Back to GetFilings.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

For the fiscal year ended December 31, 2003

OR

Commission file number 1-6462

TERADYNE, INC.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code: (617) 482-2700

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12(b-2).

Yes x    No ¨

The aggregate market value of the voting stock held by nonaffiliates of the registrant as of June 29, 2003 was $3.2 billion based upon the composite closing price of the registrant’s Common Stock on the New York Stock Exchange on that date.

The number of shares outstanding of the registrant’s only class of Common Stock as of February 27, 2004 was 193,908,836 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement in connection with its 2004 annual meeting of shareholders are incorporated by reference into Part III.

TERADYNE, INC.

FORM 10-K

PART I

Item 1:    Business

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

Teradyne’s automatic test equipment products include systems that:

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

Broadband Test Systems and Diagnostic Solutions have been combined into “Other Test Systems” for purposes of reporting Teradyne’s operating segments. For financial information concerning Teradyne’s operating segments, see “Note T: Operating Segment and Geographic Information” in Notes to Consolidated Financial Statements.

Statements in this Annual Report on Form 10-K which are not historical facts, so called “forward looking statements,” are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. Investors are cautioned that all forward looking statements involve risks and uncertainties, including those detailed in Teradyne’s filings with the Securities and Exchange Commission. See also “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Certain Factors That May Affect Future Results” and “Note E: Risks and Uncertainties” in Notes to Consolidated Financial Statements.

Products

Semiconductor Test Systems

Teradyne produces Semiconductor Test Systems which test a wide variety of “system on a chip” (“SOC”) semiconductor devices during the manufacturing process. These devices contain integrated analog, digital and memory functions which allow an entire system or subsystem to reside on a single device or “chip.” These chips are used in automotive, communications, consumer, computer and electronic game applications, among others. Semiconductor Test Systems are sold to Integrated Device Manufacturers (“IDMs”), Fabless companies and to subcontractors (“Subcons”). Subcons provide test and assembly services for the final packaged devices to both Fabless companies and IDMs. Fabless companies perform the design of integrated circuits without manufacturing capabilities, and use Foundries for wafer manufacturing and Subcons for test and assembly. These customers use Teradyne’s Semiconductor Test Systems to:

2

with the overall benefit of comprehensively testing advanced performance devices while reducing their total costs associated with testing. The systems work in both wafer probe test and final package test applications.

SOC devices span a huge range of functionality, from very simple low-cost devices such as operational amplifiers or voltage regulators to complex digital signal processors and microprocessors. Teradyne offers a suite of test solutions to cover this range in the most economical way for each segment. The main test equipment products are described below:

The J750 and J750K test systems are designed to address the highest volume semiconductor devices. Devices such as microcontrollers are at the heart of almost every consumer electronics product, from small appliances to automotive engine controllers. These devices are produced in enormous quantities. The lowest cost of test at very high production throughput rates is essential to meeting the economic requirements in these markets. Teradyne’s J750 test systems combine compact packaging, high throughput and ease of production test. These benefits are possible due to the high level of integration in the design. A single circuit board in the J750 test system provides up to 64 digital input/output channels. This innovative approach eliminated the traditional “mainframe,” creating a “tester in the test head,” or “zero footprint design.” This approach allows the test system to be placed directly on top of a wafer prober, without the need for any floor space for the tester itself. The J750 has met with great success in the marketplace, and has an installed base of over 1,300 systems. The J750 platform technology also has been used to create Teradyne’s IP750 Image Sensor test system. The IP750 is focused on testing image sensor devices used in digital cameras and other imaging products.

The Catalyst and Catalyst-Tiger test systems are designed to test a broad range of higher performance SOC devices. The Catalyst is designed to test devices requiring data rates up to 400 Mega bytes per second (“bps”) with a broad range of analog performance. Over 1,200 Catalyst systems are in use today at IDMs and Subcons testing integrated circuits for DVD players, wireless cellular phones, networking appliances, telecommunications systems, computer peripherals, and many other applications.

The “Tiger” version of Catalyst provides similar analog capability, but extends the digital performance up to 3.2 Giga bps on up to 1,264 input/output channels. This extended digital performance enables complete functional testing of the world’s most demanding SOC and high-speed logic integrated circuits, used in computer graphics, personal computer chip set, microprocessor, and networking applications. The Tiger is installed at both IDMs and Subcons around the world.

Teradyne’s most recently introduced test system, the FLEX, is the beginning of the next generation of high throughput general purpose SOC test systems and combines the integration and parallelism of the J750 with the synchronization and instrument flexibility of the Catalyst. FLEX employs a unique “SOC tester per pin” architecture bringing a higher degree of parallelism to mixed signal and SOC testing. By testing more functions and more devices at the same time (“in parallel”) FLEX increases the production efficiency of SOC device testing. The core of FLEX design employs a “universal slot” concept, which provides the user the flexibility to install any instrument into any of the tester “slots.” FLEX is similar to the J750 in that the instrumentation tends to be implemented on self contained circuit boards that plug into the test head. This modular design and the universal slot architecture adds a level of adaptability and flexibility to production testing which is new to the industry. FLEX currently tests a range of devices in the consumer electronics area, including automotive, higher performance microcontrollers, and power control. FLEX will be expanded to test wireless, other integrated mixed signal device areas, and other major segments of the SOC device market over time. The system is also designed with an open-architecture, which allows customers and third party companies to add test capability to the system.

3

Connection Systems

Connection Systems is a leader in high-performance connection systems, designing and manufacturing backplane systems, printed circuit boards and the industry’s leading high-speed, high-density connectors. Connection Systems helps Original Equipment Manufacturers (“OEMs”) solve system design challenges with integrated interconnect solutions for application in the networking, communications, storage, computer server, and medical equipment markets. Connection Systems’ technology can be found in such products as internet routers, computer servers, mass data storage systems and telecommunication switches.

Advanced printed circuit board fabrication capabilities, leading connector technology and decades of backplane assembly expertise gives Connection Systems unique knowledge and experience with the entire signal transmission path. Teradyne believes this experience enables Connection Systems to differentiate itself in the market by providing integrated solutions for backplane systems. Connection Systems’ engineers are involved early in their customers’ product design process to help them get to market quickly with the optimum solution for price and performance. Engineering support, manufacturing and program management is available worldwide at Connection Systems’ locations in Asia, Europe and North America to support both new product introductions and full-scale volume production.

Connection Systems’ products and services include a broad range of high-speed, high-density connectors covering multiple applications within a single system. A suite of backplane connectors, including GbX^™, VHDM-HSD^™ and VHDM^® are utilized for traditional right-angle interface of printed circuit boards. For parallel connection of printed circuit boards, Connection Systems offers NeXLev^®, VHDM Stacker, and HDM^® Stacker. These products allow designers to relocate high pin count devices onto mezzanine cards to simplify board routing. In 2003, Connection Systems introduced the industry’s first modular optical interconnect, HD-Optyx^™. Connection Systems also offers co-planar, power, guidance and cabling solutions, and will work with customers to develop custom products for specific applications.

Connection Systems’ printed circuit board capabilities are among the industry’s most advanced, employing innovative solutions, such as improving routing to remove layers, or back drilling and blind or buried vias to produce enhanced signal quality and/or lower cost. Connection Systems was the first printed circuit board facility to be qualified to the military specification MIL-PRF-310321A and 2, and delivers boards for mission critical applications such as radar systems and the Patriot Missile.

Assembly Test Systems

The central element of almost every electronic product is a printed circuit board assembly. A circuit board assembly includes all the components and their interconnections that cause the board to perform its intended functions. As more and more product functionality is packed into smaller packages, such as personnel digital assistants (“PDAs”), phone handsets and laptop computers, both the circuit boards and their components become increasingly complex. The circuit board assembly manufacturing process is also complex and demands a number of test and inspection steps. Teradyne’s assembly test equipment is used in the manufacturing process to ensure high production yields, to maintain overall product quality, to diagnose faults quickly where and when they occur, and to reduce total manufacturing cost. The Teradyne assembly test product range includes the following:

In-Circuit Test Systems

In-circuit test systems examine the assembled and soldered printed circuit board for proper construction under both power-off and power-on conditions. Defective components and solder joints are identified quickly and precisely. High throughput, relatively low-cost fault identification and diagnostic accuracy are valued features which cause in-circuit testers to be used universally in virtually every electronics production line. Teradyne’s in-circuit products support a full range of circuit board test applications, including high-volume production, selective or sample test, prototype testing and final or system test. Accordingly, Teradyne offers a

4

wide variety of capabilities and options with its Spectrum 8000-series and TestStation product lines. The most recent option added to the Test Station product is SafeTest Technology. This capability allows Teradyne to test the increasing volume of low-voltage, battery-operated electronic assemblies found in products such as laptops and PDAs, with no risk of damage to the product-under-test. Teradyne believes that only its products currently have this capability. Teradyne has begun to receive orders from new customers on the basis of this new capability.

Imaging Inspection Systems

As circuit boards become increasingly dense and complex, achieving the electrical contact required for the traditional in-circuit test method is becoming more difficult, time-consuming and expensive. “Loss of (electrical) access” is a primary driver behind the increasing popularity of imaging inspection systems, which examine the circuit board for physical qualities including correct component presence and orientation, the absence of electrical opens and solder quality. Teradyne’s AXI imaging inspection systems employ automated x-ray inspection (“AXI”), which captures an x-ray image of the board. Teradyne believes AXI is the only technology that is capable of analyzing hidden solder-related defects. Teradyne’s Xstation 4000 AXI product line offers surface mount technology line-speed throughput with high resolution using x-ray transmission technology.

Military/Aerospace Test & Diagnostics

The Mil/Aero test product line applies Teradyne’s expertise in the functional test and diagnosis of assemblies of electronics to the military and commercial aerospace markets. These solutions come in the form of systems, instruments, and software products.

Teradyne’s traditional focus in the military market has been to provide test and diagnostic solutions for factory and depot level maintenance and repair activities. These solutions are typically deployed in stable, fixed environments with an emphasis on fast, accurate diagnostics down to a repairable component on a replaceable unit. Teradyne has recently begun to exploit architectural components that allow the repackaging of Assembly Test Systems solutions into smaller, lighter, ruggedized implementations enabling Teradyne to expand its served markets to include the mobile environments of the military market. The requirements here are to isolate failures down to the smallest replaceable unit in a mobile, harsh environment. The failed unit is then passed back to the depot or factory for further diagnosis down to the repairable component before being cycled back into stock. In the commercial aerospace market, Teradyne utilizes the same functional test and diagnostics capabilities that apply to military markets to test the increasingly complex electronic functions found in today’s aircraft.

The success of Assembly Test Systems’ Mil/Aero product line has been demonstrated by recent design wins on major Department of Defense programs such as the F-35 Joint Strike Fighter, the B1-B Bomber, C-17, and RT-CASS, as well as with aerospace customers such as Boeing. Teradyne believes these design wins lay the foundation for significant growth potential, as Teradyne is serving much larger markets than in the past.

Diagnostic Solutions

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

Vehicle Configuration and Test Solutions (“VCATS”)

Diagnostic Solution’s VCATS products are used on automotive and major automotive subassembly production lines. Diagnostic Solution’s connects to the vehicle to test and program (or “configure”) the electronic

5

systems on vehicles. These vehicle electronic systems include engine control modules and subsystems such as braking, navigation and air conditioning. Diagnostic Solutions is also able to link to an OEM’s manufacturing control system in order to provide statistical quality reports to operators and management. In addition, Diagnostic Solutions also provides VCATS solutions to subcontractors to the OEMs.

OEM Service Diagnostics

OEM dealer service technicians use Diagnostic Solutions’ systems to find faults in vehicles in use by their customers, and to reduce OEM warranty costs. Historically, the focus has been on fixing faults in the service bay, but is growing to include constant monitoring of the vehicle to predict and prevent failure.

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

Broadband Test Systems

Broadband Test provides test systems for voice and digital subscriber line (“DSL”) telephone networks and high-speed internet test products for cable networks. Teradyne’s Celerity systems are equipped on approximately 30 million subscriber lines to qualify DSL services provided by major telephone companies. Testing more than 120 million access lines worldwide for many of the world’s largest telecommunications companies, Teradyne’s 4TEL is designed to reduce operating costs by accurately detecting and identifying faults within the copper access network and providing a dispatch statement to customer service representatives.

Teradyne products within the Broadband Test Systems market include:

4TEL & 4TEL II Voice Service Test Systems

Teradyne’s 4TEL voice service test system automates the process to accurately identify and isolate faults within the copper access network including the “last mile of copper” between the home to the central office exchange. The 4TEL II voice service test system is a software upgrade to 4TEL that uses expert system technology to further isolate faults primarily between the consumers’ premises and outside copper plant without the need to install a remote isolation device (“RID”) at the consumers’ premises.

The 4TEL and 4TEL II systems enable telephone companies to automate customer care and field repair processes resulting in substantial reductions in network maintenance and operating costs.

Celerity ^TM DSL Test System

Telephone companies need to know which telephone lines between the central office and the consumer are qualified for broadband DSL service before committing service to consumers. Existing cable records are typically not sufficient. Teradyne’s Celerity uses accurate insertion loss, length and load coil detection, to qualify millions of lines in hours for DSL service. The system augments the phone company’s system showing which lines are qualified, which lines require conditioning, and which lines are disqualified. This information is then used to support DSL point-of-sale and marketing efforts. Celerity finds more DSL-ready lines in the network that can be sold to residential and small business customers. It also helps reduce the cost of provisioning DSL through automation of the loop qualification process and reduction of field dispatches.

6

Celerity provides reactive, on-demand testing for in-service DSL lines to support fault isolation and dispatch. After DSL service is installed, the requirement is to accurately determine whether the copper loop has a problem that requires a repair. Line test systems in use today for voice service normally cannot detect certain DSL-related problems, affecting physical faults and may incorrectly conclude that faults affecting voice also affect DSL. The Celerity system enables a repair technician or call center receptionist to determine the cause of a DSL-related problem by identifying both the type of problem on the line and the dispatch location of the fault. This capability reduces operating costs and decreases DSL maintenance costs.

NetFlare ^TM for Cable High-speed Data (“HSI”) Service Assurance

NetFlare’s patented design quickly performs the complex diagnostics required to identify and locate cable HSI performance and connectivity problems. End-to-end performance is tested from the subscriber’s perspective identifying specific jurisdictions operating below service expectations. Connectivity problems in the access network are located for proper dispatch to repair. By automating otherwise manual troubleshooting procedures, operating costs can be reduced and consistent problem handling can be ensured for each subscriber reported problem.

NetFlare is a server-based web solution requiring only a web browser for access, thereby eliminating the overhead of distributing software to end user desktops and laptops. Data generated by the NetFlare proprietary IP test suite, combined with industry standard cable modem data, provides for accurate analysis of service faults and dispatch for repair.

Broadband access to the internet is provided through telephone/DSL, cable, or wireless technologies. While DSL is a global leader, cable is the dominant supplier in the U.S. In the race to acquire broadband subscribers, a major issue for cable providers is cost effective management of the field installation and repair workforce. NetFlare went into trial in the latter half of 2003 with the Service Verification application to address this problem in the cable market.

7

Summary of Net Revenue by Operating Segment

Teradyne’s four principal operating segments accounted for the following percentages of consolidated net revenue for each of last three years:

Investor Information

Teradyne, a Massachusetts corporation incorporated on September 23, 1960, is subject to the informational requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). Therefore, Teradyne files periodic reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street, NW, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

You can access financial and other information, including charters for Teradyne’s Audit Committee, Compensation Committee and Nomination and Corporate Governance Committee and Teradyne’s Corporate Governance Guidelines and Standards of Business Conduct (“Ethics Policy”), by clicking the Investors link on Teradyne’s website at www.teradyne.com. Teradyne makes available, free of charge, copies of its SEC filings, including its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act through Teradyne’s website as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.

Sales and Distribution

Prices for Teradyne’s systems can reach $3 million or more. In 2003, 2002, and 2001 no single customer accounted for more than 10% of Teradyne’s consolidated net revenue. In each of the years, 2003, 2002, and 2001, Teradyne’s three largest customers in aggregate accounted for 21%, 23%, and 24% of consolidated net revenue, respectively.

Direct sales to United States government agencies accounted for less than 2% of consolidated net revenue in 2003, 2002 and 2001. Approximately 12% and 10% of Assembly Test Systems revenue in 2003 and 2002, respectively, was to United States government agencies and 28%, 15% and 27% of Assembly Test Systems revenue in 2003, 2002 and 2001, respectively, was to customers who are government contractors.

Teradyne has sales and service offices located throughout North America, Asia, and Europe, as Teradyne’s customers outside the United States are located primarily in these geographic areas. Teradyne sells in these areas predominantly through a direct sales force. Although Teradyne conducts manufacturing activities outside the U.S. as detailed in Item 2—Properties, Teradyne’s manufacturing activities are primarily conducted in the United States. Sales to customers outside the United States accounted for 63% of consolidated net revenue in 2003, 54% in 2002, and 49% in 2001. Sales to customers located in Singapore were 11% of consolidated net revenue in 2003, 8% of consolidate net revenue in 2002 and 4% of consolidated net revenue in 2001. Sales to customers located in Taiwan were 9% of consolidated net revenue in 2003 and 2002 and 10% of consolidated net revenue in 2001. Sales are attributed to geographic areas based on the location of the customer site.

8

Teradyne is subject to the inherent risks involved in international trade, such as:

Teradyne attempts to reduce the effects of currency fluctuations by hedging those currency exposures associated with certain assets and liabilities denominated in non-functional currencies and by conducting some of its international transactions in U.S. dollars or dollar equivalents. See also “Item 7A. Quantitative and Qualitative Disclosures About Market Risks” and “Note F: Financial Instruments” in Notes to Consolidated Financial Statements.

Competition

Teradyne faces significant competition throughout the world in each of its operating segments. Some of Teradyne’s competitors have substantially greater 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 revenues 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.

Backlog

At December 31, 2003 and 2002, Teradyne’s backlog of unfilled orders in each of its four principal operating segments was as follows:

The increase in Semiconductor Test Systems backlog from 2002 to 2003 of $94 million was due to a sharp increase in the demand for testers at the end of 2003. The decrease in Connection Systems backlog from 2002 to 2003 of $29 million was primarily due to a decrease in the storage market as a result of Teradyne’s decision to exit the lower margin electronic manufacturing services (“EMS”) business. Of the backlog at December 31, 2003, approximately 99% of the Semiconductor Test Systems backlog, 99% of the Connection Systems backlog, 84% of Assembly Test Systems backlog, and 93% of the Other Test Systems backlog is expected to be delivered in 2004. Generally, Teradyne’s backlog policy requires delivery of products and services within twelve months.

9

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, financial condition, and results of operations.

Raw Materials

Teradyne’s products require a wide variety of electronic and mechanical components from 3,000 suppliers of which 47 represent 80% of the spending. Teradyne can experience occasional delays in obtaining timely delivery of certain items. Additionally, Teradyne could experience a temporary adverse impact if any of its sole source suppliers ceased to deliver products. Approximately 30% of material purchases require some custom work where having multiple suppliers would be cost prohibitive. Any prolonged inability to obtain adequate supplies, or any other circumstances that would require Teradyne to seek alternative sources of supply could have a material adverse effect on its business, financial condition, and results of operations.

Patents and Licenses

Teradyne’s development of its products, both hardware and software, is based in significant part on proprietary information and technology. Teradyne protects its rights in proprietary information and technology through various methods, such as:

However, these protections might not be effective in all circumstances. Competitors might independently develop similar technology or exploit Teradyne’s proprietary technology and/or information in countries where Teradyne lacks enforceable intellectual property rights (“IP”) or enforcement of such rights through the legal system provides an insufficient deterrent. Also, IP protections can be invalidated through legal processes. While Teradyne does not believe that any single piece of intellectual property or proprietary rights is essential to its business, if a significant portion of Teradyne’s intellectual property or proprietary rights is invalidated or ineffective, Teradyne’s business could be materially adversely affected.

Employees

As of December 31, 2003, Teradyne employed approximately 6,100 people. Since the inception of Teradyne’s business, there have been no work stoppages or other labor disturbances. Teradyne has no collective bargaining contracts.

Engineering and Development Activities

The highly technical nature of Teradyne’s products requires a large and continuing engineering and development effort. Engineering and development expenditures were $254.6 million in 2003, $293.9 million in 2002 and $287.3 million in 2001. These expenditures amounted to approximately 19% of consolidated net revenue in 2003, 24% in 2002 and 20% in 2001.

10

Environmental Affairs

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

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.

11

EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth the names of all executive officers of Teradyne and certain other information relating to their positions held with Teradyne and other business experience. Executive officers of Teradyne do not have a specific term of office but rather serve at the discretion of the Board of Directors.

12

13

Item 2:    Properties

The following table provides certain information as to Teradyne’s principal general offices and manufacturing facilities.

14

Item 3:    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, in 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. Discovery proceedings are continuing.

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 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 California securities case discussed above, which is pending in the Federal District Court in San Diego, California. On January 16, 2004, the U.S. Magistrate Judge recommended to the U.S. District Court that Teradyne’s motion to dismiss the consolidated amended class action complaint in its entirety be allowed without prejudice. On February 2, 2004, the lead plaintiffs filed an objection to the U.S. Magistrate Judge’s recommendation. Teradyne is currently preparing its response to the lead plaintiffs’ objection. Teradyne believes it has meritorious defenses to the claims and will defend itself vigorously.

On May 23, 2003, Electro Mechanical Solutions, Inc., (“EMS”) and several affiliated debtors including PRECISMetals (collectively, the “Debtors”) filed a complaint against Teradyne in the United States Bankruptcy Court for the Northern District of California, alleging that Teradyne received payments in 2001 totaling $12.7 million from the Debtors 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. On January 6, 2004, the Debtors and Teradyne entered into a settlement agreement pursuant to which Teradyne will pay EMS an immaterial amount in exchange for a full release of all claims by the Debtors and the allowance in full of Teradyne’s U.S. $6.9 million unsecured claim in the ongoing bankruptcy proceeding. The Debtors and Teradyne are awaiting approval of the executed settlement agreement by the U.S. Trustee and Bankruptcy Court.

In August of 2003, Teradyne was notified by one of its suppliers, Connector Service Corporation, aka AMAX Plating, Inc. (“CSC”) of potential claims and liabilities relating to a supply agreement and course of dealings between CSC and Teradyne. In addition, Hampshire Equity Partners II, LP (“HEP”), an investor in CSC

15

and its majority shareholder, has informed Teradyne that it may make a claim involving misrepresentations allegedly made by Teradyne with respect to CSC’s existing business operations and future business prospects with Teradyne. On September 3, 2003, Teradyne terminated the supply and service agreement with CSC, although Teradyne continued to purchase from CSC until September 24, 2003. On September 24, 2003, CSC filed a petition for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Illinois (the “Petition”). On October 16, 2003, Teradyne entered into an agreement with CSC allowing for post-Petition purchases. On January 29, 2004, CSC and Teradyne entered into a settlement agreement which was approved by order of the Bankruptcy Court on the same day. On February 9, 2004, the Bankruptcy Court order became final and non-appealable. Pursuant to the settlement agreement and final order relating thereto, Teradyne will pay a total of $0.8 million to the estate and/or creditors of CSC for the purchase of spare parts, documented CSC specialized knowledge, the return of Teradyne’s dies and tools and a release of claims by the debtors relating to CSC’s estate. Teradyne continues to investigate the HEP allegations. Although HEP has not commenced litigation against Teradyne seeking damages in connection with its investment in CSC, it could do so at any time.

Teradyne has also been designated as a potentially responsible party (“PRP”) with respect to an environmental clean-up matter at a site in California. See the discussion of this item in Item 1: “Environmental Matters” above.

Teradyne is not presently able to reasonably estimate potential losses, if any, related to any of the claims above. Teradyne disputes all of the claims above and believes they are without merit, and intends to defend vigorously against them. Management does not believe that the outcomes of any of the above referenced claims will have a material adverse effect on Teradyne’s financial position or results of operations but a presently unexpected adverse resolution of any of these claims could have a material adverse effect on Teradyne’s financial position and/or results of operations.

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.

None.

PART II

Item 5:    Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

The following table shows the market range for Teradyne’s Common Stock based on reported sale prices on the New York Stock Exchange.

16

The number of record holders of Teradyne’s Common Stock at February 27, 2004 was 4,724.

Teradyne has never paid cash dividends because it has been Teradyne’s policy to use earnings to finance expansion and growth. Payment of future cash dividends will rest within the discretion of the Board of Directors and will depend, among other things, upon Teradyne’s earnings, capital requirements and financial condition. Teradyne presently expects to retain all of its earnings for use in the business.

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

Item 6:    Selected Financial Data

*Note: Previously published financial data prior to 2000 has not been restated to give the pro forma effect of the adoption of the provisions of SAB 101. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”). SAB 101 summarizes certain of the Staff’s views in applying generally accepted accounting principles to revenue recognition in financial statements. During the fourth quarter of 2000, Teradyne implemented the SEC’s SAB 101 guidelines, retroactive to the beginning of the year. This was reported as a cumulative effect of a change in accounting principle as of January 1, 2000. The cumulative effect of the change in accounting principle on prior years resulted in a charge to income of $64.1 million (net of income taxes of $27.5 million) or $0.35 per diluted share which has been included in income for the fiscal year ended December 31, 2000. For the fiscal year ended

17

December 31, 2000, Teradyne recognized $126.1 million in revenue that is included in the cumulative effect adjustment as of January 1, 2000. Pro forma amounts for the periods beginning before January 1, 2000 have not been presented as the effect of the change in accounting principle could not be reasonably determined.

Item 7:    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. In addition to the historical information contained in this document, the discussion in this Annual Report on Form 10-K contains forward-looking statements, made pursuant to Section 21E of the Securities Exchange Act of 1934, that involve risks and uncertainties, such as statements of Teradyne’s plans, expectations and intentions. The cautionary statements made in this Annual Report on Form 10-K should be read as being applicable to all related forward-looking statements whenever they appear in this Annual Report on Form 10-K. Teradyne’s actual results could differ materially from the results contemplated by these and any other forward-looking statements. Factors that could contribute to such differences include those discussed below as well as those cautionary statements and other factors set forth in “Certain Factors That May Affect Future Results” and elsewhere herein.

Critical Accounting Policies and Estimates

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

Preparation of Financial Statements and Use of Estimates

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

Revenue Recognition

In accordance with the guidance provided by the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104, “Revenue Recognition,” Teradyne recognizes revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to Teradyne’s customers upon shipment. In circumstances where either title or risk of loss pass upon destination, acceptance or cash payment, Teradyne defers revenue recognition until such events occur.

For equipment where there is hardware and software that is incidental to the product, revenue is recognized upon shipment provided that customer acceptance criteria can be demonstrated prior to shipment. Certain contracts require Teradyne to perform tests of the product to ensure that performance meets the published product specifications or customer requested specifications, which are generally conducted prior to shipment. Where the criteria cannot be demonstrated prior to shipment, or in the case of new products, revenue is deferred until customer acceptance has been received. For multiple element arrangements, Teradyne defers the greater of the fair value of any undelivered elements of the contract or the portion of the sales price which is not payable until the undelivered elements are delivered. For a delivered item to be considered a separate unit, the delivered

18

item must have value to the customer on a standalone basis, there must be objective and reliable evidence of fair value of the undelivered items in the arrangement and the delivery or performance of the undelivered item must be considered probable and substantially in the control of Teradyne. Teradyne also defers the portion of the sales price that is not due until acceptance, which represents deferred profit. Fair value is the price charged when the element is sold separately. Teradyne’s post-shipment obligations include installation, training services, one-year standard warranties, and extended warranties. Installation does not alter the product capabilities, does not require specialized skills or tools and can be performed by the customers or other vendors. Installation is typically provided within five to fifteen days of product shipment and is completed within one to two days thereafter. Training services are optional and do not affect the customer’s ability to use the product. Teradyne defers revenue for the fair value of installation and training. Extended warranties constitute warranty obligations beyond one year and Teradyne defers revenue in accordance with FASB Technical Bulletin 90-1. Teradyne’s products are generally subject to warranty and related costs are provided for in cost of revenue when product revenue is recognized. Teradyne classifies shipping and handling costs in cost of revenue. Service revenue is recognized over the contractual period or as the services are performed.

Connection Systems revenue is generally recognized upon shipment according to the shipping terms of the arrangement as there is no installation required and there are no contractual acceptance requirements.

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

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

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

Inventories

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

19

Stock Option and Stock Purchase Plans

Teradyne accounts for its employee stock option and employee stock purchase plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related Interpretations. Teradyne’s employee stock purchase plan is a non-compensatory plan. Teradyne’s stock option plans are accounted for using the intrinsic value method under the provisions of APB 25. There have been no charges for employee or director stock options or employee stock purchase plans. Proceeds from the exercise of stock options and the issuance of the employee stock purchase plan under Teradyne’s stock plans are credited to common stock at par value and the excess is credited to additional paid-in capital.

Teradyne makes pro forma footnote disclosures as though the fair value method was followed 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.” See “Note B: Accounting Policies,” in the Notes to Consolidated Financial Statements for pro forma stock option and stock purchase plan information.

Income Taxes

On a quarterly basis, Teradyne evaluates the realizability of its deferred tax assets and assesses the need for a valuation allowance. 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 and established a valuation allowance. Due to the continued uncertainty of realization, Teradyne maintained its valuation allowance at December 31, 2003. Teradyne does not expect to significantly reduce its valuation allowance until sufficient positive evidence, including profitability, exists that realization is more likely than not.

Goodwill, Intangible and Long-Lived Assets

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

Allowance for Doubtful Accounts

The volatility of the industries that Teradyne serves can cause certain of its customers to experience shortages of cash flows, which can impact their ability to make required payments. Teradyne maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Estimated allowances for doubtful accounts are reviewed periodically taking into account the customer’s current payment history, the customer’s current financial statements and other information regarding the customer’s credit worthiness. If the financial condition of Teradyne’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

20

SELECTED RELATIONSHIPS WITHIN THE CONSOLIDATED

STATEMENTS OF OPERATIONS

Results of Operations:

Business Overview

Teradyne’s operating results were adversely affected by the recent severe technology and semiconductor downturn which affected the semiconductor industry and caused a general reduction in capital spending. As a result of the challenging economic conditions, Teradyne has taken significant cost structure initiatives to more appropriately size the business. Actions taken include: reductions in workforce across all groups which has led to the consolidation and reorganization of certain functions, curtailment of discretionary expenses, shifts of manufacturing and some shared services operations to lower cost regions, reductions in the number of operating facilities and the outsourcing of certain manufacturing and applications development. In addition, Teradyne has eliminated certain product lines to efficiently allocate engineering and development spending to areas that provide a high potential for growth. Recent increases in business activity indicate that the industry is in the midst of a recovery leading to the next growth cycle. In the fourth quarter of 2003, Teradyne’s net bookings increased 45% sequentially, and worldwide semiconductor test utilization levels climbed to levels which had not been seen since the past business peak in 2000.

Although sales remained relatively flat throughout the four quarters of 2003, net bookings increased almost 40% from the first to the second half of the year.

21

Bookings

Teradyne’s net orders for its four principal operating segments for 2003, 2002 and 2001 are as follows:

From 2002 to 2003, the growth in orders shifted more heavily to Subcons in Taiwan, Singapore and other parts of Asia. During the last quarter of 2003, Teradyne saw a rise in bookings driven primarily by semiconductor testing needs for the wireless and baseband industries, whose chips are sold mainly by European and U.S. semiconductor companies. These chips are fabricated and tested by Foundries and Subcons in many parts of Asia, but concentrated in Taiwan and Singapore and increasingly in China. The economic downturn which prevailed in the past years has pushed companies to lower fixed costs. As a result, an increasing trend by chip makers has been to outsource their non-core competency testing needs to Subcons in low-cost regions. As Teradyne’s total Semiconductor Test Systems bookings have grown, the bookings from Subcons have continued to make up a larger percentage of total orders. Bookings from Subcons increased 325% from $72 million in 2002 to $307 million in 2003 and made up 37% of total Semiconductor Test Systems bookings in 2003 compared to 15% of total Semiconductor Test Systems bookings in 2002. In 2001, excess inventory, slower economic growth and a reduction in end-user demand of electronic goods by Teradyne’s Semiconductor Test Systems’ customers resulted in a reduction in capital spending as well as cancellations or postponements of previously placed orders. From 2001 to 2002, Semiconductor Test Systems bookings grew primarily as a result of increased demand for SOC products by both IDMs and Subcons.

The increase in Connection Systems bookings from 2002 to 2003 was due in part to a decrease in cancellations in 2003, as well as an increase in demand in the telecommunications market, driven by wireless network deployments, which increased appreciably for both U.S. and European telecommunications equipment providers in the latter part of the fourth quarter of 2003 compared to the first half of 2003. Teradyne’s high-speed high-density interconnect and backplane solutions, such as VHDM-HSD^™, are well positioned in this market. Bookings were up modestly in the computer/server market, and down in the storage market as Connection Systems exited a lower margin EMS product line and repositioned itself to support its core products. From 2001 to 2002, bookings were impacted by significant cancellations along with a decline in demand of over 50% from key communications customers year over year.

The net decrease in Assembly Test Systems orders from 2002 to 2003 is due primarily to the sale of the manufacturing software and the manual x-ray and rework product lines. This decrease was offset by a 25% increase in orders by government agencies and contractors in the Mil/Aero business, which had a twofold increase in orders from the first half to the second half of 2003. The increase in orders from 2001 to 2002 largely resulted from the full year impact of the GenRad acquisition. The first half of 2001 had strong orders from contract manufacturers in the in-circuit test business but demand weakened as a result of the sluggish economy in the latter half of 2001 and into 2002.

The increase in Other Test Systems bookings from 2001 to 2002 was due primarily to the addition of Diagnostic Solutions in the fourth quarter of 2001 as part of the acquisition of GenRad, which includes Diagnostic Systems, which is included in the Other Test Systems segment.

22

Teradyne’s cancellations for its four principal operating segments for the last three years are as follows:

The Semiconductor Test Systems cancellations were largely due to orders that were booked in late 2000 and early 2001 by Subcons in anticipation of a further increase in their own demand. Cancellations in the Connection Systems business came from major customers in the telecommunication and information technology infrastructure industries, as their own demand levels dropped.

Teradyne’s net bookings by region as a percentage of total net bookings are as follows:

For the past three years, Teradyne’s backlog of unfilled orders for its four principal operating segments is as follows:

Customers may delay delivery of products or cancel orders suddenly and without significant notice, subject to possible cancellation penalties. In 2003, 2002, and 2001 there were no significant cancellation penalties received. 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, financial condition, and results of operations.

Revenue

Teradyne’s net revenue for its four principal operating segments for 2003, 2002 and 2001 is as follows:

23

More than half of the Semiconductor Test Systems sales increase from 2002 to 2003 is attributable to growing sales to Subcons for use in their Asian facilities, primarily Singapore, Taiwan and Malaysia. The revenue derived from Subcons was driven by higher demand from their mixed signal SOC customers, led by sales of Catalyst and Tiger systems. As is described in the Bookings section, Semiconductor Test Systems has seen a recent growth in revenue due to increased need for testing in the wireless and baseband sectors. To a lesser extent, the Semiconductor Test Systems segment continues to see revenue growth in the optical disk sector, automotive applications testing, and image sensor testing. Included in 2001 Semiconductor Test Systems sales is $98.7 million from the accounting impact of the implementation of Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements” in the fourth quarter of 2000 due to shipments of customer orders in 2000 where title was retained by Teradyne until customer payment in order to perfect a security interest.

Connection Systems sales declined from 2002 to 2003 primarily as a result of the decision to exit the lower margin EMS business. The segment saw downward pricing pressure throughout the past three years.

The increase in Assembly Test Systems revenue from 2001 to 2002 largely resulted from the full year impact of the GenRad acquisition in the fourth quarter of 2001. From the second half of 2001 through 2003, the commercial business saw decreases in revenue, particularly in the in-circuit test business, while the Mil/Aero business has seen steady revenue numbers throughout the past three years.

The increase in Other Test Systems revenue from 2001 to 2002 was due primarily to the addition of Diagnostic Solutions in the fourth quarter of 2001 as part of the acquisition of GenRad, which includes Diagnostic Solutions, which is included in the Other Test Systems segment.

Teradyne’s four principal operating segments accounted for the following percentages of consolidated net revenue for each of last three years:

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

Teradyne’s product and service revenue breakout for the past three years is as follows:

24

Service revenue is derived from the servicing of Teradyne’s installed base of products and includes maintenance contracts, repairs, extended warranties, parts sales and applications support.

In the past three years, no single customer accounted for more than 10% of consolidated net revenue. In 2003, 2002, and 2001, Teradyne’s three largest customers in aggregate accounted for 21%, 23% and 24% of consolidated net revenue, respectively.

Gross Margin

Teradyne’s gross margin improvement from 2002 to 2003 was impacted by a variety of factors, including manufacturing efficiencies, lower inventory provisions, and volume and product mix. Gross margin improvement of 4.9 points is attributed to reduced fixed manufacturing costs, including depreciation and facility costs resulting from restructuring actions primarily taken in the second half of 2002, along with increased sales volumes which resulted in higher utilization. An improvement of 2.5 points of gross margin is credited to a shift in Teradyne’s mix of revenues, with a higher percentage in 2003 being derived from Semiconductor Test Systems which has higher incremental margins, coupled with a shift in Teradyne’s supply chain to low cost regions. Inventory provisions decreased from $39.0 million in 2002 to $16.6 million in 2003, which contributed a 2.0 point gross margin improvement.

Teradyne’s gross margin remained relatively flat from 2001 to 2002, and was impacted by a variety of factors including lower inventory provisions, offset by pricing pressures and lower utilization of fixed manufacturing costs as sales volumes decreased. Inventory provisions decreased from $139.7 million in 2001 to $39.0 million in 2002, which contributed a 6.5 point gross margin improvement. As sales volumes decreased from 2001 to 2002 and certain components of cost of revenues remained fixed, gross margin was negatively impacted by 1.8 points due to the lower utilization of manufacturing overhead. Pricing pressures, net of product mix and cost reduction activities in the second half of 2002 resulted in a 1.6 point decrease in gross margin.

The breakout of product and service gross margin is as follows:

Teradyne assesses the carrying value of its inventory on a quarterly basis by estimating future demand and comparing that demand against on-hand and on-order inventory positions. Forecasted revenue information is obtained from the sales and marketing groups and incorporates factors such as backlog and future revenue demand. This quarterly process identifies obsolete and excess inventory. Obsolete inventory, which represents items for which there is no demand, is fully reserved. Excess inventory, which represents inventory items that are

25

not expected to be consumed during the next four quarters, is written-down to estimated net realizable value. The activity with respect to the provisions recorded for excess and obsolete inventory for 2003, 2002, and 2001 is as follows:

Teradyne has no set timeline for scrapping the remaining inventory.

The yearly provisions consisted of obsolete and excess inventory as follows:

Teradyne’s writedowns and write-offs consisted of raw material and components. The provisions were accounted for in the following segments:

26

Of the inventory provision recorded in 2003, $9.3 million relates to Assembly Test Systems which includes $3.6 million relating to the discontinuance of manufacturing, distributing and primary support of the AOI product line and $5.2 million relates to Semiconductor Test Systems SOC parts and components.

Of the inventory provision recorded in 2002 for Semiconductor Test Systems, $20.7 million was in memory test related to Probe-One and J996 product line discontinuances. The Probe-One and J996 inventory has been fully written-off as of December 31, 2003. There is no material exposure remaining for the Probe-One or J996 products.

The total 2001 inventory provision for excess and obsolete inventory was $139.7 million and was principally due to the sharp decline in incoming Semiconductor Test Systems and Connection Systems orders. Of the 2001 provision for Semiconductor Test Systems, $86.3 million was related to SOC parts and $32.3 million was for memory product parts and components related to an inventory writedown for the discontinuance of Teradyne’s Flash 750 memory product.

Teradyne currently does not believe there is any material remaining exposure for the other products that Teradyne continues to actively market, although our estimates of future demand may differ from actual demand which may result in additional provisions. As of December 31, 2003 and December 31, 2002, Teradyne had inventory related reserves for amounts which have been written-down or written-off of $191.1 million and $220.8 million, respectively.

Engineering and Development

Throughout the downturn, Teradyne has maintained its commitment to sustained levels of investment in research through continued engineering and development spending. More than two-thirds of Teradyne’s total engineering and development expenses are incurred by the Semiconductor Test Systems segment, where a new test platform requires up to three years for development and costs between $150-$250 million. During the past three years, Semiconductor Test Systems has reduced the number of platforms under major development, which has increased the resources for remaining platforms. The consolidation of multiple product divisions within Semiconductor Test Systems into one group has enabled more leverage and reuse for application specific integrated circuits development and instrumentation. Semiconductor Test Systems has consolidated engineering facilities, outsourced certain software engineering development to a low-cost region and limited the amount of engineering work done by outside consultants in an effort to reduce overall costs.

The reduction in engineering and development expenses from 2002 to 2003 resulted primarily from the exiting of product lines within Semiconductor Test Systems and Assembly Test Systems. The elimination of memory test within the Semiconductor Test Systems segment resulted in a reduction of $13 million and $5 million in engineering expenses from 2001 to 2002 and 2002 to 2003, respectively. As a result of the sale in Assembly Test Systems of its manufacturing software product line and manual x-ray inspection and rework product line as well as the discontinuance of the automated optical inspection products, engineering expenses from 2002 to 2003 decreased by approximately $15 million.

The decrease from 2002 to 2003 in engineering and development spending resulting from the discontinuance of product lines and actions taken to reduce costs consists of the following amounts:

27

The increase in spending from 2001 to 2002 in engineering and development was primarily due to:

The additional engineering and development expense in 2001 compared to 2002 was partially offset by actions taken to reduce costs which consist of the following:

Selling and Administrative