Edgar Filing: TERADYNE, INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 29, 2008

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

For the transition period from to

Commission File No. 001-06462

TERADYNE, INC.

(Exact name of registrant as specified in its charter)


Massachusetts		04-2272148
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

600 Riverpark Drive, North Reading, Massachusetts		01864
(Address of Principal Executive Offices)		(Zip Code)

978-370-2700

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes x No ¨

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

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

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

The number of shares outstanding of the registrant’s only class of Common Stock as of August 1, 2008 was 168,861,816 shares.

TERADYNE, INC.

INDEX


		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited):

	Condensed Consolidated Balance Sheets as of June 29, 2008 and December 31, 2007	3

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 29, 2008 and July 1, 2007	4

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 29, 2008 and July 1, 2007	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31

Item 4.	Controls and Procedures	32

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 4.	Submission of Matters to a Vote of Security Holders	34

Item 6.	Exhibits	34

PART I

Item 1: Financial Statements

TERADYNE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	June 29, 2008			December 31, 2007
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	286,094		$	562,371
Marketable securities		19,780			75,593
Accounts receivable, net of allowance for doubtful accounts of $4,256 and $4,493 on June 29, 2008 and December 31, 2007, respectively		212,458			189,487
Inventories:
Parts		50,288			27,627
Assemblies in process		42,486			31,272
Finished Goods		25,667			21,414

Net inventories		118,441			80,313
Deferred tax asset		30,779			3,216
Prepayments and other current assets		39,805			33,953

Total current assets		707,357			944,933
Property, plant, and equipment, at cost		830,809			825,771
Less: accumulated depreciation		477,704			473,064

Net property, plant, and equipment		353,105			352,707
Marketable securities		108,462			104,978
Goodwill		241,730			69,147
Intangible assets, net		96,593			5,992
Other assets		25,632			24,855
Long-term deferred tax assets		—			6,280
Retirement plans assets		48,028			46,396

Total assets	$	1,580,907		$	1,555,288

LIABILITIES
Current liabilities:
Accounts payable	$	80,456		$	57,426
Accrued employees’ compensation and withholdings		70,991			71,691
Deferred revenue and customer advances		53,781			41,928
Other accrued liabilities		46,330			47,002
Accrued income taxes		2,366			5,187

Total current liabilities		253,924			223,234
Retirement plans liabilities		77,876			80,388
Deferred tax liabilities		20,495			—
Long-term other accrued liabilities		30,705			22,492

Total liabilities		383,000			326,114

Commitments and contingencies (Note N)

SHAREHOLDERS’ EQUITY
Common stock, $0.125 par value, 1,000,000 shares authorized, 167,822 and 173,088 shares issued and outstanding at June 29, 2008 and December 31, 2007, respectively		20,977			21,636
Additional paid-in capital		1,103,956			1,105,441
Accumulated other comprehensive loss		(46,930	)		(46,028	)
Retained earnings		119,904			148,125

Total shareholders’ equity		1,197,907			1,229,174

Total liabilities and shareholders’ equity	$	1,580,907		$	1,555,288

The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s

Annual Report on Form 10-K for the year ended December 31, 2007 are an integral part of the condensed

consolidated financial statements.

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	For the Three Months Ended					For the Six Months Ended
	June 29, 2008			July 1, 2007		June 29, 2008			July 1, 2007
	(in thousands, except per share amounts)
Net revenues:
Products	$	248,779		$	229,504	$	481,770		$	424,137
Services		68,926			59,206		133,250			118,266

Net revenues		317,705			288,710		615,020			542,403
Cost of revenues:
Cost of products		124,925			112,338		243,232			212,329
Cost of services		38,932			39,152		79,437			79,457

Total cost of revenues		163,857			151,490		322,669			291,786

Gross profit		153,848			137,220		292,351			250,617
Operating expenses:
Engineering and development		56,154			52,417		111,303			101,679
Selling and administrative		65,463			62,182		130,684			125,129
Acquired intangible asset amortization		4,774			955		8,637			1,866
In-process research and development		—			—		1,100			16,700
Restructuring and other, net		12,726			568		24,511			2,815

Operating expenses		139,117			116,122		276,235			248,189

Income from operations		14,731			21,098		16,116			2,428
Interest income		2,932			9,299		7,544			19,398
Interest expense and other		(484	)		303		(14	)		2,545

Income from continuing operations before income taxes		17,179			30,700		23,646			24,371
Provision for income taxes		6,100			3,454		10,200			4,839

Income from continuing operations		11,079			27,246		13,446			19,532
Income from discontinued operations before taxes		—			618		—			711
Provision for income taxes		—			210		—			225

Income from discontinued operations		—			408		—			486

Net income	$	11,079		$	27,654	$	13,446		$	20,018

Income from continuing operations per common share:
Basic	$	0.06		$	0.14	$	0.08		$	0.10

Diluted	$	0.06		$	0.14	$	0.08		$	0.10

Net income per common share:
Basic	$	0.06		$	0.15	$	0.08		$	0.11

Diluted	$	0.06		$	0.14	$	0.08		$	0.10

Weighted average common share—basic		170,644			189,391		172,203			189,508

Weighted average common share—diluted		174,096			191,405		174,909			191,184

The accompanying notes, together with the Notes to Consolidated Financial Statements included in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2007 are an integral part of the condensed consolidated financial statements.

TERADYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Six Months Ended
	June 29, 2008			July 1, 2007
	(in thousands)
Cash flows from operating activities:
Net income	$	13,446		$	20,018
Income from discontinued operations		—			486

Income from continuing operations		13,446			19,532
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation		39,077			30,965
Amortization		9,720			3,904
Stock-based compensation		10,821			14,068
In-process research and development charge		1,100			16,700
Gain on sale of land and building		(1,682	)		—
Gain on sale of product lines		—			(906	)
Provision for inventory		3,254			1,062
Non-cash charge for the sale of inventories revalued at the date of acquisition		4,346			—
Other non-cash items, net		(291	)		1,312
Changes in operating assets and liabilities, net of businesses and product lines acquired and sold:
Accounts receivable		4,488			(55,795	)
Inventories		(1,223	)		24,327
Other assets		(6,195	)		(3,435	)
Accounts payable, deferred revenue and accrued expenses		10,410			(10,016	)
Retirement plans contributions		(3,717	)		(1,644	)
Income taxes payable		(2,608	)		(25,953	)

Net cash provided by continuing operations		80,946			14,121
Net cash used for discontinued operations		—			(2,998	)

Net cash provided by operating activities		80,946			11,123

Cash flows from investing activities:
Investments in property, plant and equipment		(56,702	)		(44,611	)
Acquisition of technology		—			(17,600	)
Proceeds from sale of product lines and business		—			906
Proceeds from sale of land and building		17,716			—
Acquisition of business, net of cash acquired		(285,324	)		—
Purchases of available-for-sale marketable securities		(40,581	)		(243,352	)
Proceeds from sale and maturities of available-for-sale marketable securities		89,777			132,244

Net cash used for continuing operations		(275,114	)		(172,413	)
Net cash used for discontinued operations		—			(189	)

Net cash used for investing activities		(275,114	)		(172,602	)

Cash flows from financing activities:
Repurchase of common stock		(91,191	)		(27,610	)
Issuance of common stock under employee stock option and stock purchase plans		9,082			14,279

Net cash used for financing activities		(82,109	)		(13,331	)

Decrease in cash and cash equivalents		(276,277	)		(174,810	)
Cash and cash equivalents at beginning of period		562,371			568,025

Cash and cash equivalents at end of period	$	286,094		$	393,215

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. The Company

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

Teradyne’s automatic test equipment products and services include:

•

semiconductor test (“Semiconductor Test”), and

•

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

Statements in this Quarterly Report on Form 10-Q 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, as amended. 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 (the “SEC”). See also “Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Certain Factors That May Affect Future Results” and Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2007.

B. Accounting Policies

Basis of Presentation

The condensed consolidated interim financial statements include the accounts of Teradyne and its subsidiaries. All significant intercompany balances and transactions have been eliminated. These interim financial statements are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for the fair statement of such interim financial statements. Certain prior year’s amounts were reclassified to conform to the current year presentation. The December 31, 2007 condensed consolidated balance sheet data were derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles.

The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in Teradyne’s Annual Report on Form 10-K, filed with the SEC on February 28, 2008 for the year ended December 31, 2007.

On August 1, 2007, Teradyne completed the sale of Broadband Test Systems, its voice and broadband access network test division. The results of operations of Broadband Test Systems as well as cash flow amounts pertaining to this business have been classified as discontinued operations in the condensed consolidated financial statements.

Preparation of Financial Statements

The preparation of consolidated financial statements requires management to make estimates and judgments that affect the amounts reported in the financial statements. Actual results may differ significantly from these estimates.

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

C. Recently Issued Accounting Pronouncements

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations.” (SFAS No. 141(R)) This Statement replaces FASB Statement No. 141, “Business Combinations.” SFAS No. 141(R) establishes new principles and requirements for how an acquiring company 1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree, 2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and 3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for business combinations occurring in the fiscal year beginning on or after December 15, 2008. Teradyne is currently evaluating the impact of adopting this standard.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS No. 161), an amendment of FASB Statement No. 133. “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 161 expands the current disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” such that entities must now provide enhanced disclosures on a quarterly basis regarding how and why the entity uses derivatives; how derivatives and related hedged items are accounted for under SFAS No. 133 and how derivatives and related hedged items affect the entity’s financial position, performance and cash flow. SFAS No. 161 is effective prospectively for periods beginning on or after November 15, 2008. Teradyne will adopt SFAS No. 161 in fiscal year 2009.

In April 2008, the FASB issued Staff Position No.142-3 (FSP No. 142-3), “Determination of the Useful Life of Intangible Assets”. This FSP amends the guidance in FASB Statement No. 142 ,”Goodwill and Other Intangible Assets”, about estimating useful lives of recognized intangible assets and requires additional disclosures related to renewing or extending the terms of a recognized intangible asset. In estimating the useful life of a recognized intangible asset, the FSP requires companies to consider their historical experience in renewing or extending similar arrangements together with the asset’s intended use, regardless of whether the arrangements have explicit renewal or extension provisions. The FSP is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements are to be applied prospectively to all intangible assets.

D. Financial Instruments

Effective January 1, 2008, Teradyne has adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS No. 157) for financial assets and liabilities. As defined in SFAS No.157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Teradyne uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during the quarter or six months ended June 29, 2008. SFAS No.157 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

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

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

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

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Teradyne’s marketable securities consist primarily of high quality, corporate debt securities that are valued using matrix pricing. Teradyne has reviewed and agrees with the valuation methodologies and procedures utilized by these parties. The following table sets forth by fair value hierarchy Teradyne’s financial assets and liabilities that were measured at fair value on a recurring basis as of June 29, 2008.


	June 29, 2008
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term marketable securities	$	—	$	19,780	$	—	$	19,780
Long-term marketable securities		9,390		99,072		—		108,462

Total	$	9,390	$	118,852	$	—	$	128,242

E. Product Warranty

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


	For the Three Months Ended						For the Six Months Ended
	June 29, 2008			July 1, 2007			June 29, 2008			July 1, 2007
	(in thousands)
Balance at beginning of period	$	9,933		$	11,327		$	9,340		$	12,897
Acquisition		—			—			492			—
Accruals for warranties issued during the period		3,606			3,529			7,209			6,829
Accruals related to pre-existing warranties (includes changes in estimates)		577			(873	)		1,182			(1,870	)
Settlements made during the period		(4,334	)		(3,734	)		(8,441	)		(7,607	)

Balance at end of period	$	9,782		$	10,249		$	9,782		$	10,249

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


	For the Three Months Ended						For the Six Months Ended
	June 29, 2008			July 1, 2007			June 29, 2008			July 1, 2007
	(in thousands)
Balance at beginning of period	$	6,612		$	7,777		$	6,610		$	8,350
Deferral of new extended warranty revenue		1,686			1,115			2,880			1,934
Recognition of extended warranty deferred revenue		(1,195	)		(1,290	)		(2,387	)		(2,682	)

Balance at end of period	$	7,103		$	7,602		$	7,103		$	7,602

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

F. Stock-Based Compensation

During the six months ended June 29, 2008, Teradyne granted restricted stock units to employees, executives and directors. The total number of shares granted was 3.1 million at the weighted average grant date fair value of $10.66. Service based awards granted to employees and executives vest in equal installments over four years. A significant number of awards granted to executive officers were performance-based restricted stock units. The performance–based restricted stock units granted to the executives in January 2008 cliff vest on the third anniversary of the grant. The amount of actual performance-based awards that will vest will be determined on the first anniversary of the grant. Awards granted to non-employee directors vest on the first anniversary of the grant date.

During the six months ended July 1, 2007, Teradyne granted restricted stock units to employees, executives and directors. The total number of shares granted was 2.0 million at the weighted average grant date fair value of $15.27. Service based awards granted to employees and executives vest in equal installments over four years. A significant number of awards granted to executive officers were performance-based restricted stock units. The performance-based restricted stock units granted to the executives in January 2007 vest in equal installments over four years. The amount of actual performance-based awards that will vest was determined on the first anniversary of the grant. Awards granted to non-employee directors vested on the first anniversary of the grant date.

G. Comprehensive Income

Comprehensive income is calculated as follows:


	For the Three Months Ended						For the Six Months Ended
	June 29, 2008			July 1, 2007			June 29, 2008			July 1, 2007
	(in thousands)
Net income	$	11,079		$	27,654		$	13,446		$	20,018
Foreign currency translation adjustments		(233	)		256			(1,055	)		234
Change in unrealized loss on foreign exchange contracts		—			55			—			55
Change in unrealized loss on marketable securities, net of taxes of $0, $0, $0 and $0		(672	)		596			(3,126	)		2,165
Retirement plans net gain, net of taxes of $431, $22, $447 and $60		2,643			2,582			2,988			3,744
Retirement plans prior service benefit, net of taxes of $0, $0, $0 and $0		153			154			307			307
Retirement plans net transition asset, net of taxes of $(2), $(11), $(5) and $(18)		(16	)		(46	)		(16	)		(24	)

Comprehensive income	$	12,954		$	31,251		$	12,544		$	26,499

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

H. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill by segment are as follows:


	Semiconductor Test		Systems Test Group		Total
	(in thousands)
Balance at December 31, 2007	$	—	$	69,147	$	69,147
Goodwill acquired during period		172,583		—		172,583

Balance at June 29, 2008	$	172,583	$	69,147	$	241,730

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


	June 29, 2008
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Useful Life
	(in thousands)
Completed technology	$	72,793	$	20,875	$	51,918	6.2 years
Customer relationships and service and software maintenance contracts		50,679		6,812		43,867	6.9 years
Trade names and trademarks		4,100		3,292		808	7.5 years

Total intangible assets	$	127,572	$	30,979	$	96,593	6.5 years


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

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

Aggregate intangible asset amortization expense was $4.8 million for the three months ended June 29, 2008 and $1.0 million for the three months ended July 1, 2007. Aggregate intangible asset amortization expense was $8.6 million for the six months ended June 29, 2008 and $1.9 million for the six months ended July 1, 2007. Estimated intangible asset amortization expense for each of the five succeeding fiscal years is as follows:


Year	Amount
	(in thousands)
2008 (remainder)	$	10,068
2009		19,368
2010		16,697
2011		15,239
2012		13,112

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

I. Net Income per Common Share

The following table sets forth the computation of basic and diluted net income per common share:


	For the Three Months Ended				For the Six Months Ended
	June 29, 2008		July 1, 2007		June 29, 2008		July 1, 2007
	(in thousands, except per share amounts)
Income from continuing operations	$	11,079	$	27,246	$	13,446	$	19,532
Income from discontinued operations		—		408		—		486

Net income	$	11,079	$	27,654	$	13,446	$	20,018

Shares used in income per common share—basic		170,644		189,391		172,203		189,508
Effect of dilutive potential common shares:
Employee and director stock options		1,986		1,169		1,582		1,057
Restricted stock units		1,269		742		999		552
Employee stock purchase rights		197		103		125		67

Dilutive potential common shares		3,452		2,014		2,706		1,676

Shares used in net income per common share—diluted		174,096		191,405		174,909		191,184

Net income per common share—basic
Continuing operations	$	0.06	$	0.14	$	0.08	$	0.10
Discontinued operations		—		0.01		—		0.01

	$	0.06	$	0.15	$	0.08	$	0.11

Net income per common share—diluted
Continuing operations	$	0.06	$	0.14	$	0.08	$	0.10
Discontinued operations		—		—		—		—

	$	0.06	$	0.14	$	0.08	$	0.10

The computation of diluted net income per common share for the three and six months ended June 29, 2008 excludes the effect of the potential exercise of options to purchase approximately 13.6 million and 14.2 million shares and restricted stock units of 1.2 million and 1.3 million shares, respectively, because the effect would have been anti-dilutive.

The computation of diluted net income per common share for the three and six months ended July 1, 2007 excludes the effect of the potential exercise of options to purchase approximately 14.4 million and 14.6 million shares, respectively, because the effect would have been anti-dilutive.

J. Restructuring and Other, Net

The tables below represent activity related to restructuring and other, net, in the six months ended June 29, 2008. The accrual for severance payments and employees’ benefits is reflected in accrued employees’ compensation and withholdings and is expected to be paid by the end of the fourth quarter of 2008. 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 over the lease terms, the latest of which expires in 2012. Teradyne expects to pay approximately $3.2 million against the lease accruals over the next twelve months. Teradyne’s future lease commitments are net of expected sublease income of $8.9 million as of June 29, 2008.

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2008 Activities


(in thousands)	Gain on Sale of Real Estate			Facility Related			Severance and Benefits			Long-Lived Asset Impairment			Total
Balance at December 31, 2007	$	—		$	—		$	—		$	—		$	—
Charges/ (Credits)		(1,682	)		10,344			12,949			550			22,161
Cash payments		—			(593	)		(8,822	)		—			(9,415	)
Accelerated depreciation and other		1,682			(8,975	)		—			(550	)		(7,843	)

Balance at June 29, 2008	$	—		$	776		$	4,127		$	—		$	4,903

During the six months ended June 29, 2008, Teradyne recorded the following restructuring activities:

•

$12.9 million of severance charges across all functions and segments related to headcount reductions of 261 people;

•

$9.0 million of facility charges across both segments related to the accelerated depreciation of a manufacturing facility in North Reading, MA as a result of the transfer of manufacturing to an outsourced partner;

•

$0.4 million of facility charges across both segments related to the early exit of a facility in Bracknell, UK;

•

$0.7 million of facility charges in the Semiconductor Test segment related to the early exit of a facility in Ontario, Canada;

•

$1.7 million gain on the sale of real estate in the Semiconductor Test segment for a facility in Agoura Hills, CA; and

•

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

2007 Activities


(in thousands)	Severance and Benefits
Balance at December 31, 2007	$	1,108
Credits		(194	)
Cash payments		(556	)

Balance at June 29, 2008	$	358

Pre-2007 Activities


(in thousands)	Facility Related			Severance and Benefits			Total
Balance at December 31, 2007	$	7,802		$	250		$	8,052
Charges/ (Credits)		2,676			(132	)		2,544
Cash payments		(895	)		(62	)		(957	)

Balance at June 29, 2008	$	9,583		$	56		$	9,639

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the six months ended June 29, 2008, Teradyne recorded the following adjustment to its pre-2007 restructuring activities:

•

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

K. Stock Repurchase Program

In November 2007, Teradyne’s Board of Directors authorized a $400 million stock repurchase program. During the three months ended June 29, 2008, Teradyne repurchased 4.7 million shares of common stock for $58.2 million at an average price of $12.46. For the six months ended June 29, 2008, Teradyne repurchased 7.5 million shares of common stock for $91.2 million at an average price of $12.20 per share. The cumulative repurchases as of June 29, 2008 total 8.5 million shares of common stock for $102.6 million at an average price of $12.14.

L. Acquisitions

Business

On January 24, 2008, Teradyne completed its acquisition of Nextest Systems Corporation (“Nextest”) of San Jose, California, for a total purchase price of $401.6 million, which consisted of $367.8 million of cash paid to acquire the outstanding common stock of Nextest, at a price of $20.00 per share, $27.7 million in fair value of assumed vested stock options and restricted stock units, which were converted into stock options and restricted stock units to purchase Teradyne’s common stock, and $6.1 million of acquisition related transaction costs, which primarily consisted of fees incurred for financial advisory and legal services. The fair value of stock options was estimated using the following weighted average assumptions:


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

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

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Nextest acquisition was accounted for as a purchase business combination and, accordingly, the results have been included in Teradyne’s consolidated results of operation from the date of acquisition. The allocation of the total purchase price of Nextest’s net tangible and identifiable intangible assets was based on their estimated fair values as of the acquisition date. The purchase price allocation is preliminary pending the final determination of the fair value of certain acquired tax assets and assumed tax liabilities and the completion of facility exit and restructuring plans. The excess of the purchase price over the identifiable intangible and net tangible assets in the amount of $172.6 million was allocated to goodwill, which is not deductible for tax purposes. The following represents the preliminary allocation of the purchase price:


	Amount
	(in thousands)
Goodwill	$	172,583
Other intangible assets		99,800
Tangible assets acquired and liabilities assumed:
Cash and cash equivalents		88,513
Other current assets		55,332
Non-current assets		16,306
Accounts payable and current liabilities		(26,487	)
Other long-term liabilities		(5,542	)
In-process research and development		1,100

Total purchase price	$	401,605

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


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

Total intangible assets	$	99,800	6.2

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


	For the Three Months Ended		For the Six Months Ended
	July 1, 2007		June 29, 2008		July 1, 2007
Revenue	$	302,490	$	624,751	$	577,335
Net income (loss)		19,246		13,086		(145	)
Net income per common share:
Basic	$	0.10	$	0.08	$	0.00

Diluted	$	0.10	$	0.07	$	0.00

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The six months pro forma results above include the following non recurring expense items: in-process research and development charge of $1.1 million and acquired inventory fair value adjustment of $4.3 million, in both six months periods presented.

Technology

On March 7, 2007, Teradyne purchased in-process enabling test technology and hired certain engineers from MOSAID Technologies Inc. (“MOSAID”) for $17.6 million, which included $0.6 million in fees directly related to the acquisition. Of the purchase price, $16.7 million was allocated to in-process research and development and therefore was immediately charged to the statement of operations. The balance of the purchase price was allocated to acquired workforce and fixed assets. In the three months ended June 29, 2008, Teradyne recorded an impairment charge of $0.6 million to write-off the acquired workforce asset.

M. Retirement Plans

Defined Benefit Pension Plans

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

Components of net periodic pension cost for all plans for the three and six months ended June 29, 2008 and July 1, 2007 are as follows:


	For the Three Months Ended						For the Six Months Ended
	June 29, 2008			July 1, 2007			June 29, 2008			July 1, 2007
	(in thousands)
Net Periodic Benefit Cost:
Service cost	$	1,107		$	1,268		$	2,490		$	2,811
Interest cost		4,418			4,118			8,856			8,274
Expected return on plan assets		(5,167	)		(4,879	)		(10,345	)		(9,762	)
Amortization of unrecognized:
Net transition obligation		(7	)		(17	)		(15	)		(33	)
Prior service cost		212			213			424			424
Net loss		346			847			713			1,822
Curtailment gain		(357	)		—			(357	)		—

Total expense	$	552		$	1,550		$	1,766		$	3,536

Teradyne contributed $0.8 million to its United Kingdom Pension Plan, $0.6 million to its Japan Pension Plan, $0.6 million to its U.S. Pension Plan and $0.3 million to its other foreign Pension Plans in the six months ended June 29, 2008.

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Post-Retirement Benefit Plans

In addition to receiving pension benefits, Teradyne’s U.S. employees who meet specific retirement eligibility requirements as of their termination dates may participate in Teradyne’s Welfare Plan, which includes death benefits, and medical and dental benefits up to age 65. Death benefits provide a fixed amount to retirees’ survivors and are available to all retirees.

Substantially all of Teradyne’s current U.S. employees could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees.

Components of net periodic postretirement benefits cost are as follows:


	For the Three Months Ended						For the Six Months Ended
	June 29, 2008			July 1, 2007			June 29, 2008			July 1, 2007
	(in thousands)
Net Periodic Benefit Cost:
Service cost	$	22		$	71		$	84		$	127
Interest cost		291			317			613			658
Amortization of unrecognized:
Prior service cost		(59	)		(59	)		(117	)		(118	)
Net loss		17			50			70			143

Total expense	$	271		$	379		$	650		$	810

Teradyne contributed $1.4 million to its U.S. Post-Retirement Benefits Plan in the six months ended June 29, 2008.

N. Commitments and Contingencies

Legal Claims

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

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

Teradyne believes that it has meritorious defenses against the above unsettled claims and intends to vigorously contest them. While it is not possible to predict or determine the outcomes of the unsettled claims or

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

to provide possible ranges of losses that may arise, Teradyne believes the potential losses associated with all of these actions will not have a material adverse effect on its consolidated financial position or liquidity, but could possibly be material to its consolidated results of operations of any one period.

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, employment, commercial and environmental matters. Although there can be no assurance, there are no such matters pending that Teradyne expects to be material with respect to its business, financial position or results of operations.

O. Segment Information

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

Teradyne evaluates performance based on several factors, of which the primary financial measure is business segment income from continuing operations before taxes. The accounting policies of the business segments are the same as those described in Note B: “Accounting Policies” in Teradyne’s Annual Report on Form 10-K for the year ended December 31, 2007. Due to the sale of Broadband Test Systems on August 1, 2007, its results have been excluded from segment reporting and included in discontinued operations for the three and six months ended July 1, 2007. Segment information for the three and six months ended June 29, 2008 and July 1, 2007 is as follows:


	Semiconductor Test			Systems Test Group			Corporate and Eliminations		Consolidated
	(in thousands)
*Three months ended June 29, 2008:*
Net sales	$	263,588		$	54,117		$	—	$	317,705
Income from continuing operations before taxes(1)(2)		18,983			(3,898	)		2,094		17,179
*Three months ended July 1, 2007:*
Net sales	$	230,681		$	58,029		$	—	$	288,710
Income from continuing operations before taxes(1)(2)		15,279			5,621			9,800		30,700
*Six months ended June 29, 2008:*
Net sales	$	511,251		$	103,769		$	—	$	615,020
Income from continuing operations before taxes(1)(2)		23,542			(6,607	)		6,711		23,646
*Six months ended July 1, 2007:*
Net sales	$	424,649		$	117,754		$	—	$	542,403
Income from continuing operations before taxes(1)(2)		(6,387	)		9,451			21,307		24,371

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

(2)	Included in the income from continuing operations before taxes for each of the segments for the three and six months ended June 29, 2008 and July 1, 2007 are charges that include restructuring and other, net, in-process research and development and inventory charges, as follows:

TERADYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Included in the Semiconductor Test segment are charges for the following:


	For the Three Months Ended				For the Six Months Ended
	June 29, 2008		July 1, 2007		June 29, 2008		July 1, 2007
	(in thousands)
Cost of revenues—inventory charges	$	884	$	304	$	2,039	$	354
Restructuring and other, net		8,901		1,483		19,033		2,572
In-process research and development		—		—		1,100		16,700

Total	$	9,785	$	1,787	$	22,172	$	19,626

Included in the Systems Test Group segment are charges for the following:


	For the Three Months Ended					For the Six Months Ended
	June 29, 2008		July 1, 2007			June 29, 2008		July 1, 2007
	(in thousands)
Cost of revenues—inventory charges	$	1,022	$	297		$	1,215	$	708
Restructuring and other, net		3,311		(1,056	)		4,745		(296	)

Total	$	4,333	$	(759	)	$	5,960	$	412

Included in the Corporate and Eliminations segment are charges for the following:


	For the Three Months Ended				For the Six Months Ended
	June 29, 2008		July 1, 2007		June 29, 2008		July 1, 2007
	(in thousands)
Restructuring and other, net	$	514	$	141	$	733	$	539

Total	$	514	$	141	$	733	$	539

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

Critical Accounting Policies and Estimates

We have identified the policies which are critical to understanding our business and our results of operations. Management believes that there have been no significant changes during the six months ended June 29, 2008 to the items disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in its Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

SELECTED RELATIONSHIPS WITHIN THE CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS


	For the Three Months Ended				For the Six Months Ended
	June 29, 2008		July 1, 2007		June 29, 2008		July 1, 2007
Percentage of total net revenues:
Products	78	%	79	%	78	%	78	%
Services	22		21		22		22

Total net revenues	100		100		100		100
Cost of revenues:
Cost of products	39		39		39		39
Cost of services	13		13		13		15

Total cost of revenues	52		52		52		54

Gross profit	48		48		48		46
Operating expenses:
Engineering and development	18		18		18		19
Selling and administrative	21		22		21		23
Acquired intangible asset amortization	1		—		2		—
In-process research and development	—		—		—		3
Restructuring and other, net	4		—		4		1

Operating expenses	44		40		45		46

Income from operations	4		8		3		—
Interest & Other	1		3		1		4

Income from continuing operations before income taxes	5		11		4		4
Provision for income taxes	2		1		2		—

Income from continuing operations	3		10		2		4
Income from discontinued operations	—		—		—		—
Provision for income taxes	—		—		—		—

Income from discontinued operations	—		—		—		—

Net income	3	%	10	%	2	%	4	%

Provision for income taxes as a percentage of income from continuing operations before income taxes	36	%	11	%	43	%	20	%

Second Quarter 2008 Compared to Second Quarter 2007

Bookings

Net bookings for our two reportable segments were as follows:


	For the Three Months Ended				Dollar Change
	June 29, 2008		July 1, 2007		Dollar Change
	(in millions)
Semiconductor Test	$	260.6	$	259.2	$	1.4
Systems Test Group		47.3		47.4		(0.1	)

	$	307.9	$	306.6	$	1.3

Semiconductor Test orders increased 1% or $1.4 million from the second quarter of 2007 to 2008 due primarily to the acquisition of Nextest which offset a decrease in Teradyne’s Semiconductor Test orders.

Customers may delay delivery of products or cancel orders suddenly and without significant notice, subject to possible cancellation penalties. In the second quarter of 2008 and 2007, there were no significant cancellations penalties received. Due to possible changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily indicative of the actual sales for any succeeding period. Delays in delivery schedules and/or cancellations of backlog during any particular period could have a material adverse effect on our business, financial condition and results of operations.

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


	For the Three Months Ended
	June 29, 2008		July 1, 2007
Taiwan	22	%	24	%
United States	22		15
Singapore	18		13
South East Asia	14		17
Japan	10		7
Europe	7		10
Korea	6		13
Rest of World	1		1

	100	%	100	%

Backlog of unfilled orders for our two reportable segments was as follows:


	For the Three Months Ended
	June 29, 2008		July 1, 2007
	(in millions)
Semiconductor Test	$	270.3	$	250.6
Systems Test Group		93.5		93.1

	$	363.8	$	343.7

Revenue

Net revenues for our two reportable segments were as follows:


	For the Three Months Ended				Dollar Change
	June 29, 2008		July 1, 2007		Dollar Change
	(in millions)
Semiconductor Test	$	263.6	$	230.7	$	32.9
Systems Test Group		54.1		58.0		(3.9	)

	$	317.7	$	288.7	$	29.0

Semiconductor Test revenue increased $32.9 million or 14% from the second quarter of 2007 to the second quarter of 2008. The majority of this increase is due to $21.4 million of sales from our Nextest acquisition, followed by an increase in revenue for J750^™ systems, and to a lesser extent, higher Flex^® family system sales resulting from a growth in wireless demand in the second quarter of 2008 compared to the second quarter of 2007.

The decrease in Systems Test Group revenue of $3.9 million or 7% was spread across all Systems Test Group divisions.

Our sales by region as a percentage of total net sales were as follows:


	For the Three Months Ended
	June 29, 2008		July 1, 2007
Taiwan	23	%	19	%
United States	19		21
South East Asia	18		16
Japan	11		11
Europe	10		10
Singapore	9		15
Korea	7		6
Rest of the World	3		2

	100	%	100	%

Gross Profit

Our gross profit was as follows:


	For the Three Months Ended						Dollar/ Point Change
	June 29, 2008			July 1, 2007			Dollar/ Point Change
	(in millions)
Gross Profit	$	153.8		$	137.2		$	16.6
Percent of Total Revenue		48.4	%		47.5	%		0.9

Gross profit as a percentage of revenue increased from the second quarter of 2007 to the second quarter of 2008 by 0.9 percentage points due to higher volume and improved service margins in our Semiconductor Test group.

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

The provisions for excess and obsolete inventory were $1.9 million and $0.6 million for the three months ended June 29, 2008 and July 1, 2007, respectively. During the three months ended June 29, 2008 and July 1, 2007, we scrapped $2.3 million and $3.9 million of inventory, respectively, and sold $0.2 million and $0.6 million of previously written-down or written-off inventory, respectively. As of June 29, 2008, we have inventory related reserves for amounts which had been written-down or written-off totaling $100.4 million. We have no pre-determined timeline to scrap the remaining inventory.

Engineering and Development

Engineering and development expenses were as follows:


	For the Three Months Ended						Dollar Change
	June 29, 2008			July 1, 2007			Dollar Change
	(in millions)
Engineering and Development	$	56.2		$	52.4		$	3.8
Percent of Total Revenue		17.7	%		18.2	%

The increase of $3.8 million in engineering and development expenses is due to the acquisition of Nextest.

Selling and Administrative

Selling and administrative expenses were as follows:


	For the Three Months Ended						Dollar Change
	June 29, 2008			July 1, 2007			Dollar Change
	(in millions)
Selling and Administrative	$	65.5		$	62.2		$	3.3
Percent of Total Revenue		20.6	%		21.5	%

The increase of $3.3 million from the second quarter of 2007 to 2008 is primarily due to the acquisition of Nextest, which is offset in part by $2.5 million of lower variable employee compensation and $1.5 million of lower general and administrative expenses and facilities costs.

Restructuring and Other, Net

The tables below represent activity related to restructuring and other, net, in the three months ended June 29, 2008. The accrual for severance payments and employees’ benefits is reflected in accrued employees’ compensation and withholdings, and is expected to be paid by the end of the fourth quarter of 2008. 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 over the lease terms, the latest of which expires in 2012. We expect to pay approximately $3.2 million against the lease accruals over the next twelve months. Our future lease commitments are net of expected sublease income of $8.9 million as of June 29, 2008.

2008 Activities


(in thousands)	Gain on Sale of Real Estate			Facility Related			Severance and Benefits			Long-Lived Asset Impairment			Total
Balance at March 30, 2008	$	—		$	184		$	1,825		$	—		$	2,009
Charges/ (Credits)		(1,682	)		5,672			5,517			550			10,057
Cash payments		—			(593	)		(3,215	)		—			(3,808	)
Accelerated depreciation and other		1,682			(4,487	)		—			(550	)		(3,355	)

Balance at June 29, 2008	$	—		$	776		$	4,127		$	—		$	4,903

During the three months ended June 29, 2008, we recorded the following restructuring activities:

•

$5.5 million of severance charges across all functions and segments related to headcount reductions of 104 people;

•

$4.5 million of facility charges across both segments related to accelerated depreciation of a manufacturing facility in North Reading, MA as a result of the transfer of manufacturing to an outsourced partner;

•

$0.2 million of facility charges across both segments related to the early exit of a facility in Bracknell, UK;

•

$0.7 million of facility charges in our Semiconductor Test segment related to the early exit of a facility in Ontario, Canada;

•

$1.7 million gain on the sale of real estate in our Semiconductor Test segment for a facility in Agoura Hills, CA; and

•

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

The restructuring actions taken during the three months ended June 29, 2008, are expected to generate quarterly cost savings of approximately $2.8 million.

2007 Activities


(in thousands)	Severance and Benefits
Balance at March 30, 2008	$	477
Charges		(7	)
Cash payments		(112	)

Balance at June 29, 2008	$	358

Pre-2007 Activities


(in thousands)	Facility Related			Severance and Benefits		Total
Balance at March 30, 2008	$	7,083		$	42	$	7,125
Credits		2,676			—		2,676
Cash payments		(176	)		14		(162	)

Balance at June 29, 2008	$	9,583		$	56	$	9,639

During the three months ended June 29, 2008, we recorded the following adjustment to our pre-2007 restructuring activities:

•

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

Interest Income and Other, net

Interest income decreased by $6.4 million from $9.3 million in the second quarter of 2007 to $2.9 million in the second quarter of 2008, due primarily to lower cash balances as a result of the acquisition of Nextest and stock repurchase activity.

Income Taxes

The tax expense of $6.1 million and $3.5 million for the second quarter of 2008 and for the second quarter of 2007, consists of foreign taxes and U.S. Federal tax for 2008 and primarily foreign taxes for 2007. The effective tax rate of 36% for the second quarter of 2008 was caused by foreign losses for which no tax benefit was recorded. As a result of incurring significant operating losses from 2001 through 2003, we determined that it is more likely than not that our deferred tax assets in the U.S. may not be realized, and since the fourth quarter of 2002 we have established a full valuation allowance for these net deferred tax assets. If we generate sustained future taxable income against which these tax attributes may be applied, some portion or all of the valuation allowance would be reversed. If the valuation allowance was reversed, a portion would be recorded as an increase to additional paid in capital, and the remainder would be recorded as a reduction to income tax expense.

Six Months of 2008 Compared to Six Months of 2007

Bookings

Net bookings for our two reportable segments were as follows:


	For the Six Months Ended				Dollar Change
	June 29, 2008		July 1, 2007		Dollar Change
	(in millions)
Semiconductor Test(1)	$	524.4	$	461.9	$	62.5
Systems Test Group		94.9		90.6		4.3

	$	619.3	$	552.5	$	66.8

(1)	Includes Nextest bookings from January 24, 2008 through June 29, 2008.

Semiconductor Test orders increased 14% or $62.5 million from the first six months of 2007 to the first six months of 2008 due primarily to the acquisition of Nextest. The remainder of the increase was in service orders, as annual service contracts that are typically booked in the fourth quarter shifted into the first quarter of 2008.

Systems Test Group increase in orders of $4.3 million or 5% was primarily due to strong program buying in the Mil/ Aero business unit.

Customers may delay delivery of products or cancel orders suddenly and without significant notice, subject to possible cancellation penalties. In the first half of 2008 and 2007, there were no significant cancellations penalties received. Due to possible changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily indicative of the actual sales for any succeeding period. Delays in delivery schedules and/or cancellations of backlog during any particular period could have a material adverse effect on our business, financial condition and results of operations.

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


	For the Six Months Ended
	June 29, 2008		July 1, 2007
Taiwan	23	%	18	%
United States	20		19
South East Asia	17		15
Singapore	12		16
Japan	10		12
Europe	9		11
Korea	8		8
Rest of the World	1		1

	100	%	100	%

Revenue

Net revenues for our two reportable segments were as follows:


	For the Six Months Ended				Dollar Change
	June 29, 2008		July 1, 2007		Dollar Change
	(in millions)
Semiconductor Test	$	511.2	$	424.6	$	86.6
Systems Test Group		103.8		117.8		(14.0	)

	$	615.0	$	542.4	$	72.6

Semiconductor Test revenue increased $86.6 million or 20% from the first six months of 2007 to the first six months of 2008 due primarily to the Nextest acquisition. The remainder of the increase was in both Flex family, due to strength in demand for systems with wireless configurations, and J750 products.

The decrease in Systems Test Group revenue of $14.0 million or 12% resulted from a decrease in our Commercial Board Test and Diagnostic Solutions business units.

Our sales by region as a percentage of total net sales were as follows:


	For the Six Months Ended
	June 29, 2008		July 1, 2007
Taiwan	21	%	13	%
United States	19		24
South East Asia	19		14
Japan	11		12
Singapore	9		15
Europe	9		12
Korea	8		7
Rest of the World	4		3

	100	%	100	%

Gross Profit

Our gross profit was as follows:


	For the Six Months Ended						Dollar/ Point Change
	June 29, 2008			July 1, 2007			Dollar/ Point Change
	(in millions)
Gross Profit	$	292.4		$	250.6		$	41.8
Percent of Total Revenue		47.5	%		46.2	%		1.3

Gross margins as a percentage of revenue increased from the first six months of 2007 to the first six months of 2008 by 1.3 percentage points. This increase is the result of higher volume and improved service margins, offset in part by a $4.3 million charge to adjust Nextest inventory to fair value.

The provisions for excess and obsolete inventory were $3.3 million and $1.1 million for the six months ended June 29, 2008 and July 1, 2007, respectively. During the six months ended June 29, 2008 and July 1, 2007, we scrapped $10.1 million and $9.2 million of inventory, respectively, and sold $1.3 million and $0.6 million of previously written-down or written-off inventory, respectively. As of June 29, 2008, we have inventory related reserves for amounts which had been written-down or written-off of $100.4 million. We have no pre-determined timeline to scrap the remaining inventory.

Engineering and Development

Engineering and development expenses were as follows:


	For the Six Months Ended						Dollar Change
	June 29, 2008			July 1, 2007			Dollar Change
	(in millions)
Engineering and Development	$	111.3		$	101.7		$	9.6
Percent of Total Revenue		18.1	%		18.7	%

The increase of $9.6 million in engineering and development expenses is due primarily to the acquisition of Nextest as well as increased investment in engineering to enter adjacent markets.

Selling and Administrative

Selling and administrative expenses were as follows:


	For the Six Months Ended						Dollar Change
	June 29, 2008			July 1, 2007			Dollar Change
	(in millions)
Selling and Administrative	$	130.7		$	125.1		$	5.6
Percent of Total Revenue		21.2	%		23.1	%

The increase of $5.6 million from the second quarter of 2007 to the second quarter of 2008 is due to the acquisition of Nextest, which is offset in part by $2.8 million of lower general and administrative expenses and facilities costs, $2.0 million of lower selling and marketing expenses due to reductions in workforce and $1.6 million of lower variable employee compensation.

Restructuring and Other, Net

The tables below represent activity related to restructuring and other, net, in the six months ended June 29, 2008. The accrual for severance payments and employee’ benefits is reflected in accrued employees’ compensation and withholdings and is expected to be paid by the end of the fourth quarter of 2008. 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. We expect to pay out approximately $3.2 million against the lease accruals over the next twelve months. Our future lease commitments are net of expected sublease income of $8.9 million as of June 29, 2008.

2008 Activities


(in thousands)	Gain on Sale of Real Estate			Facility Related			Severance and Benefits			Long-Lived Asset Impairment			Total
Balance at December 31, 2007	$	—		$	—		$	—		$	—		$	—
Charges/ (Credits)		(1,682	)		10,344			12,949			550			22,161
Cash payments		—			(593	)		(8,822	)		—			(9,415	)
Accelerated depreciation and other		1,682			(8,975	)		—			(550	)		(7,843	)

Balance at June 29, 2008	$	—		$	776		$	4,127		$	—		$	4,903

During the six months ended June 29, 2008, we recorded the following restructuring activities:

•

$12.9 million of severance charges across all functions and segments related to headcount reductions of 261 people;

•

$9.0 million of facility charges across both segments related to the accelerated depreciation of a manufacturing facility in North Reading, MA as a result of the transfer of this activity to an outsourced partner;

•

$0.4 million of facility charges across both segments related to the early exit of a facility in Bracknell, UK;

•

$0.7 million of facility charges in our Semiconductor Test segment related to the early exit of a facility in Ontario, Canada;

•

$1.7 million gain on the sale of real estate in our Semiconductor Test segment for a facility in Agoura Hills, CA; and

•

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

The restructuring actions taken during the six months ended June 29, 2008, are expected to generate quarterly cost savings of approximately $6.1 million.

2007 Activities


(in thousands)	Severance and Benefits
Balance at December 31, 2007	$	1,108
Credits		(194	)
Cash payments		(556	)

Balance at June 29, 2008	$	358

Pre-2007 Activities


(in thousands)	Facility Related			Severance and Benefits			Total
Balance at December 31, 2007	$	7,802		$	250		$	8,052
Charges/ (Credits)		2,676			(132	)		2,544
Cash payments		(895	)		(62	)		(957	)

Balance at June 29, 2008	$	9,583		$	56		$	9,639

During the six months ended June 29, 2008, we recorded the following adjustment to our pre-2007 restructuring activities:

•

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

In-process Research and Development

On January 24, 2008, we completed our acquisition of Nextest for the total purchase price of $401.6 million. Of the purchase price, $1.1 million has been allocated to in-process research and development and therefore has been immediately charged to the statement of operations.

Interest Income and Expense

Interest income decreased by $11.9 million from $19.4 million in the first six months of 2007 to $7.5 million in the first six months of 2008, due primarily to lower cash balances as a result of the acquisition of Nextest and stock repurchase activity.

Income Taxes

The tax expense of $10.2 million and $4.8 million for the first six months of 2008 and the first six months of 2007 consists of foreign taxes and U.S. Federal tax for 2008 and primarily foreign taxes for 2007. The year to date effective rate of 43% was caused by foreign losses for which no tax benefit was recorded and non deductible intangible asset amortization expense associated with our acquisition of Nextest. As a result of incurring significant operating losses from 2001 through 2003, we determined that it is more likely than not that our deferred tax assets in the U.S. may not be realized, and since the fourth quarter of 2002 we have established a full valuation allowance for our net deferred tax assets. If we generate sustained future taxable income against which these tax attributes may be applied, some portion or all of the valuation allowance would be reversed. If the valuation allowance was reversed, a portion would be recorded as an increase to additional paid in capital, and the remainder would be recorded as a reduction to income tax expense.

Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities balance decreased $328.6 million in the first six months of 2008, to $414.3 million. Cash and cash equivalents activity for the first six months of 2008 and 2007 were as follows:


	For the Six Months Ended
	June 29, 2008			July 1, 2007
	(in millions)
Cash provided by (used for) operating activities:
Net income from continuing operations, adjusted for non-cash items	$	79.8		$	86.6
Changes in operating assets and liabilities, net of businesses and product lines acquired and sold		1.1			(72.5	)
Cash used for discontinued operations		—			(3.0	)

Total cash provided by operating activities		80.9			11.1
Cash used for investing activities from continuing operations		(275.1	)		(172.4	)
Cash used for investing activities from discontinued operations		—			(0.2	)

Total cash used for investing activities		(275.1	)		(172.6	)
Total cash used for financing activities		(82.1	)		(13.3	)

Decrease in cash and cash equivalents	$	(276.3	)	$	(174.8	)

Changes in operating assets and liabilities, net of product lines and businesses sold and acquired, provided cash of $1.1 million in the first six months of 2008 due primarily to a decrease in accounts receivable of $4.5 million and an increase in accounts payable, deferred revenue and accrued expenses of $10.4 million. Accounts receivable decreased $4.5 million due to a decrease in days sales outstanding from 66 days as of December 31, 2007 to 61 days as of June 29, 2008 as a result of improved collections. These increases in cash were partially offset by an increase in other assets of $6.2 million and retirement plan contributions of $3.7 million. Changes in operating assets and liabilities used cash of $72.5 million in the first six months of 2007 due primarily to an increase in accounts receivable of $55.8 million and a decrease in accrued income taxes of $26.0 million for taxes paid primarily in foreign jurisdictions. Accounts receivable increased $55.8 million, primarily in the Semiconductor Test segment, partially due to increased volume since December 31, 2006 and partially due to an increase in days sales outstanding from 55 days as of December 31, 2006 to 67 days as of July 1, 2007 due to increased shipments in the last month of the period. Inventory decreased $24.3 million in the first six months of 2007 primarily in our Semiconductor Test segment and to a lesser extent in the Systems Test Group segment.

Investing activities consist of purchases, sales and maturities of marketable securities, proceeds from asset disposals, cash paid for assets and purchases of capital assets and businesses. Investing activities used cash of $275.1 million in the first six months of 2008, primarily due to $285.3 million of cash used for the acquisition of Nextest, net of cash acquired.

Financing activities include issuance of our common stock and repurchases of our common stock. During the six months ended June 29, 2008, we repurchased 7.5 million shares of common stock for $91.2 million at an average price of $12.20.

We believe our cash, cash equivalents and marketable securities balance of $414.3 million will be sufficient to meet working capital and expenditure needs for at least the foreseeable future. Inflation has not had a significant long-term impact on earnings.

Equity Compensation Plans

Discussed in “Note O: Stock Based Compensation” in our 2007 Form 10-K, we have a 1996 Employee Stock Purchase Plan and a 2006 Equity and Cash Compensation Incentive Plan (the “2006 Equity Plan”), a cash and equity compensation incentive plan.

The purpose of the 1996 Employee Stock Purchase Plan is to encourage stock ownership by all eligible employees of Teradyne. The purpose of the 2006 Equity Plan is to provide equity ownership and compensation opportunities in Teradyne to our employees, officers, directors, consultants and/or advisors. Both plans were approved by our shareholders.

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations.” (SFAS No. 141(R)) This Statement replaces FASB Statement No. 141, “Business Combinations.” SFAS No. 141(R) establishes new principles and requirements for how an acquiring company 1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree, 2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and 3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for business combinations occurring in the fiscal year beginning on or after December 15, 2008. We are currently evaluating the impact of adopting this standard.

In April 2008, the FASB issued Staff Position No.142-3 (FSP No. 142-3), “Determination of the Useful Life of Intangible Assets”. This FSP amends the guidance in FASB Statement No. 142 ,”Goodwill and Other Intangible Assets”, about estimating useful lives of a recognized intangible assets and requires additional disclosures related to renewing or extending the terms of recognized intangible asset. In estimating the useful life of a recognized intangible asset, the FSP requires companies to consider their historical experience in renewing or extending similar arrangements together with the asset’s intended use, regardless of whether the arrangements have explicit renewal or extension provisions. The FSP is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements are to be applied prospectively to all intangible assets.

Certain Factors That May Affect Future Results

From time to time, information we provide, statements made by our employees or information included in our filings with the SEC (including this Form 10-Q) contain statements that are not purely historical, but are forward looking statements, made under Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which involve risks and uncertainties. In particular, forward looking statements made herein include projections, plans and objectives for our business, financial condition, operating results, future operations, or future economic performance, statements relating to the sufficiency of capital to meet working capital requirements, capital expenditures, including future lease payments and commitments and contributions

to our pension plan, expectations as to customer orders and demand for our products and statements relating to backlog, bookings and cancellations, gross margins and pricing considerations. These statements are neither promises nor guarantees but involve risks and uncertainties, both known and unknown, which could cause our actual future results to differ materially from those stated in any forward looking statements. Factors that may cause such differences include, but are not limited to the following:

•

we are subject to intense competition;

•

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

•

our operating results are likely to fluctuate significantly;

•

we are subject to risks of operating internationally;

•

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

•

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

•

our operations may be adversely impacted if our outsourced service providers fail to perform;

•

we may incur higher tax rates than expected;

•

we may acquire new businesses or form strategic alliances in the future, and we may not realize the benefits of such acquisitions;

•

we have taken measures to ensure that we are prepared to address slowdowns in the market for our products, which could have long-term negative effects on our business or impact our ability to adequately address a rapid increase in customer demand;

•

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

•

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

•

we have significant guarantees and indemnification obligations;

•

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

•

our business may suffer if we are unable to attract and retain key employees;

•

our business is impacted by worldwide economic cycles, which are difficult to predict;

•

acts of war, terrorist attacks and the threat of domestic and international terrorist attacks may adversely impact our business; and

•

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

These factors, and others, are discussed from time to time in our filings with the SEC, including our Annual Report on Form 10-K filed with the SEC on February 28, 2008 for the year ended December 31, 2007.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

For “Quantitative and Qualitative Disclosures about Market Risk” affecting Teradyne, see Item 7a. “Quantitative and Qualitative Disclosures About Market Risks,” in our Annual Report on Form 10-K filed with the SEC on February 28, 2008. There were no material changes in our exposure to market risk from those set forth in our Annual Report for the fiscal year ended December 31, 2007.

Item 4: Controls and Procedures

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

During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

PART II. OTHER INFORMATION

Item 1: Legal Proceedings

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

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

We believe that we have meritorious defenses against the above unsettled claims and intend to vigorously contest them. While it is not possible to predict or determine the outcomes of the unsettled claims or to provide possible ranges of losses that may arise, we believe the potential losses associated with all of these actions 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.

Item 1A: Risk Factors

In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A: Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

(c) The following table includes information with respect to repurchases we made of our common stock during the three-month period ended June 29, 2008 (in thousands except per share price):


Period	(a) Total Number of Shares (or units) Purchased(1)	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(1)	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may Yet Be Purchased Under the Plans or Programs(1)
March 31, 2008–April 27, 2008	657	$	12.14	4,439	$	347,617
April 28, 2008–May 25, 2008	616	$	13.61	5,055	$	339,231
May 26, 2008–June 29, 2008	3,399	$	12.32	8,454	$	297,375

	4,672	$	12.46	8,454	$	297,375

(1)

In November 2007, our Board of Directors authorized a stock repurchase program. Under the program, we are permitted to spend an aggregate of $400 million to repurchase shares of our common stock in open market repurchases, in privately negotiated transactions or through other appropriate means. During the three months ended June 29, 2008, we repurchased 4.7 million shares of common stock for $58.2 million at an average price of $12.46. The cumulative repurchases as of June 29, 2008 total 8.5 million shares of common stock for $102.6 million at an average price of $12.14.

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

(a)	Our annual meeting of shareholders was held on May 22, 2008.

(b)	The following nominees were elected as directors to serve until the 2009 annual meeting of shareholders:


Nominee	Total Votes “FOR”	Total Votes “AGAINST”	Total Votes “ABSTAINING”
James W. Bagley	157,367,926	1,314,351	1,559,558
Michael A. Bradley	157,391,278	1,292,361	1,558,196
Albert Carnesale	157,339,568	1,346,785	1,555,482
Edwin J. Gillis	157,739,689	975,685	1,526,461
Vincent M. O’Reilly	157,693,775	988,713	1,559,347
Paul J. Tufano	157,653,934	1,028,497	1,559,404
Roy A. Vallee	157,393,410	1,288,640	1,559,785
Patricia S. Wolpert	157,368,315	1,339,022	1,534,498

(c)	The other proposals voted upon at the annual meeting were:

1. To approve an amendment to the 2006 Equity and Cash Compensation Incentive Plan to establish a $3 million per fiscal year maximum amount of variable compensation awards that can be received by a participant.

Total Votes For

Total Votes

Against

Total Votes

Abstaining

Total Broker

Non-Votes

149,112,069

9,521,590

1,608,176

2. To ratify the selection of PricewaterhouseCoopers LLP as independent auditors for fiscal year ending December 31, 2008.

Total Votes For

Total Votes

Against

Total Votes

Abstaining

Total Broker

Non-Votes

157,719,141

1,155,956

1,366,738

Item 6: Exhibits


Exhibit Number		Description
10.1		2006 Equity and Cash Compensation Incentive Plan, as amended * (filed herewith)

31.1		Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2		Certification of Principal Financial Officer, pursuant to Rule 13a-14(a) of Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.1		Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

32.2		Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

SIGNATURES

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

TERADYNE, INC.

Registrant

/s/ GREGORY R. BEECHER

Gregory R. Beecher

Vice President,

Chief Financial Officer and Treasurer

(Duly Authorized Officer
and Principal Financial Officer)

August 7, 2008

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