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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

For the fiscal year ended December 31, 2004

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.

Yes  x    No  ¨

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

Indicate by check mark whether the registrant is 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 July 4, 2004 was $4.1 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 28, 2005 was 195,625,134 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement in connection with its 2005 annual meeting of shareholders are incorporated by reference into Part III.

TERADYNE, INC.

FORM 10-K

PART I

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

Teradyne^® automatic test equipment products include systems that:

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

Broadband Test Systems and Diagnostic Solutions have been combined into “Other Test Systems” for purposes of Teradyne’s segment reporting. For financial information concerning Teradyne’s reportable segments and geographical data, 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 D: 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 Foundries and 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 obtain the overall benefit of comprehensively testing advanced performance devices while reducing their total costs associated with testing by using Teradyne’s Semiconductor Test Systems to:

The systems work in both wafer probe test and final package test applications.

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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 test system is 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 been met with success in the marketplace, and has an installed base of over 1,900 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 bits per second (“bps”) with a broad range of analog performance. Over 1,400 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. Over 100 Tiger systems are installed at IDMs and Subcons around the world.

Teradyne’s most recently introduced test system, the FLEX^™ test system, is the beginning of the next generation of high throughput general purpose SOC test systems, and has been expanded with the addition of the MicroFLEX^™ test system. The FLEX architecture 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” concept 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, power control, and wireless applications. FLEX will be expanded to cover the complete non-memory device spectrum as high performance analog and digital instrumentation is added to the platform. The system is also designed with an open-architecture, which allows customers and third party companies to add test capability to the system. The MicroFLEX is a smaller footprint version of the FLEX, fully compatible, and supporting half as many instruments in a smaller cabinet. Like the J750, the MicroFLEX can be positioned directly on top of a wafer prober, providing “zero footprint” testing at wafer probe.

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.

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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 military/aerospace markets. Connection Systems’ technology can be found in such products as Internet routers, computer servers, mass data storage systems, telecommunication switches, radar systems and other defense applications.

Leading connector technology, advanced printed circuit board fabrication capabilities 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 the industry-leading VHDM-HSD^™ and VHDM^® and the recently introducted GbX^® connectors are utilized for traditional right-angle interface of printed circuit boards with high bandwidth requirements. For parallel connection of printed circuit boards, Connection Systems offers NeXLev^®, VHDM Stacker, and HDM^® Stacker connectors. These products allow designers to relocate high pin count devices onto mezzanine cards to simplify board routing and optimize system cost and performance. In 2003, Connection Systems introduced the industry’s first modular optical interconnect, the HD-Optyx^™ connector. In addition, Connection Systems works 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/2 and has delivered boards for mission critical defense applications since 1982.

Assembly Test Systems

The functionality of nearly every electronic product is generated by one or more printed circuit boards (PCBs), each of which contain complex components. Cell phones and laptop computers contain single-board assemblies, while more complex Internet switches and military avionics systems usually comprise multi-board assemblies. As more and more functionality is packed into these systems, the manufacturing and assembly processes become more complex. This intensifies the need for fast, accurate and reliable test and inspection systems. Teradyne’s PCB assembly test equipment is commonly used in the production process to maintain high yields, ensure product quality, diagnose faults and reduce manufacturing cost. The company’s functional test equipment is used to verify proper operation of both single- and multi-board assemblies at the end of the manufacturing cycle, and later in the maintenance and repair cycle. 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. Fast, low-cost fault identification and accurate diagnostic capabilities are valued features of Teradyne’s in-circuit testers, which cause them to be used by global electronics manufacturers. Teradyne’s in-circuit products support a full range of PCB test applications, including high-volume production, selective or sample test, prototype testing and final or system test. Accordingly, Teradyne offers a variety of features and

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options with its TestStation^™ and Spectrum 8000-series products. The most recent option added to Teradyne’s TestStation family is the SafeTest^™ product. This technology allows users to test the new low-voltage components commonly found on low power PCBs for portable systems and battery operated instrumentation. SafeTest^™ has helped improve the company’s market share of testers sold to manufacturers of consumer and commercial goods.

Imaging Inspection Systems

As circuit boards grow more complex, achieving the electrical contact that traditional in-circuit testers require is more difficult, time-consuming and expensive. The “loss of (electrical and visual) access” and the move to lead-free manufacturing are contributing to the demand for advanced x-ray imaging inspection systems. Teradyne’s automated x-ray inspection (AXI) systems are used to examine PCBs for manufacturing defects. Solder integrity problems are the most common; however these new systems can automatically detect improper component placement and orientation, electrical opens and shorts and a host of other board quality issues. Teradyne’s XStation products are the most widely used test platforms among major automotive manufacturers worldwide.

Military/Aerospace Test Systems & Instrumentation

Teradyne’s expertise in the functional test and diagnosis of complex PCBs is valuable to the more demanding military and commercial aerospace markets. Teradyne’s test solutions include a wide range of systems, instruments, and software products that military and aerospace companies use for production test and the military services use to perform critical maintenance and repair duties.

The pace of military and aerospace technological advances has increased dramatically in recent years, resulting in board assemblies of greater complexity, speed and accuracy. New programs, such as the F-35 Joint Strike Fighter, as well as widespread retrofit and upgrade programs are continuing to fuel the demand for high performance test systems. Teradyne is a leading provider of test instrumentation and systems with performance that is uniquely suited to the demands of military / aerospace electronics manufacturers and repair depots worldwide.

Successful penetration in this market is illustrated by Teradyne’s sales into major Department of Defense programs, including the F-35 Joint Strike Fighter, B-1 Bomber and C-17 Transport.

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:

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.

Vehicle Configuration and Test Solutions (“VCATS”)

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

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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.

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. Teradyne’s Celerity^® DSL test system is equipped on approximately 60 million subscriber lines to qualify DSL services provided by major telephone companies.

Teradyne products within the Broadband Test Systems market include:

4TEL^™ Voice Service Test System

Testing more than 130 million access lines worldwide for many of the world’s largest telecommunications companies, Teradyne’s 4TEL voice service assurance system is designed to automate customer care and field repair processes to reduce network maintenance and operating costs. 4TEL accurately identifies and isolates faults in the central office exchange, the copper cable to the consumer’s premise, and the premise itself.

Celerity 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. Teradyne’s patented Celerity system uses accurate insertion loss, length and load coil detection, to qualify millions of lines in hours for DSL service. 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.

Celerity also provides on-demand testing for in-service DSL lines to support quick fault isolation and efficient field repair dispatches. 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.

Summary of Net Revenue by Reportable Segment

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

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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 Nominating 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 2004, 2003, and 2002 no single customer accounted for more than 10% of Teradyne’s consolidated net revenue. In each of the years 2004, 2003, and 2002, Teradyne’s three largest customers in aggregate accounted for 18%, 21%, and 23% of consolidated net revenue, respectively.

Direct sales to United States government agencies accounted for less than 2% of consolidated net revenue in 2004, 2003 and 2002. Approximately 23%, 12%, and 10% of Assembly Test Systems revenue in 2004, 2003 and 2002, respectively, was to United States government agencies and 24%, 28% and 15% of Assembly Test Systems revenue in 2004, 2003 and 2002, 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 some 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 70% of consolidated net revenue in 2004, 63% in 2003, and 54% in 2002. Sales to customers located in Singapore were 13%, 11%, and 8% of consolidated net revenue in 2004, 2003, and 2002, respectively. Sales to customers located in Taiwan were 15%, 9%, and 9% of consolidated net revenue in 2004, 2003 and 2002, respectively. Sales are attributed to geographic areas based on the location of the customer site.

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

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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 the majority 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 reportable segments. These competitors include, among others, Advantest Corporation, Agilent Technologies, Inc., Credence Systems Corporation, and LTX Corporation. 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, 2004 and 2003, Teradyne’s backlog of unfilled orders in each of its four reportable segments was as follows:

Of the backlog at December 31, 2004, approximately 96% of the Semiconductor Test Systems backlog, 100% of the Connection Systems backlog, 100% of Assembly Test Systems backlog, and 93% of the Other Test Systems backlog is expected to be delivered in 2005. Generally, Teradyne’s backlog policy requires delivery of products and services within twelve months.

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

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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, 2004, Teradyne employed approximately 6,200 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 $262.0 million in 2004, $254.6 million in 2003 and $293.9 million in 2002. These expenditures amounted to approximately 15% of consolidated net revenue in 2004, 19% in 2003 and 24% in 2002.

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.

CEO Certification

An annual CEO Certification was submitted by our CEO to the New York Stock Exchange on June 18, 2004 in accordance with the NYSE’s listing standards.

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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.

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

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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 filed a motion to dismiss the complaint in its entirety on behalf of Teradyne and the two individual defendants. The court granted the motion in part, and the only remaining claims were that the sale of our common stock to the former owners violated certain California securities statutes and common law and that we had breached certain contractual obligations in the agreements relating to the acquisitions. Our 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. We opposed these motions. On April 22, 2003, the Court denied the plaintiffs’ motion from reconsideration and the plaintiffs’ request for certification under Rule 54(b). The only claim remaining before the District Court from the original complaint related to an allegation of fraud in connection with the setting of the transaction price. We have answered and denied all liability. On December 27, 2004, Plaintiffs voluntarily stipulated to the dismissal with prejudice of its remaining claims in the trial court, without having received any payment or other consideration from Teradyne. On February 2, 2005, the plaintiffs filed a notice of appeal from the court’s prior orders dismissing certain of the plaintiffs’ claims and granting partial summary judgment against them and denying the plaintiffs’ motion for reconsideration.

In 2001, we were 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. We have asked the State of California to drop the PRP designation, but California has not yet agreed to do so.

In August of 2003, Hampshire Equity Partners II, LP (“HEP”) informed Teradyne of a potential claim that was subsequently contained in the complaint that HEP filed on April 30, 2004 against Teradyne and Teradyne’s Connection Systems segment (“TCS”) in the United States District Court of the Southern District of New York, relating to its February 21, 2001 investment of $55 million in Connector Service Corporation aka AMAX Plating, Inc. (“CSC”), which was a supplier to TCS at the time. During the due diligence that HEP conducted prior to making that investment, an agent of HEP spoke with TCS, among other CSC customers, concerning CSC. On or about September 24, 2003, CSC filed for bankruptcy protection as discussed above. HEP has now brought suit against Teradyne and TCS asserting fraud and negligence based claims, and a claim for intentional interference with economic opportunity, relating to statements that a TCS representative made to HEP’s agent prior to HEP’s February 2001 investment in CSC. HEP seeks to hold Teradyne and TCS responsible for its decision to invest in CSC and for the losses that it suffered upon the bankruptcy of CSC. HEP is now seeking damages for an unstated amount of not less than $55 million. On June 17, 2004, Teradyne and TCS filed a motion to dismiss HEP’s complaint in its entirety. On August 9, 2004, HEP filed its opposition to the motion to dismiss and Teradyne filed its reply brief on September 22, 2004. Teradyne’s motion to dismiss remains pending.

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

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

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None.

PART II

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

The number of record holders of Teradyne’s Common Stock at February 28, 2005 was 2,997.

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.

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*Note: 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 December 31, 2000, Teradyne recognized $126.1 million in revenue that is included in the cumulative effect adjustment as of January 1, 2000.

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

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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, management evaluates its estimates, including those related to inventories, investments, goodwill, intangible and other long-lived assets, bad debts, income taxes, pensions, warranties, contingencies, and litigation. Management bases its estimates on historical experience and on appropriate and customary assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ 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 that includes 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 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.

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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 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. In instances where an arrangement contains multiple elements, revenue is deferred related to the undelivered elements to the extent that vendor-specific objective evidence of fair value (“VSOE”) exists for such elements. In instances where VSOE does not exist for one or more of the undelivered elements of an arrangement, all revenue related to the arrangement is deferred until all elements have been delivered. VSOE is the price charged when the element is sold separately. Revenue for the separate elements is only recognized where the functionality of the undelivered element is not essential to the delivered element.

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

Inventories

Inventories, which include materials, labor, and manufacturing overhead, are stated at the lower of cost (first-in, first-out basis) or net realizable value. On a quarterly basis, 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.

Stock Option and Stock Purchase Plans

Teradyne accounts for its director and 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. Accordingly, 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 stock under the employee stock purchase plan 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.

In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment” (“SFAS 123R”). In interim or annual periods beginning after June 15, 2005, SFAS 123R would eliminate the ability to

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account for equity-based compensation using the intrinsic value-based method under APB 25. SFAS 123R requires companies’ to calculate equity-based compensation expense for stock compensation awards based on the fair value of the equity instrument at the time of grant. Under SFAS 123R, equity-based compensation is required to be recognized in companies’ financial statements. Teradyne expects to adopt SFAS 123R in the third quarter of 2005, as required. For the years ended December 31, 2004, 2003 and 2002, had SFAS 123R been effective, Teradyne would have recognized additional non-cash equity-based compensation expense of $91.8 million, $85.1 million, and $110.3 million, respectively, applying the provisions of SFAS 123.

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 and 2004. Teradyne does not expect to significantly reduce its valuation allowance until sufficient positive evidence, including sustained 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.

Accounts Receivable and Allowance for Doubtful Accounts

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

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SELECTED RELATIONSHIPS WITHIN THE CONSOLIDATED

STATEMENTS OF OPERATIONS

Results of Operations:

Bookings

Teradyne’s net orders for its four reportable segments for 2004, 2003 and 2002 are as follows:

From 2003 to 2004, Semiconductor Test Systems bookings increased due to growth in the overall system-on-a-chip (“SOC”) tester market (excluding memory testers). Semiconductor Test Systems bookings within the SOC market showed a continuation of the growth in Asian markets from 2003 into 2004, mainly related to Subcons in Taiwan and Singapore. Over 2004, Teradyne saw a rise in bookings driven primarily by semiconductor testing needs in the wireless, broadband, consumer electronics, and mass storage/datacom markets, which are serviced by the J750, Catalyst and FLEX products, and whose chips are sold mainly by European and U.S. semiconductor companies. Many of these chips are fabricated and tested by Foundries and

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Subcons in many parts of Asia, but concentrated in Taiwan and Singapore. The economic downturn which prevailed in past years has pushed companies to lower fixed costs. As a result, an increasing trend by chip makers has been to outsource non-core competency testing needs to Subcons in low cost regions. As total Semiconductor Test Systems bookings have grown, the bookings from Subcons have continued to make up a large percentage of total orders. Bookings from Subcons increased 45% to $443 million in 2004 from $307 million in 2003, and made up 43% of bookings in 2004 compared to 37% in 2003. Semiconductor Test Systems backlog increased from 2002 to 2003 primarily due to increased orders from Subcons and Foundries located in the Asian markets.

The growth in Connection Systems orders from 2003 to 2004 was a result of continued spending for wireless network deployments in the United States and Europe as well as an increase in network spending for both the enterprise and service provider markets. The computer/server market was also strong. Bookings were up appreciably for Connection Systems’ VHDM-HSD backplane interconnect product lines as well as the NeXLev family of high-speed, high-density mezzanine connectors. Similar to 2003, the growth in orders was partially offset by a decline in orders due to the decision to exit a portion of Connection Systems’ lower margin EMS product line. 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 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.

Orders in the Assembly Test Systems segment increased from 2003 to 2004, primarily driven by increases in the mil/aero business and increased sales of in-circuit products. The growth in these areas was offset by a decline in orders resulting from the sale of the manufacturing software and the manual x-ray and rework product lines in 2003. 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.

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

Semiconductor Test Systems experienced $10.5 million of cancellations and backlog adjustments in 2004. Approximately 50% of this amount was related to cancellations, while the remainder was a backlog adjustment related to management’s estimate of what may be canceled in future periods.

The Connection Systems cancellations in 2003 were from major customers in the telecommunications and networking infrastructure industries, due principally to product program cancellations.

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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 reportable segments is as follows:

Customers may delay delivery of products or cancel orders suddenly and without significant notice, subject to possible cancellation penalties. In 2004, 2003, and 2002 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 reportable segments for 2004, 2003 and 2002 is as follows:

The increase in Semiconductor Test Systems sales from 2003 to 2004 is attributable to growth in the overall SOC test market, and a share gain by Semiconductor Test Systems in that market. The worldwide market for semiconductor test equipment (excluding memory testers) grew by approximately 34% in 2004. Semiconductor Test System’s share in that market grew from 2003 to 2004. Much of the increased sales for Semiconductor Test Systems came from Subcon customers for use in their Asian facilities, primarily in Singapore and Taiwan. The revenue derived from Subcons was driven by higher demand from their mixed signal SOC customers, led by sales of Catalyst and FLEX systems. As is described in the Bookings section, Semiconductor Test Systems has seen growth in revenue from 2003 to 2004 due to increased need for testing in the wireless, broadband, and to a lesser extent, mass storage/datacom sectors. Sales of the J750 product were also relatively strong in 2004, serving the microcontroller and high volume logic customer segments. Similar to the increase in sales from 2003 to 2004, the increase from 2002 to 2003 was attributable to increased demand from Subcons located in the Asian markets, particularly, Singapore, Taiwan, and Malaysia.

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Connection Systems sales in 2004 increased to $381.7 million led by stronger customer demand for Connection Systems’ high-speed, high-density interconnect products, which more than offset the decrease in sales associated with the exiting of the lower margin EMS business in 2003. 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 sales from 2003 to 2004 was due to increases in both the commercial and mil/aero businesses. Commercial business growth was due to increased sales of in circuit test products, while the increase in mil/aero sales was generated by a number of large projects which were undertaken in 2004. These increases were offset, in part, by decreases from the sale of the manual x-ray, rework and AOI product lines in 2003. From 2002 through 2003, the commercial business saw decreases in revenue, particularly due to the sale of product lines referenced above, while mil/aero revenue increased slightly year over year .

Teradyne’s four reportable segments accounted for the following percentages of consolidated net revenue for each of the 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:

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 2004, 2003, and 2002, Teradyne’s three largest customers in the aggregate accounted for 18%, 21% and 23% of consolidated net revenue, respectively.

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Gross Margin

The gross margin improvement from 2003 to 2004 was the result of several factors. An improvement of 9 points is credited to an increase in sales volumes and a shift in the mix of revenues, with higher Semiconductor Test Systems content which has higher incremental margins. The remainder is attributable to lower material costs and a reduction in fixed manufacturing costs, including depreciation and facility costs resulting from past restructuring actions.

Teradyne’s gross margin improvement from 2002 to 2003 was impacted by a variety of factors, including an improvement of 4.9 points related to reduced manufacturing costs and increased volume levels, and an improvement of 2.5 points related to an increase in volume and a shift in product mix. Inventory provisions decreased from $39.0 million in 2002 to $16.6 million in 2003, which contributed a 2.0 point gross margin improvement.

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 not expected to be consumed, is written-down to estimated net realizable value. These write-offs and write-downs consist of raw materials and components. Sales of previously reserved inventory items result in recovery of the related inventory provision which is recorded in cost of revenues.

During the year ended December 31, 2004, Teradyne recorded excess and obsolete provisions in cost of revenues of $3.5 million and $7.8 million, respectively. Of the $11.3 million of total excess and obsolete provisions recorded, $6.2 million related to Semiconductor Test Systems, $3.0 million related to Assembly Test Systems, $1.6 million related to Connection Systems and $0.5 million related to Other Test Systems.

During the year ended December 31, 2003, Teradyne recorded excess and obsolete provisions in cost of revenues of $7.4 million and $9.2 million, respectively. Of the $16.6 million of total excess and obsolete provisions recorded, $9.3 million related to Assembly Test Systems which included $3.6 million relating to the discontinuance of manufacturing, distributing and primary support of the AOI product line and $5.2 million related to Semiconductor Test Systems SOC parts and components.

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During the year ended December 31, 2002, Teradyne recorded excess and obsolete provisions in cost of revenues of $28.1 million and $10.9 million, respectively. Of the $39.0 million of total excess and obsolete provisions recorded, $27.9 million related to Semiconductor Test Systems, including $20.7 million of memory test inventory related to Probe-One and J996 product line discontinuances. The Probe-One and J996 inventory had been fully written-off as of December 31, 2003. There is no material exposure remaining for the Probe-One or J996 products.

During the years ended December 31, 2004 and 2003, Teradyne sold inventory that was previously reserved for which had a gross margin impact of $2.2 million and $5.3 million, respectively.

Teradyne scrapped $44.8 million, $30.3 million, and $22.8 million of inventory which had been previously written-down or written-off during the years ended December 31, 2004, 2003 and 2002, respectively. Teradyne has no set timeline for scrapping the remaining inventory.

As of December 31, 2004 and 2003, Teradyne had inventory reserves for amounts which have been written-down or written-off of $153.9 million and $191.1 million, respectively. Of the reserves at December 31, 2004, $10.5 million, $12.6 million, $3.6 million, and $127.2 million relate to inventory provisions recorded in 2004, 2003, 2002, and prior to 2002, respectively. Of the reserves at December 31, 2003, $16.6 million, $20.2 million, and $154.3 million related to inventory provisions recorded in 2003, 2002 and prior to 2002, respectively.

Engineering and Development

During 2004, Teradyne 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 2002 and 2003, Semiconductor Test Systems reduced the number of platforms under major development, which increased the resources for continued engineering on selective 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.

The increase of $7 million in engineering and development spending from 2003 to 2004 consists of the following amounts:

These increases were offset in part by the following:

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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 $5 million in engineering expenses from 2002 to 2003. In addition, Semiconductor Test Systems 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 costs. 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:

Selling and Administrative

The increase in spending of $19 million from 2003 to 2004 was principally due to the following approximate amounts:

These increases were offset in part by the following:

The decrease in spending from 2002 to 2003 was principally due to the following approximate amounts:

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Restructuring and Other Charges

The tables below represent activity related to restructuring charges for the years ended December 31, 2004, 2003, and 2002. The accrual for severance and benefits is reflected in accrued employees’ compensation and withholdings. The accrual for lease payments on vacated facilities is reflected in other accrued liabilities and other long-term accrued liabilities and is expected to be paid out over the lease terms, the latest of which expires in 2012. Teradyne expects to pay out approximately $7.0 million against the lease accruals over the next twelve months. Teradyne’s future lease commitments are net of expected sublease income of $13 million as of December 31, 2004. Teradyne has subleased approximately 52% of its unoccupied space as of December 31, 2004 and is actively attempting to sublease the remaining space.

The table below summarizes the liability and activity for the year ended December 31, 2004 relating to restructuring and other charges (in thousands):

During the year ended December 31, 2004, Teradyne recorded the following activity related to restructuring and other charges:

The restructuring actions taken in 2004 are expected to generate cost savings of approximately $13.8 million million annually across all areas of operations.

During 2004, Teradyne recorded a gain on the sale of a business of $0.9 million. This amount related to an earn-out provision from a divestiture in the Connection Systems segment in 1999, and has been classified as a gain on the sale of business in the statement of operations for the year ended December 31, 2004.

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The table below summarizes the liability and activity for the year ended December 31, 2003 relating to restructuring and other charges: