains pending before the District Court. Teradyne has answered and denied all liability. On April 1, 2003, Teradyne filed a motion to compel production of documents and asked the District Court to grant sanctions for the plaintiff’s failure. On May 14, 2003, the plaintiffs filed an opposition to Teradyne’s motion to compel and request for sanctions. On June 11, 2003, the District Court granted Teradyne’s motion to compel and awarded Teradyne a portion of its attorney’s fees and costs associated with the motion to compel. Discovery proceedings are continuing. Management does not believe that the outcomes of these claims will have a material adverse effect on Teradyne’s financial position or results of operations but there can be no assurance that any such claims would not have a material adverse effect on Teradyne’s financial position or results of operations.

Also arising out of the August 2000 acquisition of Herco Technology Corp. and Perception Laminates, Inc. is a demand for arbitration, made on or about October 19, 2001, by the former owners of those companies, which was filed with the American Arbitration Association. The arbitration is with respect to environmental indemnification claims initially asserted by Teradyne under the respective acquisition agreements. These claims arose in connection with environmental matters related to Herco Technology Corp. and Perception Laminates, Inc. facilities in California. The arbitration demand by the former owners seeks release of certain shares of Teradyne’s common stock being held in escrow pursuant to the terms of the acquisition agreements and damages related to failure to release the escrow. Teradyne has counterclaimed for enforcement of the environmental indemnity provisions of the acquisition agreements. Hearings in connection with the arbitration have been completed and the parties have submitted post-hearing briefs to the arbitrators. On May 29, 2003, the arbitrators issued a Preliminary Award designating Teradyne as the substantially prevailing party in the arbitration, awarding Teradyne indemnification damages in the form of 18,256 shares of escrowed stock and entitling Teradyne to seek attorney’s fees and costs from the former owners. Following the Preliminary Award, Teradyne and the former owners filed briefs on the subject of attorneys fees and costs. On July 10, 2003, the arbitrators issued the Final Award which confirmed the Preliminary Award findings and also awarded Teradyne indemnification of attorneys’ fees and costs in the form of 15,374 shares of escrowed stock. Pursuant to the Final Award, Teradyne shall receive a total of 33,630 shares of escrowed stock. Execution of the Final Award will result in distribution of all shares held in escrow except 2,000 shares which shall be retained in escrow for future environmental expenditures.

Teradyne and two of its executive officers were named as defendants in three purported class action complaints that were filed in Federal District Court, Boston, Massachusetts, in October and November 2001. The court consolidated the cases and has appointed three lead plaintiffs. On November 8, 2002, plaintiffs filed and served a consolidated amended class action complaint. The complaint alleges, among other things, that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by making, during the period from July 14, 2000 until October 17, 2000, material misrepresentations and omissions to the investing

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public regarding Teradyne’s business operations and future prospects. The complaint seeks unspecified damages, including compensatory damages and recovery of reasonable attorneys’ fees and costs. Teradyne filed a motion to dismiss all claims asserted in the complaint on February 7, 2003. On April 9, 2003, the lead plaintiffs filed a memorandum in opposition to Teradyne’s motion to dismiss. On May 28, 2003, Teradyne filed a reply memorandum in support of its motion to dismiss all claims asserted in the complaint. Oral arguments in connection with Teradyne’s motion to dismiss were presented to the District Court on June 26, 2003. Claims asserted in this case are similar to the claims asserted in the case discussed above, which is pending in the Federal District Court in San Diego, California. Teradyne believes it has meritorious defenses to the claims and will defend itself vigorously. Management does not believe that the outcomes of these claims will have a material adverse effect on Teradyne’s financial position or results of operations but there can be no assurance that any such claims would not have a material adverse effect on Teradyne’s financial position or results of operations.

By letter dated October 22, 2002, counsel for Electro Mechanical Solutions, Inc., (“EMS”) and several affiliated debtors including PRECISMetals in Chapter 11 bankruptcy cases pending in the United States Bankruptcy Court for the Northern District of California (collectively, the “Debtors”), asserted that Teradyne received payments in 2001 totaling $12.4 million from PRECISMetals in the 90 days prior to the bankruptcy filing and that those payments constitute avoidable preferential transfers. On May 23, 2003, the Debtors filed a complaint against Teradyne in the U.S. Bankruptcy Court for the Northern District of California alleging that Teradyne received preferential transfers totaling $12.7 million from EMS and PRECISMetals in the 90 days prior to the bankruptcy filing and that those payments constitute avoidable preferential transfers. On June 30, 2003, Teradyne filed its answer and denied all liability. Teradyne believes that it has good faith defenses to the alleged preferential transfers and intends to contest the claims vigorously. Management does not believe that the outcomes of these claims will have a material adverse effect on Teradyne’s financial position or results of operations but there can be no assurance that any such claims would not have a material adverse effect on Teradyne’s financial position or results of operations.

In 2001, Teradyne was designated as a “potentially responsible party” (“PRP”) at a clean-up site in Los Angeles, California. This claim arises out of Teradyne’s acquisition of Perception Laminates, Inc. in August 2000. Prior to that date, Perception Laminates had itself acquired certain assets of Alco Industries Inc. under an asset purchase agreement dated July 30, 1992. Neither Teradyne nor Perception Laminates have ever conducted any operations at the Los Angeles site. Teradyne has asked the State of California to drop the PRP designation, but California has not yet agreed to do so. Management does not believe that the outcome of this matter will have a material adverse effect on Teradyne’s financial position or results of operations but there can be no assurance that any such outcome would not have a material adverse effect on Teradyne’s financial position or results of operations.

In August 2002, Teradyne was designated as a PRP at a site in Whittier, California. Teradyne was identified as a PRP based on shipments from its Woodland Hills, California and Agoura Hills, California sites during 1983 and 1984. Based upon review of the shipping documents, Teradyne considered that any potential liability to be limited to that of a de minimus contributor to the site. On April 18, 2003, Teradyne entered into an agreement to settle any potential liability related to this site and pursuant to that agreement paid a de minimus amount as full and final settlement of any potential liability.

In October 1998, a former employee of GenRad, Inc., which Teradyne acquired on October 26, 2001, instituted an arbitration proceeding against GenRad alleging breach of his severance agreement. The last arbitration hearing was conducted on October 28, 2002, On June 2, 2003, the arbitrator issued an award in favor of Genrad, finding that Genrad had not breached the severance agreement and that the former employee had resigned from Genrad without reason, and as such, was not entitled to any severance benefits.

In August of 2003, Teradyne was notified by one of its suppliers of potential claims and liabilities relating to a supply agreement and course of dealings between the supplier and Teradyne. Simultaneously, the supplier’s investors and majority shareholders informed Teradyne of a potential claim involving misrepresentations

41

allegedly made by Teradyne with respect to the supplier’s existing business operations and future business prospects with Teradyne. No formal complaint has been filed against Teradyne as of August 13, 2003. Teradyne is currently investigating these matters. Based on the unspecified nature of the claims, Teradyne is not presently able to reasonably estimate potential losses, if any, related to these potential claims and therefore, as of August 13, 2003, has not accrued for any potential losses from these unasserted claims.

Teradyne disputes all of the claims above and believes they are without merit, and intends to defend vigorously against them. However, an adverse resolution of any of the claims could have a material adverse effect on Teradyne’s financial position or results of operations. Teradyne is not presently able to reasonably estimate potential losses, if any, related to any of the claims and therefore as of June 29, 2003 has not accrued for any potential losses from the claims.

In addition, Teradyne is subject to legal proceedings, claims and investigations that arise in the ordinary course of business such as but not limited to patent, commercial and environmental matters. There are no such matters pending that Teradyne expects to be material with respect to its business, financial position or results of operation but there can be no assurance that any such matters would not have a material adverse effect on Teradyne’s business, financial position or results of operations.

Item 4:    Submission of Matters to a Vote of Security Holders

The annual meeting of security holders of Teradyne was held May 22, 2003. The following were elected as Class II Directors, to serve for a three (3) year term and until their successors have been duly elected and qualified:

Nominee	Total Vote For Each Nominee	Total Vote Withheld For Each Nominee
George W. Chamillard	167,231,944	3,654,294
Albert Carnesale	166,419,569	4,466,669
Roy A. Vallee	162,025,958	8,860,280

In addition, the security holders ratified the selection of the firm of PricewaterhouseCoopers LLP as auditors for the fiscal year ending December 31, 2003, with 164,121,723 shares voting in favor, 5,841,070 shares voting against, and 923,445 shares abstaining.

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Item 6:    Exhibits and Reports on Form 8-K

(a):    Exhibits

Exhibit Number	Description
10.31	Amendment No. 1 to Deferral Plan for Non-Employee Directors* (filed herewith).
10.32	Change in Control Agreement dated July 2, 2003 between the Company and the Executive* (Filed herewith)
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** (furnished herewith).
32.2	Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** (furnished herewith).

* Indicates management contract or compensatory plans.

** Teradyne has the originally signed certificate and will provide it to the Securities and Exchange Commission upon request.

(b):    Reports on Form 8-K

A Current Report on Form 8-K dated May 22, 2003, was filed with the Securities and Exchange Commission on May 27, 2003, announcing pursuant to Item 5 thereof that Michael A. Bradley was appointed President of Teradyne, Inc., effective immediately, and that George W. Chamillard would continue as Teradyne’s Chief Executive Officer and Chairman.

A Current Report on Form 8-K dated April 15, 2003, was filed with the Securities and Exchange Commission on April 16, 2003 furnishing information pursuant to Item 9 and 12 relating to Teradyne’s first quarter financial results and its interim financial statements.

43

SIGNATURES

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

TERADYNE, INC. Registrant
	/s/ GREGORY R. BEECHER
	Gregory R. Beecher Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) August 13, 2003

44

EX-10.31

EXHIBIT 10.31

TERADYNE, INC.

AMENDMENT NO. 1 TO DEFERRAL PLAN FOR NON-EMPLOYEE DIRECTORS

May 22, 2003

Effective as of March 1, 2003, the Teradyne, Inc. Deferral Plan for Non-Employee Directors (the “Plan”) is hereby amended as follows:

1. The first sentence of Section 1 is hereby deleted in its entirety and replaced with the following:

“All Non-employee Directors of the Company who are eligible to participate in the Company’s 1997 Employee Stock Option Plan (the “1997 Plan”) are eligible to participate in this Plan.”

2. The last sentence of Section 5 is hereby deleted in its entirety and replaced with the following:

“Shares delivered on any payment date shall be authorized pursuant to and issued in accordance with the terms of the 1997 Plan.”

In all other respects the Plan is hereby affirmed and shall remain in full force and effect.

[Remainder of Page Left Blank Intentionally]

TERADYNE, INC.

By: /s/ George W. Chamillard                    

Name: George W. Chamillard

Title: Chairman & Chief Executive Officer

Teradyne, Inc.

Deferral Plan for Non-Employee Directors

WHEREAS, Teradyne, Inc. (the “Company”) is desirous of offering its Non-employee Directors the option of deferring the receipt of their retainers and any and all other applicable compensation and fees.

NOW, THEREFORE, the Company hereby adopts the Teradyne, Inc. Deferral Plan for Non-employee Directors (the “Plan”) as set forth below effective January 1, 2001.

1. Eligibility

All Non-employee Directors of the Company are eligible to participate in this Plan. If a subsidiary wishes to participate in the Plan, the Board of Directors of the subsidiary shall adopt a resolution authorizing participation by the subsidiary in the Plan.

2. Participation

Each Non-employee Director may elect or defer, on a year by year basis, the receipt of 100% of his or her retainer and any and all other fees and compensation related to the position as a Non-employee Director that would otherwise be payable to the Non-employee Director for a Plan Year.

Each Non-employee Director who elects to participate in this Plan for any Plan Year must complete a Deferral Election Form no later than the December 1 prior to the first day of such Plan Year. For the first Plan Year, Non-employee Directors who elect to participate must complete a Deferral Election Form as soon as administratively possible prior to December 15, 2000. Such annual elections are irrevocable with respect to the Plan Year to which they relate.

Non-employee Directors who do not timely complete a Deferral Election Form for any Plan Year shall not be allowed to participate herein for such Plan Year and shall receive the retainer and any and all other applicable compensation and fees to which they become entitled during such Plan Year with respect to their position as a Non-Employee Director in accordance with the Company’s customary practices.

3. Administration

Deferral amounts shall, as elected annually by the Non-employee Director, be invested in one of the following:

a. A notional cash account credited with interest for each Plan Year or portion thereof based upon the 10 year Treasury Note interest rate in effect on the first day of such Plan Year.

b. A deferred stock unit (DSU) account in which deferrals will be deemed to be invested in common stock of the Company based on its fair market value on the date such deferrals are contributed to the Plan and any deemed dividends declared thereon shall be deemed to be invested in common stock of the Company based on its fair market value on the date such dividends are declared.

Deferral amounts will be deemed to have been contributed to the Plan on the day such amounts would have been payable to the Non-employee Director in accordance with the Company’s customary practices, but for his irrevocable election to defer payment.

4. Voting and Divided Rights

No Participant shall be entitled to any voting rights or to receive any dividends with respect to any amounts deferred to the DSU account.

5. Distributions

The value of the amounts deferred shall be distributed in a single payment within 90 days of the date the Non-employee Director no longer serves as such.

Amounts credited to a Participant’s notional cash account are distributable only in cash.

Amounts credited to a Participant’s DSU account are distributable in the common stock of the Company. Any fractional shares in the DSU account, however, are distributable in cash at the Company’s discretion based upon the fair market value of the Company’s common stock, on the date of payment. Shares delivered on any payment date may be either Treasury shares or authorized and unissued shares or both.

6. Amendments and Terminations

The Board of Directors may amend or terminate this Plan at any time provided that no such action shall adversely affect any right or obligation with respect to any amounts deferred prior to such termination or amendment.

7. Definitions

As used in this Plan, the following terms shall have the following meanings:

a. Account means amounts invested at the Participant’s election in either or both the notional cash account or the DSU account.

b. Board of Directors means the Board of Directions for Teradyne, Inc.

c. Participants means any Non-employee Director who makes an annual election to defer receipt of his or her retainer and any and all other applicable compensation and fees otherwise payable to him or her with respect to his or her position as a Non-employee Director.

d. Plans means the Teradyne, Inc. Deferral Plan for Non-employee Directors as specified herein and amended from time to time.

e. Plan Year means the calendar year. The first plan year is effective January 1, 2001.

f. Fair market value of the common stock of the Company on any date shall be the opening price for such date as officially quoted by the New York Stock Exchange. If the common stock should not then be listed or admitted to trading on the New York Stock Exchange, the opening price shall be the opening price for such date as officially quoted by the Exchange on which such stock is listed. However, if the Company’s common stock is not publicly traded, fair market value shall be deemed to be the fair value of the common stock as determined by the Directors (excluding any Non-employee Directors participating herein) after taking into consideration all factors which they deem appropriate, including, without limitation, recent sale and offer prices of the common stock in private transactions negotiated at arm’s length, revenues and pre-tax earnings of the Company for the most recent twelve month period, projected revenues and pre-tax earnings of the Company for the next twelve-month period, discounted positive cash flow of the Company, price/earnings multiples of comparable publicly-traded companies (adjusted for any illiquidity associated with the Company’s stock), appropriate discounts for illiquidity and appropriate consideration of the senior rights, preferences and privileges of other classes of preferred stock outstanding, and other pertinent factors determined by such Directors.

8. Dilutions and other Adjustments

In the event of any change in the outstanding shares of the common stock of the Company by reason of any stock dividend or split, recapitalization, merger, consolidation, spin-off, reorganization, combination or exchange of shares or other similar corporate change, then if the Company shall determine, in its sole discretion, that such change equitably requires an adjustment in the number or kind of shares then held in a Participant’s DSU account, then such adjustments shall be made by the Company and shall be conclusive and binding for all purposes of the Plan.

9. Miscellaneous Provisions

A Participant’s right and interest under the Plan may not be assigned or transferred. In the case of a Participant’s death, payments of the Participant’s Account due under this Plan shall be made to his designated beneficiary, or in the absence of such designation, to his estate.

Any amounts deferred under this Plan shall remain the assets of the Company until paid in accordance with the provisions of this Plan, and in the event of the Company’s insolvency, will be subject to the claims of the Company’s general creditors. In the event of the Company’s insolvency, a Participant shall be a general creditor of the Company with respect to his or her claim for benefits hereunder.

10. This Plan is established in accordance with the laws of the Commonwealth of Massachusetts.

IN WITNESS WHEREOF, the Company has caused this Plan to be signed in its name by its duly authorized officer and impressed with its corporate seal.

By: /s/ George W. Chamillard            

Title: Chairman and Chief Executive Officer

EX-10.32

EXHIBIT 10.32

EXECUTIVE OFFICER CHANGE IN CONTROL AGREEMENT

EXECUTIVE OFFICER CHANGE IN CONTROL AGREEMENT entered into this 2nd day of July, 2003, by and between Teradyne, Inc., a Massachusetts corporation (“Teradyne”), and the undersigned executive officer of Teradyne (“Employee”).

WITNESSETH:

WHEREAS, Teradyne and Employee desire to set forth certain terms and conditions relating to benefits to be afforded to Employee upon the occurrence of a Change in Control (as hereinafter defined) of Teradyne;

NOW THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, the parties hereto hereby agree as follows:

1.    Option Acceleration.  (a) During the Term (as hereinafter defined), if within twenty-four (24) months following a Change in Control there is a Termination Event (as hereinafter defined), all of Employee’s unvested Options granted prior to, on, or after the date hereof (but only (I) such Options as have been granted to Employee by Teradyne as of the date of the Change in Control or (II) such Options as have been assumed by an acquiring company at the time of a Change in Control or such new options that have been substituted by an acquiring company for Options existing at the time of a Change in Control, each pursuant to the terms of any Teradyne option plan) shall automatically become fully vested as of the date of such Termination Event. The parties hereto acknowledge that the terms of this Agreement are intended to modify the terms of Employee’s existing Option agreements and to be a supplement to future Option agreements.

(b) For purposes of this Agreement, the following terms shall have the following meanings:

“Cause” shall mean conduct involving one or more of the following: (i) the substantial and continuing failure of Employee, after notice thereof, to render services to Teradyne in accordance with the terms or requirements of his or her employment; (ii) Employee’s disloyalty, gross negligence, willful misconduct, dishonesty, fraud or breach of fiduciary duty to Teradyne; (iii) Employee’s deliberate disregard of the rules or policies of, or breach of an agreement with, Teradyne which results in direct or indirect loss, damage or injury to Teradyne; (iv) the unauthorized disclosure by Employee of any trade secret or confidential information of Teradyne; or (v) the commission by Employee of an act which constitutes unfair competition with Teradyne.

A “Change in Control” shall be deemed to have occurred upon the occurrence of any of the following events: (i) any consolidation, cash tender offer, reorganization, recapitalization, merger or plan of share exchange following which the shareholders of Teradyne immediately prior to such transaction own less than a majority of the combined voting power of the then-outstanding securities of the combined corporation or person immediately after such transaction; (ii) any sale, lease, exchange or other transfer of all or substantially all of Teradyne’s assets; (iii) the adoption by the Board of Directors of Teradyne of any plan or proposal for the liquidation or dissolution of Teradyne; (iv) a change in the majority of the Board of Directors of Teradyne through one or more contested elections; or (v) any person (as that term is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act of 1934, as amended) becomes beneficial owner of 30% or more of the combined voting power of Teradyne’s outstanding voting securities.

“Good Reason” shall mean any one or more of the following: (i) any material reduction of Employee’s responsibilities (other than for Cause or as a result of death or disability); (ii) any material reduction in Employee’s model compensation as in effect on the date of the consummation of the Change in Control, or as the same may be increased from time to time, or any failure by Teradyne to pay to Employee any bonus accrued, but not yet paid, upon written notice by Employee to Teradyne, within 45 days; (iii) a material reduction in the value

of Employee’s benefit package from the value of Employee’s benefit package on the date of the consummation of the Change in Control; or (iv) any permanent assignment of Employee to a job location situated more than 50 miles away from his current job location.

“Option” shall mean an option to purchase shares of Teradyne Common Stock.

“Termination Event” shall mean (i) any termination of Employee by Teradyne without Cause or (ii) any voluntary termination by Employee for Good Reason.

2.    (a) Parachute Payment Gross-Up.  If any Payments (as hereinafter defined) to Employee are subject to the Excise Tax (as hereinafter defined), Teradyne shall pay to Employee a Gross-Up Payment (as hereinafter defined). The Gross-Up Payment with respect to any Payment shall be paid no later than 15 days prior to the date that the Excise Tax is due with respect to such Payment.

(b)    Definitions.  For purposes of this Section 2, the following terms shall have the following meanings:

(i) “Code” shall mean the Internal Revenue Code of 1986, as amended.

(ii) “Excise Tax” shall mean the tax imposed by Section 4999 of the Code. The amount of the Excise Tax (if any) imposed on any non–cash benefits or any deferred payment or benefit shall be reasonably determined by Teradyne, after consultation with its legal and tax advisors.

(iii) “Gross-Up Payment” shall mean, with respect to Payments to the Employee, the amount necessary so that the amount retained by Employee, after reduction for (1) any Excise Tax on the Gross-Up Payment and (2) any federal, state, or local income and employment taxes imposed on the Gross-Up Payment, is an amount equal to the Excise Tax on the Payments to Employee, other than the Gross-Up Payment. The amount of the Gross-Up Payment shall be reasonably determined by Teradyne after consultation with its legal and tax advisors.

(1) For purposes of determining the amount of the Gross–Up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal, state and local income tax in the calendar year in which the Gross–Up Payment is made (determined by reference to Employee’s residence for such calendar year), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.

(2) In the event that the Excise Tax with respect to the Payments is determined to exceed the amount taken into account hereunder, Teradyne shall make an additional Gross–Up Payment in respect of such excess. For purposes of calculating such Gross-Up Payment, any interest or penalties imposed in connection with such excess Excise Tax shall be treated as an Excise Tax.

(3) In the event that the Excise Tax with respect to the Payments is subsequently determined to be less than the amount taken into account for purposes of calculating the Gross-Up Payment, Employee shall promptly repay to Teradyne the after-tax portion of the Gross–Up Payment that exceeds the Gross-Up Payment that otherwise would have been payable in connection with the actual Excise Tax imposed on the Payments.

(iv) “Payment” shall mean, with respect to the Employee, any payment in the nature of compensation to (or for the benefit of) such individual, if such payment is contingent on a change (i) in the ownership or effective control of Teradyne or (ii) in the ownership of a substantial portion of the assets of Teradyne (in each case, as reasonably determined by

Teradyne in accordance with Section 280G(b)(2) of the Code and the regulations promulgated thereunder). Notwithstanding the foregoing, any amount payable to (or for the benefit of) the Employee shall be a Payment if an Excise Tax is imposed on the Employee with respect to such payment or benefit, and such payment or benefit is contingent on a change (i) in the ownership or effective control of Teradyne or (ii) in the ownership of a substantial portion of the assets of Teradyne (in each case, determined in accordance with Section 280G(b)(2) of the Code and the regulations promulgated thereunder).

3.    No Obligation of Employment.  Employee understands that the employment relationship between Employee and Teradyne will be “at will” and Employee understands that, prior to any Change in Control, Teradyne may terminate Employee with or without “Cause” at any time. Following any Change in Control, Teradyne may also terminate Employee with or without “Cause” at any time subject to Employee’s rights and Teradyne’s obligations specified in this Agreement.

4.    Governing Law.  This Agreement shall be governed by and construed in accordance with the internal laws of the Commonwealth of Massachusetts and this Agreement shall be deemed to be performable in Massachusetts.

5.    Severability.  In case any one or more of the provisions contained in this Agreement for any reason shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement and this Agreement shall be construed to the maximum extent permitted by law.

6.    Waivers and Modifications.  This Agreement may be modified, and the rights, remedies and obligations contained in any provision hereof may be waived, only in accordance with this Section 6. No waiver by either party of any breach by the other or any provision hereof shall be deemed to be a waiver of any later or other breach thereof or as a waiver of any other provision of this Agreement. This Agreement may not be waived, changed, discharged or terminated orally or by any course of dealing between the parties, but only by an instrument in writing signed by the party against whom any waiver, change, discharge or termination is sought.

7.    Assignment.  Employee may not assign any of his rights or delegate any of his duties or obligations under this Agreement. The rights and obligations of Teradyne under this Agreement shall inure to the benefit of, and shall be binding upon, the successors and assigns of Teradyne. For purposes of this Agreement, “Teradyne” shall be deemed to include all successors and assigns of Teradyne.

8.    Entire Agreement.  This Agreement constitutes the entire understanding of the parties relating to the subject matter hereof and supersedes and cancels all agreements, written or oral, made prior to the date hereof between Employee and Teradyne relating to the subject matter hereof; provided, however, that Employee’s existing option agreements, as modified hereby, shall remain in effect.

9.    Notices.  All notices hereunder shall be in writing and shall be delivered in person or mailed by certified or registered mail, return receipt requested, addressed as follows:

If to Teradyne, to:    Teradyne, Inc.

321 Harrison Avenue

Boston, MA 02118

Attention: General Counsel

If to Employee, at Employee's address set forth on the signature page hereto.

10.    Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

11.    Section Headings.  The descriptive section headings herein have been inserted for convenience only and shall not be deemed to define, limit, or otherwise affect the construction of any provision hereof.

12.    Term.  The term of this Agreement (the “Term”) shall commence upon the date hereof and terminate upon the earlier of (i) twenty-four (24) months following any Change in Control of Teradyne, (ii) the date prior to any Change in Control of Teradyne that Employee for any reason ceases to be an employee of Teradyne and (iii) the date following any Change in Control of Teradyne that Employee is terminated for Cause or voluntary terminates his employment (other than for Good Reason).

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.

TERADYNE, INC.
By:	/s/    GEORGE W. CHAMILLARD
Name: Title:	George W. Chamillard Chairman & Chief Executive Officer of Teradyne, Inc.

EMPLOYEE
By:	/s/    MARK A. JAGIELA
Name: Address:	Mark A. Jagiela

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, George W. Chamillard, certify that:

1.    I have reviewed this quarterly report on Form 10-Q 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)) 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) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986];

(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;

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 function):

(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: August 13, 2003
By:	/s/    GEORGE W. CHAMILLARD
	George W. Chamillard Chief Executive Officer

EX-31.2

Exhibit 31.2

I, Gregory R. Beecher, certify that:

1.    I have reviewed this quarterly report on Form 10-Q 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) 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) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986];

(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;

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 function):

(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: August 13, 2003
By:	/s/    GREGORY R. BEECHER
	Gregory R. Beecher Chief Financial Officer

EX-32.1

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 Quarterly Report of Teradyne, Inc. (the “Company”) on Form 10-Q for the period ending June 29, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, George W. Chamillard, 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/    GEORGE W. CHAMILLARD        

George W. Chamillard

Chief Executive Officer

August 13, 2003

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Teradyne, Inc. and will be retained by Teradyne, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

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 Quarterly Report of Teradyne, Inc. (the “Company”) on Form 10-Q for the period ending June 29, 2003 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/    GREGORY R. BEECHER        

Gregory R. Beecher

Chief Financial Officer

August 13, 2003

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Teradyne, Inc. and will be retained by Teradyne, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.